• Reading the Financial Reform Bill: As interesting as Lady Gaga backward?


    Perhaps you’re thinking, “Hey, Mitch, there’s some 2300 pages of stuff in that brand new financial reform bill that was just passed. Have you read them all?” Can you tell me what’s in it?”

    The answer to the first question — no. I have not read them. I’d rather be waterboarded while listening to Lady Gaga played backwards at high speeds. But I can, at least, share some preliminary thoughts about some things that the bill President Obama signed last week does, and doesn’t do. I’ll probably have more thoughts later, but for now, here’s some of what I like and don’t like.

    First, don’t expect huge changes right away. The law creates a brand new governmental body, the Bureau of Consumer Financial Protection, housed within the Federal Reserve. And like all starting governmental bodies, it will take time to get things running. According to Michael Barr, assistant U.S. Treasury secretary for financial institutions and a leading candidate for the job of head of the new Bureau itself, it will take a while for the Bureau to consolidate and transfer power from the myriad agencies regulating this terrain before. People will have to be transferred and hired. Regulations will need to be written (and lobbyists will be trying to influence the writing of those regulations.) Figure a year before we find out what kind of teeth, or even gums, they have.

    Second, don’t assume that everything is being regulated. There are two significant exceptions to the array of lenders affected by this bill: Auto dealers and community banks. With respect to the auto dealers, although the law does allow the Bureau to regulate the loan documents themselves, which would be from the lender, not the dealer, the dealers themselves escape regulation for any other documents they have prospective vehicle buyers fill out.

    This is kind of a big gap. Plenty of people still use the dealer as their source of financing, as opposed to finding their own financing. And not regulating the dealers themselves leaves one of the most common consumer financing transactions at least partly outside the Bureau’s jurisdiction.

    This, of course, was no accident. According to Philip Reed, a senior consumer advice editor at Edmunds.com, “They avoided regulation (by the new bureau) by saying they’re part of Main Street, not Wall Street. They put uniforms on Little Leaguers. They know people on a first-name basis.”

    They are, of course, really, really big businesses, owned by really, really large corporations. But never mind that.

    By the way, this loophole big enough to drive a fleet of freshly financed trucks through was strongly opposed by military leaders, who had seen the practice of dealers pushing bad loans on military families and wanted it stopped. Keep that in mind the next time you hear someone in Congress saying, “Support the Troops.”

    The other exemption, sort of, is smaller community banks, which still have to follow the Bureau’s rules, but won’t be subject to its enforcement. The enforcing duties will remain with the governmental entities that regulated them before. You know, the ones that missed the disaster the first time.

    In all fairness, the lending practices of community banks were not the primary cause of the housing crisis. (And don’t tell me the real cause was the Community Reinvestment Act. It wasn’t. Not even close.) So this may not be that big a deal. We’ll see.

    (Full disclosure—I own shares of stock in a small community bank, specifically Ephrata National Bank in Ephrata, Pennsylvania.)

    Finally, one area that is being regulated by the Bureau is payday lending, a practice that has been particularly vile. That industry fought hard to be exempted from the legislation, but failed. They will, presumably, not go away when it comes to writing the regulations that will govern their trade.

    I’ll have more thoughts as the new Bureau springs to life over the coming months.

    Leave a Comment