Embrace financial reforms now or suffer later, Geithner warns

President Obama’s plan for a powerful new agency to protect consumers from shady financial products is coming under increasing fire from the industry it would regulate and its allies in Congress, forcing backers to delay action on legislation to put the plan in force.

The proposed Consumer Financial Protection Agency would have broad authority to make consumer protection rules for credit cards, bank accounts and other financial products. It would also monitor institutions for compliance and have the power to penalize those in violation of the rules.

Business groups, along with conservative lawmakers, contend that the financial super cop would end up limiting the choices consumers could make. Adding to the opposition, existing regulators object to parts of the plan that would strip them of their consumer protection powers.

The result has been to push legislation creating the agency off the fast track this week. And Treasury Secretary Timothy F. Geithner was on Capitol Hill on Friday trying to keep the proposal from being derailed or the new agency’s authority gutted.

“We can all agree . . . that in the years leading up to the current crisis our consumer protection regime fundamentally failed,” Geithner told the House Financial Services Committee. “We believe that the only viable solution is to provide a single entity in the government with a clear mandate for consumer protection in financial products and services with clear authority to write rules and to enforce those rules.”

There is still strong Democratic support for the new agency. But Financial Services Chairman Barney Frank (D-Mass.) said he was delaying next week’s committee vote on creation of the agency until September to give consumer groups and other supporters time to rebut the opposition.

Frank, who remains a major backer, is critical of regulators such as the Federal Reserve and Office of the Comptroller of the Currency that have argued their specific consumer protection powers shouldn’t be shifted to the new agency.

“They can argue that taking the powers away from them may not make sense because the powers that will be taken away from them are in very good shape, because they have rarely been used,” Frank said Friday. “They have sat largely undrawn upon for a while, but I think it’s time to put them into hands of someone who will use them.”

Another key part of the Obama administration’s regulatory overhaul, a proposal to give the Federal Reserve new power to monitor the entire financial system for major risks, also is running into opposition on Capitol Hill.

Some Republicans and Democrats oppose granting the Fed more authority, charging that it failed to foresee the current crisis. They also worry the Fed is becoming too powerful because of the emergency lending powers it has used to try to stabilize the economy.

Geithner told Congress it was important to pass the entire package of regulatory reforms this year or risk a repeat of last year’s financial crisis, which was triggered in part by defaults on subprime loans by borrowers who may not have understood their obligations.

“The president decided we needed to move quickly while the memory of the searing damage caused by this crisis was still fresh and before the impetus to reform faded,” he said. “There is a lot of resistance and opposition, and if we wait and we try to do it piecemeal, it’s going to be much harder for this committee to find consensus on something sufficiently strong.”

But the consumer agency was the focus of attack for several Republicans, who said it would limit consumer choice by allowing un-elected bureaucrats to determine what kind of financial products would be allowed in the marketplace.

“The proposal represents one of the greatest assaults on consumer rights I have witnessed,” Rep. Jeb Hensarling (R-Texas) said. “The legislation will stifle innovation, perhaps the next online banking service or the next frequent-flier mile offering and, worse yet, will contract credit to our small businesses at a time of historic unemployment.”

Rep. Melvin Watt (D-N.C.) said the agency was the part of the plan about which he had received the most negative feedback. And though he said the criticisms were overstated, he plans to work with opponents on ways to avoid them.

Consumer protection is now spread over eight agencies. Obama’s plan, unveiled last month, would put most of those powers in the new agency, including the Fed’s authority to enact consumer protection rules as well as the ability of it and other banking regulators to monitor financial institutions for compliance as part of the bank examination process.

Several regulators said they had problems with parts of the proposed agency, as well as other aspects of the regulatory overhaul.

Fed Chairman Ben S. Bernanke said he wanted the central bank to retain its consumer protection rule-writing authority. And the heads of three banking regulatory agencies -- the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Office of Thrift Supervision -- told the committee that they opposed shifting their consumer protection monitoring to the new agency.

Geithner said it was understandable that regulators “aren’t enthusiastic” about giving up some of their authority. But he asked Congress to keep such turf defense in mind when weighing the arguments.

“They are doing what they should, which is to defend the traditional prerogatives of their agencies,” he said. “I think all arguments need to be viewed through that prism.”

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jim.puzzanghera@ latimes.com