Business for Shared Prosperity

By Sewell Chan
New York Times, Feb 23, 2010

WASHINGTON — The Obama administration continued its push on Tuesday for the creation of a Consumer Financial Protection Agency that could regulate mortgages, auto loans and credit cards. The agency has emerged as the main stumbling block in the Congressional debate over legislation to overhaul financial regulations.

Michael S. Barr, the assistant Treasury secretary for financial institutions, on Tuesday morning laid out the case for separating consumer oversight from existing supervision of banks and credit unions. On Monday, the Treasury Secretary Timothy F. Geithner and the White House press secretary, Robert Gibbs, called new consumer protections fundamental components of any regulatory overhaul.

The administration’s push comes as the Democratic chairman and ranking Republican on the Senate Banking Committee are expected to unveil competing versions of the regulatory reform bill later this week. The White House has been urging the chairman, Christopher J. Dodd, Democrat of Connecticut, to include the consumer agency in his version. The House included the consumer agency in a regulatory overhaul that passed, on a largely party-line vote, in December.

Critics of the proposal argue that it would interfere with “prudential regulation,” the rules set up to preserve the safety and soundness of financial institutions. Mr. Barr tried to allay those concerns.

“Our proposal will strengthen the banking system, not weaken it,” he told the Credit Union National Association in a speech at the Washington Convention Center. “More transparent markets, markets where nonbanks are subject to oversight, markets with fewer unfair or deceptive practices — these are markets in which banks and credit unions will be stronger.”

Industry groups — including the United States Chamber of Commerce, the American Bankers Association and the Financial Services Roundtable — have been fiercely lobbying against the consumer proposal.

In his remarks, Mr. Barr said the Bush administration had also endorsed the idea of separating “business conduct” regulation — protections for investors and consumers — from prudential regulation. “Safety-and-soundness regulators have their eyes trained on risks to banks, not risks to consumers,” Mr. Barr said.

He said the federal government spent at least 15 times more on consumer compliance and enforcement for banks and credit unions than for nonbank financial institutions, even though there are at least 5 times as many of the latter as of the former. A separate agency, he said, would help correct “misallocation of federal resources,” make consumer protection a priority and create “a level playing field for all providers.”

The bill’s greatest impact would be on the largest financial institutions. Under the House bill, Mr. Barr said, existing regulators would have the primary responsibility for consumer protection for 98 percent of banks and savings and loans and 99 percent of credit unions. (Those regulators include the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Office of Thrift Supervision.)

Mr. Barr also said that a new agency would be required to share information with existing regulators and that the agencies would be required to coordinate their efforts. “The system we have proposed will be more likely to bring bank weaknesses to the attention of prudential regulators than a system in which consumer compliance supervision is subordinated to prudential supervision,” he said.

The United States Chamber of Commerce, which started a Web site, StoptheCFPA.com, says it supports clear and concise disclosures to consumers about the risks of financial products, as well as crackdowns on fraudulent and predatory practices. But the chamber argues that creating a “big, new, expensive government bureaucracy” would choke off credit to small businesses, limit consumer choices and lead to higher prices.

The proposal for a Consumer Financial Protection Agency was born out of a journal article that a Harvard law professor, Elizabeth Warren, wrote in 2007. The Obama administration embraced the proposal when it presented its regulatory proposal to Congress last June. Ms. Warren is now the chairwoman of the Congressional Oversight Panel for the Troubled Asset Relief Program, the 2008 bailout package that has been used to rescue financial institutions, automakers and other companies.

Supporters of the consumer agency have been outspent and are less organized than the opponents. Groups supporting the idea include the Consumer Federation of America and two fairly new coalitions, Americans for Financial Reform and Business for Shared Prosperity.

The debate over the consumer agency led to a breakdown in talks between Mr. Dodd and the ranking Republican on the Banking Committee, Richard C. Shelby of Alabama. The two men had been trying since last fall to forge a bipartisan agreement on a regulatory overhaul.

Another point of contention is the degree to which bank supervision should be consolidated, and whether the Federal Reserve should retain its power to oversee bank holding companies.

Other, less contentious elements under consideration include the creation of a council, led by the Treasury secretary, to detect systemic risk in the financial system; new regulations for the over-the-counter derivatives market and for credit rating agencies; reforms in corporate governance and executive pay; and a mechanism to dissolve any company deemed “too big to fail” before it can damage the economy and require another government bailout.

Copyright 2010 New York Times