Ten Loopholes That Can’t Make It Into FinReg

May 04, 2010 | Last updated: July 31, 2020

Dan Pfeiffer, the White House communications director, wrote a blog post that lists the loopholes lobbyists most want inserted into Sen. Chris Dodd’s (D-Conn.) financial regulatory reform bill. Here they are, trimmed down a bit for readability:

  • *OK, Consumer Protection Rules are Fine… Just Don’t Enforce Them. * The current bill would apply the same rules to providers of consumer financial services or products, whether the provider is a bank or a non-bank financial provider.  The bill would also allow State Attorneys General to enforce those rules.  Lobbyists are pushing hard to amend the bill so that Attorneys General lose their enforcement authority.
  • Letting Non-Banks Play by a Weaker Set of Rules. We know this is coming, so keep an eye out: attempts to give car dealers that make car loans and other major providers of financial services a big exemption from the consumer protection rules.
  • *If You Can’t Kill Consumer Protection Now, Starve it to Death Later. *One of the keys to effective consumer protection is having a consumer financial protection bureau that is independent. And one of the keys to independence is having an independent source of funding. So be prepared for attempts to take away the bureau’s source of funds.
  • Preventing States from Protecting Their Own Citizens. Under the current bill, the Bureau of Consumer Financial Protection would set minimum standards for the consumer finance market, but states would still be allowed to adopt additional protections. In other words, federal consumer protections would set a floor, not a ceiling. There’s likely to be a fight about that provision.
  • Removing the Derivatives Trading Requirement to Protect Wall Street Profits. Under the current bill, standard derivatives would have to be traded on exchanges or other electronic trading platforms. Expect amendments to eliminate this trading requirement.
  • *Stretching the Derivatives “End-User” Exemption into a Hedge Fund Loophole. *Be on the lookout for attempts to stretch this exemption.
  • ***Creating an “AIG Loophole.” *Rest assured, there are large “non-banks” out there who would rather not be scrutinized quite so closely.
  • *Who Needs to Know What’s Happening at Insurance Companies? *Insurance is regulated by the states, not the federal government — and this bill doesn’t change that.  But this bill would give the Treasury Department the ability to collect information from insurance companies so that it can help identify emerging risks before they blow up the financial system — like AIG.
  • Letting Firms Make Loans Without Skin in the Game. It’s cheaper for mortgage lenders and Wall Street to be in the mortgage business if they don’t have to worry about the borrower’s ability to pay — but it’s a lot more costly for Americans to perpetuate the same system that helped cause the housing crash.
  • *Preserving “Too Big to Fail” While Pretending to Kill It. *The key to preventing future bailouts is to end the problem of “Too Big to Fail.”  And the only way to do that is to make sure that we can shut down big financial firms in a swift, orderly way if they’re on the brink of failure.

Of these, the consumer financial protection provisions seem to be most under fire by Republicans — despite how insane that political calculus seems.