The move this week to downgrade a proposed Consumer Financial Protection Agency to lure bipartisan support instead appears to be undermining the Obama administration’s effort to overhaul the nation’s regulation of the entire industry.
The overhaul, aimed at preventing a repeat of the economic meltdown that helped send the nation and world markets into a deep recession, now might be moving closer to the junk heap of congressional bills than to a significant new law.
Creating a powerful and independent consumer agency, which is strongly opposed by the financial industry and Republicans, has been the major roadblock in drafting a bill that could pass in the Senate. Desperate to surmount that hurdle as this year’s legislative clock winds down, Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) floated the idea this week of putting the new agency in the Federal Reserve.
Although the move would gain some Republican support, it has led to howls of protests from many Democrats and consumer advocates that threaten to derail any compromise. And for good reason.
Dodd himself and other supporters of the consumer agency have criticized the Fed’s previous inaction as a main reason for creating such an entity, noting that the central bank took 14 years before enacting rules in 2008 to protect consumers from unscrupulous mortgage lending.
“The issue of independence is the main sticking point in the Senate negotiations,” said Travis Plunkett, legislative director of the Consumer Federation of America. “I don’t know if we can have an agency like that in the Federal Reserve.”
Treasury Secretary Timothy F. Geithner and Valerie Jarrett, a senior White House advisor, met Wednesday with representatives from consumer, labor and other organizations that support a strong, stand-alone consumer agency and told them that “strengthening consumer protections remains a central objective of our financial reform efforts,” according to an administration official.
Although Geithner and Jarrett said they would not accept a bill unless it included a consumer agency with “real independence,” they did not specifically rule out housing it in the Fed or another agency.
Dodd’s dilemma: Add an independent consumer agency to the bill and he loses the Republicans; move it into an existing agency and he gains some Republicans, but not enough to cover the Democrats who would bail on the bill.
When Dodd unveiled his financial regulatory overhaul bill four months ago, he called the Fed’s performance on consumer protection “an abysmal failure.”
At the time, Dodd proposed to strip the Fed of its responsibility to write consumer protection rules, moving it to a new Consumer Financial Protection Agency similar to what President Obama proposed and the House included in its overhaul bill passed in December.
Giving the Fed more consumer oversight is a nonstarter with many Democrats. House Financial Services Committee Chairman Barney Frank (D-Mass.) called the idea “a bad joke.”
“My main objection to housing this critical function in the Federal Reserve has been the central bank’s historical failure to implement consumer protection as a central part of its mission and role,” said Frank, who led the House push for a stand-alone agency.
Rep. Brad Sherman (D-Sherman Oaks), another supporter, said Wednesday that many House Democrats were unlikely to agree to give the Fed more consumer authority.
“It’s somewhere between bad and terrible,” Sherman said of the proposal. “For a number of my colleagues . . . that might just kill it.”
Dodd’s proposal might not even get through his own committee, potentially adding further delay in a mid-term election year in which major legislation is unlikely to get through Congress if not finished by the summer.
Sen. Jack Reed (D-R.I.) said he and some colleagues on the Banking Committee would try to amend the legislation to add a stand-alone consumer agency outside the Fed or any other banking regulatory body.
“There’s quite a bit of disappointment with the Fed,” Reed said Wednesday. “I think the best approach is an independent entity.”
Dodd has been searching for months for a bipartisan compromise, a move made more urgent after a Republican, Scott Brown, won the special Massachusetts Senate election in January, giving the GOP enough votes to block any Democratic legislation. After negotiations with Sen. Richard C. Shelby (R-Ala.) reached an impasse, Dodd began working with Sen. Bob Corker (R-Tenn.).
The financial regulatory overhaul passed by the House was the most sweeping since the Great Depression and included new regulation of complex financial derivatives and broad government power to dismantle major firms in danger of failing to avoid future bailouts.
Creating the consumer agency is the most controversial part of the legislation, and Dodd and Corker continued to work on the legislation Wednesday, a Corker spokeswoman said.
Corker has said he would not support an independent, stand-alone consumer agency. He and other Republicans, joined by many in the financial industry, argue that taking consumer protection responsibility away from bank regulators risks the fiscal health of the firms.
Supporters counter that such an arrangement led to abuses such as risky subprime mortgages in the years leading up to the financial crisis.
“What we’re looking for is something that is truly independent, which means the decisions are made with the consumer in mind and cannot be vetoed by any regulator that is serving the interest of banks or predatory lenders,” said Heather Booth, executive director of Americans for Financial Reform, a coalition of labor, consumer, civil rights and liberal activist groups.
Her group unveiled a video this week on FunnyOrDie.com featuring current and former “Saturday Night Live” cast members. The video shows former presidents visiting Obama in the White House, urging him to fight for the consumer agency.