House split over new consumer agency

There is broad agreement in Congress that government regulators failed to protect Americans from subprime mortgages and other risky credit products, but Democrats and Republicans split sharply Wednesday over creating a consumer watchdog agency to police the financial industry.

A Consumer Financial Products Agency is one of the pillars of the Obama administration’s overhaul of financial regulations to avoid the unfettered wheeling and dealing that precipitated the economic crisis that has gripped the nation for the last 18 months. But like another key component -- expanding the power of the Federal Reserve to regulate large financial institutions -- the proposal is drawing fire on Capitol Hill, demonstrating the difficulty the administration faces in pushing its complex plan into law.

“Un-elected bureaucrats will decide what mortgages we can have, what bank accounts we can open, they may even decide if we can have a credit card,” said Rep. Jeb Hensarling (R-Texas). “We must preserve economic liberty and consumer choice.”

The proposed consumer agency is supported by key Democratic lawmakers, including House Financial Services Chairman Barney Frank (D-Mass.), who held a hearing on the plan Wednesday. He said creation of the agency would be one of the first components of President Obama’s regulatory reform plan his committee votes on, and it plans to do so by the end of July.

Frank agreed with Obama that consumer issues largely have been an afterthought at the numerous financial regulatory agencies that share responsibility for them, with disastrous consequences for the economy. The administration plan would centralize those responsibilities in a new agency with consumer protection as its sole mandate. The agency would have power to write new rules for mortgages, credit cards and other products, and enforce them in conjunction with state officials.

“It’s been my experience that when you have an ongoing responsibility for broad systemic issues, consumer complaints can get crowded out,” Frank said, hammering the Federal Reserve in particular for “literally ignoring” its responsibility for policing mortgages and credit cards offered to average Americans.

The proposal for a new agency mirrors legislation introduced in March by Rep. Bill Delahunt (D-Mass.). The idea was the brainchild of Elizabeth Warren, a Harvard University law professor and chairwoman of the government panel overseeing the $700-billion financial bailout fund.

“We need someone in Washington . . . who looks at the products not from the point of view primarily of bank profitability, but what it means to families and the economy,” Warren, who proposed such an agency in 2007, told the Financial Services Committee on Wednesday. She said the terms for credit cards have become so complex that even an expert on contracts such as herself can’t understand them.

Democrats are keen on addressing consumer issues related to financial products in the wake of the economic crisis.

On Wednesday, the House Education and Labor Committee voted 29 to 17 to require 401(k) retirement plans to disclose fees in a clear and simple way to enable workers to better compare plans. Retirement plans, mutual funds and other investment vehicles wouldn’t be covered by the proposed new agency, which would focus on consumer credit, savings and payment products, such as mortgages and payday loans. Investment products are largely overseen by the Securities and Exchange Commission, which would retain consumer protection authority under the Obama plan.

Consumer groups strongly support creating the agency. But Republicans said it made no sense to address one regulatory failure by creating another layer of regulation.

They argued the new agency’s consumer mandate would conflict with the mission of banking regulators to preserve the safety and soundness of financial institutions. The result would be counterproductive: Banks and other lenders would cut back on the products they offer to consumers, Republicans said.

“We have to ask ourselves if those changes have the potential to reduce consumer choice, limit innovation and exacerbate the credit crunch consumers already are facing,” said Rep. Spencer Bachus (R-Ala.). He touted a plan by House Republicans to consolidate banking regulation, including consumer protection, in a single existing agency, streamline the complaint process and improve disclosures for mortgages and other products.

Opponents of a Consumer Financial Protection Agency used stark language to question the broad power it would have to rein in what the Obama plan defined as “unfair, deceptive, and abusive acts or practices.” Rep. Scott Garrett (R-N.J.) called the proposal an example of an “Orwellian, heavy-handed, government-knows-best mentality,” and Hensarling said the new regulators would rule as “un-elected philosopher kings” over the financial services industry.

Edward L. Yingling, president of the American Bankers Assn., also opposed the plan. He said banks would be caught between conflicting mandates from a consumer protection agency focused on the products being offered and traditional financial regulators who focus on the “safety and soundness” of the business.

Yingling cited procedures for clearing checks as an example. A consumer agency would want the process to be as fast as possible so people would have quick access to their money, but a banking regulator would want the institution to take the time to make sure a check wasn’t fraudulent.

“We really don’t believe you can separate the business from the products,” he said. “To have these two regulators will put banks in the middle, where they will be pushed and pulled.”

But Warren said the system must be changed because it doesn’t work and consumer protection gets overshadowed at financial regulatory agencies such as the Federal Reserve or Office of the Comptroller of the Currency.

“When the Fed has monetary policy and consumer protection, it cares about monetary policy. When the OCC has profitability of the banks and consumer protection, it cares about profitability of the banks,” she said. “If you really care about consumers and the economic health of the American consumer, where do you go in Washington? There is no home.”

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jim.puzzanghera@latimes.com