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Dodd Goes Solo; Unveils New Financial Reform Bill

March 16, 2010

The legislation that aims to create a new consumer protection watchdog  was resurrected yesterday in the Senate, but the new financial bill received a cold reception, both from those for and against the creation of a new federal entity.

Unveiling it more than 18 months after the financial crisis and after lengthy negotiations, Senator Chris Dodd (D-Conn.) said the new financial reform bill will protect against future crises. The legislation would give the Federal Reserve Bank the power to regulate the biggest players in the financial system, create a new consumer protection agency in the Fed, and end government bailout for firms considered to big to fail.

“We must restore confidence and optimism in our economy, accountability in our markets, and stability to our middle class,” Dodd said during a press conference yesterday. “The point of this bill is not to punish the financial services industry.”

In a statement released yesterday, Chris Stinebert, president and CEO of the American Financial Services Association (AFSA), said the creation of another federal entity could curtail activity of financial companies, which, according to Federal Reserve statistics in January, account for approximately $1.228 trillion in non-mortgage credit outstanding. He added that consumers will be the ultimate losers, as they’ll end up with higher costs, limited credit access and fewer choices.

“AFSA has major concerns with this proposal, as we believe it’s bad for consumers and problematic for our members,” Stinebert said. “Finance companies account for approximately 50 percent of non-mortgage consumer credit outstanding. Much of this activity is likely to be curtailed if these lenders are subject to a new, untested consumer protection bureau whose rulemaking authority is vast but largely undefined.”

Far less sweeping than Dodd’s original reform bill, the legislative package will not create an independent consumer protection agency as first proposed. Instead, it will create a consumer division within the Federal Reserve Board that could have proposals overridden by a proposed systemic council. That council will be tasked with identifying unsafe products or practices that could threaten the country’s economic stability.

The original Dodd bill would also have taken away the Fed’s bank supervisory responsibility and created a single regulatory for all banks. The new version does not.

Under the new bill, the Fed would lose oversight of holding companies and state banks with less than $50 billion of assets. However, it would keep its authority to oversee all large financial holding companies.

The bill would also allow the new consumer division to write rules for banks and non-banks while providing the division with enforcement powers over banks with more than $10 billion in assets, all mortgage-related companies and large nonbanks such as payday lenders.

Dodd’s original draft also would also have created a Financial Institutions Regulation Administration. The new bill aims to eliminate the Office of Thrift Supervision and merge its responsibilities with the Office of the Comptroller of the Currency.

The changes didn’t impress the members of the National Community Reinvestment Coalition (NCRC), a national organization that promotes access to basic banking services to create and sustain affordable housing and job development in underserved communities.

“Senator Dodd’s bill fails to ensure a regulatory framework that will provide strong protections for consumers,” said John Taylor, president and CEO of the NCRC. “In particular, placing the CFPA at the Federal Reserve and giving existing financial regulators veto power undermines the goal of protecting consumers.”

Dodd had been working with Senator Bob Corker (R-Tenn.) for weeks to close differences with Republicans over key provisions in the previous legislation, including consumer protection. However, those differences remained unsettled.

Political analysts believe that Dodd is attempting to get the bill passed through committee before attention in the Senate returns to health care reform. While acknowledging that pressure in an interview with PBS NewsHour, Dodd said that with 60 legislative days left, it was time to move on.

“Jobs have been lost. Homes, retirement have been lost,” he told host Judy Woodruff. “The economic carnage is significant. And we need to step up and do the job.”

It is unclear whether Dodd will get the necessary Democratic votes to pass the bill along partisan lines, although political insiders believe Dodd will get the support he needs. Analysts also believe the package Dodd put forth will allow for further negotiations with Republicans on the Senate floor.

The question is whether President Obama, who threw his support behind Dodd’s bill yesterday, will allow for a weaker bill. “As the bill moves forward, I will take every opportunity to work with Chairman Dodd and his colleagues to strengthen the bill and will fight against efforts to weaken it,” Obama said in statement released yesterday.

The AFSA, which represents the major players in the auto finance industry, is encouraging the Senate Banking Committee to vote against the proposal and to consider consumer protection alternatives that will retain borrowers’ choice and consolidated regulatory oversight for financial institutions.

“While the proposal appears to acknowledge the need for a balanced approach to consumer protection and prudent oversight, it does not achieve this objective,” said Stinebert. “The autonomy that would be given to the proposed new Consumer Financial Protection Bureau within the Federal Reserve creates the strong potential for future consumer protection rules that conflict with prudential requirements established by other federal banking regulators.”

Dodd’s New Proposal

So far, Senator Dodd’s new proposal for financial reform hasn’t please either side of the aisle, but it’s believed the package put forth was created to allow for negotiations on the Senate floor once it gets out of the Senate Banking Committee. Below are quotes from Dodd’s press conference yesterday regarding the four major reforms his legislation addresses:

  1. “The legislation will end too-big-to-fail bailouts. Never again should the American tax payer be asked to write a check to because of an implicit guarantee that the federal government will bail out a company when it collapses,” he said.
  2. “The legislation will create a strong and independent consumer protection watchdog. The important part is that the consumer protection watchdog has the independence and the authority to get the job done. It will be there to protect consumers from the abuses that we’ve seem become almost standard operating procedures,” he said. 
  3. “This legislation will create an early warning system, so someone is tasked for looking out for the next crisis. We will create a systemic risk council with the job of scanning the economic radar to identify unsafe products or practices that could threaten our economic stability,” he said.
  4. “This legislation will bring transparency and accountability to exotic instruments like hedge funds and derivatives that have for far too long lurked in the shadows of our economy,” he said.

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