National Installment Lending Association

Legislative Updates

NILA Membership Legislative Update on CFPA

While many are disappointed with House passage of a 1,300-page financial regulatory reform bill that leaves many of the underlying troubling issues unaddressed, we are encouraged by the growing recognition that there is a better way to overhaul our outdated, financial regulatory system. We now look forward to working with the Senate to advance a more effective reform bill that will protect consumers and strengthen our markets without adding new layers of bureaucracy, rules, and penalties on state regulated installment lenders. Enacting the wrong financial regulatory reforms will have adverse consequences which will be felt throughout the economy, delaying Main Street recovery.

State of Play

House of Representatives

On December 11th, 2009 the House of Representatives (by a vote of 223-202) passed The Wall Street Reform and Consumer Protection Act (H.R. 4173) that creates a new "Consumer Financial Protection Agency" (CFPA). The bill, with several last-minute amendments, passed the House with 223 Democrats voting for it, and no Republicans support. Additionally, 27 Democrats crossed party lines to vote against the bill. During the nine days between bill introduction and passage, more than 200 amendments were proposed, with 33 amendments proceeding to a floor vote. Of those amendments, 22 were agreed to, 10 were rejected, and one was withdrawn.

United States Senate

In the Senate, Christopher Dodd, Chairman of the Senate Committee on Banking, Housing, and Urban Affairs (the Banking Committee), unveiled his own financial services reform proposal on December 11, 2009. The Dodd proposal, tentatively entitled "The Restoring American Financial Stability Act of 2009", is currently being drafted but has not yet been formally introduced. As of this report, the Banking Committee staff indicates that a target date for introducing Chairman Dodd's bill has not been set.

Chairman Dodd and Banking Committee Ranking Member Richard Shelby have been making "meaningful progress" on a bipartisan regulatory overhaul bill. Goals both senators have in common are systemic risk regulation, strengthening consumer protections, and divesting the Federal Reserve Board of its regulatory authority and requiring it to focus on monetary policy. The Senators disagree as to the proposed CFPA - Dodd supports it, Shelby opposes it - and Banking Committee members are considering a proposal that would create an agency that writes consumer regulations but would leave enforcement to specific banking and state regulators.

Impact of Senator Dodd's Retirement

Without the burdens of a tough re-election race, Senate Banking Committee Chairman Christopher Dodd will likely be liberated to forge a bipartisan consensus revamping the nation's financial regulatory system, providing a crowning achievement for his career. Dodd has already reached out to Ranking Member Richard Shelby to develop a compromise through "working groups" to his discussion draft that he unveiled in November. The two released a statement on December 23 that they would work together to resolve differences, especially over creation of a Consumer Financial Protection Agency that Republicans oppose.

Timing

The Senate returns for legislative business on January 19; however, most of the Committees will not begin work until after the State of the Union Address. A markup on Chairman Dodd's bill may happen as early as early to mid February. No floor time has yet been scheduled for this bill at this time, but the CFPA is a top priority for the Obama administration and Dodd, who has been a strong consumer advocate, shepherding through legislation last year that placed tough restrictions on credit card issuers. Consumer groups will be pushing Dodd and Senate Democrats not to give in on CFPA concessions beyond what House Financial Services Chairman Barney Frank has already allowed.

Odds of Enactment

We anticipate that like Health Care reform, movement of any financial services reform legislation will require 60 votes to proceed. At this point, it is impossible to predict whether such legislation could move forward if it included a "full" CFPA approach. As a result, we believe a CFPA - if there were one created at all - would have to be considerably watered down. Still, this outcome would be a very big risk given how powerful a CFPA or CFPA-like agency were to be created. NILA and other industry groups have worked with Senate Banking Committee members to raise concerns and label the CFPA as the largest obstacle to broader financial services reform. Senator Shelby has been a champion on this issue and we will continue to work with him and his staff on crafting legislation that keeps installment lending effectively state regulated.

Possible Regulatory Impacts

Because of the broad, general language in the House-passed legislation, a CFPA could interpret its authority to include every interaction that lenders have with consumers. As the first CFPA director will likely be a critic of the short-term, small-dollar lending industry - like an Elizabeth Warren - this is of serious concern.

In the House passed bill, the CFPA will have massive authority to regulate businesses in virtually all industries, even those not directly involved in consumer finance. This legislation is filled with too many broad definitions and vague regulatory standards, exposing businesses to excessive regulation and costly litigation. The uncertainty surrounding these regulatory standards will create significant disincentives for installment lenders that lend to consumers with damaged credit or a lack of credit history. Any new federal regulation will have a negative impact as it restricts access to credit and increases the price of credit for consumers.

Both the House and Senate versions of financial services reform legislation create a Consumer Finance Protection Agency that would oversee all consumers lending including installment lending, mortgages, credit cards, payday loans, and even terms on savings accounts. The legislation would take consumer regulation and enforcement powers away from state regulators and bank regulators. Under this proposed legislation, the Federal government could set a minimum standard of regulation, which would be more restrictive than current state law, thereby precluding state regulators and state legislators from effectively regulating the industries they are charged to regulate.

Who is Covered?

H.R. 4173 would exempt a number of entities from the CFPA's rulemaking, supervisory, enforcement and other authorities, including the authority to order assessments regarding whether a specific financial product offered is "fair" or "properly regulated". These exempted entities include retailers, merchants, pawn brokers and sellers of primarily non-financial goods when providing a good or service directly to a consumer but only to the extent in which the good or service being provided is not itself a consumer financial product or service. Accountants, income tax preparers, attorneys, real estate brokers and agents, automobile dealers and sellers, and others also would generally be exempt from the CFPA's authority when they are engaged in the normal, nonfinancial activities of their respective businesses. However, the CFPA would retain any authority provided by an enumerated consumer law over these entities.

The lending industry is seeking additional rollbacks in the CFPA if it cannot prevent its enactment. Industry groups are seeking language to craft a complete pre-emption of state consumer laws by the agency; making it part of a division under the overhaul, rather than a stand-alone agency; and stripping away all enforcement and examination abilities so it would only have rule-writing responsibility. NILA will continue to focus on key members on the Senate Banking Committee, Democratic and Republican leadership, and the public to make them aware of the impacts of this legislation. NILA will also continue to support strong consumer protections, the elimination of duplicative regulation, and strong enforcement against illegal financial activities and will continue to argue that the installment lending industry is consumer friendly, highly and effectively regulated and should stay state regulated, period.