Banks could win, consumers could lose, thanks to Dodd

Banks may have successfully stopped efforts for an independent consumer finance agency, and we have Senator Chris Dodd (D-Conn.) to thank for their success. Based on news reports this morning, Dodd has worked out a compromise with Sen. Bob Corker, a Tennessee Republican, for a compromise that will kill the idea of an independent consumer finance agency and instead place it inside the Federal Reserve.

The same Federal Reserve that failed to protect consumers from abuses in credit cards and mortgages as the asset bubble inflated.

That's a complete 180 degree turnaround from what he promised when he opened the committee markup of financial reform legislation in November 2009.

He sang a much different tune at that time. In his opening statement about the Consumer Financial Protection Agency (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."

Rep. Barney Frank, Chairman of the House Financial Services Committee, called the new Senate compromise a "joke." He told Bloomberg in an interview on Tuesday that shielding consumers from harmful financial products is "the most conspicuous failure by the Fed."

While there has been a lot of opposition to an independent consumer finance agency, other suggestions that would have been more consumer friendly include a proposal to place the agency within the FDIC, which has shown itself to be more consumer friendly, or within the Treasury Department. Republicans quickly opposed placing the agency inside the Treasury Department, so that was taken off the table almost as soon as it was suggested.

Even Sen. Richard Shelby, the top Republican on the Senate Banking Committee wanted something stronger than what it appears Dodd has agreed to with Sen. Corker. Sen. Shelby wanted the agency to be an autonomous entity within the Fed so the Board of Governors would have some control. Whether or not that would be better for consumers would depend on the makeup of the Federal Reserve Board.

While under Alan Greenspan, there was very little concern for the impact on consumers and most of the outrageous mortgage programs that helped to inflate the real estate bubble were allowed to flourish. Ben Bernanke changed the rules on these mortgage plans and shut them down as soon as he was able. He does appear to be more consumer friendly than Greenspan, but his first priority as Federal Reserve chairman has been and will likely always be to the banks and not to consumers. Even if Bernanke is more consumer friendly, will that be true of the next chairman?

Banks are delighted with the move of leaving consumer protection at the Fed. They were very concerned that the agency would ignore the health of the financial system and put consumers first -- and we know the banks clearly don't want that to happen.

They've shown with their efforts to get around the new credit card protection rules that they'd rather not have those rules in place at all, and they can depend on the Federal Reserve to minimize consumer protections. Even when the new credit card rules were passed by the Federal Reserve, it gave the banks 18 months to abide by the regulations. Congress voted to cut that to 12 months, but even 12 months gave the banks enough time to jack up interest rates and cut people's credit lines, so they were able to reshape credit cards to their liking even before the new rules took effect in last month.

Dodd is showing his clear colors after years of getting money from the banks. In fact it was the favors he's gotten from banks in the past, such as the VIP loan from Countrywide, that caused him to lose favor with Connecticut voters. He finally had to drop his bid for reelection.

While it would be a shame to put off financial reform until the next Congress, can we really trust that this bill will be the best it can be under Sen. Dodd's leadership?

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Improving Your Credit Score and The Complete Idiot's Guide to Personal Bankruptcy.
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