On March 14, 2010, Senate Banking Committee Chairman Christopher Dodd (D-Conn.) unveiled the latest development in the ongoing Congressional push for comprehensive reform of the U.S. financial services industry – his proposal for financial reform (the “Proposal”). Dodd’s Proposal includes sweeping reforms across the financial system, and provides for the creation of a Consumer Financial Protection Bureau. Instead of the independent Consumer Financial Protection Agency approved by the House of Representatives, the Senate’s proposed Consumer Financial Protection Bureau would act as a watchdog entity housed in and funded by the Federal Reserve Board. A director appointed by the President for a five-year term would head the Bureau.
In terms of organizational structure, the Proposal provides for the establishment of specific functional units, including research, community affairs, and collecting and tracking consumer complaints. The Proposal also provides for the creation of the Office of Fair Lending and Equal Opportunity, the Office of Financial Literacy and a Consumer Advisory Board.
With respect to powers, the Bureau would have general rulemaking, examination, and enforcement authority over banks and credit unions with total assets greater than $10 billion, mortgage-related businesses, and non-bank financial companies. The Bureau would have rulemaking and enforcement authority over existing federal consumer financial laws. The proposal would also authorize the Bureau to promulgate rules that prohibit unfair, deceptive, or abusive acts or practices in connection with a consumer financial product or service, to require disclosures in connection with consumer financial products or services, and to prohibit or limit mandatory pre-dispute arbitration among other things.
Dodd’s Proposal includes an interesting check on the Bureau’s powers. It would establish a Financial Stability Oversight Council responsible for monitoring and addressing systemic risks in the U.S. financial system. The Council would have the ability to set aside a rule promulgated by the Bureau if the Council determines by a 2/3rd vote that the rule would jeopardize the safety and soundness of the U.S. financial system.
The Senate proposal also includes provisions related to preemption of state law for national banks and federal savings banks. Dodd’s proposal calls for the preemption of state consumer financial laws only if (1) application of state law would have a discriminatory effect on federally chartered banks, as compared to the effect of the law on a state-chartered bank; (2) a court or the Office of the Comptroller of the Currency (“OCC”) by regulation or order determines, on a case-by-case basis, that the law is preempted in accordance with the legal standard set forth in Barnett Bank v. Nelson, 517 U.S. 25 (1996); or (3) “the State consumer financial law is preempted by a provision of Federal law other than this title.” This third provision appears to preserve the current preemption standards under the National Bank Act and the Home Owner’s Loan Act. The proposal would also overturn the U.S. Supreme Court’s decision in Watters v. Wachovia and establish that non-bank subsidiaries and affiliates cannot assert the same preemption as their parent banks. Finally, the proposal would codify the U.S. Supreme Court’s decision in Cuomo v. The Clearing House Association, LLC, that allows state attorneys general to enforce non-preempted consumer protection statutes against national banks and federal savings associations. The proposal would require a state attorney general to consult with the OCC before commencing any such enforcement action.
The Senate Banking Committee is expected to mark up the bill in late March. If the Senate Banking Committee approves the bill, it will go to the full Senate for approval. If the Senate approves the bill, it must be reconciled with the financial reform package passed by the House of Representatives in December 2009. Congressman Barney Frank (D–Mass.), chairman of the House Financial Services Committee expressed hope that the two houses could reach a consensus: “There are some differences between the House-passed bill and Senator Dodd’s version, but they are more alike than they are different. I believe that we will be able to work constructively together to meet the public need for a tough, comprehensive bill.”
Meghan Musselman is an associate in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Meghan at 410-865-5403 or by email at mmussleman@hudco.com.