Today, the Senate voted to pass the Dodd-Frank Wall Street Reform and Consumer Protection Act, sending the landmark legislation to President Obama's desk for signature next week. The bill is not perfect, but it will bring greater security to American consumers, investors and Main Street businesses. Most importantly, it turns the page on an era of misguided deregulation that has cost Americans 8 million jobs and trillions in lost household wealth. Demos has contributed to the reform effort with policy analysis and advocacy on three major issues:

1. A Fairer Financial Marketplace for American Consumers. 

The bill establishes the Consumer Financial Protection Bureau (CFPB), an independent federal entity housed within the Federal Reserve, with the sole mission of protecting consumers from unfair, deceptive and illegal practices in the lending market. Demos was one of the first public supporters of an independent consumer finance regulator. The CFPB will consolidate the consumer protection responsibilities of as many as seven federal agencies under one roof. It will have independent leadership and funding, and the authority to write and enforce rules to address the tricks and traps now commonplace in Americans' checking accounts, mortgages, credit cards, and student loans. The new law gives states the authority to go beyond CFPB rules to prevent a local problem from becoming a national disaster. And it creates common-sense standards for fairness in mortgage lending, such as a requirement that borrowers can afford their loans and a ban on prepayment penalties and broker kickbacks for steering borrowers into higher-cost loans than they qualify for.

The Demos policy brief Why We Need an Independent Consumer Financial Protection Agency Now, recounts the history of financial deregulation at the state and federal levels, connecting this policy to increased family economic security and the current economic crisis. The brief also answers some of the Frequently Asked Questions about a new consumer regulator. The release resulted in coverage of the CFPA by Bob Herbert in the New York Times and by Chris Hayes on The Nation's The Breakdown podcast .

A Stronger Economic Foundation for the Next Generation. Risking Our Future Middle Class: Why Young Americans Need Financial Reform published in partnership with The Student PIRGs and the United States Student Association, made the case that the generation of adults just entering the workforce has an enormous stake in rebuilding the regulatory framework needed to avoid future economic crises and protect consumers. An earlier brief released with the same partner organizations, Subpriming Our Students, highlighted the burden of unregulated private student loans, which typically have uncapped, variable interest rates that are highest for those who can least afford them, and are nearly impossible to discharge in bankruptcy. Under the new reform bill, the CFPB will have the power to write rules for all private student loans. The new law also creates a private student loan ombudsman at the CFPB, charged with assisting borrowers, analyzing complaints and making policy recommendations to Congress and the Administration.

A Setback for Consumers: Auto Loans. One glaring shortcoming in the legislation is the special interest carve-out from CFPB oversight for auto dealers who sell or broker loans, consistently the top source of consumer complaints to the Better Business Bureau and state consumer protection agencies. Car buyers of color and military personnel are routinely targeted for interest rate "markups" and other loan scams. Furthermore, as demonstrated in Auto Race to the Bottom: Free Markets and Consumer Protection in Auto Finance by Demos Board member and Cambridge Winter Center for Financial Institutions Policy president Raj Date, exempting auto dealers from CFPB rules will artificially squeeze community banks and credit unions that also supply auto loans to customers into an even smaller share of the market, resulting in lower customer satisfaction and higher financing costs. Dmos helped coordinate a Hill briefing to educate congressional staff on this critical issue. Although the auto dealer industry was able to secure their exemption from the CFPB, the legislation does grant the Federal Trade Commission enhanced authority to act much more quickly to protect consumers from unfair and deceptive practices in abusive auto lending.


2. An End to the Conflict of Interest for Wall Street Ratings Agencies. 

Nowhere was the breakdown of our financial system more patent than in the failure of the major credit rating agencies to uphold their primary role as independent arbiters of risk. It was their seal of approval that enabled Wall Street to develop a multi-trillion-dollar market for bonds resting on a foundation of unaffordable loans and inflated housing prices. Demos Senior Fellow James Lardner addressed the core conflict of interest that arises from ratings agencies seeking payments from the Wall Street firms whose securities they rate in Reforming the Rating Agencies: A Solution that Fits the Problem. The report recommended the creation of an independent clearinghouse that would receive rating applications from securities issuers and assign each job to a rating agency in a random or unpredictable way, eliminating the perverse incentives that result in high ratings over accurate ones. Sen. Al Franken (D-MN) introduced an amendment based on the Demos proposal, and the Franken amendment passed the U.S. Senate on a bipartisan vote of 64-35. After a tough conference battle, the final Act requires the SEC to enact the Franken proposal or an alternative that eliminates this conflict of interest after a two-year study.

The Act also includes a number of other worthy provisions to strengthen the oversight and regulation of credit rating agencies: For the first time, the SEC will have an Office of Credit Ratings with the authority to write rules and levy fines. Investors will now be able to recover damages in private anti-fraud actions brought against rating agencies for gross negligence in the rating. And raters must apply ratings consistently for corporate bonds, municipal bonds, and structured finance products and instruments.


3. Limits on Wall Street Risk. 

After decades of deregulation, America's financial industry has grown riskier, more interconnected, and more concentrated. To make the case that the financial meltdown demanded bold structural reform, Demos released a series of reports on bank risk: A Brief History of the Glass-Steagall ActSix Principles for True Systemic Risk Reform, and Bigger Banks, Riskier Banks, authored by Heather McGhee and Senior Fellows James Lardner and Nomi Prins. Unfortunately, the Act falls short of creating a 21st Century Glass-Steagall Act to separate the commercial banking that is critical to our economy (and supported by the federal safety net) from excessive speculative risk. Nor does the bill limit the size of the largest banks, as the Brown-Kaufman amendment would have accomplished with a 2% GDP cap on non-deposit liabilities. Nevertheless, the bill includes some important first steps. Demos' Heather McGhee contributed to the policy development and response on these issues, serving as Americans for Financial Reform's Chair for Systemic Risk and Resolution Authority. Her analysis of systemic risk issues, including the Volcker Rule and shadow bank regulation, appeared in TIMEPoliticoUSA Today, the Washington Post and on MSNBC's The Ed Show, among other outlets.

Highlights of the Act's approach to systemic risk include the Merkley-Levin amendment's stronger version of the Volcker Rule. The rule ensures that banks do not make risky "proprietary" bets for their own accounts with taxpayer-backed deposit funds, and limits bank investment in private leveraged funds. Proprietary trading and private fund speculation introduces needless volatility into our core credit markets, puts banks in conflict with their clients and diverts bank capital away from loans to America's small businesses and families. Senator Scott Brown (R-MA) was able to win a carveout in the Volcker Rule's original private fund ban to allow banks to continue to own these funds, and invest up to 3% of their capital in them. However, banks have to set aside in capital reserves amounts equal to their investment in these funds and are prohibited from bailing them out. The Merkley-Levin provision also bans firms from packaging risky securities for customers and then betting that they will fail, a practice at the center of the recent Goldman Sachs SEC fraud case.

The Act also creates a council of regulators to monitor systemic risk and, through the Kanjorski Amendment, empowers the council to break up banks that pose a grave threat to the economy. For the first time, it requires regulators to impose higher capital, leverage and liquidity standards on the largest, riskiest financial firms and creates bank-like oversight for large, interconnected "shadow bank" financial companies like AIG, GE Capital and mortgage financers that were at the center of the crisis. Unfortunately, the final bill includes a last-minute Senate amendment that unnecessarily allows any financial firm with more than 15 percent of its assets or revenue from commercial activities to escape oversight from the systemic risk council, no matter the threat the firm could pose to the economy. The Act also fails to impose statutory limits on the leverage, or debt, of a financial firm. To address the dangerous degree of interconnection on Wall Street (through derivatives contracts, repurchase ("repo") agreements and other non-deposit funding), the Act imposes limits on bank exposure to any single financial counterparty or to their own affiliates.


What's Next. 

The Wall Street Reform and Consumer Protection Act is only the beginning of the work that needs to be done to rebuild our regulatory structure. Demos will continue to work with policymakers, experts, advocates and engaged citizens to provide timely research to inform the regulatory process. We will also continue to make the case for structural reforms to ensure that the financial sector helps create, not undermine, broadly-shared prosperity for American families and businesses.