Senate Compromise on Financial Reform Legislation Could House Consumer Financial Protection Function in Existing Federal Agency

In an effort to craft bi-partisan financial reform legislation, the Senate Banking Committee has apparently dropped the idea of an independent consumer financial protection agency in favor of a Bureau of Financial Protection to be housed within the Fed or the Treasury. The Bureau would have a Director appointed by the President and a dedicated budget raised through assessments on banks and non-bank financial institutions. Financial literacy activities would be centralized in the new Bureau of Financial Protection and a national hotline would be created within the Bureau to take consumer complaints.

The new Bureau would be authorized to adopt regulations that would apply across the board to all firms offering financial services or products. As a check on this rulemaking authority, the Bureau would have to consult with the prudential regulator of the firm before proposing a rule or adopting a rule and make public in the Federal Register any objections the prudential regulator may have raised and explain how the Bureau addressed the regulator’s concerns or the reason it decided to adopt the rule despite those concerns.

If the prudential regulator determines that a consumer protection regulation would put the safety and sound operation or the stability of the financial system at risk, the regulator could appeal the issuance of the regulation to the new Systemic Risk Council, which would include the SEC. If the Council agrees with the regulator, it could either veto the rule or remand it back to the Bureau to be rewritten. The Council would have to act with a specified time limit.

The purported Senate version would differ with legislation passed last year by the House that would create a separate Consumer Financial Protection Agency. It is anticipated, however, that the Senate bill will adopt the House-passed preemption standard.

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