Business for Shared Prosperity

Jeff Bounds and Kent Hoover
Dallas Business Journal, December 18, 2009

Sweeping legislation that would re-regulate much of the financial services industry drew fire in North Texas this week, with critics complaining that much of the bill will make credit more expensive and harder to get. It would, among other things, create an agency to protect consumers from what are perceived to be unfair financial products and services.

Known as the Consumer Financial Protection Agency, the new regulatory body would have the power to set basic standards for financial products, ban practices such as teaser rates on loans, and require easy-to-understand contracts for credit cards and mortgages.

It is part of the Wall Street Reform and Consumer Protection Act (H.R. 4173), which aims to prevent the type of systemwide collapse that almost pushed Wall Street over the edge last year. As part of the legislation, which passed the House on Dec. 11 by a 223-202 vote, an interagency council would identify financial firms and activities that could pose a systemic risk to the financial system, and subject them to increased oversight and regulation. The bill also would establish a process for unwinding one of these firms if it does collapse.

Although most of the bill looks to put limitations on Wall Street, the House included some breaks for Main Street as well. For example, the bill includes an amendment that would continue to exempt public companies with market values of less than $75 million from the Sarbanes-Oxley Act’s requirement for an outside audit of their internal controls. Small public companies maintain these audits would be too expensive.

It might cost Claimsnet.com, a Dallas company that does electronic processing of health care claims, $100,000 to comply with the audit provision of the Sarbanes-Oxley Act, according to CEO Don Crosbie. Investors in the company (OTC BB: CLAI.OB) were concerned that this would essentially mean lower returns while delivering little or nothing extra in the way of value, said Crosbie, adding: “We could never have fulfilled all those rules.”

Supporters of the Consumer Financial Protection Agency contend it is needed because banking regulators failed to rein in what critics consider to be abusive practices by the financial industry. Small businesses, as well as consumers, would benefit from the agency, said Margot Dorfman, CEO of the U.S. Women’s Chamber of Commerce.

“Business owners and consumers need the security of knowing that the costs and risks of financial products, services and lending are fully and fairly disclosed,” Dorfman said. “We need a strong, independent federal agency to promote financial product safety and establish clear, enforceable rules of the road.”

But opponents of the bill in different arms of the financial services industry say additional government regulation simply will make it tougher for consumers and businesses to get capital.

“I do think we need some streamlining, no question about it,” said Scott MacDonald, president and CEO of the Southwestern Graduate School of Banking in the Cox School of Business at Southern Methodist University. “But we need to focus on where the problem came from. It wasn’t the banks.”

MacDonald points the finger largely at other financial services fields, such as mortgage lenders and hedge funds. Rather than dumping more regulation on banks, government oversight needs to be extended to other sectors of the financial services industry, such as mortgage banks, he said.

“We need to have a full understanding of all financial products out there,” he said. “Rather than try to regulate the whole industry through banks, we need to regulate the whole industry.”

Mortgage bankers, for one, think their industry has enough regulation to keep bad apples out of the basket and ensure a repeat of 2008 doesn’t happen.

“It’s easy to pile on the mortgage industry when there’s enough blame to go around for everybody,” said Scott Norman, vice president of the Texas Mortgage Bankers Association.

But while different segments of the financial services industry may point fingers at each other on the question of who should be blamed for the economy’s near-collapse, they tend to be united in the opposition to the Consumer Financial Protection Agency.

The U.S. Chamber of Commerce strongly opposes the creation of the agency. It contends the Consumer Financial Protection Agency would add an unnecessary layer of regulation on banks, reduce choices of financial products, stifle innovation and make credit even harder to get. The chamber and its banking industry allies hope the close House vote will improve their chances of blocking the agency in the Senate, which will take up the bill next year.

President Barack Obama strongly supports the Consumer Financial Protection Agency. At a Dec. 14 meeting at the White House, he personally urged the CEOs of the nation’s largest banks to stop lobbying against creation of the agency.

“If they wish to fight common-sense consumer protections, that’s a fight I’m more than willing to have,” Obama said after the meeting.

Ron Glancz, an attorney who chairs the financial services group in the Washington, D.C., office of the Venable law firm, said the Consumer Financial Protection Agency would increase regulatory costs for banks, and these costs would be passed down to borrowers.

“At the end of the day, it’s the customer who pays for it,” he said.

Banks also would further tighten credit availability as a result of uncertainty over what rules the new agency would issue, said Richard Fischer, a partner in the financial services group at Morrison & Foerster’s Washington, D.C. office.

The number of credit card accounts has dropped about 20% from 2008’s levels because of recently enacted legislation regulating fees and other credit card terms, and the rules implementing this legislation haven’t gone into effect yet, he said. He predicts uncertainty over the role of the Consumer Financial Protection Agency could cause banks to further reduce credit card availability.

That would hurt small businesses since many of them “live on credit cards,” he said.

jbounds@bizjournals.com | 214-706-7122, hoover@bizjournals.com | 703-258-0845

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