Consumer agency opponents focusing on state preemption issue

Exclusive analysis for FinReg21 by Darrell Delamaide

After lawmakers scaled back proposals for a Consumer Financial Protection Agency by removing the requirement to offer a “plain vanilla” product and other concessions, the fight is now focused on whether rules of the new federal agency should preempt state regulations or not.

Industry is still opposed to the creation of new agency altogether, arguing that yet another regulator would limit consumer choice and even access to credit and add further to the burden and expense of compliance.

But if Congress does move forward with the administration’s proposal, industry is keen on making sure that the federal protection rules would preempt state rules.

In the current draft, the House version of the bill, recently revised by lawmakers to take account of objections to some earlier provisions, still allows states to impose stricter protections on financial products than those promulgated by the new CFPA.

The banking industry wants the federal preemption currently enjoyed by national banks to prevail.

“We believe that without such preemption we will have a patchwork of state, and even local, laws that will confuse consumers, greatly increase the cost of financial services, and serve as a strong disincentive to create new products of value to consumers,” Edward Yingling, chief executive of the American Bankers Association, told the House Financial Services Committee in a hearing last week (Sept. 30).

Consumer advocates argue just as fervently against preemption, preserving the provisions in the current draft legislation that allow states to impose stricter rules.

“Preemption was part of the guidance system that drove us to the precipice,” Michael Calhoun, president of the Center for Responsible Lending, said in testimony before the panel.

While preemption ‘has been touted as a cure-all,” the failure of federal regulators to take sufficient measures to protect consumers from predatory lending by national banks enjoying the benefits of preemption contributed to the financial crisis, he said.

In fact, said this consumer advocate, the conflicts of interest and strong incentives to ignore lending abuses in federal regulatory agencies led to the failure of regulation to stop unfair lending.

“Thirty-five years ago, Congress vested all the federal banking regulators with the responsibility to prevent unfair and deceptive acts and practices by the banks, thrifts and credit unions they regulate,” Calhoun said. “Yet in recent years none of these agencies has pursued this mandate diligently, and, in fact, often denied their authority to do so or refused to take enforcement actions.”

Industry countered that the CFPA proposal is the wrong solution for fixing a neglect of consumer protection among regulated institutions or extending regulation to non-bank institutions. “The Administration proposal unnecessarily imposes new burdens on banks and credit unions and creates an agency with vast and unprecedented new powers,” said ABA’s Yingling.

David John, a senior research fellow at the conservative Heritage Foundation, articulated the objection of the industry: “A CFPA would raise costs for consumers, reduce the number and kind of products available to them, increase the micro-management of financial services firms, and greatly increase the confusion caused by differing and conflicting consumer laws in the different states.”

He recommended instead the creation of a “coordinating council” of existing federal and state regulators to promote equal standards of consumer protection using agencies’ existing powers.

Yingling noted that the Federal Reserve has the authority to provide protection in consumer areas – including mortgages, credit cards, overdrafts and other areas where consumer advocates have found abuses – and has moved to do so. Even if this response is tardy, he said, it should be sufficient to take care of the problem.

Committee chairman Barney Frank said the panel would act on the CFPA legislation by mid-October. He circulated a memo to his Democratic colleagues on Sept. 22 outlining some of the revisions he thought necessary in light of objections raised by industry and other critics of the proposal.

The chief revisions were elimination of the “plain vanilla” requirement, which industry objected to because it would open the door for the CFPA to meddle with business plans, and of the “reasonableness” standard, which would have placed financial institutions in the untenable position of having to assess whether consumers comprehend the products and services they are being offered.

Instead, CFPA will be mandated to improve the current disclosure regime with an emphasis on clarity, simplicity, conciseness, and reduction of regulatory burden, Frank said in his memo.

The lawmaker also clarified that nonfinancial businesses would be exempt from oversight by the CFOA. Merchants and retailers can continue to give their customers tabs and layaway plans without becoming subject to a new layer of regulation. Also, doctors and other businesses that implicitly grant credit by billing their customers after a service is provided, including telephone, cable, and internet providers, will be excluded.

Likewise, accountants and tax preparers, real estate brokers and agents, lawyers, auto dealers, and certain other businesses providing services will be specifically excluded from regulation for the performance of their traditional activities.

In an attempt to allay concern among smaller banks that they will be footing the bill for regulation of non-banks, Frank also called for the Federal Reserve to fund the new agency to the extent that bank regulators are already spending money on consumer protection regulation. Non-banks would be subject to an assessment to pay for their regulation.

Frank also called for exams to be coordinated between the new agency and the traditional bank regulators to avoid adding to the regulatory burden, and clarified a dispute resolution mechanism in the event banks received conflicting directions from the regulators.

At last week’s hearing, witnesses from the NAACP and La Raza urged at the hearing that the CFPA specifically monitor discrimination against minorities.

While enforcing compliance for the Community Reinvestment Act has already been excluded from the CFPA’s duties, the new agency would have an Office of Fair Lending and Equal Opportunity to ensure that the agency has adequate resources to address fair lending and civil rights laws under its jurisdiction.