Senate financial reform bill embodies consumer protection principles

Senate Banking Committee Chairman Chris Dodd (D-CT) released the Restoring American Financial Stability Act of 2009 today. Woodstock Institute believes the bill contains important provisions that will protect consumers and prevent the risky lending and abusive practices that led to the financial crisis. Sen. Dodd’s proposal will create a Consumer Financial Protection Bureau to crack down on the most egregious abuses from big banks and allow states to act as first responders to stop problems before they escalate.

“While there is room for improvement, we believe this bill goes a long way towards creating a financial system in which all Americans can safely borrow, save, and flourish,” says Woodstock Institute president Dory Rand. “We support Sen. Dodd’s efforts to stand strong against the interests of Wall Street and create a bill that puts Main Street first.”

Under the Dodd proposal, the Consumer Financial Protection Bureau (CFPB) would regulate all financial companies, not only banks. This means that the CFPB will be able to rein in the risky and abusive lending practices of the independent mortgage lenders, payday lenders, and other currently unregulated purveyors of high-cost credit that continue to strip wealth from working families. Woodstock has advocated for the inclusion of nonbank financial institutions in the CFPB’s purview and encourages lawmakers to ensure consumer protections for all financial products, including those offered by nonbank financial companies.

The proposal preserves the ability of states to pass stronger consumer protection laws and makes federal standards a floor, not a ceiling. State Attorneys General are uniquely positioned to respond swiftly and forcefully to their local consumer protection needs. States have often taken action against abusive financial practices, such as subprime mortgage lending and payday lending, long before the federal government has acted.

Woodstock Institute is concerned about some provisions regarding the CFPB’s structure, however. The CFPB needs independence in order to be an effective champion for consumers. Sen. Dodd’s bill places the CFPB within the Federal Reserve Board. While the CFPB has rulewriting authority for all financial institutions, it is only able to examine and enforce regulations for large banks, large credit unions, large non-bank financial institutions, and all mortgage-related businesses. A council of regulators, led by the Treasury, would have the power to overturn CFPB rules with a two-thirds vote. These provisions weaken the ability of the CFPB to implement strong consumer protection laws.

Woodstock Institute is also disappointed that the proposed CFPB does not enforce the Community Reinvestment Act (CRA). Access to safe and sustainable credit is crucial to America’s economic recovery. Without rigorous enforcement of the CRA, there is no assurance that productive credit will be made available to all communities, particularly those who have been hardest hit by the recession.

“We look forward to working with policymakers, regulators, and community organizations to ensure that safe and sustainable credit is available and that all communities, including low-wealth communities and communities of color, can share in the economic recovery,” said Rand.