H.R. 4173: The Geithner/Frank Financial Regulatory Reform Plan: Permanent Bailouts of Wall Street Firms and a Government Takeover of Financial Services

H.R. 4173

The Geithner/Frank Financial Regulatory Reform Plan: Permanent Bailouts of Wall Street Firms and a Government Takeover of Financial Services

December 8, 2009 (111th Congress, 1st Session)

Staff Contact

Floor Situation

H.R. 4173 is expected to be considered under a structured rule later this week.  The legislation was introduced by Rep. Barney Frank (D-MA) on December 2, 2009.  H.R. 4173 itself was never reported by the Financial Services Committee.  H.R. 4173 is a combination of nine bills reported by the Financial Services Committee.  

Bill Summary

H.R. 4173 makes permanent the bailout policies used to prop up AIG, Fannie Mae, Freddie Mac, GM and Chrysler, and other failing firms.  The FDIC would be authorized to extend federal guarantees and loans to financially troubled firms for the sake of "financial stability," and the agency would not be required to unwind such a failing firm-certain parts of the company could be propped up indefinitely using taxpayer dollars.  Since some institutions would be considered "too big to fail" (likely those that happen to be "politically significant"), bailouts are inevitable.  The proposal also gives government regulators the authority to dismantle large firms even if those firms are economically healthy and well-capitalized.

H.R. 4173 restricts the use of derivatives.  Derivatives encourage job creation and provide customized hedges to help businesses like farmers, grocery stores and energy companies to manage price volatility, so that retail prices can remain low and stable.   Yet, H.R. 4173 authorizes government regulators to arbitrarily impose capital and margin requirements for "over the counter" (OTC) derivatives, and impose new capital requirements for cleared swaps, which would lead to increased retail prices and make it less likely that corporations could engage in responsible risk management. 

The bill also expands the reach of government in the financial services industry, allowing bureaucrats to determine types and terms of credit products offered to consumers, H.R. 4173 would establish an independent agency in the executive branch to regulate financial products and services-the so called Consumer Financial Protection Agency (CFPA).  An unelected "credit czar" could dictate what financial products could be offered and at what terms, drastically reducing the number of financial products available and driving up the cost of credit generally.

H.R. 4173 undermines safety and soundness by separating the regulation of protecting consumers from ensuring safety and soundness, creating a conflict between numerous existing agencies.  Agencies need the ability to consider safety and soundness and consumer protection together to ensure that a balance is achieved and neither responsibility is neglected or jeopardized.

The bill provides the trial bar with a windfall by authorizing the SEC to restrict the use of arbitration agreements for disputes arising under federal securities laws (and granting similar authority to the CFPA in the consumer credit context).  Arbitration agreements in the securities industry provide investors the opportunity to have their claims heard close to home, before highly trained and experienced arbitrators, in a forum that has proven to resolve disputes at least as fairly as the judicial system, and much faster and less expensively.

H.R. 4173 empowers federal regulators to impose wage controls on private sector employees.  The bill requires the federal financial regulators to prescribe joint regulations that prohibit any compensation structure or incentive-based payment arrangement that encourages "inappropriate risks" by financial institutions.  Firms under the jurisdiction of the proposed plan would no longer be able to make market-based determinations regarding compensation and other incentives for its employees.  Instead, those decisions would be made by government bureaucrats.



Title I-Financial Stability Improvement Act

Financial Services Oversight Council:  The bill establishes a Financial Services Oversight Council upon enactment.  Members of the council include the Chairs and Directors of the federal banking agencies, the Securities and Exchange Commission, Commodity Futures Trading Commission and the National Credit Union Administration.  Non-voting members include a State insurance commissioner and a State banking supervisor.  Its many duties include advising Congress, monitoring financial markets, identifying threats to stability of the financial system.  Some Members may be concerned that all voting members of the proposed council were already responsible for advising Congress (via oversight hearings), monitoring markets, identifying threats (safety and soundness regulators) and all other "newly" assigned duties before and during the current financial crisis.  Yet, the financial crisis still occurred.

Resolution of Disputes:  The bill requires the council to resolve jurisdictional disputes among federal financial regulatory agencies.

Reports to the Congress:  The bill requires the council to submit a report to Congress semiannually on significant financial and regulatory developments, recommend actions to improve financial stability, plans to respond to potential threats to financial stability, and dispute resolution.  The Comptroller General is required to evaluate the council's report within 120 day of receipt.  The council is required to submit signed statements to verify that the government and private sector are taking reasonable steps to ensure stability of the financial system.  Members may be concerned that such action by the council may create a false sense of security for investors and the public at large.  For example, up to the moment Fannie Mae and Freddie Mac failed, many public officials, including Rep. Frank indicated that Fannie and Freddie were safe and sound institutions and that the bailout authority being granted to the Treasury would never need to be used.

Authority to Obtain Information:  The bill authorizes the council and the Federal Reserve to receive information from members of the council to monitor the financial services market to identify potential threats to the stability of the financial system.

Prudential Regulation Recommendations:  The bill authorizes the council to formally recommend that a federal financial regulatory agency adopt stricter prudential standards for firms it regulates.  The Federal Reserve, acting on behalf of the council, is authorized to impose stricter prudential standards on any firm if the council, after considering certain criteria, deems it necessary.  In the case of a financial "emergency," the Fed, FDIC and Treasury Secretary with approval of the President may determine that a financial company must be subject to stricter standards with approval of a majority of the council. 

Expanded Jurisdiction of Federal Reserve:  The bill authorizes the Federal Reserve to impose "stricter prudential standards" on any financial firm if the Fed deems it appropriate after considering certain criteria.  This includes conducting stress tests, imposing higher capital standards, dismissing executive officers and board members and restricting compensation.  The Fed is authorized to conduct special examinations of any financial firm to determine the firm's condition.  Also, thrift holding companies would be regulated in a similar fashion to bank holding companies, by the Fed.  Some Members may be concerned that the bill would further distract the Fed from its primary monetary policy mission and elevate it status to "super regulator," expanding its jurisdiction to cover firms that are under the jurisdiction of other federal regulators.  The Fed gets this promotion even though it missed the signs leading to the current financial crisis and contributed to creating the current crisis by inflating the housing bubble. This provision sets up conflict among the federal agencies, future jeopardizing the financial system at the expense of the taxpayers.

Unlimited Power of the Council:  The bill authorizes the Council to restrict the operations and activities of any firm that it deems to be too big and interconnected and may pose a threat to the nation's financial stability.  The authority of the Council ranges from imposing stricter prudential standards to breaking up the firm.  Some Members may be concerned that this authority exists even though the targeted firm may be financially healthy and well managed. The Fed is authorized to take any necessary action to ensure compliance if a firm fails to implement a plan or decision by Council within a "reasonable" timeframe.

Government Control of Innovation:  The proposal authorizes the Council to restrict any financial activity or practice that it determines "could" create problems among financial institutions, markets, minority or underserved communities or financial stability.  When the Council determines that a firm, activity, or practice is no longer subject to heightened prudential scrutiny, the Fed would inform the primary federal regulator.  Some Members may be concerned that such broad and arbitrary power may stifle innovation and result in fewer products offered to consumers and less risk mitigation tools available for firms, including small businesses. 

Permanent Bailout Authority:  The bill authorizes the FDIC to take over and wind down large, complex financial institutions that are in default or in danger of default, and whose failure would threaten the financial system, as determined by the Secretary of the Treasury upon written recommendation by the Federal Reserve Board and the appropriate regulatory agency. The bill permits the FDIC to take the following actions: (1) make loans to a failing firm; (2) purchase the assets of a failing firm; (3) guarantee the obligations of a failing firm to its creditors; (4) take a security interest in the assets of the failing firm; and (5) sell or transfer assets that the FDIC has acquired from the failing firm.  The FDIC is authorized to borrow up to $150 billion from the Secretary of Treasury and to tax firms through assessments which are sure to be passed to consumers in the form of higher costs.  Should the FDIC require more, it can ask Congress for $50 billion more.  That request would then be subject to a Joint Resolution of Approval before the FDIC receives the additional taxpayer monies.  Some Members may be concerned that this provision could expose the taxpayers to $200 billion in liabilities without the consent of Congress.

Federal Reserve Audit:  The bill requires the Comptroller General to conduct an audit of all actions taken by the Federal Reserve during the current economic crisis pursuant to the authority granted under section 13(3) of the Federal Reserve Act.  After completion of the audit, the Comptroller General must submit a report on the findings along with recommendations to Congress with 90 days.

Studies:  The bill requires the chairman of the Council to study the effects of size and complexity of financial institutions on capital market efficiency and economic growth.  Also, the bill requires a study on the macroeconomic effects of risk retention requirements.

Stress Tests:  The proposal requires every firm subject to stricter standards to conduct quarterly stress tests and submit the results to its primary regulator and the Fed.  Firms not subject to stricter standards are firms that have more than $10 billion in total assets are required to conduct semiannual stress tests.

New Government Divisions:  The bill abolishes the Office of Thrift of Supervision and creates a Division of Thrift Supervision within the Office of the Comptroller of the Currency.  The Comptroller of the Currency is designated as a bureau of the Treasury Department under the supervision of the Secretary of the Treasury.  The Treasury Secretary is required to appoint no more than five deputy comptrollers of the currency to perform various functions.  In addition, the Fed chairman would replace the OTS director on the board of the FDIC.  This provision is likely unconstitutional in that it requires the removal of the Comptroller of the Currency effective on the date of enactment.  This is a legislative branch removal of a Presidentially-appointed, Senate confirmed executive branch official and is unconstitutional. 

"Improvements" to Holding Companies and Depository Institutions:  The bill alters the treatment of credit card banks, industrial loan companies, and identified financial companies and subjects them to higher prudential standards through the creation of a Section Six Holding Company ("SSHC").  It requires the Fed to consider the stability of the financial system in its process for approving bank holding company mergers, acquisitions, or consolidations.  The bill also requires that financial holding companies apply for the Fed‘s approval for acquisitions in excess of $25 billion (only notice is currently required). The bill eliminates the investment bank holding company framework in which the SEC is a consolidated regulator; and permits examinations fees (e.g., taxes) on bank holding companies with more than $10 billion in assets for all bank holding company examinations.

Federal Deposit Insurance Fund:  The bill attempts to create a risk focused assessment base by requiring the assessment of any depository institution imposed to be equal to an assessment rate established by the FDIC and the institution's average total assets minus the insured depository institution's average tangible equity during the assessment period.  The bill eliminates procyclical assessments.

Asset-Backed Securitization:  The legislation requires creditors and securitizers to hold an interest in a material portion of the risk of loans that they sell off for securitization.  It would apply to commercial as well as residential loans.  The federal banking agencies and the SEC would have the authority to increase or decrease the amount of risk retained and to roll back the bill's prohibition on hedging that retained risk.


Title II-Corporate and Financial Institution Compensation Fairness Act 

Say on Pay:  The bill amends the Securities and Exchange Act of 1934 to require all publicly traded companies to hold an annual, non-binding shareholder vote to approve executive compensation.  Additionally, it mandates a separate non-binding shareholder vote on golden parachute compensation in the event of a corporate merger or acquisition. 

Compensation Committee Independence:  The bill requires that all publicly traded companies have compensation committees comprised of independent directors.  Compensation consultants to the compensation committee would also be required to meet independence standards established by the Securities and Exchange Committee.

Federally Determined Compensation Restrictions for Financial Institutions:  H.R. 4173 requires federal regulators to prescribe joint regulations that prohibit any compensation structure or incentive-based payment arrangement that encourages inappropriate risks by financial institutions (with more than $1 billion in assets) or their officers or employees that could: (1) threaten the safety and soundness of covered financial institutions; or (2) present serious adverse effects on economic conditions or financial stability.  This provision exempts financial institutions with assets less than $1 billion.

The bill directs the Comptroller General of the United States to carry out a study to determine whether there is a correlation between compensation structures and excessive risk taking.


Title III-Over-the Counter Derivatives Market Act 

Overly Broad Definitions:  H.R.4173 contains broad definitions of "Major Swap Participant" and "Major Security-Swap Participant" that could capture any swap market participant, including derivatives end-users, deemed by bureaucrats to be in need of monitoring.

Inefficient Joint Rulemaking Authority:  The bill establishes guidelines for joint Commodity Futures Trading Commission (CFTC) and the SEC rulemaking authority.  If the SEC and CFTC fail to meet statutory deadlines, the bill authorizes the Secretary of the Treasury to prescribe rules.  Like the Office of Federal Housing Enterprise Oversight and HUD, the former regulators of the failed Fannie Mae and Freddie Mac, this proposal sets up a new byzantine regulatory structure that depends on two agencies that historically have not been able to work well together (SEC & CFTC) having to cooperate on a number of issues. 

Jurisdiction:  The bill removes limitations on the CFTC's jurisdiction with respect to certain derivatives transactions, including swap transactions between "eligible contract participants."

Clearing Requirement:  The bill requires that a swap or a security-based swap must be submitted for clearing if it is accepted by a registered derivative clearing organization (DCO).  The CFTC or the SEC, however, must approve the swap (or class of swaps) for clearing before the DCO can accept it for clearing.   "Cleared transactions," standardized derivative contracts that are processed on an exchange or through a clearinghouse, provide liquidity with stricter oversight than the over-the-counter market, but could result in higher capital and margin costs for end-users.

Clearing Agency Requirements:  H.R. 4173 requires the SEC and CFTC to jointly issue rules for registered clearing agencies that clear security-based swaps.  Furthermore, the bill requires that the SEC and CFTC (in consultation with the prudential regulator) jointly adopt uniform rules and regulations governing clearing agencies for swaps and clearing agencies for security-based swaps.

Trade Execution:  H.R. 4173 requires transactions in standardized swaps between swap dealers and major swap participants to be executed on a designated contract market or a registered swap execution facility.   The bill also requires that transactions in standardized securities-based swaps between securities-based swap dealers and major security-based swap participants be executed on a national securities exchange or a registered security-based swap execution facility.   If a transaction in a cleared swap is not executed on one of those platforms, the transacting entities must comply with any recordkeeping or end-of-day transaction reporting requirements that are stipulated by the CFTC.  Likewise, if a transaction between securities-based swap dealers or major securities-based swap participant in a standardized securities-based swap is not executed on one of those platforms, the transaction is subject to any recordkeeping or transaction reporting requirements that are stipulated by the SEC.  Some Members may be concerned that the proposal provides bureaucrats with the sole authority to determine what swaps and securities-based swaps are standardized and thus subject to mandatory clearing and exchange trading.  These unnecessary government burdens could impair the usefulness of derivatives as an innovative risk mitigation tool, thereby increase risk exposure of the many market participants that have come to depend on them.  In addition, the customized hedging needs of many institutions cannot be adequately satisfied through these exchanges.

Derivatives Clearing Organizations and Agencies:  The bill requires the derivatives clearing organizations (DCOs) and derivatives clearing agencies (DCAs) that clear swaps or securities based swaps to register with the CFTC or the SEC.  The bill provides for voluntary registration as a DCO or DCA and dual CFTC-SEC registration in applicable cases.  The CFTC may exempt DCOs from dual registration, if it finds that the DCO is subject to comparable regulation from the SEC, a Prudential Regulator, or relevant foreign authority. 

Legal Certainty for Identified Banking Products:  The bill clarifies that identified banking products will continue to be regulated by federal banking agencies and not the CFTC or SEC. 

Public Reporting of Aggregate Swap Data:  The proposal directs the CFTC (or a designated DCO or swap repository) to make available to the public aggregate data on swap trading volumes and positions. 

Swap and Security-Based Swap Repositories:  The proposal requires swap repositories to register with the CFTC and security-based swap repositories with the SEC. 

Reporting and Recordkeeping:  The bill requires reporting and recordkeeping by any person who enters into a swap or a security-based swap that is not cleared through a registered derivatives clearing organization or reported to a swap repository or a security-based repository.

Registration and Regulation of Swap Dealers and Major Swap Participants:  The bill requires swap dealers and major swap participants to register with the CFTC.  The bill also requires security-based swap dealers and major security-based swap participants to register with the SEC.  Dual registration is required in applicable cases. 

Capital and Margin Requirements:  The proposal directs the prudential regulators to set capital standards for cleared swaps and security-based swaps.  Capital charges for transactions that are not cleared shall be higher than the charge for cleared transactions.  Capital charges for nonbank swap dealers and major swap participants would be set by the CFTC and SEC and be higher than capital charges set by the banking regulators.  Brokers-dealers, futures commission merchants, or introducing brokers shall maintain sufficient capital to comply with the stricter of the requirements to which it is subject.  Regulators would set margin for noncleared transactions involving only swap dealers, major swap participants, security-based swap dealers and major security-based swap dealers.  The prudential regulators may, but are not required to, set margin for transactions in which one of the counterparties is not a swap dealer, major swap participant, security-based swap dealer or major security-based swap dealer.  Margin requirements set by the prudential regulators shall provide for the use of non cash collateral.  Members may be concerned that businesses will be forced by regulators to post capital and margin in order to hedge everyday business risks, creating unnecessary access to capital problems for businesses when the unemployment rate is at a twenty-six year high.

Segregation of Assets Held as Collateral in Swap Transactions:  The bill requires a swap dealer to segregate and maintain the initial or variation margin or collateral posted by that counterparty in an account carried by an independent third-party custodian in accordance with rules and regulations prescribed by the Commission or a Prudential Regulator.  Swap dealers that are not requested by counterparties to segregate assets shall report to counterparties on a quarterly basis that its back office procedures relating to margin and collateral requirement are in compliance with the agreement of the counterparties.

Swap Execution Facilities:  H.R. 4173 defines a swap execution facility (SEF) as one that is registered under this section and facilitates the execution of swaps between two persons by any means of interstate commerce.  The SEF must also establish rules limiting new investment in the SEF by a "restricted owner" as defined in the Act, if that investment results in restricted owners, in the aggregate, having control of more than 20 percent of the votes entitled to be cast on matters voted by holders of the ownership interest.  The provisions are intended to address potential conflicts of interest, but they establish significant new statutory restrictions on ownership and governance.  

Designated Contract Markets:  The bill requires a board of trade to demonstrate that it provides a competitive, open, and efficient market for trading; has adequate financial, operational, and managerial resources; and has established robust system safeguards to help ensure resiliency.

Position Limits for Swaps:  H.R. 4173 authorizes the CFTC to establish aggregate position limits across commodity contracts listed by designated contract markets, commodity contracts traded on a foreign board of trade that provides participants located in the US with direct access to its electronic trading and order matching system, and swap contracts that perform or affect a significant price discovery function with respect to regulated markets. 

Position Limits for Security-Based Swaps and Large Trader Reporting:  H.R. 4173 authorizes the SEC to establish limits on the size of positions in any security-based swap and, in establishing such limits, require any person to aggregate positions in any security-based swap or exempt from such limits any person, class of persons, transaction, or class of transactions and direct a self-regulatory organization to adopt rules relating to position limits for security-based swaps.

Foreign Boards of Trade:  The legislation authorizes the CFTC to adopt rules and regulations that require registration of a foreign board of trade that provides its members or participants in the U.S. with direct access to the board's electronic trading and order matching system.  "[D]irect access" refers to an explicit grant of authority by a foreign board of trade to an identified member or other participant located in the U.S. to enter trades directly into the trade matching system of the foreign board of trade.

Large Swap Trader Reporting:  The bill requires reporting and recordkeeping with respect to large swap positions that perform or affect a significant price discovery function with respect to regulated markets.

Authority to Ban Abusive Swaps:  The CFTC and SEC may collect information and jointly, by issue a report with respect to any types of swaps or security-based swaps which the CFTC and SEC find would be detrimental to the stability of a financial market or of participants in a financial market.

Ban Access to the US Financial System:  H.R. 4173 authorizes the Treasury to bar a foreign entity from participating in any swap or security-based swap activity in the United States, if the entity's home country regulates swaps in a way that would adversely affect the U.S. financial system. 


Title IV-Consumer Financial Protection Agency Act

New Government Bureaucracy:  H.R. 4173 establishes the Consumer Financial Protection Agency (CFPA) to dictate the provision of financial products and services to consumers.  

"Credit Czar":  The CFPA would be headed by a single director appointed by the President and confirmed by the Senate for a term of five years.   Under the guise of "consumer protection," H.R. 4137 authorizes the CFPA to make rules and take actions to prevent a covered person from committing or engaging in "unfair, deceptive or abusive acts or practices" in connection with any transaction with a consumer for a financial product or service.  The phrase "unfair, deceptive or abusive acts or practices" indicates that an act or practice can be "abusive" even though it is not "deceptive" or "unfair."  Such authority would permit the credit czar to arbitrarily exercise authority at a whim and drive innovation out of the market.  The proposal authorizes the credit czar to restrict product terms and provider practices to all credit, savings, and payment products.     No longer would institutions have an incentive to innovate to meet the needs of consumers, including many small businesses.  Rather, institutions would strive to meet the demands of the credit czar.  The credit czar would solely determine what products are abusive, unfair, deceitful, and discriminatory. 

Consumer Financial Protection Oversight Board:  The bill establishes a Consumer Financial Protection Oversight Board to advise the director.  The board has twelve members consisting of the chairs of the Board of Governors, FDIC, NCUA, FTC, and the liaison committee of representatives of State agencies to the FFIEC, the head of the national bank regulator, and the HUD Secretary; and seven members appointed by the President with the advice and consent of the Senate, from among experts in the fields of consumer protection, fair lending and civil rights, representatives of depository institutions that primarily serve underserved communities, or representatives of communities that have been significantly impacted by higher-priced mortgage loans, as such communities are identified by the director through an analysis of data.   ACORN is eligible to serve on the Oversight Board. 

Office of Financial Literacy:  The bill requires the CFPA to establish an Office of Financial Literacy, whose functions include activities designed to facilitate the education of consumers with regard to financial products and services. 

Office of Fair Lending and Equal Opportunity:  H.R. 4173 requires the director to establish an Office of Fair Lending and Equal Opportunity to oversee and enforce federal laws intended to ensure the fair, equitable, and nondiscriminatory access to credit for both individuals and communities that are enforced by the CFPA.

Consumer Advisory Board:  H.R. 4173 establishes a CFPA to establish a Consumer Advisory Board to advise and consult with the CFPA.  The CFPA would appoint the members of the Consumer Advisory Board, and must assemble experts in financial services, community development, fair lending, civil rights, consumer protection, and consumer financial products or services, and seek representation of the interests of covered persons and consumers.  An employee of a covered organization, as defined by the proposal, may not be appointed.  No more than half of the board members may be members of the same political party.  

Coordination:  The legislation requires the CFPA to coordinate with the SEC, CFTC, Treasury, other federal agencies and State regulators to promote consistent regulatory treatment and enforcement related to consumer and investment products, services, and laws.  Some members may be concerned that "consistent regulatory treatment" is at odds with the lack of a complete preemption.  Preemption has the purpose of promoting consistent regulatory treatment.   The CFPA would be required to coordinate with each agency that is a member of the Financial Literacy and Education Commission established by the Financial Literacy and Education Improvement Act (20 U.S.C. § 9701 et seq.) to assist each agency in enhancing its existing financial literacy and education initiatives and to ensure the consistency of such initiatives across Federal agencies.  

Funding:  For the first year of the CFPA's existence, the Federal Reserve shall transfer funds in an amount equaling 10 percent of the Fed's total budget to the CFPA for the purposes of carrying out the CFPA's authorities.  This is roughly $400 million.  Some Members may be concerned that the CFPA would have broad spending powers, with few restrictions on what entities could be assessed. There is no requirement that the fees be imposed on those who caused the CFPA to spend funds or who benefited from the CFPA spending.

Examination Fees:  H.R. 4173 requires the CFPA to assess fees on covered persons to meet its expenses.  The CFPA shall not assess examination fees on an institution referred to in section 123(a) [insured depositories with total assets not over than $10 billion or insured credit union with total assets not over $1.5 billion], or an institution whose examination responsibilities have been delegated to an appropriate agency, pursuant to § 122(c)(11) [small institutions].  Some members may be concerned that any new fees assessed would be passed on to consumers in the form of higher costs for credit products.

Taxpayers Share in Funding the Bureaucracy:  H.R. 4173 authorizes apportion of "such sums as may be necessary" for any fiscal year.  Notwithstanding any other provision of law, such amounts shall be subject to apportionment under 31 U.S.C. § 1517 and restrictions that generally apply to the use of appropriated funds in title 31, and other laws.  Some members may be concerned that taxpayers would share in the burden of financing the CFPA.

CFPA Civil Penalty Fund:  The plan requires monies collected from civil money penalties go into a Civil Penalty Fund.  Amounts in the Civil Penalty Fund shall be available to the CFPA, without fiscal year limitation, for payments to the victims of activities for which civil penalties have been imposed under the underlying legislation.

Safety and Soundness Protection:  H.R. 4137 would separate the regulation of protecting consumers from ensuring safety and soundness, creating a conflict between numerous existing agencies.  Agencies need the ability to consider safety and soundness, consumer protection and product approval together to ensure that a balance is achieved and neither responsibility is jeopardized.  This would also preclude the federal banking agencies from setting safety and soundness standards for consumer-related practices.  Instead, the CFPA would monitor for risks to consumers.  This failed model for regulatory oversight was a primary cause of the current financial crisis.  Fannie Mae and Freddie Mac were examples of what happens when there is a bifurcated system of regulation.  The Office of Federal Housing Enterprise Oversight regulated safety and soundness while HUD was the mission regulator with the authority to approve new products. 

Limit on Consumer Choice:  One advertised objective of the CFPA is ensuring that "consumers have and can use the information they need to make responsible decisions."  Some members may be concerned that the new credit czar alone would be authorized to determine what is considered information that consumers can "use" to make "responsible decisions."  This allows the credit czar to require financial service providers to ensure that a consumer "understand" financial products and services before allowing the purchase.  In effect, the proposal allows those who the credit czar deem who can "understand" their desired credit products enough to purchase them, eliminating the same freedom to purchase the desired credit products for others.

Expansion of Government:  The CFPA would have jurisdiction over any financial activity, product or service to be used by a consumer.  The definition of "financial activity" would be determined by the agency, which gives it the authority to expand its jurisdiction at will and without congressional approval.  The proposal's definition of a "covered person" would give the CFPA jurisdiction over anyone who engages "directly or indirectly in a financial activity" or "provides a material service" to anyone who engages in a financial activity.  The legislation attempts to exempt a few industries but the CFPA would retain authority provided by an enumerated consumer law over these entities.

Concentration of Power:  The proposal grants exclusive rulemaking authority for consumer protection provisions under at least 13 existing federal consumer protection laws.  It also provides the CFPA primary examination and enforcement powers for consumer compliance issues over banks with $10 billion or less in assets, and credit unions with $1.5 billion or less in assets would remain with those institutions' safety-and-soundness regulator, rather than being transferred to the CFPA.  However, the bill would provide a procedure by which the CFPA could acquire these powers over institutions that have not been adequately supervised by the prudential regulator.

Costs of Products and Services:  H.R. 4137 authorizes the CFPA to issue regulations, orders, and guidance regarding the manner, settings, and circumstances for providing any consumer financial services or products to ensure that the risks, costs, and benefits of the products or services, both initially and over the term of the products or services, are fully and accurately represented to consumers.  Rather than allowing firms to price for risks, the credit czar could determine the price for products like payday loans.  Also, the CFPA would have the authority to set transaction fees since the bill makes it unlawful to "advertise, market, offer, sell, enforce, or attempt to enforce, any term, agreement, change in terms, fee or charge in connection with a consumer financial product or service that is not in conformity with this title or applicable rule or order issued by the Agency."  It would be unlawful for any person to offer or sell financial products or services in violation of a rule or order adopted by the CFPA.

Litigation Risk:  H.R. 4137 permits the CFPA, by rule, to prohibit or impose conditions on mandatory pre-dispute arbitration agreements between consumers and covered persons if doing so is in the "public interest" and for the "protection of consumers."

Intrusive Information Collection:  The bill gives the CFPA broad authority to seek information, under oath, in any form for any reason from any source, and would be able to prescribe rules regarding the treatment of such information.

Disclosures:  This proposal authorizes the CFPA to prescribe regulations to ensure "appropriate and effective" disclosure to consumers of the costs, benefits, and risks associated with any consumer financial product or service.  

Pilot Disclosures:  The bill intends to regulate disclosures to be used for products or services that a covered person desires to begin marketing.  It requires the credit czar to establish standards and procedures for the approval of pilot disclosures to be provided to consumers by covered persons.  This may require a Federal Register notice and comment period every time any covered person wants to market a new, or slightly varied, consumer financial product or service.

Standards for Covered Persons:  The proposal encourages States to prescribe standards applicable to covered persons, other than insured depository institutions and credit unions, to deter and detect unfair, deceptive, abusive, fraudulent or illegal transactions in the provision of consumer financial products or services.  The CFPA may prescribe rules establishing "minimum standards" for any class of covered persons other than those subject to the jurisdiction of a federal banking agency or State banking agency, or for any service provider.

Broad Authority to Impose Duties:  The bill authorizes the credit czar to prescribe rules imposing duties on a covered person, or an employee of a covered person, or agent or independent contractor for a covered person, who deals directly with or communicates directly with consumers in providing products and services.  The CFPA may also prescribe rules regarding compensation practices to promote fair dealing (e.g., to limit "negative" consequences of incentive-based compensation), but this does not include any limits on the total dollar amount paid in compensation.  The "duty of care" language is very broad and could be interpreted to cover everyone from the bank's CEO to the tellers, among others, if the credit czar decides they are providing advice with respect to any aspect of a transaction.

No Preemption of State Laws:  H.R. 4137 makes clear that any rule adopted by the CFPA will not preempt State law.  State attorneys general may bring civil actions for violations of the bill.  Before initiating any action, a State attorney general or appropriate State regulator must provide prior notice to the CFPA.  The National Bank Act and the Home Owners Loan Act are amended by adding a new section to each to state that national banks shall generally comply with State laws.  The proposal gives the OCC and OTS some ability to preempt State laws, but consultation with the CFPA would be required, and the state law would need to "significantly interfere" with the business of banking.  This would add an additional layer of rules to the maze, making the cost of doing business more expensive and ultimately driving up the costs of products and services for consumers.  Allowing 50 States to set different standards will not simplify the regulatory maze, but it will undermine the duel-banking system.  Many Members may be concerned that this provision would further expand the scope of lawsuits that would raise costs, and discourage firms that do business in multiple states from offering some products and services, rather than dealing with possible lawsuits filed by some of the 50 State attorneys general.

Visitorial Powers:  This bill establishes the visitorial powers provisions of State attorneys general under the National Bank Act and the Home Owners' Loan Act.

Uncommon Enforcement Powers:  The bill authorizes the CFPA to issue subpoenas, civil investigative demands for written material, answers or testimony, and cease-and-desist orders; conduct hearings and adjudication procedures; and transmit evidence of federal criminal law violations to the Attorney General.  The CFPA would have the ability to bring a civil action against any person who violates the Act or a rule promulgated by the CFPA; available remedies include monetary penalties and/or broadly enumerated equitable relief.  Unlike other independent agencies, the CFPA would have the authority to represent itself, and to act in its own name, in both state and federal court.

Broad Cease and Desist Powers:  The CFPA could enforce through cease and desist actions any law. There is no requirement that the violation of law at issue relate to consumer protection. Further, the CFPA can issue temporary cease and desist orders when a violation of law is likely to prejudice the interests of consumers, and require the covered person to remedy the condition.

Intrusive Government Data Collection:  The bill authorizes collection of deposit account data and small business loan data.


Title V-Capital Markets 

Private Fund Investment Advisers Registration Act

The Private Fund Investment Advisers Registration Act, attempts to address the threat of systemic and investor risks posed by private pools of capital.  Specifically, the bill seeks to eliminate the existing "private adviser" exemption in the Investment Advisers Act of 1940 (IAA) commonly relied on by the advisers of private funds to avoid registering with the SEC. The legislation expands the reporting requirements of investment advisers who advise private funds by authorizing the SEC to collect information from private fund advisers under two circumstances:  (1) as the SEC determines it to be necessary or appropriate in the public interest and for the protection of investors; and (2) in consultation with the Fed, it is necessary to assess systemic risk.  The legislation authorizes the SEC to share the reports of private fund advisers with the Fed and any other entity the SEC identifies as having systemic risk responsibility.

The bill further amends the IAA to remove impediments to the SEC obtaining information concerning the identity, investments, or affairs of the investment adviser's clients.  The bill contains a limited exemption from registration for advisers of "venture capital funds" -to be defined by the SEC-but subjects such advisers to information collection rules.  The bill generally exempts from registration requirements the advisers of private funds, if such private funds have assets under management in the United States of less than $150 million, while maintaining reporting requirements as directed by the SEC.


Accountability and Transparency in Rating Agencies Act

H.R. 4137 gives broader powers to the SEC to regulate nationally recognized statistical rating organizations (NRSROs).  The bill creates a new regime of enhanced corporate governance for NRSROs and attempts to address concerns about the integrity of the procedures and methodologies underlying credit ratings.  Additionally, the legislation increases the information available to the public and investors by requiring a variety of disclosures by NRSROs.

Moreover, the bill seeks to enhance accountability by clarifying and reforming aspects of the liability of NRSROs under the securities laws.  The bill attempts to address the over-reliance by federal regulators on credit ratings and foster more independent analysis by investors and users of credit ratings, too.  Finally, the legislation commissions a number of studies to further investigate enhancements and reform of the industry.

Repeal of Provisions of Credit Rating Agency Reform Act:  The bill repeals two important provisions of the Credit Rating Agency Reform Act of 2006 that ensure there is no waiver of rights for credit rating agencies seeking designation as a nationally registered statistical rating organization.  These provisions do not make NRSROs immune from private suit, nor do they create any new defenses.  However, repeal of these recently enacted provisions may well have an unintended consequence that may prove detrimental to the markets and investors.  These changes will likely lead to fewer credit rating agencies, and a reduction in long-term ratings, thus reducing competition and deprive investors of greater choice in the ratings opinions they use. 

Repeal of Rule 436(g):  The bill also proposes to repeal SEC Rule 436(g), which encourages the disclosure of ratings by providing NRSROs with an exemption from liability under Section 7 and Section 11 of the Securities Act of 1933 when their ratings are included as part of the registration statements filed under that Act.  Without the exemption, issuers would have to obtain the consent of an NRSRO before including those ratings.  Obtaining such consent could increase dramatically the time and costs involved with raising capital, and thus make it more difficult for issuers to do so.  Moreover, some NRSROs may refuse consent, with the result being less information available to investors as they evaluate securities in a registration statement. 

Moreover, many market participants who commented on the rule at the time the rule was proposed were concerned that requiring consent and subjecting NRSROs to Section 11 liability could affect their independence, and thus the quality of their ratings, by making them more active "participants" in the offering.  In addition, expanding the potential for litigation against NRSROs would create incentives for NRSROs to narrow the scope of their rating analysis in order, again, to minimize the areas for liability based on after-the-fact second-guessing.  Finally, increased liability would discourage new entrants into the ratings industry, thus undermining the important goal of increasing competition.


Investor Protection Act 

More Government Bureaucracy:  The proposal codifies the Investor Advisory Committee established by the SEC.  The membership on the Investor Advisory Committee consists of people representing the interests of individual and institutional investors. The committee must meet at least twice a year, and its members would receive compensation for participation in meetings and travel expenses.

Unnecessary New Standard:  The bill authorizes the SEC to promulgate rules harmonizing the duties owed to individual investors by investment advisers and broker-dealers.   The current standards for investment advisers and broker-dealers are well established and interpreted under case law.  The proposal's harmonized standard would result in additional legal interpretation for broker-dealers, unnecessarily creating uncertainty for market participants at a time when certainty is needed the most.  Also, proposal would provide the SEC with the authority to expand the application of the new standard of care beyond broker-dealers and investment advisers who give advice to retail customers.  (The proposal defines a retail customer as individuals or legal representatives who receive "personalized investment advice from a broker, dealer, or investment adviser; and...use such advice primarily for personal, family, or household purposes.")  However, the proposal provides that the new standard of conduct would apply to broker, dealers and investment advisers in providing advice to retail customers "and such other customers" as the SEC may provide.  For example, a broker who is not providing personal investment advice but is merely executing an order on behalf of a customer may be subject to the new standard of care if the SEC deems it so.  Members may be concerned that the bill's expansion of the fiduciary standard to broker-dealers fails to recognize the complexities of the broker-dealer business model and seeks to impose a "one-size-fits-all" standard on the brokerage industry, undermining the proprietary model that provides investors with an array of investment choices

Eliminating Mandatory Pre-Dispute Arbitrations:  Arbitration is used to resolve disputes among industry members, their employees, and individual investors a less expensive way for all parties involved to resolve controversies.  Cases involving investors are resolved by a neutral panel of three arbitrators.  Arbitration awards are to be paid within 30 days of the date of the award, unless a party seeks judicial review.  The bill allows the SEC to promulgate rules to prohibit or restrict the use of pre-dispute agreements requiring arbitration between a broker, dealer, or municipal securities dealer and its customers.  As investment firms begin to factor in the risk of litigation, the associated costs would be passed on to customers, making investment transactions more expensive.  The legislation would also allow the SEC to alter existing contracts to strike the arbitration clauses, a clear disregard for the sanctity of private contracts.

Whistleblower Protection:  The legislation authorizes the SEC to establish a fund to pay whistleblowers for information that leads to enforcement actions resulting in significant financial awards using funds collected in enforcement actions not otherwise distributed to investors.  Members may be concerned that these provisions would increase the number of lawsuits filed against firms by disgruntled employees, further raising the cost of investment transactions and services.

Collateral Bars:  Generally, this section would authorize the SEC to impose collateral bars against regulated persons.  The SEC would have the authority to bar a regulated person who violates the securities laws in one part of the industry (e.g., a broker-dealer who misappropriates customer funds) from access to customer funds in another part of the securities industry (e.g., an investment adviser).  By expressly empowering the SEC under the Exchange Act and the Investment Advisers Act to impose broad prophylactic relief in one action in the first instance, this section would enable the SEC to more effectively protect investors and the markets while more efficiently using SEC resources.

Aiding and Abetting Authority:  The bill provides the SEC with the authority to bring actions for aiding and abetting violations of the Securities Act and the Investment Company Act.  It also clarifies that the knowledge requirement to bring an aiding and abetting claim can be satisfied by "recklessness" and expressly permits the imposition of penalties on aiders and abettors.

Service of Subpoenas:  The proposal attempts to enhance the SEC's enforcement program by providing the SEC with the ability to make nationwide service of process available in civil actions filed in federal courts.  

Authority to Impose Civil Penalties:  The proposal attempts to streamline the SEC's existing enforcement authorities by permitting the SEC to seek civil money penalties in cease-and-desist proceedings under federal securities laws.

Formerly Associated Persons:  The bill attempts to clarify that the SEC, or in applicable cases the Public Company Accounting Oversight Board, may sanction or discipline persons who engage in misconduct while associated with a regulated or supervised entity even if they are no longer associated with that entity.

Sharing Privileged Information:  The bill allows the SEC to share information with domestic and foreign regulators and law enforcement agencies engaged in the investigation and prosecution of violations of applicable securities laws without waiving any privileges the SEC may have with respect to such information.

Access to Grand Jury Material:  The legislation authorizes government attorneys to seek court authorization to release certain limited grand jury information to SEC personnel for use in matters within the SEC's jurisdiction.  It also permits sharing of information with regard to conduct that may constitute violations of the federal securities laws.

Extraterritorial Jurisdiction of the Antifraud Provisions:  The bill codifies the SEC's authority to bring proceedings under both tests developed by the courts regardless of the jurisdiction of the proceedings.

Fidelity Bonding:  The bill provides the SEC with the authority to require that registered management investment companies provide and maintain a bond against losses caused by any fraudulent act or theft committed by any officer or employee of the company, either alone or in collusion with others.

Authority to Conduct Surveillance and Risk Assessment:  The bill provides the SEC with the authority to make document requests as the SEC by rule or order deems necessary or appropriate to conduct surveillance or risk assessments of the securities markets.

Investment Company Examinations:  The proposal authorizes the SEC under the Investment Companies Act to review "all" records.

Application of Anti-Fraud Provisions:  The bill attempts to broaden the SEC's authority under several sections of the Exchange Act to apply the anti-fraud provision to securities transactions not conducted on exchanges. This provision excludes government securities.

Authorization of Appropriations:  The proposal authorizes additional taxpayer funds to be appropriated to the SEC for the next six fiscal years.  The proposal would increase the SEC's budget by $89 million for FY 2010 and $56 million for 2011.  For FY 2014, the bill allocates $2 billion, and for FY 2015, the bill allocates $2.25 billion.  These allocations are in addition to "any other funds authorized to be appropriated to the Commission."

Grants the SEC Taxing Authority:  The bill gives the SEC the authority to create new user fees paid by investment advisers to fund the SEC's work related to the inspection and examination of investment advisers.  Members may be concerned that the bill dramatically increases the SEC's taxing authority but does little to reform the agency's outdated and ineffective structure.  These fees would be passed to consumers in the form of higher costs for products and services.

Commission Organizational Study:  The bill requires an independent study of the present structure of securities regulation by an entity with expertise in organizational change.  Within six months of completion of the study, the SEC is required to issue a report to the House Financial Services Committee and the Senate Banking Committee regarding the actions the agency is taking to implement the report's recommendations and reorganize securities regulation.

Securities Lending:  The bill clarifies the SEC's authority to regulate stock loans and stock borrowing.  

Lost and Stolen Securities:  The bill expands the scope of securities that must be reported to the SEC or its designee under the Lost and Stolen Securities Program, to include cancelled, missing or counterfeit securities certificates.

Fingerprinting:  The bill requires fingerprinting for the personnel of registered securities information processors, national securities exchanges, and national securities associations.

Clarification of Section 205 of the Investment Advisers Act:  The proposal attempts to eliminate any remaining application of federal law to investment adviser firms that the States now solely regulate.

Testimony on Transparency in Financial Reporting:  The bill requires the SEC, the Financial Accounting Standards Board, and the Public Company Accounting Oversight Board to provide oral testimony, beginning in 2010, and annually for 5 years, to the House Committee on Financial Services on their efforts to reduce the complexity in financial reporting to provide more accurate and clearer financial information to investors.

Municipal securities:  The bill gives the SEC more flexibility in determining the make-up of the Municipal Securities Rulemaking Board, director independence, and how the board functions.

Authority to Protect Redeeming Investors:  The legislation permits the SEC by rules and regulations to limit the extent to which a registered open-end investment company may own, hold or invest in illiquid securities or other illiquid property.

Increasing the Assessment Paid by SIPC Members:  The bill updates the Securities Investor Protection Act (SIPA) to increase the minimum assessments paid by members of the Securities Investor Protection Corporation (SIPC) to the SIPC Fund.

Increasing the Borrowing Limit on Treasury Loans:  The bill authorizes the SEC to make loans to the SIPC Fund by issuing notes or other obligations up to $2.5 billion to the Secretary of the Treasury.

Increasing the Cash Limit of Protection:  The bill increases the maximum cash advance amount to $250,000 and authorizes SIPC, subject to the approval of the SEC, to make inflationary adjustments every 5 years to that amount starting in 2010.

SIPC as Trustee in SIPA Liquidation Proceedings:  The legislation permits SIPC to designate itself as trustee for the liquidation of a failed SIPC member regardless of the size of the firm's liabilities to unsecured general creditors and where the failed firm appears to have less than 5,000 customers.

Insiders Ineligible for SIPC Advances:  The bill attempts to conform the treatment of an insider's claims filed in a stockbroker liquidation under the Bankruptcy Code and in a SIPA liquidation proceeding.

Eligibility for Direct Payment Procedure:   The bill authorizes SIPC to use the direct payment procedure to resolve the failure of small firms with total claims of all customers up to an aggregate of $850,000.

Increases the Fine for Certain Acts Under SIPA:  The proposal increases the maximum fine under SIPA to $250,000.

Penalty for Misrepresentation of SIPC Membership:  The bill adds false advertising and misrepresentation regarding SIPC membership or protection to the list of prohibited acts under SIPA.  It also prescribes civil liability for damages caused by such misrepresentations and criminal liability in the form of a fine up to $250,000 or imprisonment up to 5 years.  Lastly, the bill extends civil liability to Internet service providers who knowingly transmit such misrepresentations and provide for court jurisdiction to issue injunctions.

Limitations on Customer Status:  The bill attempts to clarify that claims for cash or securities arising out of repurchase agreements and reverse repurchase agreements are ineligible for customer relief under SIPA.

Futures Held in a Portfolio Margin Securities Account Protection:  The bill attempts to extend SIPC insurance to futures positions held in a customer portfolio margining account under a program approved by the SEC.

Risk-Based Premiums:  The bill directs the GAO to study whether SIPC should be required to impose risk-based premiums on its members.

Budgetary Treatment of Commission Loans to SIPC:  The bill attempts to clarify that SIPC is a budgetary entity as defined by the Federal Credit Reform Act.

Public Company Accounting Oversight Board Oversight of Auditors of Non-Public Brokers and Dealers:  The bill provides the Public Company Accounting Oversight Board (PCAOB) with oversight authorities over the auditors of all brokers-dealers.

Foreign Regulatory Information Sharing:  The proposal authorizes the PCAOB to share information with foreign regulatory and law enforcement agencies engaged in the investigation and prosecution of violations of applicable accounting and auditing laws without waiving any privileges the SEC may have with respect to such information.

Expansion of Audit Information:  The bill attempts to enhance the ability of the PCAOB to access the audit work of foreign public accounting firms when the foreign public accounting firm performs audit work, conducts interim reviews, or performs other material services upon which a registered public accounting firm relies in the conduct of an audit or interim review.

Fair Fund Amendments:  The proposal increases the money available to compensate defrauded investors by revising the Fair Fund provisions to permit the SEC to use penalties obtained from a securities fraudster to recompense victims of the fraud even if the SEC does not obtain an order requiring the fraudster to disgorge ill-gotten gains.

Whistleblower Protection:  The proposal attempts to create additional protections for whistleblowers who report securities fraud and other wrongdoing by eliminating a defense now raised in a substantial number of actions brought by whistleblowers and apply the whistleblower protections under the Sarbanes-Oxley Act to both issuers and their subsidiaries and affiliates.  Members may be concerned that these provisions would increase the number of lawsuits filed against firms by disgruntled employees, further raising the cost of investment transactions and services.

Senior Investment Protection:  The bill requires the SEC to establish a program providing grants to the States to investigate and prosecute misleading and fraudulent marketing practices and to educate seniors to reduce the occurrence of those practices.  States obtaining grants under this title can receive assistance for three years, after which they may reapply for funding.  To carry out the program created under this title, this section authorizes $8 million for each of the fiscal years 2011 through 2015.

Municipal Financial Advisers:  The bill requires municipal financial advisers to register with the SEC. 


Title VI-Federal Insurance Office

The bill establishes within the Department of the Treasury the Federal Insurance Office (FIO), headed by a Director appointed by the Secretary.

The FIO would be authorized to: (1) monitor the insurance industry to gain expertise in all lines except health insurance; (2) recommend to the Financial Services Oversight Council that it designate an insurer as an entity subject to stricter standards; (3) assist the Secretary in administering the Terrorism Insurance Program; (4) coordinate federal efforts and develop policy on international insurance matters; (5) determine whether state insurance measures are preempted by international insurance agreements; (6) consult with States regarding insurance matters of national and international importance; (7) perform other related duties assigned by the Secretary; (8) collect, analyze, and disseminate data and information, and to issue reports; and (9) advise the Secretary on major domestic and prudential international insurance policy issues.

The bill triggers preemption of State insurance measures only if the director determines the measure is inconsistent with an international insurance recognition agreement and directly results in treatment of a foreign insurer that is subject to such an agreement less favorably than a U.S. insurer.  Among other things, the bill requires the director publish in the Federal Register notice of potential inconsistency and provide an opportunity for comment by the interested parties.  The bill also requires the director to notify the House Financial Services Committee and the Senate Banking Committee of the inconsistency.

The bill requires the director to consult with state insurance regulators in carrying out the functions of the office.  Finally, the bill does not establish any general supervisory or regulatory authority of the Office or the Department over the business of insurance.



Mortgage Standard:  The bill sets minimum standards for mortgages requiring that consumers have the ability to repay at the time the mortgage is consummated and that mortgage refinancings provide a "net tangible benefit" to the consumer.

Liability for Securitizers:  The bill attempts to make securitizers and other participants in the secondary mortgage market liable for supporting irresponsible lending.  It provides that certain high-quality, low-cost loans (defined as Qualified Mortgages) will be presumed to meet these federal standards.

The bill prohibit financial incentives that encourage mortgage originators, including mortgage brokers and loan officers of lending institutions, to steer consumers to higher-cost mortgage.  Also, the bill requires creditors to retain an economic interest in a material portion of the credit risk for certain mortgages they originate.

Bans Certain Terms:  The bill prohibits prepayment penalties for any adjustable rate mortgage and other mortgages that do not meet the definition of a "Qualified Mortgage," limits prepayment penalties charged to borrowers who wish to close out their loans, bans single premium credit insurance and prohibits mandatory arbitration clauses.  Members may be concerned that a prohibition of mandatory arbitration clauses would increase costs for consumer due to the risk of litigation factored into the price for mortgages.

Foreclosure Mitigation:  The bill provides for legal assistance to homeowners and tenants facing foreclosure.  This assistance is in addition to numerous foreclosure mitigation plans currently offered by the federal regulatory agencies and financial institution.  In fact, the Treasury Department has committed $75 billion for loan modification and foreclosure prevention through its Making Home Affordable Program.

Increases Regulatory Authority:  The bill authorizes the federal banking agencies to address through rulemaking abusive mortgage terms and practices that may arise in the future.

Increased Liability from Securitizers:  The bill permits consumers to obtain redress directly from firms involved in "securitizing" mortgages, unless the securitizer has performed appropriate due diligence to comply with the ability to repay and net tangible benefit standards and effected a modification or refinancing that provides the borrower with a loan that satisfies these standards.  This provision may discourage those providers of liquidity from participation in the secondary mortgage market.

More Disclosures:  The bill attempts to enhance consumer protections for high-cost loans under the Home Ownership and Equity Protection Act (HOEPA) and requires additional disclosures to consumers. The bill also requires lenders to provide written disclosures about the need to pay taxes and insurance premiums to all borrowers if they opt out of creating escrow accounts.  The bill requires the inclusion, in the form of further disclosure, of escrow payments for taxes and insurance in any repayment analysis provided to consumers at the time of a quote on a mortgage.  Voluminous disclosures do not automatically equate "effective" disclosure.  Members may be concerned that the bill does not provide for simplicity of disclosure.

New Government Office Established:  The bill establishes an Office of Housing Counseling at HUD to provide and coordinate homeownership and rental housing counseling programs.

Mandatory Accounts:  The bill requires subprime borrowers to have accounts established in conjunction with their mortgages to provide protection against tax liens and the forced placement of insurance, among other things.  

New "Consumer Protections":  The bill amends the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA) to create new consumer protections. The protections include detailing when the servicer can impose force-placed insurance, mandating swifter responses to consumer written inquiries, increasing penalties for violations of RESPA, requiring the prompt crediting of payments, and mandating that borrowers receive payoff statement quotes within a reasonable amount of time after a request.

Appraisals: The bill prohibits lenders from making subprime mortgage without first obtaining a written appraisal of the physical property. The bill requires a second written appraisal, free of charge, if another loan on the property occurred within six months.  Lenders are required to provide mortgage applicants with copies of any and all written appraisal reports and valuations developed in connection with a mortgage transaction at least three days before the scheduled closing date on the property.

Federal Monitoring of State Appraisers:  The bill provides the Appraisal Subcommittee with more authority to monitor the performance of State appraiser agencies. The Appraisal Subcommittee is also required to describe its activities in greater detail in an annual report to the Congress.  Many of the additional appraisal changes are designed to strengthen licensing and education standards, as well as to establish a Federal grant program to the States.  Some Members may be concerned about the bills untested mandate requiring FFIEC's appraisal subcommittee to monitor the State agencies.



CBO estimates that enacting the legislation would increase budget deficits by $10.7 billion over the 2010-2014 period and by $4.5 billion over the 2010-2019 period.