House Financial Services Committee Chairman Rep. Barney Frank (D-MA) has reportedly proposed suggested changes to President Obama's proposal for a Consumer Financial Protection Agency (CFPA). Some are significant and would make the CFPA a little less controversial.
Reuters summarizes some of the majors changes contained in a memo that Frank sent to lawmakers. His changes are noteworthy: given his positions, he's likely to be one of the chief architects of whatever financial regulation we end up with. I think a few are worth highlighting.
No "Reasonableness" Standard - CFPA will not be able to mandate "reasonableness" standards that would place financial institutions in the untenable position of having to assess whether consumers comprehend the products and services they are being offered. Instead, CFPA will be mandated to improve the current disclosure regime with an emphasis on clarity, simplicity, conciseness, and reduction of regulatory burden.
I think this change is the most significant. This shows Frank isn't comfortable with the idea of putting a bunch of bureaucrats in a room and asking them whether it's "reasonable" that an average person would be able to comprehend a financial product. Neither am I. That leaves a lot of discretion up to whatever administration is in power to control the financial products that are or are not offered. Instead, Frank suggests that consumers' understanding of products should be enhanced and made clearer through better disclosure. This would allow individuals to make an educated decision with richer information, instead of a bureaucrat making the choice for them.
No "Plain Vanilla" Requirement - Financial institutions will not be required to offer plain vanilla products and services and CFPA will not have authority to approve or change business plans.
Both aspects of this change are significant. Some businesses thrive on their ability to offer niche products to consumers. Their business would critically wounded if the "plain vanilla" product provision is included. Clearly, consumers can still get plain vanilla products and services if that's what they desire, just from other firms.
Similarly, the idea that the CFPA would be able to approve or change business plans is frighteningly Orwellian. Business strategies are the very heart of a firm's innovation. By killing a company's ability to mold its strategy would ultimately damage competition, creativity and consumers.
Nonfinancial Businesses Exempt - Merchants, retailers and other nonfinancial businesses will be excluded from the regulation and oversight of CFPA. That means that merchants and retailers can continue to give their customers tabs and layaway plans without becoming subject to a new layer of regulation. Also, doctors and other businesses that bill their customers after a service is provided, including telephone, cable, and internet providers, will be excluded.
This one I find a touch puzzling. Why should retailers continue to be able to do whatever they want when financial firms cannot? This seems to imply that those businesses can develop tricky layaway plans or other payment structures without the same kind of disclosure requirements and other regulatory measures created by the CFPA to protect consumers. I'm not sure why there's a double standard here.
Other Exemptions - In addition to providing clear exclusions for securities, commodities, investment and general insurance products (other than financial planners), the following businesses will not be subject to CFPA regulation for acting in their traditional capacities:
- Accountants and other businesses that perform tax preparation services;
- Real estate brokers and agents;
- Lawyers;
- Auto dealers;
- Telecom, cable and other communications providers;
- Consumer reporting agencies;
- Providers of IRAs, 401(k) plans, 529 plans and pension plans; and
- Service providers that provide strictly ministerial and support services to financial institutions.
Real estate brokers are exempt? Aren't they the ones who originated some of the wackiest, most dangerous mortgage products? It seems that if there's any lesson to learn from the housing bubble it's that rogue mortgage brokers can be very, very destructive.
As with the prior point, I'm still a little unclear why auto dealers and telecom aren't included. Unless Frank means this as a technical point, and their finance arms are still subject to the CFPA it seems like an odd distinction to make. Auto dealers make loans just like banks. Why wouldn't they have to play by the same rules?
In any case, most of Frank's changes seem to be positive. Some of his exclusions seem odd, but overall, I think he did a good job of eliminating some of the wilder suggestions in the proposal. Of course, the CFPA will continue to be controversial, but its critics will have a little less to complain about.
FYI:
Real Estate brokers but buyers in touch with sellers. They typically don't design (or sell) mortgage products. When a deal is reached (or just before it's reached), the buyer gets in touch with a mortgage banker that arranges financing.
Also, auto dealers don't typically make car loans. If you buy or lease a car from, say, Honda, then once you negotiate a price, they put you in touch with Honda Financial Corp (I made up that name, although it could be right...), who handles the financing. The companies have a referral relationship, but they are two separate companies. I assume Frank sought to exclude the former, but not the latter?
Right. And that's what I meant when I said, "Unless Frank means this as a technical point, and their finance arms are still subject to the CFPA." But then, why were such groups included in the original CFPA proposal I wonder?
Real estate brokers = realtors. They broker sales of real estate, not real estate loans.
On the more general issue, think of it this way: if you charge money for extending credit, you're subject to Truth in Lending Act and therefore subject to CFPA. If you're extending credit only in the sense that you're billing someone after providing a service (e.g. lawyers, doctors, phone companies), you're not subject to CFPA.
Realtors and auto dealers get paid for brokering big financial transactions (purchase of a home or car), but it's not really financial services, so they're being excluded from CFPA.
With exceptions for cash sales, everyone extends credit to their customers at some point in the business cycle. I may bill my customer for services, and for the most part, am paid at the conclusion of the services being performed, or within a few days or weeks. Sadly some take months to pay, and we assess interest, etc.
I suppose anything short of immediate payment is an extension of credit, if only for a day or a week.
Not having read the proposed legislation, maybe a per-client dollar amount should be a factor, or something to do with the length of time the credit is extended. Such that someone that owed $300 for a week isn't a triggering factor, but someone that owed $20K for up-to three years would be.
Some of the financial products are offered by the types of businesses that are being shown as exempt. H&R offers financial products to the people thay prepare tax returns for. Clearly they shouldn't be exempt for the credit extended through any financial transaction just because they prepare tax returns. Yet, a tax preparer that didn't provide financial or insurnace products shouldn't be subjected to the same level of rules just because they didn't get paid by their customers for some length of time.
Likewise, lawyers often have receivables due from their clients, but lawyers may also delve into the financial services business.
There should be some separation between the credit extended for certain types of services performed or goods delivered.
CFPA jurisdiction follows the product rather than the firm, so it reflects your proposal exactly. A CPA who does his client's taxes and bills him two months later is not subject to CFPA jurisdiction. A CPA who does his client's taxes, bills him two months later, but also offers a "refund anticipation loan" will be subject to CFPA jurisdiction on the loan.