In Details of Dodd's Financial Reform Bill, Some Loopholes and Unanswered Questions

The fine print in the sweeping overhaul of the U.S. financial system proposed by Sen. Christopher Dodd reveals loopholes, ambiguities and unanswered questions about some key players – among them a new consumer protection bureau, credit-rating companies and payday lenders.

Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, unveiled his draft legislation on Monday. His plan’s details suggest his struggle to balance the conflicting demands of Republicans and the financial industry lobbyists, who oppose an independent new consumer agency, and Democrats, many of whom question whether Dodd has gone far enough.

Dodd has stressed the reach of his blueprint, especially noting the importance of a new independent consumer watchdog to write rules for products such as mortgages and credit cards. “This crisis started when people were given mortgages they didn’t understand and could never afford,” said Dodd. “If there was a watchdog on duty, it didn’t bark.”

Still, the legislation would impose significant limits on the autonomy of the new watchdog. It would establish a Financial Stability Oversight Council of nine members, all but one of whom would be existing financial regulators such as the Treasury Secretary and Comptroller of the Currency, which oversees national banks.

Just one member of the Council would have the power to delay the bureau’s suggested regulations, and six would be needed to override them. Council members could block any bureau recommendation they feel threatens the stability of the banking system.

Even before it crafted a rule, the consumer bureau would be required to consult with other financial regulators about whether the rule would be consistent with the objectives of those existing agencies, some of which have been accused of being lax in the lead-up to the financial crisis. The bureau also would have to consult with the Federal Trade Commission before imposing any regulations.

Nor would the consumer bureau be allowed to examine the books of any lender without first coordinating with other federal and state bank examiners so that they all go on the same day – a measure intended to reduce the regulatory burden on lenders.

In addition, the new bureau would have to rely as much as possible on existing documents of the financial institutions it oversees and could not dictate that they use any specific technology to aid the bureau in monitoring.

The consumer bureau would be housed in the Federal Reserve. While Dodd said the Fed wouldn’t have “one iota” of authority over the bureau – and would basically be renting office space – the bill provides for the presidents of the regional Fed banks to recommend at least six members to the bureau’s advisory board.

Much of the bill addresses what the consumer bureau would not be able to do. For instance, the bureau could not declare a lending practice “unlawful” simply because it is deemed unfair. To be illegal, the practice must be “likely to cause substantial injury to consumers, which is not reasonably avoidable by consumers.”

It’s also unclear exactly which lenders the bureau could regulate. Take, for example, payday lenders, which offer short-term, high interest loans.

Dodd’s bill does not actually mention the word “payday.” Yet Dodd’s  11-page summary of the bill does. The summary says a new consumer protection bureau housed within the Fed will have the authority to examine and enforce regulations for “large payday lenders.” But “large” is not defined.

"It's not clear what 'large' means," states the "Payday Pundit," a blog of the industry trade group, the Community Financial Services Association. "I will try to seek clarification over the next few days."