Bankruptcy Questions Answered

Bankruptcy Provision aside, Consumer Protection Passes House

Late last week, the U.S. House of Representatives voted to approve a bill that introduces a spate of consumer protection measures.

The amendment that would have permitted homeowners to address foreclosure in bankruptcy by altering the terms of mortgage loans (in what’s known as “cramdowns”), though, did not make the cut.

Provisions of the Bill

The Wall Street Reform and Consumer Protection Act, as it’s known, includes the following provisions:

• Mortgage lending reform: The bill would outlaw the type of predatory lending that allowed for the subprime boom and subsequent bust. Essentially, the bill requires mortgage lenders to lend only what their borrowers can repay.
• Increased consumer protection: It creates the Consumer Financial Protection Agency, a government group proposed earlier this year whose job would be to protect Americans from unfair financial practices and fraud of all stripes.
• Amped up oversight: The Financial Stability Council, another provision of this bill, would identify firms that are intrinsically risky and increase monitoring and oversight of these to prevent widespread financial crises.
• Bailout replacement: If this bill becomes law, taxpayer bailouts will be a thing of the past, because it includes orderly measures for closing firms that are “too big to fail.”
• Limits on executive pay: In addition to giving regulators an opportunity to halt what seem to be questionable payment policies, the bill would give shareholders a chance to weigh in on the salaries and retirement packages of a firm’s executives.
• Increased investor protections: The bill would increase the power of the Security and Exchange Commission (SEC) and mandate an examination of the securities industry to determine what reforms are needed.
• Regulations on derivatives: All-new regulations would be instituted for the derivatives market, which reportedly has a value of at least $600 billion.
• Hedge fund registration: Those who run hedge funds would have to register with the SEC and comply with regulatory guidelines to minimize risk for investors.

What Happens Now?

At this point, the bill will move on to the Senate, where it could be modified before becoming law, perhaps with a new bankruptcy amendment.

But, in the words of Speaker Nancy Pelosi, the bill “sends a message” to Wall Street and consumers about a new era of protection.

Additional Resources

Full Text of HR 4713 (PDF)