WASHINGTON — If you doubt that U.S. banks long to return to the days of impotent regulation, you need only look at one of the financial sector's top legislative priorities: killing a proposed new agency that would be dedicated solely to protecting consumers' financial interests.
The Obama administration is asking Congress to create a new Consumer Financial Protection Agency to regulate consumer financial products ranging from credit cards to mortgages, and to simplify disclosure about them all.
Though virtually every cause of the nation's recent financial crisis was rooted in weak consumer protection, the U.S. Chamber of Commerce is leading the fight against the proposed agency on grounds that it would make credit less available and more costly. The American Bankers Association, the Independent Community Bankers of America, and the Financial Services Roundtable also oppose the measure.
"We have no argument that regulation failed. Consumer protection is just one of the many areas where it fell down," said David Hirschmann, the president of the U.S. Chamber of Commerce's Center for Capital Markets, which opposes the panel. "It just simply adds a new layer of regulation without fixing . . . our outdated, broken regulatory structure that was a contributing factor in our crisis."
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The Chamber said it's spending about $2 million on ads, educational efforts and a grassroots campaign to kill the agency. It said that the grassroots effort has led to more than 23,000 letters sent to Congress to date.
The Center for Responsive Politics said that for the 2010 election cycle, commercial banks have donated almost $3.7 million to lawmakers — 54 percent of it to Republicans. Companies that provide credit have given about $1.4 million, 59 percent to Democrats. Mortgage bankers and brokers have given $581,423.
"Maybe instead of making government BIGGER, we should focus on making government BETTER," reads one Chamber ad.
The Chamber warns that the agency could morph into a monster regulator.
"If you look at this actual bill, the powers are so broad and so ill-defined that the scope of who is covered is incredible. They've managed to create a proposed new regulator for anyone who directly or indirectly provides credit to consumers," Hirschmann said. "If you allow people to give gift cards for your store . . . you've got a new regulator. It's amazingly broad in scope, scale and power."
The administration scoffs at those charges.
"Contrary to some advertisements you may have seen, we have no desire to interfere with Main Street retailers' ability to provide credit to their customers. That argument is to the financial regulation debate what the Death Panel argument is to the health insurance debate," Lawrence Summers, the chief economic adviser to President Barack Obama, said in a recent speech. "We have become convinced that it is essential that consumer financial regulation be carried on by an independent body whose mandate is uniquely and exclusively consumer and investor protection."
Until the current crisis, responsibility for these consumer protections fell to several separate regulators, who made consumer protection subservient to their core mission of regulating institutions for safety and soundness.
Predatory lending and no-documentation loans helped spawn the housing crisis. Weak oversight by federal regulators allowed mortgage bonds to be sold to investors as the safest of investments when they were far from it.
When economic times got tough last year, banks began padding their balance sheets by socking surprised consumers with new credit card fees that were hidden in contractual fine print.
"In practice, nobody really took it seriously. . . . I think clearly you have had a lot of abuses, and whatever was on the books wasn't being enforced," said Morris Goldstein, a former top official at the International Monetary Fund and a researcher for the Peterson Institute of International Economics. "I think it makes sense to try to wrap it together and give someone the responsibility to deal with the great bulk of it."
Opponents have suggested that the new agency could impede the way businesses operate, but that concern is rejected by Elizabeth Warren, a Harvard University law professor who's long championed creation of such a regulator. Separately, Warren leads a congressional panel that monitors the Treasury Department's bank bailout program.
"The CFPA will provide real oversight over financial institutions and create some basic safety standards. This will make it safer for your local butcher to take out a mortgage or a credit card, but the CFPA is not going to regulate the way he carries out his business," she told McClatchy, referring to a Chamber ad that suggests even local butcher shops would be regulated.
Rep. Barney Frank, D-Mass., the chairman of the House of Representatives' Financial Services Committee, said Tuesday that he intends to exempt most non-financial businesses from oversight by the new agency. At a congressional hearing on Wednesday, the Chamber's Hirschmann said that while he appreciated Frank's modifications, the Chamber still opposes the bill.
Some leading Republicans are siding with the banks.
"Is the proper role of the government to limit consumer choice?" Alabama Rep. Spencer Bachus, the senior Republican on the Financial Services panel, asked Assistant Treasury Secretary Michel Barr during a hearing this month.
Barr, who as a former professor helped create the concept of a consumer financial protection agency, responded that by requiring clear and simple information for consumers, the agency would help them make better informed choices.
"It doesn't limit choice," Barr said.
Some Democrats, such as New York Rep. Nydia Velazquez, who heads the House committee on small business, are concerned about the bill's potentially broad sweep. In a statement to McClatchy, she warned that, "if these proposals are not crafted correctly, they could ensnare small businesses we don't think of as financial institutions. In addition, we need to consider how new regulations will impact small firms in the financial sector, like community banks and credit unions."
The proposed agency appears to have broad Democratic support in the House of Representatives. In the Senate, which has been slower to deal with financial regulation, support is harder to gauge.
Sen. Christopher Dodd, D-Conn., the chairman of the Banking Committee, has voiced support for the idea, but he's breaking with the administration and the House by proposing to consolidate half a dozen bank regulators into a single unified agency. A consumer protection agency could be folded into it, or it could be separate.
Advocacy groups say that the financial sector's opposition underscores the need to act.
"I don't see why people don't understand that this should be a measure of why to pass it," said Barbara Roper, the director of investor relations for the Consumer Federation of America. "If you assume, as I do, that they fear anything that threatens the way they do their business, their ability to profit through the abuse of their customers, then this (legislation) should be taken seriously."
In this environment, J.P. Morgan Chase and Bank of America announced this week that they'd modify their overdraft fee policies.
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