Business and Finance Career - As Congress and the White House battle over the outlines of an agency to protect consumers from deceptive financial practices, their biggest hurdle is figuring out how independent it should be.
Republicans have floated proposals to create a consumer protection unit at the Federal Reserve or the Federal Deposit Insurance Corporation, which could weaken President Obama’s goal of creating an agency free from the influence of banks and federal regulators whose priority is to shore up banks’ profitability and soundness.
Asking bank regulators to house a consumer protection authority could leave the balance of power tilted toward the banks, critics fear. The Fed, for instance, ignored years of warnings about the dangers of subprime mortgages and overdraft fees before finally taking substantive action in recent years. An independent agency devoted to consumer protection would be more responsive to such problems, the critics say.
Kathleen E. Keest, a lawyer at the Center for Responsible Lending, said that while bank regulators already had some consumer protection duties, it “was an afterthought, at best, and viewed as a drag on profitability and innovation.”
Representative Barney Frank, a Massachusetts Democrat and chairman of the House Financial Services Committee, warned Friday that if the Republican proposals would pull the teeth from a consumer watchdog, he might consider scrapping larger efforts at a regulatory overhaul for the financial industry.
“Anything that would subordinate this to bank regulators would be a bad mistake,” Mr. Frank said. “If you could trust bank regulators to handle consumer protection, we wouldn’t need to be doing this. There’s a natural tension there. It gets second priority.”
While acknowledging regulatory lapses, most Republican lawmakers and banking lobbyists say it would be cumbersome and potentially disastrous to separate regulators who are focused on the safety and soundness of banks from those concentrating on consumer protection. They want a bank regulator to have veto authority over any consumer agency.
“By separating those two functions, literally the bank could be told to do two different things that are in conflict,” said Edward L. Yingling, president and chief executive of the American Bankers Association. Regular reports to Congress and strong leadership would assure that regulators maintain their focus on consumer financial protection, he said.
Christopher J. Dodd, Democrat of Connecticut and chairman of the Senate Banking Committee, insisted Friday that any new agency have an independent budget and director and the ability to write rules and enforce them, even if it is housed within another entity. Mr. Dodd had suggested that the agency be put under the Treasury Department.
The most contentious issues are whether the consumer agency will be able to enforce rules on its own, or whether banking regulators should have authority to make the final decisions.
Richard C. Shelby of Alabama, the senior Republican on the Senate Banking Committee, has said he will not support a bill that puts consumer protection above bank regulation. He said his constituents were more concerned about bank failures than consumer protection.
“They’re worried about banks not loaning money, and they’re worried about the solvency of banks,” he said. To address those concerns, Mr. Dodd would have the watchdog consult with other regulators before issuing rules and publicize any objections they had, while allowing other regulators to appeal the watchdog’s protections to a new interagency council led by the Treasury Department. This council could veto any proposed consumer protections, or send them back to the consumer agency to be rewritten.
Both sides agree that the current regulatory framework for consumer protection is inadequate. That function is spread among the Federal Reserve, the Office of the Comptroller of the Currency, and the F.D.I.C., which oversee banks, and the Office of Thrift Supervision, which regulates savings and loans.
The Fed is mainly responsible for writing consumer protection rules, and the other agencies are charged with enforcing the rules and ensuring the health of banks.
Each regulator already has employees devoted to consumer issues. But, according to testimony by Lauren K. Saunders, a lawyer for the National Consumer Law Center, they are often trumped by “a deregulatory bias and faith in the free market, an antipathy to taking significant consumer protection measures that are opposed by the industry, an excessive reliance on fine print disclosures when the agencies have acted and just plain inertia.” She was speaking at a Congressional hearing last year. At the Fed, regulators maintained a light touch for years because of a deregulatory environment fostered by the longtime chairman, Alan Greenspan, who supported free markets and self-regulation.
Although the Fed had authority to act against abusive mortgage practices, predatory credit card companies and overdraft fees on checking accounts, it made few substantive changes. As evidence mounted of abuse by credit card companies, the Fed focused on improved disclosures that “did nothing about fundamental abusiveness of credit card tactics,” Ms. Saunders testified.
In 2005, the Fed joined other bank regulators in issuing “best practices” on overdraft fees that the industry largely ignored.
Since the onset of financial turmoil in 2007, Fed officials, including Mr. Greenspan’s successor, Ben S. Bernanke, have acknowledged regulatory lapses and have been more aggressive in issuing rules on consumer matters, including credit cards and overdraft fees. Fed officials declined to comment for this article. But if consumer groups fear a consumer financial agency housed in the Fed, they are terrified of the prospect, however remote, of it being turned over to the Office of the Comptroller of the Currency, which supervises banks with national charters, including Chase, Citibank and Bank of America.
Run since 2005 by Comptroller John C. Dugan, a former bank lobbyist, the O.C.C. has fought efforts by state regulators to curb abuses, including predatory lending and fees on credit and gift cards. In 2004, the O.C.C. issued “pre-emption” rules that blocked enforcement of state laws against banks with national charters, which the O.C.C. regulates.
In response, nearly half of the state attorneys general have endorsed the proposal for an independent consumer agency. Many say the O.C.C. is all but a tool of the banks.
Richard Blumenthal, attorney general of Connecticut, spoke of a courtroom encounter with the O.C.C. years ago, after he had sued three banks that he said had charged noncustomers A.T.M. fees in violation of state law. He said he was stunned when the O.C.C. lawyer argued in the banks’ defense. “The O.C.C. has been at best indifferent and more commonly hostile to consumer interests.”
Mr. Dugan made no apologies for his efforts to pre-empt state consumer laws, arguing that different state rules would cripple the national banking system. He acknowledged some regulatory failures, but said that his office had pursued many of the same consumer issues as the states, like credit card abuses. Raj Date, executive director of the Cambridge Winter Center for Financial Institutions Policy, worried that even if bank regulators showed a newfound commitment to consumer finance, they might forget it once the spotlight on the issue receded.
Republicans have floated proposals to create a consumer protection unit at the Federal Reserve or the Federal Deposit Insurance Corporation, which could weaken President Obama’s goal of creating an agency free from the influence of banks and federal regulators whose priority is to shore up banks’ profitability and soundness.
Asking bank regulators to house a consumer protection authority could leave the balance of power tilted toward the banks, critics fear. The Fed, for instance, ignored years of warnings about the dangers of subprime mortgages and overdraft fees before finally taking substantive action in recent years. An independent agency devoted to consumer protection would be more responsive to such problems, the critics say.
Kathleen E. Keest, a lawyer at the Center for Responsible Lending, said that while bank regulators already had some consumer protection duties, it “was an afterthought, at best, and viewed as a drag on profitability and innovation.”
Representative Barney Frank, a Massachusetts Democrat and chairman of the House Financial Services Committee, warned Friday that if the Republican proposals would pull the teeth from a consumer watchdog, he might consider scrapping larger efforts at a regulatory overhaul for the financial industry.
“Anything that would subordinate this to bank regulators would be a bad mistake,” Mr. Frank said. “If you could trust bank regulators to handle consumer protection, we wouldn’t need to be doing this. There’s a natural tension there. It gets second priority.”
While acknowledging regulatory lapses, most Republican lawmakers and banking lobbyists say it would be cumbersome and potentially disastrous to separate regulators who are focused on the safety and soundness of banks from those concentrating on consumer protection. They want a bank regulator to have veto authority over any consumer agency.
“By separating those two functions, literally the bank could be told to do two different things that are in conflict,” said Edward L. Yingling, president and chief executive of the American Bankers Association. Regular reports to Congress and strong leadership would assure that regulators maintain their focus on consumer financial protection, he said.
Christopher J. Dodd, Democrat of Connecticut and chairman of the Senate Banking Committee, insisted Friday that any new agency have an independent budget and director and the ability to write rules and enforce them, even if it is housed within another entity. Mr. Dodd had suggested that the agency be put under the Treasury Department.
The most contentious issues are whether the consumer agency will be able to enforce rules on its own, or whether banking regulators should have authority to make the final decisions.
Richard C. Shelby of Alabama, the senior Republican on the Senate Banking Committee, has said he will not support a bill that puts consumer protection above bank regulation. He said his constituents were more concerned about bank failures than consumer protection.
“They’re worried about banks not loaning money, and they’re worried about the solvency of banks,” he said. To address those concerns, Mr. Dodd would have the watchdog consult with other regulators before issuing rules and publicize any objections they had, while allowing other regulators to appeal the watchdog’s protections to a new interagency council led by the Treasury Department. This council could veto any proposed consumer protections, or send them back to the consumer agency to be rewritten.
Both sides agree that the current regulatory framework for consumer protection is inadequate. That function is spread among the Federal Reserve, the Office of the Comptroller of the Currency, and the F.D.I.C., which oversee banks, and the Office of Thrift Supervision, which regulates savings and loans.
The Fed is mainly responsible for writing consumer protection rules, and the other agencies are charged with enforcing the rules and ensuring the health of banks.
Each regulator already has employees devoted to consumer issues. But, according to testimony by Lauren K. Saunders, a lawyer for the National Consumer Law Center, they are often trumped by “a deregulatory bias and faith in the free market, an antipathy to taking significant consumer protection measures that are opposed by the industry, an excessive reliance on fine print disclosures when the agencies have acted and just plain inertia.” She was speaking at a Congressional hearing last year. At the Fed, regulators maintained a light touch for years because of a deregulatory environment fostered by the longtime chairman, Alan Greenspan, who supported free markets and self-regulation.
Although the Fed had authority to act against abusive mortgage practices, predatory credit card companies and overdraft fees on checking accounts, it made few substantive changes. As evidence mounted of abuse by credit card companies, the Fed focused on improved disclosures that “did nothing about fundamental abusiveness of credit card tactics,” Ms. Saunders testified.
In 2005, the Fed joined other bank regulators in issuing “best practices” on overdraft fees that the industry largely ignored.
Since the onset of financial turmoil in 2007, Fed officials, including Mr. Greenspan’s successor, Ben S. Bernanke, have acknowledged regulatory lapses and have been more aggressive in issuing rules on consumer matters, including credit cards and overdraft fees. Fed officials declined to comment for this article. But if consumer groups fear a consumer financial agency housed in the Fed, they are terrified of the prospect, however remote, of it being turned over to the Office of the Comptroller of the Currency, which supervises banks with national charters, including Chase, Citibank and Bank of America.
Run since 2005 by Comptroller John C. Dugan, a former bank lobbyist, the O.C.C. has fought efforts by state regulators to curb abuses, including predatory lending and fees on credit and gift cards. In 2004, the O.C.C. issued “pre-emption” rules that blocked enforcement of state laws against banks with national charters, which the O.C.C. regulates.
In response, nearly half of the state attorneys general have endorsed the proposal for an independent consumer agency. Many say the O.C.C. is all but a tool of the banks.
Richard Blumenthal, attorney general of Connecticut, spoke of a courtroom encounter with the O.C.C. years ago, after he had sued three banks that he said had charged noncustomers A.T.M. fees in violation of state law. He said he was stunned when the O.C.C. lawyer argued in the banks’ defense. “The O.C.C. has been at best indifferent and more commonly hostile to consumer interests.”
Mr. Dugan made no apologies for his efforts to pre-empt state consumer laws, arguing that different state rules would cripple the national banking system. He acknowledged some regulatory failures, but said that his office had pursued many of the same consumer issues as the states, like credit card abuses. Raj Date, executive director of the Cambridge Winter Center for Financial Institutions Policy, worried that even if bank regulators showed a newfound commitment to consumer finance, they might forget it once the spotlight on the issue receded.
