As a Member of the exclusive House Committee on Financial Services, I play a part in reviewing and exercising jurisdiction over such wide ranging issues as securities, insurance, banking, and housing. The Committee also oversees the work of the Federal Reserve Bank, the U.S. Treasury, the Securities Exchange Commission, and other financial services regulators. I am also a Member of the Subcommittee on Housing and Community Opportunity as well as the Subcommittee on Oversight and Investigations.
In the recent past, Americans have faced the worst financial crisis since the Great Depression. Millions have lost their jobs, businesses have failed, housing prices have dropped, and savings were wiped out. The failures that led to this crisis require bold action. On Wednesday July 20, 2010 President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. I believe this law goes a long way toward restoring responsibility and accountability in our financial system and gives Americans confidence that there is a system in place that works for and protects them. After years of work, this lawcreates a sound foundation to grow the economy and create jobs.
The Dodd-Frank Wall Street Reform and Consumer Protection Act holds Wall Street responsible in the first major regulatory response to the banking crisis of 2008. This legislation addresses three major components thought to be most critical in our financial crisis: systemic risk, consumer protections, and derivative regulation. Years without accountability for Wall Street and big banks brought us the worst financial crisis since the Great Depression, the loss of 8 million jobs, failed businesses, a drop in housing prices, and wiped out personal savings.
The failures that led to this crisis require bold action. We must restore responsibility and accountability in our financial system to give Americans confidence that there is a system in place that works for and protects them. We must create a sound foundation to grow the economy and create jobs.
HIGHLIGHTS OF THE LEGISLATION
- Consumer Protections with Authority and Independence: Creates a new independent watchdog, housed at the Federal Reserve, with the authority to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, and protect them from hidden fees, abusive terms, and deceptive practices.
- Ends Too Big to Fail Bailouts: Ends the possibility that taxpayers will be asked to write a check to bail out financial firms that threaten the economy by: creating a safe way to liquidate failed financial firms; imposing tough new capital and leverage requirements that make it undesirable to get too big; updating the Fed’s authority to allow system-wide support but no longer prop up individual firms; and establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.
- Advance Warning System: Creates a council to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the economy.
- Transparency & Accountability for Exotic Instruments: Eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated -- including loopholes for over-the-counter derivatives, assetbacked securities, hedge funds, mortgage brokers and payday lenders.
- Executive Compensation and Corporate Governance: Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation and golden parachutes.
- Protects Investors: Provides tough new rules for transparency and accountability for credit rating agencies to protect investors and businesses.
- Enforces Regulations on the Books: Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefits special interests at the expense of American families and businesses.
Perhaps the major issue in financial reform has been how to address the systemic fragility that was revealed by the crisis. The Dodd-Frank Act creates a new regulatory umbrella group chaired by the Treasury Secretary—the Financial Stability Oversight Council—with authority to designate certain financial firms as "systemically significant" and subjecting them to increased prudential regulation, including limits on leverage, heightened capital standards, and restrictions on certain forms of risky trading. These firms will also be subject to a special resolution process similar to that used in the past to address failing depository institutions.
As a former Mayor, I know firsthand the importance of remaining competitive or risking the loss of jobs and industry. I believe we have to continue to implement Dodd-Frank capably, carefully, and with great consideration of the many American households in Missouri’s Fifth District and around the country, who suffered as a result of falling asset prices, tightening credit, and increasing unemployment.
Other aspects of financial reform address particular sectors of the financial system or selected classes of market participants. The Dodd-Frank Act consolidates consumer protection responsibilities in a new Bureau of Consumer Financial Protection within the Federal Reserve. The act consolidates bank regulation by merging the Office of Thrift Supervision (OTS) into the Office of the Comptroller of the Currency (OCC). It requires more derivatives to be cleared and traded through regulated exchanges, and it mandates reporting for derivatives that remain in the over-the-counter market. Hedge funds have new reporting and registration requirements. Credit rating agencies are subject to greater disclosure and legal liability provisions, and references to credit ratings will be removed from statute and regulation. A federal office is created to collect insurance information. Executive compensation and securitization reforms attempt to reduce incentives to take excessive risks. Intermediaries who provide investment advice to retail investors and municipalities may be subject to a fiduciary duty. The Federal Reserve's emergency authority is amended and its activities are subject to greater public disclosure and oversight by the Government Accountability Office (GAO).
The Volcker Rule
The concept of the Volcker Rule is simple: loan-making, deposit-taking banks should not engage in speculative trading or investing in hedge funds. Doing so threatens the safety and soundness of the financial system and harms taxpayers. According to the GAO, the global financial crisis wiped out $9 trillion in assets and reduced economic output by $12 trillion. Proprietary trading by big banks – which occurs when a firm trades financial instruments using its own money – was one cause.
The Volcker Rule’s detractors contend that prop. trading played little to no part in causing the 2008 financial crisis. They also argue that drawing a line between “prop. trading” and permissible market-making activity is oh-so challenging—if not impossible—making the Volcker Rule unworkable and potentially harmful to our capital markets. I disagree.
The Volcker Rule does not outlaw proprietary trading outright – it merely says that it must be done outside the bounds of the “federal safety net.” In other words, it keeps taxpayers off the hook. When banks engage in “prop. trading,” they are essentially gambling for their own profit – instead of serving the needs of their customers. The Volcker Rule will refocus banks’ attention off proprietary trading and back where it should be: trading on behalf of their clients. The Volcker Rule makes sense for consumers and makes sense for our financial system. Losses from proprietary trading required taxpayers to step in to bailout the system. The Volcker rule will ensure federal dollars are not used to protect this type of risky trading. Doing so will protect the U.S. economy from suffering another debilitating financial crisis and will ensure taxpayer dollars are never again used to rescue failed financial firms.
The Federal Reserve
In the midst of the worst crisis since the Great Depression, the Federal Reserve put the U.S. economy and the financial sector back on a stable path toward recovery. From the beginnings of the financial crisis, the Federal Reserve played a critically important role in stabilizing the financial sector so it could support a recovery. Having learned important lessons from the Great Depression, the Fed swiftly took action when the first signs of crisis emerged in 2007.
The Fed initially cut its discount rate for loans, extended credit to banks, and brought down the interest rate for depository institutions. When this wasn’t enough, the Fed took extraordinary steps to provide emergency funds directly to institutions and foreign central banks that desperately needed it. The severity of the crisis and its impact on millions of Americans also forced the Fed to enter unchartered territory, engaging in large-scale financial asset purchases that lowered long-term interest rates. This policy – known as “quantitative easing” – has provided a significant boost to our recovery.
Quantitative Easing (QE) has spurred economic growth and helped to create millions of jobs. QE has been successful in boosting economic growth. The effectiveness of QE speaks for itself, as Treasury yields and mortgage rates remain at historic lows. And the drop in interest rates triggered by QE has led to improvements in the housing sector and, by extension, the larger economy. Lowering mortgage rates beyond where they would have been stimulated a housing recovery, spurring home sales and boosting home construction. The result was a rise in home prices, leading to fewer borrowers underwater on their mortgages and an increased number of homeowners who are eligible to refinance. Given the meager improvement in the labor market, it is expected that the Fed will likely begin to taper its asset purchases in the next few months. Although QE cannot fully offset the contractionary effects of cuts to federal spending, I join with many economists in my belief that QE has boosted economic growth. I know the Fed continues to monitor the relevant data
Importantly, the Federal Reserve’s policies have created jobs and an economic turnaround that was otherwise impossible. And as the Fed weighs the need for further large-scale asset purchases, the Federal Open Market Committee should take into account the ongoing impact of the long-term unemployment crisis is having on millions of American families. The Federal Reserve’s dual mandate of high employment and low inflation is complimentary – and critically important. We must preserve it to ensure job creation over the long term.
The policies of the Federal Reserve are helping the economy, which in turn benefits the middle class struggling to recover from the recession. While we have made progress, more needs to be done to address the long-term unemployment crisis. With nearly 4 million Americans out of work for 27 weeks or more, further delay could permanently damage the labor force and slow long-term economic growth.
The Consumer Financial Protection Bureau
Since its inception, the CFPB has been hard at work standing up for consumers and service members who have been subject to the deceptive practices of unscrupulous corporations and financial institutions. The purpose of the CFPB, as you know, is to implement and enforce federal consumer financial laws while ensuring that consumers can access financial products and services. The CFPB is tasked with ensuring that the markets for consumer financial services and products are fair, transparent, and competitive. It is truly a consumer ally.
In just over two years, CFPB’s enforcement actions have resulted in over $3 billion directly refunded to more than 9.7 million consumers and service members. In addition, the CFPB has also helped solve tens of thousands of individual consumer problems.
In Missouri alone, CFPB has addressed 3,858 total complaints.
- 550 related to credit card issues
- 1757 related to mortgages
- 131 regarding credit products
- 391 related to bank and account services
- 152 on student loans
- 310 regarding credit reporting
- 17 related to money transfers
- 521 regarding debt collections
And more. The CFPB continues to go after institutions and industries that, for years, have abused our nation’s consumers without consequence.
In implementing the Dodd-Frank Act, the CFPB has followed many special and unprecedented procedures to ensure that smaller financial institutions do not face an undue regulatory burden. These smaller institutions, many of whom play an important role in Missouri’s Fifth District, have been granted safeguards, exemptions, and benefits designed to allow them to profit and thrive. While I have not agreed with every decision the CFPB has made, I have been impressed and encouraged by their ability to educate, regulate, and accommodate different constituencies and interests.
For example, I have met with local bankers around Missouri's Fifth District to get their input on a number of issues, and listen to concerns. Many shared with me the negative impact a particular regulation, the Qualified Mortgage/Ability-To-Repay rule is having on rural banks.
It started as a well-intentioned rule, but was combined with an exception that was too narrow. And to top it off, a dose of worrisome execution was then thrown in. The intent behind the rule was good. It was meant to make sure consumers get a fair shake, banks are able to work with families buying their first home, and entrepreneurs wanting to expand can access capital. But the exemption relied upon a narrow definition that treated our thriving rural communities as mere suburbs of Kansas City--something that may mean little to those of us in Washington, D.C., but meaning much to me and my constituents.
Immediately following this meeting with bankers, I wrote a letter to Director Richard Cordray. I explained my opinion that the rule should be re-evaluated and a more expansive definition of rural should be put into place. I followed my letter with a phone call to Director Cordray. I was not alone in my concerns, and Director Cordray was very sympathetic and understood my communication. In response to these concerns, the Bureau recently amended the rule to provide a two-year transition period which will allow time for review. I look forward to continuing to work with this valuable and fundamentally consumer-oriented organization.
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