House Creates Consumer Protection Agency

Yet another agency could be coming to the U.S. government, a prospect that may be welcomed by Washington office developers but is dreaded by most of the business community.

On a 223-202 vote, the House today passed sweeping changes in how the financial industry is regulated. The legislation aims to prevent the type of systemwide collapse that Wall Street faced a year ago by creating an interagency council that would identify financial firms and activities that could pose a systemic risk to the financial system, and subject them to increased oversight and regulation. It also would establish a process for unwinding one of these firms if it does collapse.

The legislation also would create a Consumer Financial Protection Agency, which consumer groups contended is needed because banking regulators have failed to rein in abusive practices by the financial industry.

“Had the Consumer Financial Protection Agency existed during the go-go years earlier this decade, it could have prevented millions of consumers from being ripped off—and protected the banks from themselves,” said Public Citizen president Robert Weissman. “The financial crisis would have been significantly less severe.”

Banks and business groups vigorously fought the creation of this new agency, which they said would add an unnecessary layer of regulation, reduce choices of financial products for consumers, stifle innovation, and make credit even harder to get. They hope the close House vote will improve their chances of blocking the agency in the Senate, which will take up the bill next year.

“The CFPA will have massive authority to regulate businesses in virtually all industries, even those not directly involved in consumer finance,” said David Hirschmann, president and CEO of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. “This legislation was written with far-too-broad definitions and vague regulatory standards, exposing businesses to excessive regulation and potential litigation.”

Edward Yingling, president and CEO of the American Bankers Association, said the CFPA “could make it very difficult for banks to effectively serve their consumer and business customers.”

The House, on a 208-223 vote, rejected an amendment that would have replaced the CFPA with a council composed of existing financial regulators. This council would identify areas where new consumer protection regulations are needed and prescribe consistent disclosure standards for financial products.

Representative Walt Minnick, Democrat from Idaho, said this council would only cost $50 million, compared with the estimated $4.6 billion cost of creating the CFPA. Plus, splitting regulatory responsibility for banking regulations would “lead to conflicts, inaction, failure, and frustration,” he said.

Republicans unanimously agreed, but only 32 other Democrats voted for Minnick’s amendment.

Representative Barney Frank said banking regulators have made consumer protection a lower priority than a bank’s safety and soundness, and substituting the council for the CFPA would “perpetuate the problem.”

Shortly after losing the amendment to kill the CFPA, Republicans unsuccessfully tried to strike the bill’s provisions and substitute language that would end the Troubled Asset Relief Program.

TARP, said Representative Jeb Hensarling has “turned us into a bailout nation” and is being used as a revolving fund to support the Obama administration’s social agenda.

Frank said this motion, which failed on a 190-232 vote, proved that Republicans “were just playing” about reform when they argued that a council of regulators was a better way to protect consumers from abusive financial products than a new agency.

Through this motion, the Republicans “use anger over TARP to frankly make sure we need another one, because they kill all regulation,” he said.

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Kent Hoover is the Washington bureau chief for bizjournals.