March 28, 2024

Consumer Agency Asks for Definitions of Nonbanks

The Dodd-Frank financial regulation law, which became effective last July, specifically allows the new consumer bureau to regulate nonbank mortgage companies, private education lenders and payday lenders. But the law allows the bureau to regulate only “larger participants” in a host of other consumer finance markets.

By July 21, 2012, one year after the bureau’s start-up date, it must define what other services will fall under its jurisdiction and what it means to be a “larger participant” in those markets.

In its notice and request for comment, the bureau has proposed six markets that might be included: debt collection; consumer reporting; consumer credit and related activities; money transmitting, check cashing and related activities; prepaid cards; and debt relief services.

But it also asks for comment on additional service areas that should be included in its jurisdiction, and whether the services need to be national in scope or if regional markets should be considered.

“Consumers deserve the peace of mind that financial companies, both banks and nonbanks, are following the rules,” said Elizabeth Warren, a special adviser to the Treasury secretary who is overseeing the agency’s start-up.

“The C.F.P.B. will be able to examine companies that have never been subject to federal oversight to ensure that no one is gaining an unfair advantage by breaking the law,” Ms. Warren said. “This will ultimately create fair competition, better product offerings and more transparent markets for consumers.”

Although the bureau is scheduled to begin operations next month, it is not allowed to begin oversight of previously unregulated entities until it has a director in place. Ms. Warren has been widely talked about as a potential director but President Obama has not yet nominated anyone to fill the post.

A nomination is subject to Senate confirmation, but 44 Republican senators have said they will not consider any nominee until structural changes are made in the bureau, including replacing its single director with a five-member commission.

Banks, credit unions and savings and loan companies have long been subject to regular examinations by federal regulators to ensure that they comply with consumer financial laws. The Dodd-Frank law expanded federal regulation to a host of financial service companies that previously had not been regulated but that some legislators felt had contributed to the instability that worsened the 2008 financial crisis.

The questions on which the bureau is seeking public input also include what criteria to use to measure a market participant, how to set the threshold for “larger participant,” whether to use a single test for all markets or specific market-related tests and over what time period a participant’s activities should be measured.

Article source: http://feeds.nytimes.com/click.phdo?i=9b22f32d56e09dfadcd636dcf686a89f

DealBook: Wall Street: Not Too Big to Fail

Wall Street is not too big to fail, a top Federal Deposit Insurance Corporation official will tell Congress on Tuesday.

“Our explicit goal is that all market players should understand that bailouts are no longer an option,” Michael H. Krimminger, the F.D.I.C.’s general counsel, said in prepared testimony before the House Financial Services Committee.

His position is a sharp turnaround from 2008, when the nation’s economy teetered on the brink of collapse. At the time, Washington enacted a $700 billion bailout for banks, the automotive industry and the giant insurer American International Group. Policymakers argued that they had no choice but to rescue the firms because they were so large and interconnected that their collapse would have caused the nation’s economic downfall.

“Such a presumption reduced market discipline and encouraged excessive risk-taking by firms,” Michael S. Barr, a former assistant Treasury Department secretary who is now a law professor at the University of Michigan, told the committee.

In the aftermath of the financial crisis, Mr. Barr was a leading architect of the Dodd-Frank Act, which aimed to rein in derivatives trading, mortgage securities and other risky Wall Street businesses.

The law, according to Mr. Krimminger, ended the era of bailouts, too.

“The Dodd-Frank Act expressly bars any bailout and prohibits taxpayers from bearing any losses,” he said.

Dodd-Frank, for instance, created the Financial Stability Oversight Council, a panel of regulators who will keep an eye on the nation’s biggest and riskiest companies. The council will designate specific financial firms — including mutual funds, insurance companies and hedge funds — that pose a systemic risk to the financial system. These firms, and banks like Goldman Sachs that have more than $50 billion in assets, will face tougher federal oversight and higher capital requirements.

The so-called systemically important financial institutions, or SIFIs, must also create a “living will” that spells out how the firms could be unwound through bankruptcy if they fall on hard times. And if the F.D.I.C. or Federal Reserve concludes that a firm’s plan is not “credible,” the regulators may force the company to shed some of its riskier assets or operations, Mr. Krimminger said.

The plan, regulators say, will prevent a repeat of the chaotic Lehman Brothers bankruptcy.

But some Republicans and financial industry executives say that labeling a company as “systemically important” only reinforces the too-big-to-fail problem. Others note that when complicated and huge institutions file for bankruptcy, as in the case of Lehman, markets can panic.

Dodd-Frank does offer an alternative: “orderly liquidation authority.” Under the law, the F.D.I.C. has receivership power over firms that are on the brink collapse, similar to the agency’s role when a local bank fails.

Critics contend that the process would give the government the arbitrary authority to decide when a firm lives and dies. Some also say it will force a fire sale of a failing firm’s assets.

Mr. Krimminger reassured lawmakers that the concerns did not have “any basis in reality.”

“This orderly liquidation authority effectively eliminates the implicit safety net of ‘too big to fail’ that has insulated these institutions from the normal discipline of the marketplace.”

Article source: http://feeds.nytimes.com/click.phdo?i=cc7dfc3cd1c812c1b0df6a64624419d5