In a move that’s raising red flags among some consumer advocates, top negotiators for the Senate Banking Committee signaled
Wednesday they favor establishing a new consumer financial protection agency within the Federal Reserve as part of a compromise
financial regulation reform bill.
Consumer advocates and Fed critics in Congress have opposed any major Fed oversight of consumer financial protection as
part of reforms. They say they Fed fumbled consumer protection during the financial bubble, failing to crack down on subprime
mortgages, predatory lending and other questionable products and practices. Fed officials have acknowledged as much and stepped
up their efforts.
But two key negotiators on the Senate Banking Committee — Republican Bob Corker of Tennessee and Democrat Mark Warner
of Virginia – indicated they support placing a new consumer protection entity in the Fed and granting it and possibly other
bank supervisors – “prudential regulators†– the power to review and change any proposed consumer rules.
The senators suggested they are concerned new rules might be so tough or complex that they could jeopardize firms’ financial
health and risk another crisis. They said they want a reform plan that strikes an “appropriate balance†between consumer protections
and banks’ operations, as Warner put it.
“No doubt there will be a mechanism whereby the prudential side has the ability to weigh in (on proposed rules)…to absolutely
insure that we don’t do anything to destabilize the safety and soundness of our financial institutions,†Corker said after
a panel on regulatory reform sponsored by the National Journal. “That’s been a Republican principle from day one. I think
a lot of moderate and conservative Democrats have said the same thing.â€
Warner echoed Corker’s comments, but added he’s “not sure†yet that the Fed is the right home for the new consumer protection
entity. Warner and Corker have been tapped by the chairman of the banking committee, Sen. Christopher Dodd (D-CT), to try
to produce a bipartisan bill.
Their comments spooked some consumer advocates, who are waiting anxiously for details on their plan.
The Fed and other regulators “always allowed consumer protection to take a back seat†to mandates they assure the “safety
and soundness†of the banks, said Kathleen Day, spokesperson for the Center for Responsible Lending. She said the mandates
historically gave regulators wide leeway in rulemaking that allowed banks to earn big profits to build capital, even if it
meant turning a blind eye to questionable financial products and sales practices.
“It is a big cause for concern,†Day said of the senators’ comments. “It’s no good for anybody if this is just rearranging
the deck chairs.â€
Her organization and other consumer groups are pushing for a free-standing, independent consumer protection agency with
a director appointed by the President and with strong rule-writing and enforcement powers. That’s what the Obama Administration
proposed in June and what the House approved in a reform bill it passed in December.
“It’s crazy to have it in the Fed,†Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, told
the Boston Globe last week. “The story of the Fed is it’s undemocratic, arrogant, elitist and it doesn’t care about Americans.
So let’s give it consumer affairs – it’s almost like a bad joke.â€
If the Senate passes a reform bill – not a certainty, given the difficulty and complexity of rewriting banking rules in
the face of intense industry lobbying — Frank will have to work with senators to hammer out a final compromise package.
Both Corker and Warner stressed that a bipartisan Senate bill will beef up consumer protections; they asked consumer advocates—and
Frank — for patience. “If everyone will just chill out,†Corker said. He said he has been meeting with consumer groups to
brief them on negotiations and possible compromises.
Financial industry sources said the new entity’s rules could be reviewed by the Fed alone or by a new council of financial
regulators that includes the Fed. The entity could also write rules that would be enforced by existing regulators, they said.
“This is about to be a huge win for consumers, and I think it would be an enormous mistake…to look at where the box is,â€
Warner said. “We ought to wait and see what the final product is.â€
But, he also said, “We’re not trying to create a whole new enforcement regime here.â€
Corker said a compromise bill was “very imminent.†Financial industry sources expect Dodd to introduce a reform bill by
next week, whether bipartisan negotiations generate a compromise or not. Corker said the banking committee’s goal is to vote
on a bill and send it to the full Senate by Congress’s Easter recess, which starts March 29.
As for other key provisions of a Senate reform plan:
–Corker said the council of regulators, which would monitor the financial system and companies for emerging risks, would
be backed by a new National Institute of Finance. It would collect, track and analyze real-time industry and market data.
–Corker said the Senate bill would include “enhanced†bankruptcy provisions to make it easier for financial firms to declare
bankruptcy without destabilizing the entire financial system, which happened when Lehman Brothers filed for bankruptcy in
fall 2008.
–But the bill will also include new “resolution authority†to allow government regulators to take over big, complex, “systemically
significant†financial firms whose bankruptcy might cause major disruptions. Regulators would be able to triggered it “only
as a last resort,†Warner said. And any firm that regulators take over would be “toast…obliterated from the map,†he said.
Corker added, â€No management group, no stockholder group…would ever, ever want to see an institution go into resolution…(It
would be) far, far more painful than bankruptcy.â€
–Financial industry sources said negotiators have agreed to create a $50 billion “resolution fund†as back the new process.
Taxpayers would pay the initial costs of a future crisis and any accompanying firm failures, sources said, and financial firms
would reimburse the government later through industry assessments. In the House legislation, a similar fund would be as large
as $150 billion.
–Corker said negotiators are considering requiring banks to hold “contingent capital,†which is a form of debt that can
be automatically converted into shareholder equity in another crisis. If converted, the securities would create a bigger capital
buffers in firms to absorb losses so that shareholders, not taxpayers, would bear the costs of a firm’s problems.
–The Fed would retain regulation of big bank holding companies like Bank of America and Goldman Sachs in the Senate bill,
financial industry sources said—the top 20 or so financial firms with assets of more than $100 billion. A Dodd proposal would
have stripped the Fed of all of its bank supervision authority and placed it in a new “super†bank regulator.
–Corker denied a New York Times report that he was seeking to exempt “payday†lenders from tough new regulations. Payday
lenders have been under scrutiny for the high interest rates they charge on short-term loans to workers waiting for their
next paychecks. “There is no carve out for payday lenders,†Corker said. “There’s no carve outs for anybody.â€
Corker and Warner stressed the ultimate goal of a bipartisan reform plan is to end taxpayer bailouts – and even the prospect
of them — for the financial services industry.
“There will not be taxpayer exposure,†Warner said. “We don’t want that to happen again.â€
