Restoring American Financial Stability Act

On May 20, 2010, the Senate passed the Restoring American Financial Stability Act, (“Act”),
viewable, with amendments, at http://thomas.loc.gov/cgi-bin/bdquery/z?d111:s.03217:.

A comprehensive financial regulatory reform bill, the Act consolidates existing consumer protection authorities into a new Consumer Financial Protection Bureau, establishes a council to monitor and address systemic risk, and implements a resolution authority to prevent firms from being considered “too big to fail”.


Consumer Financial Protection Bureau

The Act establishes the Consumer Financial Protection Bureau, an independent entity housed within the Federal Reserve.

The Act authorizes the Bureau to write consumer protection rules for banks and nonbank financial firms offering consumer financial services or products, and examine and enforce regulations for banks and credit unions with greater than $10 billion in assets, all mortgage-related businesses (i.e., lenders, servicers, and mortgage brokers), and large non-bank financial companies (i.e., payday lenders, debt collectors, and consumer reporting agencies).

Interestingly, the Act prohibits the Bureau from defining “insurance” as a financial product or service and excludes from its authority insurance, accountants and tax preparers, attorneys, persons regulated by a state insurance regulator, merchants, retailers, other sellers of non-financial services, real estate brokerage activities, manufactured home retailers and modular home retailers.

Instead, the Act creates Office of National Insurance within the Treasury Department to monitor the insurance industry, coordinate international prudential insurance issues, and conduct a study and report to Congress on modernizing insurance regulation.


Financial Stability Oversight Council

The Act also creates the Financial Stability Oversight Council to identify, monitor, and address systemic risk and make recommendations to the Federal Reserve for heightened capital, leverage, liquidity, and risk management standards.

The Act mandates minimum leverage and risk-based capital requirements for insured depository institutions, depository institution holding companies, and for nonbank financial firms identified by the Council.


Creation and Enforcement of Consumer Rights

The Act amends the Truth In Lending Act by requiring lenders to determine a borrower’s “reasonable ability to repay” before making a mortgage and prohibits loan originator compensation that varies with loan terms other than the principal amount thereby prohibiting yield spread premiums.

The Act also requires that credit bureaus provide consumers with numerical credit scores contained in a credit report used to deny credit and allows state attorneys general to sue national banks for failure to comply with state laws or for violating Bureau issued regulations.


Financial Institution Oversight

The Act merges the Office of Thrift Supervision into the Office of the Comptroller of the Currency and the Federal Reserve will retain supervision of bank holding companies and state-chartered banks and become supervisor of savings and loan holding companies.

The Act will also require large, complex companies to periodically submit “funeral plans” for their rapid and orderly shutdown/wind-down in the event of economic failure and redefines how the Federal Deposit Insurance Company calculates the deposit insurance premiums it charges by basing premiums on the risks posed by those institutions.

The Act does not address Fannie Mae and Freddie Mac’s future and must be reconciled with H. R. 4173, the House-passed financial regulatory reform bill.