The Green Sheet Online Edition
November 23, 2009 • Issue 09:11:02
Insider's report on payments
Regulatory reforms loom
Efforts to reform the federal financial services regulatory structure are on the congressional fast track. I use the term "fast" in the context of legislative time frames: It won't happen next week; it may not happen in the current session of the U.S. Congress, but the rhetoric and likelihood of reform legislation is certain to increase in 2010.
Never has it seemed more obvious that the deregulation trend that began more than 20 years ago, freeing financial services firms from the shackles of Depression-era mandates, has ground to a halt. A little over a year since the federal government came to the rescue of a financial sector on the verge of collapse, lawmakers are beginning to extract recompense.
Earlier in 2009, Congress passed and President Obama signed into law the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (Credit CARD Act), following years of pressure from consumer lobbyists. It imposed sweeping changes in the way credit card issuers impose and collect fees from cardholders and will take effect in early 2010.
Now, in response to claims by critics that issuers have been raising fees in anticipation of the new rules, leaders in the House and the Senate want the bill to take effect today. The House approved legislation (H.R. 3639) to accelerate implementation of the Credit CARD Act; in the Senate a similar bill (S. 1799) was introduced by Sen. Chris Dodd, D-Ct., Chairman of the Senate Banking Committee.
Provisions of the Credit CARD Act include:
- A prohibition against "arbitrary" interest rate increases
- Prohibitions against over-limit fees and "double cycle" billing
- Required reviews of past rate increases
- Procedures for applying cardholder payments
- Required parental consent before consumers under the age of 21 can obtain credit cards
"We worked long and hard to enact the safeguards in the Credit CARD Act, and no sooner had it been signed into law, but credit card companies were looking for ways to get around the protections this Congress and the American people demanded," Dodd said in introducing the bill in October. "At a time when families are struggling to make ends meet, jacked up rates can quickly create crushing debt. People need to be responsible with their money, but they shouldn't be taken to the cleaners by outrageous rates."
Barney Frank, D-Mass, has been more vocal, taking his complaints to the airwaves as well as the halls of Congress. During a Nov. 4 debate over the bill on the House floor, he railed against card issuers raising fees and changing terms. "It's the single unfairest economic transaction I can think of that doesn't involve a pistol," he said.
Also, in an interview aired on Nov. 9 by National Public Radio's "All Things Considered," Frank asserted that the latest round of card rate hikes is building support for a consumer financial protection agency. "People now understand the need for an ongoing supervisory power that's aimed at consumers and not as an afterthought to bank regulation," he told the interviewer
Focus on consumers
The notion of a consumer protection agency directed at financial services isn't new, but it seems to be gaining converts. Legislation in both houses of Congress would create a new consumer protection agency entrusted with rule-making and enforcement duties that are today spread among six federal agencies (financial institution regulators and the Federal Trade Commission).
The new agency would be run by a five-person board that includes one regulator and an independent director, and it would have broad authority to develop and enforce rules at all types of financial services firms, not just banks and credit card issuers.
One version of that legislation has been approved by the House Financial Services Committee and is now awaiting a vote by the full House.
A statement from Dodd's office detailing the omnibus financial regulatory reform bill he introduced Nov. 11, 2009, read, "American consumers already have protections against faulty appliances, contaminated food and dangerous toys.
With the creation of the Consumer Financial Protection Agency, they'll finally have a watchdog to oversee financial products, giving Americans confidence that there is a system in place that works for them - not just big banks on Wall Street.
"The economic crisis was driven by an across-the-board failure to protect consumers. When consumer protections are handled by regulators whose primary responsibility is to safeguard the profitability of the companies they regulate, consumer protections don't get the attention they need. The result has been unfair, deceptive and abusive practices being allowed to spread unchallenged, nearly bringing down the entire financial system."
Dodd's bill calls for a consumer protection board to regulate the "Shadow Banking Industry." An analysis of the bill provided by Dodd's office uses examples like mortgage companies and payday lenders.
But it wouldn't be a stretch to expect a final provision that includes other loosely regulated activities and services like in-store ATM and prepaid card programs.
Interchange might even land in this agency's lap if merchants and their allies succeed in making interchange a consumer issue. Although there had been speculation that Dodd would address interchange in his omnibus reform package, highlights of the bill (1,136 pages) include no mention of interchange or merchant card processing fees.
These are key reforms in Dodd's omnibus reform bill:
- An end to the notion that any financial institution is "too big to fail"
- Reorganization of regulatory responsibilities, for example, eliminating the Fed's bank regulatory mission and consolidating all financial institution regulation into a single agency
- Government and board oversight of executive compensation
"This is not a time for timidity," Dodd said during a press briefing on the bill. "It is the job of Congress to restore responsibility and accountability in our financial system to give Americans confidence that there is a system in place that works for and protects them."
One component of the Federal Reserve's current mission that isn't addressed by pending reform legislation is its role in the payments system. The Monetary Control Act of 1980 mandated, among other things, that the Fed provide competitively priced payment services (check, wire and automated clearing house transaction processing) to federally insured financial institutions.
Deliberation over regulatory reforms will likely address this important function.
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at email@example.com.
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