Dodd's new financial bill means Fed wins, consumers could lose

Senate to vote on consumer finance protection measuresSenator Chris Dodd (D-Conn.) gave up trying to find a bipartisan compromise on the bill to overhaul the financial regulatory system and plans to introduce a new version of the bill on Monday. The House of Representatives passed a financial reform bill in December with a separate agency for consumer financial protection to be known as the Consumer Financial Protection Agency (CFPA).

Unfortunately Dodd does not think he can get a bill that includes a separate consumer financial agency passed in the Senate, especially now that the Democrats no longer have a 60-vote majority. So he's backing away from his earlier stance to weaken the Federal Reserve and plans to put a new division inside the Federal Reserve, which he says will have autonomy -- but will it be enough?

When Dodd 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."

In the past few months, Dodd tried to work with the top Republican on the Senate Banking Committee, Sen. Richard Shelby (R-Ala.). When that failed, he worked with Sen. Bob Corker (R - Tenn). Now that Dodd's given up on working out a compromise with Corker, he'll introduce a bill that's closer to the House bill but without a stand-alone CFPA.

Dealing with powerful opposition

The Federal Reserve strongly fought the idea of an independent consumer protection agency and made a strong case for keeping the Fed's consumer and regulatory power intact. Fed chairman Ben Bernanke admitted in a recent speech before the American Economic Association that he thinks regulatory failure -- not monetary policy failure -- caused housing to be 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.

Even the house bill weakened the CFPA

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.

Now it looks like the Senate bill will take this one step further and do what the banks want -- make the CFPA a division of the Fed, killing the dream of consumer advocates for an independent consumer protection agency.

So what's in the bill for consumers?

  • New rules written by an autonomous Fed division for all financial companies, from payday lenders to huge megabanks
  • More power for the government to crack down on risky lending programs and other activities the Fed determines are risky
  • More power to seize and dismantle financial companies that are failing
  • More scrutiny for derivatives and other risky financial instruments
  • Shareholders given more say on pay structure and other governance issues, such as nomination of directors
While consumers won't get their own agency with Dodd's version of the bill, let's hope his proposal for Federal Reserve's new division will truly put consumers first. That would be a breath of fresh air at the Federal Reserve.

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