This vote was on an amendment by Richard Shelby, R-Ala., that would have made wholesale changes to the way a bill overhauling financial regulations deals with protecting consumers. Specifically the amendment would have created a consumer regulatory body within the Federal Deposit Insurance Corporation (FDIC) and given it the authority to create new rules governing institutions that offer financial services to consumers. It also would have replaced consumer protection language in the bill with other language that granted the FDIC primary authority over large mortgage originators that aren’t banks, and as well as other types of financial service providers that had violated consumer protection statutes. This would have been done in place of creating a new regulatory body intended to protect consumers. The amendment was offered to a bill that aims to close gaps in financial regulations, strengthen oversight of consumer lending and more closely oversee financial derivatives. Derivatives are, in essence, very complex financial contracts that businesses use as a hedge against large changes in the price of some commodities such as gasoline, but that have also become popular with speculators looking to gamble on big profits. Speculation in derivatives, relatively unhampered by regulation, is often blamed for partially contributing to the financial meltdown in 2008.
“This will give the FDIC broad authority to clamp down on the worst offenders of our consumer protection laws without needlessly subjecting law-abiding businesses to expensive regulation,” Shelby said. He said unlike language in the underlying bill, Shelby’s amendment would ensure that consumer protection rules would be issued “without considering their impact on the safety and soundness of financial institutions.”
“Need I remind my colleagues that this is the same regulatory model that produced the fiascos at Fannie and Freddie. In that case, HUD wrote rules on their housing goals and underwriting standards, while [an oversight agency] regulated them for safety and soundness. Do we need a better example of the foolishness of divorcing consumer protection from safety and soundness?” Shelby asked.
Chuck Schumer, D-N.Y., said Shelby’s amendment would create a new division within FDIC without any power to examine or enforce actions against banks of any size or any of their affiliates.
“Even worse, it could only do examinations of nonbank consumer finance companies if they “demonstrate a pattern or practice of violations” of consumer law—in other words, only after consumers have been harmed repeatedly. That is what one could call too little, too late,” Schumer said. “Even the banks want the new consumer division to be able to enforce its rules at nonbanks. This is amazing. Some of the most rapacious institutions that prey on consumers are not banks. They operate outside the scope of the Federal regulatory authorities. They are often responsible for many of the most egregious abuses and predatory lending practices. Many of the products provided to consumers by these nonbanks played a direct role in the financial crisis. And many of these businesses—payday lenders, rent-to-own companies—currently operate below the radar screen to prey on vulnerable communities. How can we exempt some of these payday lenders and rent-to-own companies?”
Schumer said further, Shelby’s amendment would prohibit this new division of the FDIC from issuing rules that affect underwriting standards for deposit institutions and their affiliates.
“After the crisis we just went through, which was in large part created by bad mortgage underwriting standards, I cannot believe anyone can propose this with a straight face because—let me repeat what it does. The consumer division cannot issue rules “that affect any underwriting standards” of deposit institutions. It is saying: Let’s repeat the mortgage crisis. It makes no sense,” Schumer said.
By a vote of 38-61, the amendment was rejected. All but two Republicans present voted for the amendment. Every Democrat present voted against the amendment. The end result is that the measure went forward without language that would have replaced a new consumer protection agency created by a financial overhaul bill with language giving the FDIC certain authorities over non-bank institutions instead.