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May 21, 2010 Friday 1:32 PM EST
SECTION: PERSONAL FINANCE
LENGTH: 1418 words
HEADLINE: Consumers win protections in bank-reform bill
BYLINE: Ruth Mantell, MarketWatch mailto:firstname.lastname@example.org.
Ruth Mantell is a MarketWatch reporter based in Washington.; Ronald D. Orol, MarketWatch mailto:email@example.com.
Ronald D. Orol is a MarketWatch reporter, based in Washington.
This update corrects the spelling of Olympia Snowe’s name.
WASHINGTON (MarketWatch) — Borrowers will be better protected from unscrupulous lenders and predatory loans thanks to the far-reaching bank-reform bill the U.S. Senate passed Thursday night, consumer advocates said Friday.
Along with new regulations governing the biggest financial institutions and the riskiest practices, the legislation calls for creating a consumer financial-product watchdog, which would write rules for companies that provide mortgages, credit cards and other products and services. The consumer watchdog would also gather information about emerging risks to consumers and the marketplace, among other actions.
“Yesterday we won an enormous victory for Main Street against Wall Street,” said Heather Booth, executive director of Americans for Financial Reform. “There are predatory lenders that prey on people who are most vulnerable. And now there will be someone looking out for consumers.”
Others agreed. “This is a big win for consumers,” said Travis Plunkett, legislative director of the Consumer Federation of America, in a statement. “The consumer bureau will ensure that credit and payment products do not have predatory or deceptive features that can harm consumers or lock them into unaffordable loans.”
The watchdog will “rein in deceptive marketing practices and require improved disclosure of terms,” Plunkett said. “It will also allow consumers to shop or take out a loan knowing that there is an agency looking out for their best interests.”
Still, some critics say the new rules could reduce access to credit and lead to higher consumer prices for some financial products.
“The consumer financial protection agency will end up proscribing products and that will in effect reduce access to credit for a number of consumers,” said Keith Leggett, senior economist with the American Bankers Association. “Individuals who maybe have had credit in the past may find it tougher to get credit.”
The consumer agency is just one piece of the overall bank-reform bill, which calls for the most significant increase in the regulation of U.S. banks since the Great Depression, placing new restrictions on the nation’s biggest banks and reining in the Federal Reserve.
Final legislation could be enacted into law by July 4, said Barney Frank, D-Mass., chairman of the House Financial Services Committee, who said the bill previously passed by the House is similar to the Senate’s bill. Top leaders from the House and Senate will meet over the next month to reconcile the differences in the bills passed by each chamber and combine them into one law to be signed by President Barack Obama.
After a Friday meeting with Obama at the White House, Frank said the bank-reform bill will empower regulators to be able to deal with new problems going forward. Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, said the United States needs to work with other countries to make sure that rules are harmonized.
Passage of the financial regulation bill in the Senate is the second major legislative accomplishment this year for Obama and the Democratic congressional leaders, following on the heels of the enactment of the health-care bill.
The mammoth legislative package — which passed 59 to 39, with four Republicans voting for the bill — sets up an agency to watch for system-wide risks, creates a mechanism to euthanize huge failing banks, requires the biggest banks to raise more capital and divest their derivatives trading units, changes the way credit-rating agencies are assigned to rate banks’ structured finance securities, and allows Congress to conduct an unprecedented, one-time audit of the Fed’s emergency response programs.
Sens. Scott Brown, R-Mass., Olympia Snowe, R-Maine, Susan Collins, R-Maine, and Charles Grassley, R-Iowa, were the four Republicans who voted for the bill, while two Democrats — Sens. Russ Feingold, D-Wis., and Maria Cantwell, D-Wash., — voted against it. Two Democrats did not vote — Arlen Specter of Pennsylvania and Robert Byrd of West Virginia.
Auto dealers not exempted
Consumer advocates cheered the exclusion of an amendment to the bill that would have exempted some auto dealers from coverage by the watchdog agency, but the final law still may exempt them from oversight. The Senate will vote Monday on whether to instruct the conference committee to accept the House language, which carves out an exception for the auto dealers.
“To its credit, the Senate fought off efforts to carve out auto dealers and other special interests, to put consumer protection under the thumb of the bank regulators who failed us and a myriad of other efforts to weaken the agency,” said Lauren Saunders, managing attorney of the Washington office of the National Consumer Law Center.
However, the House’s bank-reform bill does exempt many auto dealers. The House and Senate need to agree on a single version of the bank-reform bill before it becomes law.
Higher prices for consumers?
The idea behind creating a single consumer watchdog agency is to ensure that important issues don’t fall through regulatory cracks due to negligence or regulators’ conflicts of interest.
Supporters say a strong independent agency and other consumer-protection rules are needed to protect the economy and financial system. But critics counter that consumer protection should not come at the cost of prudent regulation. And the rules could lead to higher prices for consumers, plus restrict the availability of credit, the ABA’s Leggett said.
Also, he said a provision in the Senate bill that aims to reduce merchants’ costs when customers use debit cards may result in bad news for consumers.
“Because this limits fee income, this will materially affect other products that banks offer,” Leggett said. “I’ve heard bankers say that this may limit the extent to which they offer free checking. They are going to have to recoup this revenue someplace else.”
Overhaul in how banks are regulated
Both bills would merge two bank regulators — the Office of Thrift Supervision and the Office of the Comptroller of the Currency — and would create a council of regulators that would set capital standards for big banks and monitor systemic risk.
The House and Senate bills both would create a system to take over and liquidate a failing megabank so that its sudden collapse doesn’t unsettle the markets, as the collapse of Lehman Bros. did in September 2008.
Both bills seek to impose a major new regulatory regime to bring a huge swath of the $450 trillion derivatives market into the open.
Proponents of stronger oversight blame credit-default swaps, a controversial insurance derivative product, for being a central cause of the financial crisis, in part because the interconnected nature of the CDS securities required a $190 billion taxpayer bailout of one of these products’ major vendors, American International Group Inc.
Under both bills, a large swath of derivatives transactions made by big banks, hedge funds and others would be required to go through transparent clearinghouses, which are intermediaries between buyers and sellers of swaps, and put their contracts through exchanges or swap-execution facilities.
Both the House and Senate would exempt many commercial end-users of derivatives, such as airlines and manufacturers, from the clearinghouse requirement.
The House would also exempt pension funds and many hedge-fund investors that are hedging balance-sheet risk, as well as the $60 trillion foreign-exchange market.
The Senate bill gives the Treasury Department the authority to reject new Commodity Futures Trading Commission rules for the foreign-exchange market. That could amount to the equivalent of exemptions, since the Treasury supports exempting the category.
The Senate bill also includes controversial provisions making it easier for investors to nominate a minority slate of directors onto corporate boards using corporate proxy cards. Democrats believe that if shareholders had a greater say in the makeup of corporate boards and the compensation of company directors and executives, banks might have packaged fewer toxic mortgages, and the crisis might have been averted.
However, Republicans argue that those provisions would empower labor unions and environmentalist investor groups in behind-the-scenes conversations at the expense of shareholder value.
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