A vote on the Obama administration’s proposal to create a Consumer Financial Protection Agency has been pushed back to the fall, with Democrats reportedly uncertain they have the votes to enact the bill and other legislation that would overhaul the nation’s financial regulatory system.

A vote on the Obama administration’s proposal to create a Consumer Financial Protection Agency has been pushed back to the fall, with Democrats reportedly uncertain they have the votes to enact the bill and other legislation that would overhaul the nation’s financial regulatory system.

The House Financial Services Committee had planned to move legislation creating a new Consumer Financial Protection Agency out of the committee before Congress adjourns July 31, The Hill reported.

More than a dozen industry groups have urged the committee to slow down the process, and Rep. Barney Frank, D-Mass., has agreed to postpone a markup session on the bill until after Congress returns from summer recess the week of Sept. 7, The Hill reported.

Democrats aren’t certain they have enough votes to support the Obama administration’s planned overhaul of the financial regulatory system, which would also expand the powers of the Federal Reserve, the Wall Street Journal reported.

The Obama administration has proposed creating a Consumer Financial Protection Agency with the power to set standards protecting consumers and the authority to ensure that consumer-protection regulations "are written fairly and enforced vigorously."

As envisioned by the administration, the agency could develop guidelines for "plain vanilla" mortgages with predictable payments and ban "yield-spread premiums," rebates paid by lenders when mortgage brokers place borrowers in high-interest-rate loans.

The American Financial Services Association, which is coordinating industry opposition to the planned agency, questions whether the government should dictate what finance products and services can or cannot be made available to consumers.

The National Association of Realtors has decided not to join the formal opposition to creation of a Consumer Financial Protection Agency (see Inman News story).

Testifying before the House Financial Services Committee at a hearing this week, Moody’s Economy.com Chief Economist Mark Zandi called a Consumer Financial Protection Agency "a good idea."

The financial crisis demonstrated that consumers have a limited understanding of their obligations as borrowers — or the risks they take as investors, Zandi said in his written testimony.

The current regulatory framework disperses the authority to protect consumers too widely — the Federal Reserve, Securities and Exchange Commission (SEC), and Federal Trade Commission (FTC) all have roles — and that authority is not well coordinated and enforced, he said.

Zandi shares the Obama administration’s view that the financial crisis presents "a once-in-a-lifetime opportunity" for regulatory reform, and that changes are needed to restore confidence in the financial system and revive the economy.

The administration’s proposed reforms would fill "most of the holes" in the current regulatory system, and reduce the odds and severity of a future crisis by putting the Federal Reserve in charge of regulating systemic risk, Zandi said.

Had the Federal Reserve been the nation’s systemic risk regulator during the housing boom, "it might have reduced leverage in the entire financial system, particularly with respect to Fannie Mae and Freddie Mac, as the Fed had already publicly expressed its skepticism over their significant risk-taking," Zandi testified. …CONTINUED

Peter J. Wallison, a financial policy analyst with the American Enterprise Institute, said expanding the Federal Reserve’s power to regulate nonbank institutions — such as bank holding companies, insurance companies, securities firms, finance companies or hedge funds — would be a mistake.

Only large commercial banks should be considered "too big to fail" and a risk to the entire financial system, Wallison argued in his prepared testimony.

"Regulating nonbank financial institutions the way we regulate banks … would be like creating Fannie Maes and Freddie Macs in every sector of the financial economy where these institutions are designated for special regulatory treatment," Wallison said.

Nonbank financial institutions are supposed to be risk-takers, Wallison said, and there is no reason to keep them from failing.

"If we were to regulate all these institutions the way we regulate commercial banks, we would suppress the risk-taking that drives growth and innovation in our economy," Wallison said.

Zandi said the increased oversight of such institutions "appears modest," and would include registration of hedge funds, studying the structure on money funds, and collecting more information on insurance companies.

"Since all of these institutions played some role in the crisis, it is important for regulators to know more about them," Zandi said.

While "reasonably well-designed," Zandi said the biggest problem with the Obama administration’s proposed reforms is that they would not fix the current "byzantine regulatory structure," an "alphabet soup of federal and state regulators" that includes the Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS), and Federal Housing Finance Authority (FHFA).

During the housing boom, lenders were able to skirt regulation by establishing corporate structures that fell outside any regulator’s watch, Zandi said, with some of "the most egregious loans" made by real estate investment trusts (REITs) that were "all but ignored" by the SEC.

The Fed has had the authority to issue guidance to all mortgage lenders, regardless of their charter and regulator, since the mid-1990s but did not exercise that authority until well after the foreclosure crisis was under way, Zandi said.

Joint guidance on standards for nontraditional mortgages such as alt-A loans was not issued by the Fed, OCC, OTS, Federal Deposit Insurance Corp. (FDIC) and National Credit Union Administration (NCUA) until late 2006. Guidance on subprime lending standards was delayed until until mid-2007 because regulators could not agree on the exact wording, Zandi noted.

The Obama administration’s proposed reforms would simplify the regulatory framework by eliminating the thrift charter and incorporating the OTC into the FDIC. The reforms would also create a Financial Services Oversight Council to improve coordination between regulators.

But regulators already hold interagency meetings, and the proposed reforms don’t do enough to identify lines of authority among regulators or create mechanisms for resolving differences, Zandi said.


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