Market In Review: The Wells Fargo ViewSM

Consumer Protection Act of 2009
In December, the U.S. House of Representatives approved – by a vote of 223 to 202 – the Wall Street Reform and Consumer Protection Act of 2009, otherwise known as H.R. 4173. This bill proposes sweeping reforms that have the potential to profoundly impact how financial companies operate and what consumers can be offered in terms of products and services.

A culmination of many months of work, the authors of the bill sought a way to protect consumers and the economy through stronger controls. While many agree that the legislation does introduce new means to achieve these goals, concern remains about the unintended consequences this bill may produce.

In its Dec. 17, 2009 public statement, the American Bankers Association said it “supports broad reform of the banking regulatory system and has expressed this view in testimony before Congress; (this includes)…the formation of a council charged with overseeing systemic risk, creation of a mechanism for the orderly resolution of systemically important non-banks, and ending too-big-to-fail. Although some improvements were made (in the bill), ABA remains opposed to this legislation as passed by the House.”

The Senate is expected to propose comparable reform legislation with some significant changes.

Financial Services Oversight

Currently, H.R. 4173 covers a comprehensive number of issues including the creation of an interagency Financial Services Oversight Council that would identify and regulate financial institutions that pose systemic risks to the country.

The bill supports heightened oversight and regulation for financial institutions and a process to dissolve firms that fail. This includes publicly identifying and subjecting financial companies to stricter standards if it is determined that the company’s performance or mix of activities could pose a threat to the financial stability of the economy. The council would be responsible for imposing a special assessment on financial companies that fail to pay for any shortfall in TARP that would add to the national debt.

Consumer Protection Agency
In addition, H.R. 4173 calls for the creation of a Consumer Financial Protection Agency (CFPA) focused on consumer financial product regulation. This group would have rulemaking, supervisory and enforcement authority over any company – with certain exceptions – that sells or provides a financial product or service.

The breadth of authority granted to the Director of the proposed new CFPA is unprecedented, and it separates safety and soundness considerations from consumer protection. ABA has consistently opposed this separation of functions as well as additional provisions – which have nothing to do with needed reform and could make it very difficult for banks to effectively serve consumers and business customers.

The concept behind the CFPA also was to more strictly regulate non-banks that are currently lightly regulated by the states. These institutions would be subject to risk examinations rather than the intensive exams that insured depositor institutions have to undergo. Retailers, merchants, and other sellers of non-financial products, to the extent they are not engaging in financial activities, would be excluded. There also would be similar exceptions for real estate brokers, accountants, tax preparers, pawnbrokers, and attorneys, among others.

Home appreciation – the big question for 2010 This year, much speculation exists about the state of home prices across the nation and the extent to which they will change – for better or worse.

After a period of consistent decline, the October 2009 S&P/ Case-Shiller Home Price indices held steady across the nation from September of 2009. Current home price indices are again at Fall 2003 levels. And, there are reports of bidding wars in San Diego and New York City, which were hardest hit by the changing market and appear to be rebounding more quickly than some other markets.

Recently, the chief economist of Moody’s, Mark Zandi, reported a more sobering prediction for the new year. According to Zandi, home prices are going to fall 5 to 10 percent or more in 2010 – at which point he expects them to possibly begin to turn around. Zandi cites foreclosures and unemployment as two influential factors in the future of the market.

The combination of these factors creates additional supply in the market for which there may not be adequate demand. October’s 10.2 percent unemployment figure was higher than most economists had forecast for the peak.

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