Consumer Agency Compromise Plan Fails to Win Backing

Originally Posted on BusinessWeek.com. Click here to view original article.

March 03, 2010, 10:44 AM EST
By Alison Vekshin and Phil Mattingly

(Bloomberg) -- A U.S. Senate compromise to create a consumer protection unit in the Federal Reserve encountered a wall of resistance over the scope of the powers planned for the regulator.

Senator Bob Corker, the Tennessee Republican, and Banking Committee Chairman Christopher Dodd, the Connecticut Democrat, drew immediate complaints from colleagues yesterday for suggesting a unit within the Fed. The proposal would be a retreat from the Obama administration plan for a stand-alone agency and a victory for the financial industry.

Democrats on the banking panel were opposed or reluctant to give the Fed consumer responsibilities. Senator Jeff Merkley of Oregon said the Fed had an 'abysmal' record on consumer protections. Republicans had different concerns. Judd Gregg of New Hampshire told reporters in Washington the unit 'can't be autonomous within the Fed.'

A cool reception from lawmakers in both parties may signal the Dodd-Corker idea lacks enough support to become part of the final legislation. Dodd and Corker, in a quest to overcome Republican opposition to Obama's consumer plan, may have to seek other alternatives.

Republicans yesterday said they wanted to make sure the consumer entity isn't autonomous regardless of whether it's housed at the Fed or the Federal Deposit Insurance Corp.

'If you have something at the Federal Reserve, the Board of Governors ought to have the control,' Senator Richard Shelby, the top Republican on the committee, told reporters yesterday. 'Why would you put anything under the Federal Reserve or the FDIC if they don't have any authority? That's like putting the Agriculture Department over in Defense.'

'It's A Joke'

House Financial Services Committee Chairman Barney Frank, who led negotiations on the House overhaul bill that passed in December with a stand-alone agency, also rejected the compromise.

'It's a joke,' Frank, a Massachusetts Democrat, said yesterday in a telephone interview. Consumer protection 'has been the most conspicuous failure by the Fed historically.'

The House wouldn't accept such a compromise, he said, although Democratic Leader Steny Hoyer of Maryland said the House will consider any alternatives that the Senate proposes to the consumer protection agency.

'If we can affect a heightening of focus on the protection of consumers in another way, then I think we need to consider that,' Hoyer said.

Frank said today in a statement that he would consider creating an agency within the Treasury Department, 'provided that the entity has sufficient independence and broad regulatory scope.'

Treasury Proposal

Dodd last month had proposed a Treasury consumer bureau that would be run by a presidential appointee with the power to write rules for companies offering financial products. Shelby rejected Dodd's proposal, according to Senate aides. Dodd then invited Corker to help craft a compromise.

The financial-services industry opposes the consumer agency more than any other provision in Obama's plan and has lobbied lawmakers to defeat it. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon called the agency 'just a whole new bureaucracy' on a December conference call with analysts.

Dodd and other Democrats have faulted the Fed for failing to use its consumer-protection authority to crack down on the mortgage lending abuses that spurred the financial crisis. In response, the Fed in 2008 adopted rules requiring lenders to determine a borrower's ability to repay and issued rules restricting credit-card issuers.

'Abysmal Failure'

Dodd called the Fed's handling of consumer-protection responsibilities an 'abysmal failure' in November and said the central bank should focus on monetary policy.

'We don't have an agreement yet,' Dodd said yesterday in response to a question about his prior criticism of the Fed. 'I'll announce when we do have an agreement.'

Democratic Senators Bob Menendez of New Jersey and Charles Schumer of New York, both banking committee members, criticized the idea.

'It's not my favorite location,' Menendez said.

'In my 20 years of trying to get the Federal Reserve to properly protect consumers, it has been an uphill, and very often unsuccessful, battle,' Schumer said in a statement. 'I am very leery of any consumer regulator being placed inside the Fed.'

Senator Evan Bayh of Indiana said he is willing to back the Dodd-Corker plan, saying while it may be less than perfect, it may help advance the broader bill.

'Best Chance'

'This one may be the one that has the best chance of actually getting done,' Bayh, a banking committee member, told reporters yesterday. 'If there's enough autonomy, enough independence, enough resources that they're actually going to get the job done, I think it's better than nothing.'

Weeks of talks between Dodd and Shelby broke down last month after they were unable to agree on how to handle the consumer authority. Dodd then began talking with Corker.

Corker proposed the consumer unit within the Fed, and Dodd on March 1 was close to endorsing the idea. Shelby said the chairman of the Fed, or head of the FDIC, should have control over the consumer unit. Without Shelby's support, Corker may be unable to win additional Republican support.

'I just don't think you get a bill done without Senator Shelby blessing that bill,' Senator Mike Johanns, a Republican from Nebraska, told reporters. Without Shelby's support, 'I just find it hard to imagine the bill goes very far.'

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