Financial Regulatory Reform: Consumer Financial Protection Agency Moves Forward

October 22, 2009

The Gibson, Dunn & Crutcher Financial Markets Crisis Group is closely tracking government responses to the turmoil that has catalyzed a dramatic and rapid reshaping of our capital and credit markets. We are providing updates on key regulatory and legislative issues, as well as information on legal and oversight issues that we believe could prove useful as firms and other entities navigate these challenging times. This update focuses on the House Financial Services Committee’s consideration and approval of H.R. 3126, the Consumer Financial Protection Agency Act of 2009.

The CFPA has been one of the most contentious components of financial regulatory reform thus far.  The agency has been heralded for its singular focus on consumer protection, while, at the same time, it has been disparaged by the business community and others as an expensive and dangerous new layer of bureaucracy.

Throughout hearings and the mark-up, which took place over a marathon five-day session, Democrats sounded the theme that current regulators have failed to fulfill their mandate to protect consumers and that the new CFPA would have both the proper tools and motivation to curb abuses like no-doc loans and payday lending.  Republicans, on the other hand, stressed that the Agency would reduce consumer choice in financial products, increase the cost of credit, and slow economic growth.

Ultimately, the measure was approved, as amended, by a vote of 39 to 29, but before that happened, committee members offered amendments in a number of broad areas.  Below, we have compiled many of the most significant amendments in each area.  Please note that, when drafting this alert, we generally did not have access to amendment text and, hence, the summaries contained herein are based largely upon debate over amendments during the mark-up.  Copies of amendments will be made available on the House Financial Services Committee website at  http://financialservices.house.gov/markups.shtml.

Exemptions from Agency Regulation

Some of the most significant amendments offered sought to exempt certain institutions, people, and practices from CFPA regulation.  The first amendment offered, by Representative Joe Donnelly (D-IN), exempted manufacturers of modular homes.  Republicans, particularly Representative Jeb Hensarling (R-TX), used Representative Donnelly’s amendment to make the point that the CFPA legislation would become a bill riddled with carve-outs.   The committee adopted amendments to exempt a number of products and practices from CFPA regulation, including:

  • Representative Brad Miller’s (D-NC) amendment to exempt banks whose assets under management are less than $10 billion and credit unions whose assets are under $1.5 billion from significant parts of CFPA coverage.  Their prudential regulators will continue to regulate and examine them, though they still would be subject to the CFPA’s rules.  The CFPA can step in to conduct examinations and enforcement if the prudential regulators fail to do so.  Republican Representatives Hensarling and Scott Garrett (R-NJ) countered with an amendment to exempt these same institutions from the CFPA entirely, which was defeated by a party-line roll call vote;
  • Chairman Frank’s amendment to clarify that stores that offer store credit will not fall under the CFPA’s purview;
  • Representative Tom Price’s (R-GA) amendment to exempt employee pension benefit plans;
  • Representative John Campbell (D-CA) and Bill Posey’s (R-FL) amendment to exempt automobile dealers, including those that finance automobile purchases by non-retail customers;
  • Representative Dennis Moore (D-KS) and Erik Paulsen’s (R-MN) amendment to exempt forms of insurance, including auto, life, and homeowners;
  • Representative Donnelly’s amendment to exempt manufacturers of modular homes.

Limitations on the CFPA’s Powers

Several amendments, mostly offered by Republicans, would have limited the CFPA’s authority and rights created under the CFPA.  These amendments, which were defeated, included:

  • Representative Hensarling’s amendments to prevent the CFPA from banning products, and, more specifically, from banning 30-year fixed rate mortgages;
  • Representatives Royce and Garrett‘s amendment to subject the CFPA’s regulation to veto by prudential regulators;
  • Representative Hensarling’s amendment to indicate that no private right of action would be established under regulations promulgated by the CFPA;
  • Representative Price’s amendment to strike the provision that would limit the ability to use arbitration in future disputes.

Financial Autopsies

Representatives Alan Grayson (D-FL) and William Lacy Clay (D-MO) offered an amendment to mandate that the CFPA carry out an annual "financial autopsy" of each state to discover which products and practices appeared to cause bankruptcies and foreclosures.  The CFPA then would be required to ban or restrict those products and practices.  The Committee defeated the amendment by roll call vote, but adopted a similar amendment offered by Representative Ed Perlmutter (D-CO), which requires the CFPA merely to study the products and practices that, in fact, were proven to cause bankruptcies and foreclosures. 

Preemption of State Laws

Major financial institutions have been particularly concerned that the CFPA would create a floor, rather than a ceiling, for financial consumer protection standards, which potentially could subject them to fifty different regulatory schemes.  Representatives Mel Watt (D-NC) and Moore offered an amendment to grant preemptive effect to federal law if a state law would have a discriminatory effect on national banks. 

Representative Melissa Bean (D-IL) planned to offer an amendment that would establish broader preemption.  Because her teenage daughter contracted swine flu and exposed her to the virus, she was banned from flying back to Washington for the mark-up.  Representative Perlmutter offered the amendment in her stead, but withdrew the amendment immediately after he offered it.

Representative Hensarling then re-introduced the amendment after Representative Perlmutter withdrew it, arguing that the banking system already is overburdened with too many regulatory schemes.  Ultimately, the Committee adopted the Watt-Moore amendment and defeated the Hensarling second degree amendment.

Definitions and Clarifications

A key criticism of the CFPA legislation has been that its terms are overbroad, which may grant the new agency authority over products and practices unintended by Congress and which may encourage litigation.  The Committee adopted several amendments focused on addressing those concerns by tightening the bill’s language, including:

  • Chairman Barney Frank’s (D-MA) Manager’s Amendment, which redefined "service providers" to mean those who have a direct relationship to a product to ensure that those parties providing ministerial support services are not swept under the regulatory scheme.  Also in his Manager’s Amendment, Chairman Frank redefined "investment advice" so as to exclude news articles;
  • Representatives Randy Neugebauer (R-TX) and Christopher Lee’s (R-NY) amendment to clarify that the CFPA does not mandate that financial institutions provide "plain vanilla products";
  • Chairman Frank agreed to work with Ranking Member Bachus to develop tighter definitions of "abusive," "unfair," and "deceptive."

Board Representation

The Committee adopted several amendments addressing the composition of the CFPA’s board and addressing the concerns of minority communities, including:

  • Representative Maxine Waters’ (D-CA) amendment to require that at least five board members be from communities affected by predatory lending, as amended by Representative Michele Bachmann’s (R-MN) amendment to prevent anyone who has been indicted for abusive consumer practices from serving on the board;
  • Representative Charles Wilson’s (D-OH) amendment to require that the CFPA board be bipartisan.

Other Amendments

The Committee adopted several non-controversial amendments throughout the debate, including:

  • Representative Posey’s amendment to include a disclaimer on public statements by the CFPA director that the agency does not endorse any financial product or service and that consumers need to exercise their own due diligence; 
  • Representative Gary Miller’s (R-CA) amendment to mandate that when the CFPA promulgates rules regarding compensation practices, those rules must apply equally to financial institutions, regardless of size, character or status;
  • Representatives Carolyn Maloney (D-NY) and Mary Jo Kilroy’s (D-OH) amendment to establish a help line and website;
  • Representatives Jim Himes (D-CT), Maloney, Kilroy’s amendment to create an office of an ombudsman at the CFPA to help resolve disputes between consumers and financial institutions;
  • Representative Maloney’s amendment to require the CFPA director to appear before the House Financial Services Committee once a year.

Gibson, Dunn & Crutcher LLP

Gibson Dunn has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above.  Please contact Michael Bopp (202-955-8256, mbopp@gibsondunn.com) in the firm’s Washington, D.C. office or any of the following members of the Financial Markets Crisis Group:

Public Policy Expertise
Mel Levine – Century City (310-557-8098, mlevine@gibsondunn.com)
John F. Olson – Washington, D.C. (202-955-8522, jolson@gibsondunn.com)
Amy L. Goodman – Washington, D.C. (202-955-8653, agoodman@gibsondunn.com)
Alan Platt – Washington, D.C. (202- 887-3660, aplatt@gibsondunn.com)
Michael Bopp
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Mark K. Schonfeld – New York (212-351-2433, mschonfeld@gibsondunn.com)

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Chuck Muckenfuss – Washington, D.C. (202- 955-8514, cmuckenfuss@gibsondunn.com)
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Richard Russo – Denver (303- 298-5715, rrusso@gibsondunn.com)
Dennis Friedman – New York (212- 351-3900, dfriedman@gibsondunn.com)
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Executive and Incentive Compensation Expertise
Stephen W. Fackler – Palo Alto (650-849-5385, sfackler@gibsondunn.com)
Charles F. Feldman – New York (212-351-3908, cfeldman@gibsondunn.com)
Michael J. Collins – Washington, D.C. (202-887-3551, mcollins@gibsondunn.com)
Sean C. Feller – Los Angeles (213-229-7579, sfeller@gibsondunn.com)
Amber Busuttil Mullen – Los Angeles (213-229-7023, amullen@gibsondunn.com

© 2009 Gibson, Dunn & Crutcher LLP

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