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The Senate's journey to agreement on a financial reform bill could lead to consumer protection responsibilities remaining in the hands of the Federal Reserve.
After much back-and-forth among senators, Senate Banking Committee Chairman Christopher Dodd (D-CT) is proposing a consumer protection unit that will be housed in the Fed. Sen. Bob Corker, R-TN, offered the idea as an alternative to Dodd's earlier proposal of creating a consumer protection division in the Treasury Department.
Dodd's revision aims to appeal more to Republicans than earlier proposals, in hopes the Senate can move forward with U.S. financial regulation overhaul. The proposal is expected to scale back the measures approved by the House of Representatives in December 2009.
The thought of consumer protection not being removed from the Fed is surprising after the central bank's slow response and lack of intervention during the financial crisis drew scathing criticism, some from Dodd himself.
The issue of consumer protection has been a key sticking point during financial reform discussions. Democrats want the creation of an agency whose sole focus is consumer protection, while Republicans don't want those responsibilities to be governed by an entity with no regulatory power. Banks and financial institutions are wary of a consumer protection advocacy that would infringe on their profits.
The role of a new consumer protection agency, wherever it may be housed, would include writing and enforcing rules that regulate financial product sales, including credit card and mortgage practices, to prevent deceptive and abusive practices. The fight over choosing an agency in which to place these responsibilities is mainly a question of who should have veto power over the new rules.
The newly proposed Fed division would be led by a White House appointee and have its own budget. The Fed already has a consumer protection division, but those concerns are often overshadowed by its monetary policy responsibilities. Whether or not the Fed could exercise regulatory veto over the division is unclear.
President Obama's mid-2009 financial reform proposal supported the creation of an independent Consumer Financial Protection Agency (CFPA), something that Dodd initially favored. A separate agency would have a strictly consumer-focused initiative free from clashes with other duties. Putting consumer protection in the hands of a regulator already overseeing financial institutions could cause dangerous conflicts of interest to arise.
"These two missions can conflict. It would be like putting the Department of Commerce in charge of the EPA," Travis Plunkett, legislative director of the Consumer Federation of America, said at a finance reform discussion hosted by the New America Foundation in Washington. "It would mean that we haven't learned the lessons of the crisis."
The Fed became an option in the consumer protection battle after other choices were shot down. Republicans immediately rejected Obama's CFPA idea, afraid it would limit access to credit and create an "unwieldy bureaucracy."
Sen. Richard Shelby, R-AL, proposed locating the consumer protection unit within the Federal Deposit Insurance Corp. (FDIC), giving an FDIC board veto power over new rules. Dodd countered by suggesting the Treasury Department, but that was rejected for fear there would be too much White House influence.
The newest proposal might be the best chance the Senate has of coming to an agreement: Democrats could support a Fed that places increased importance on consumer rights, and Republicans would like the Fed's opportunity to support bank-friendly consumer protection rules.
But the voices of opposition won't go quietly, and the bill will still have to face an Obama administration that heavily favors consumer-protection independence.
News and Related Story Links:
- The House of Representatives:
The Wall Street Reform and Consumer Protection Act of 2009
- The Wall Street Journal:
Deal Nears on Banking Rules
- The Financial Times:
Dodd proposes consumer role for the Fed
- New America Foundation:
Consumer Financial Protection
- Money Morning:
U.S. Sen. Christopher Dodd's Plan for Financial Reform as Ambitious as it is Antagonistic
- Money Morning:
Is the Obama Administration's Financial System Overhaul Pushing Us Toward State Capitalism?