U.S. Rep. John Spratt (D-SC) voted Wednesday for a bipartisan bill to rein in and regulate financial institutions. The bill creates a consumer financial protection bureau under the Federal Reserve and an inter-agency, umbrella council to oversee the safety and soundness of all financial institutions. The bill seeks to limit, if not end, the policy that regards some large banks as "too big to fail."
The "Wall Street Reform and Consumer Protection Act" will police and help stop financial practices that led almost to a financial meltdown. The bill creates a process to shut down large, failing firms whose collapse would put the entire economy at risk. After exhausting all of the company's assets, additional costs would be covered by a "dissolution fund," to which all large financial firms would contribute.
The bill will create the Consumer Financial Protection Bureau (CFPB), a new consumer watchdog devoted to protecting Americans from unfair and abusive financial practices. This independent bureau will provide clear and accurate information to families and small businesses to ensure that bank loans, mortgages, and credit cards are fair and affordable. The CFPB will also set safety standards to prevent practices such as hidden fees, deceptive "fine print," and abuses that in the past have escaped oversight.
"As we rebuild our economy," said Spratt, "we have to build in some plain common-sense rules which ensure that big commercial banks and big investment banks can't gamble on risks, like sub-prime mortgages, that jeopardize our economy."
The bill has been called the "strongest set of Wall Street reforms in three generations" by Elizabeth Warren, who chairs the nonpartisan Congressional Oversight Panel. It has won the endorsement of the AARP, Consumer Federation of America, Consumers Union, Council of Institutional Investors, National Fair Housing Alliance, and the National Restaurant Association, among many others. The bill was debated for more than 50 hours, and was amended to include over 70 Republican and bipartisan amendments.
The conference report on the bill passed the House on a vote of 237 to 192, and now goes to the Senate.
Highlights of the Wall Street Reform and Consumer Protection Act
Ends "Too Big to Fail" Bailouts: Ends the practice of having taxpayers being asked to bail out financial firms by establishing an orderly process for dismantling and liquidating large, failed financial firms like AIG or Lehman Brothers in a way that protects taxpayers and prevents contamination of the rest of the financial system.
Consumer Protections with Authority and Independence: Creates a new independent Consumer Protection Financial Bureau, housed at the Federal Reserve, with the authority to ensure American consumers get the clear and accurate information they need to shop for mortgages, credit cards, and other financial products and protect them from hidden fees, abusive terms and deceptive practices. The Bureau will be led by an independent director appointed by the President and confirmed by the Senate, and for the first time creates a national consumer complaint hotline so that consumers will have a single toll free number to report problems with financial products and services. Further, the Bureau will be able to act fast, since they will constantly be on the lookout for bad deals and schemes and will not have to wait for Congress to pass a law in order to act.
Audit of the Federal Reserve: Authorizes the Government Accountability Office (GAO) to conduct an audit of all Federal Reserve 13(3) emergency lending that took place during the financial crisis. Details on all lending will be published on the Federal Reserve website by December 1, 2010. In the future, GAO will have ongoing authority to audit the Federal Reserve's 13(3) emergency lending, discount window lending, and open market transactions. Furthermore, GAO will conduct a study of the current system for appointing Federal Reserve Bank directors, to examine whether the current system effectively represents the public, and whether there are actual or potential conflicts of interest.
Advance Warning System: Creates a Financial Stability Oversight Council to identify and address systematic risks posed by large, complex companies, products, and activities before they threaten the stability of the economy. The Council will be chaired by the Treasury Secretary and is made up of 10 federal financial regulators from the Federal Reserve Board, Security and Exchange Commission (SEC), U.S. Commodity Futures Trading Commission (CFTC), Office of Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Federal Housing Finance Agency (FHFA), National Credit Union Administration (NCUA), and the new Consumer Financial Protection Bureau. The Council will also be comprised of an independent appointee with insurance expertise and 5 nonvoting members from the Office of Financial Regulation (OFR), the newly created Federal Insurance Office (FIO), and state banking, insurance, and securities regulators.
"PayGo" Compliant: According to the independent and nonpartisan Congressional Budget Office (CBO), the costs of the new agencies created in this bill are more than fully offset and actually reduce the deficit by $3.2 billion over 10 years. CBO estimates that this Act will save $2.1 billion over 10 years by making the system more stable and providing for an orderly liquidation system and reduces federal spending by $14.5 billion over 10 years by ordering the FDIC to return the deposit insurance fund to a healthy reserve ratio and increasing the insured deposit level to $250,000.
Executive Compensation: Addresses pay practices that encourage executives to take excessive risk at the expense of their companies, shareholders, employees, and ultimately the American taxpayers by giving shareholders a "say on pay"--an advisory vote on pay practices including executive compensation and golden parachutes. This legislation also enables regulators to ban inappropriate or imprudently risky compensation practices, and requires financial firms to disclose any compensation structures that include incentive-based elements.
Investor Protections: Strengthens the Securities and Exchange Commission's (SEC) power so that it can protect investors better and regulate the nation's securities markets. The bill also calls for an independent, comprehensive study of the entire securities industry that will identify needed reforms and force the SEC and other entities to improve investor protection.
Regulation of Derivatives: Regulates, for the first time, the over-the-counter (OTC) derivatives marketplace. Under the bill, all standardized swap transactions between dealers and "major swap participants" would have to be cleared and traded on an exchange or electronic platform. The bill defines a major swap participant as anyone who maintains a substantial net position in swaps, exclusive of hedging for commercial risk, or whose positions create such significant exposure to others that it requires monitoring.
Hedge Fund, Private Equity and Private Pools of Capital Registration: Fills a regulatory hole that allows hedge funds and their advisors to escape any and all regulation. This bill requires almost all advisers to private pools of capital to register with the SEC. Further, they will be subject to systemic risk regulation by the Financial Stability regulator.
Mortgage Reform and Anti-Predatory Lending: Incorporates the tough mortgage reform and anti-predatory lending bill the House passed earlier this year. This legislation outlaws many of the worst practices that marked the subprime lending boom, and it would ensure that mortgage lenders make loans that benefit the consumer. Further, this bill establishes a simple standard for all home loans by ensuring that the industry follows basic principles of sound lending, responsibility, and consumer protection. For instance, institutions must be sure that borrowers can repay the loans they take out.
Credit Score Protections: Addresses the role that credit rating agencies played in the economic crisis, and takes strong steps to reduce conflicts of interest, reduce market reliance on credit rating agencies, and impose a liability standard on the agencies.
Office of Insurance: Creates a Federal Insurance Office that will monitor all aspects of the insurance industry, identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis and undermine the financial system.