A new summary of Sen. Chris Dodd's Consumer Financial Protection Agency compromise is now making the rounds -- you can check it out here [PDF]. It's not dissimilar from the better of the two compromises discussed last week, creating a Bureau of Financial Protection (BFP) within Treasury with some independence and broad rule-making powers. Beyond the essential problem of putting the agency within the oft-politicized executive branch and not an independent agency, I see a few major problems in this proposal:
- Too many checks on rule-making. While nominally independent, prudential regulators could challenge rules written by the new agency and ask the systemic risk council to overrule them. Since the point of creating a separate home for consumer regulation is to get it outside the short-term-profit focus of the prudential regulators that left so many consumers unprotected in the last cycle, this is a problem. This might be acceptable only if there was reciprocity, so that the BFP could challenge prudential rules that it feels are dangerous for consumers.
- Enforcement extended by complaint... Instead of giving the BFP jurisdiction over all non-bank consumer financial products, the law would give it authority to keep an eye on independent mortgage lenders but no one else -- that means auto lenders, check cashers, and other non-bank lenders would escape scrutiny. While the BFP could extend its authority after receiving complaints, this represents one more unnecessary hurdle.
- ...but complaint enforcement is eliminated for small banks. The House proposal also exempted the CFPA from examining banks with assets under $10 billion but allowed it to pursue a direct role if problems developed. In Dodd's proposal, the exemption continues but the direct role is no longer available.
- Federal Preemption questions? Over at Capital Gains and Games, Edmund Andrews doesn't like that Dodd's proposal adopts the House compromise on federal preemption. My understanding is that the House compromise is a step in the right direction, away from the previous blanket preemption regime, which allowed federal regulators to tell state authorities not to interfere at all with banks. Instead, it returns to a pre-2004 standard that forces banks to individually appeal each statute they want an exemption from, making it more likely for state officials to have some say.
Republicans, of course, want to replicate the existing structure by keeping consumer regulation subsumed within a consolidated federal bank regulator, but that model has clearly failed. While this compromise moves away from the status quo, as I noted last week, it's unclear why Dodd feels the need to compromise on substantial financial regulation when it seems that a stronger bill would still be politically viable.
-- Tim Fernholz
