House Approves Creation of Consumer Protection Agency

By:
Kirk Haverkamp | December 14, 2009

Legislation to establish a Consumer Finance Protection Agency to regulate mortgages, credit cards and other consumer lending was passed by the U.S. House on Friday, along with other measures to regulate financial markets.

The legislation is intended to protect consumers from abusive lending practices and prevent the type of excesses that led to the collapse of subprime mortgage markets and overall financial collapse in 2008. The measure would give the federal government authority to take over failing financial institutions and break up those deemed “too big to fail” if their failure would present a threat to the stability of the overall financial system.
 
The measure was approved on a 223-203 vote, with all Republicans and 27 conservative Democrats opposing.
 

Further changes expected

 
Although some version of the legislation is eventually expected to be enacted, it is far from clear what the final bill will look like. The Senate is expected to make significant changes when it takes up its version of the bill next year and the White House has expressed dissatisfaction with some provisions of the House bill already and may seek to have them strengthened in the final legislation.
 
The House bill has already drawn criticism from both the lending industry and consumer advocates, with the former saying it would expose the financial industry to excessive regulation, with the latter saying it contains too many loopholes to be effective.
 

Would regulate all consumer lending

 
The Consumer Finance Protection Agency established under the bill would have authority over all types of consumer lending – including mortgages, credit cards, auto loans, payday loans and more. On mortgages, the agency would have authority to limit “exotic” mortgage types such as interest-only loans and other types that contributed to the collapse of the subprime mortgage market. The agency would also have authority to regulate credit card practices, including limits on how and when a lender can raise a borrower’s interest rate.
 
Another major aspect of the legislation would be the establishment of a regulator with authority over large financial institutions. Modeled after the FDIC, which has the authority to shut down failing banks, the new regulator would have authority to step in and take over failing financial firms, as well as to dismantle firms that had grown so large as to present a systemic risk to the economy if they should fail, even if a failure is not imminent. The regulator would be funded by a $150 billion reserve generated by a tax on the regulated companies.

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