An Independent Consumer Financial Protection Agency Could Be Dead

Bankers have aggressively tried to kill an independent Consumer Financial Protection Agency (CFPA) since President Obama first made the proposal when he took office. Now that Sen. Christopher Dodd (D-Conn.) no longer has to worry about getting reelected, he's considering scrapping the idea of an independent agency in return for bipartisan support of the broader financial regulation overhaul bill, according to a report in Friday's Wall Street Journal.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId- alignment-right size-small"%% When Dodd (pictured) opened the committee markup of financial reform legislation in November 2009, he sang a much different tune. In his opening statement about the CFPA he said, "This proposal has been the focus of well-funded, well-orchestrated attacks from the very entities that created these problems. They argue that the CFPA is a new bureaucracy by combining the disparate and ineffective functions of various agencies. They argue that it will limit credit availability. Well, the abusive lenders and their Wall Street enablers have pretty well shut down the credit markets all by themselves."

But Dodd likely now realizes that he can't get the 60 votes he'll need on the floor of the Senate to pass a bill that includes an independent CFPA, so he's working on a compromise with the top Republican on the Senate Banking Committee, Sen. Richard Shelby (R-Ala.). Such a deal might include a CFPA-like watchdog that's part of another agency, rather than being a stand-alone operation. Shelby says a independent CFPA would create a "nanny state," and he strongly opposes it.

A Powerful Lineup in Opposition

The Federal Reserve also isn't keen on the idea of an independent consumer protection agency. It has been making its case to keep the Fed's consumer and regulatory power intact. Bernanke admitted at a recent speech before the American Economic Association that he thinks regulatory failure -- not monetary policy failure -- caused housing to overinflated. Even though the Fed didn't act in the best interest of consumers during the housing bubble, it doesn't want to give up the power it now has regarding consumer regulations.

The American Bankers Association agrees with the Fed. The ABA sent a letter in October to the House Committee on Financial Services saying the "ABA and its members support improved consumer protections. We believe this can be accomplished without tearing down the existing regulatory framework. The consumer protection problems that do exist do not justify these broad new powers proposed by the CFPA."

In November, Dodd made it clear that he thought the Fed should focus on monetary policy without the distraction of bank oversight and consumer protection. The House agreed with Dodd on the issue of stripping the Fed of consumer protection, but it left the Fed with the responsibility of supervising financial institutions that are registered with it.

Watered-Down Compromises

When the House passed its version of the financial regulation bill, it did create an independent CFPA but weakened its powers from what President Obama envisioned when he proposed the idea. The watered-down CFPA would primarily examine only the country's largest banks and just write rules that applied to other companies offering financial products.

If the Senate takes that a step further and does what the banks want -- make the CFPA a division of another regulator -- the original vision of an independent consumer protection agency will be dead. Right now, alternatives being considered include a new division of the Treasury Department that would draft consumer rules. A second alternative could be that a new federal bank regulator, as Dodd originally proposed, would include a consumer-protection division.

Such approaches would likely result in minor improvement over current consumer financial protections. Consumer groups lobbied hard for a federal financial agency whose only job would be to protect consumers. That dream looks pretty dim right now.
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