Financial regulatory reform: analysis of the Consumer Financial Protection Agency (CFPA) as proposed by the Obama administration and H.R. 3126.(Congressional Research Service)(Report)

July 17, 2009

Summary

In the wake of what many believe is the worst U.S. financial crisis since the Great Depression, the Obama Administration has proposed sweeping reforms of the financial services regulatory system, the broad outline of which has been encompassed in a nearly 90-page document called the President's White Paper (the White Paper or the Proposal). The Proposal seeks to meet five objectives:

(1) "Promote robust supervision and regulation of financial firms";

(2) "Establish comprehensive supervision and regulation of financial markets";

(3) "Protect consumers and investors from financial abuse";

(4) "Improve tools for managing financial crises"; and

(5) "Raise international regulatory standards and improve international cooperation."

The Administration likely will offer specific legislative proposals that would implement each of the five objectives of the White Paper. On June 30, 2009, the Obama Administration made available the first such legislative proposal, called the Consumer Financial Protection Agency Act of 2009 (the CFPA Act or the Act). The Act would establish a new executive agency, the Consumer Financial Protection Agency (the CFPA or the Agency), to protect consumers of financial products and services. On July 8, 2009, Representative Barney Frank, Chairman of the House Financial Services Committee, introduced very similar legislation, H.R. 3126, which also is entitled the CFPA Act of 2009.

This report provides a brief summary of the President's CFPA Act and delineates some of the substantive differences between it and H.R. 3126, as introduced. It then analyzes some of the policy implications of the proposal, focusing on the separation of safety and soundness regulation from consumer protection, financial innovation, and the scope of regulation. The report then raises some questions regarding state law preemption, sources of funding, and rulemaking procedures that the Act does not fully answer.

Contents

Introduction
Summary of the CFPA Act
H.R. 3126, Chairman Frank's CFPA Act of 2009
Would the CFPA Be An Improvement?
   Redundancy?
   Financial Innovation Jurisdiction
Questions Left Unanswered
   Preemp
   Funding
   Rulemaking

Contacts

Author Contact Information

Introduction

In the wake of what many believe is the worst U.S. financial crisis since the Great Depression, the Obama Administration has proposed sweeping reforms of the financial services regulatory system, the broad outline of which has been encompassed in a nearly 90-page document called the President's White Paper (the White Paper or the Proposal). (1) The Proposal seeks to meet five objectives:

(1) "Promote robust supervision and regulation of financial firms" through the creation of an oversight council of the primary federal financial regulators; the provision of systemic risk oversight powers for the Federal Reserve; heightened prudential standards for financial firms; and increased federal oversight of institutions that are unregulated or only lightly regulated under current law;

(2) "Establish comprehensive supervision and regulation of financial markets" by enhancing regulation over credit rating agencies; requiring originators and issuers to retain a long-term interest in securitized loans; regulating over-the-counter (OTC) derivatives; and providing the Federal Reserve with new oversight authority of payment, settlement, and clearing systems;

(3) "Protect consumers and investors from financial abuse" through the creation of a new executive agency devoted exclusively to consumer protection of financial products and services;

(4) "Improve tools for managing financial crises" by establishing an insolvency regime for systemically significant financial institutions and improving the Federal Reserve's emergency lending powers; and

(5) "Raise international regulatory standards and improve international cooperation" by coordinating oversight of international financial firms and other regulatory changes. (2)

The Administration likely will offer specific legislative proposals that would implement each of the five objectives of the White Paper. On June 30, 2009, the Obama Administration made available the first such legislative proposal, called the Consumer Financial Protection Agency Act of 2009 (the CFPA Act or the Act). (3) The Act would establish a new executive agency, the Consumer Financial Protection Agency (the CFPA or the Agency), to protect consumers of financial products and services. On July 8, 2009, Representative Barney Frank, Chairman of the House Financial Services Committee, introduced very similar legislation, H.R. 3126, which also is entitled the CFPA Act of 2009.

This report provides a brief summary of the President's CFPA Act and delineates some of the substantive differences between it and H.R. 3126, as introduced. It then analyzes some of the policy implications of the proposal, focusing on the separation of safety and soundness regulation from consumer protection, financial innovation, and the scope of regulation. The report then raises some questions regarding state law preemption, sources of funding, and rulemaking procedures that the Act does not fully answer.

Summary of the CFPA Act

Under the Act, the CFPA would be headed by …