Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) is circulating… (Joshua Roberts / Bloomberg…)
Reporting from Washington — President Obama may be forced to accept a watered-down version of his proposed consumer protection agency to get a sweeping overhaul of financial regulations approved by Congress.
Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) is circulating a proposal that would scrap plans for a Consumer Financial Protection Agency, which Obama has touted as crucial to protecting consumers from predatory mortgages, credit cards and other products. He and administration officials say the agency is key to avoiding a repeat of the financial crisis that rocked the country in 2008.
In an attempt to lure the Republican votes needed to get a sweeping overhaul through the Senate, Dodd proposes to replace the controversial stand-alone agency with a less powerful Bureau of Financial Protection within the Treasury Department. The new bureau would take the power from the Federal Reserve to write rules to protect consumers in the financial marketplace. And the bureau would have expanded authority to write regulations that cover products issued by firms other than banks, such as mortgage brokers and payday lenders.
But the bureau would have far less authority than the agency proposed by Obama, which was included in the financial regulatory overhaul legislation that passed the House last December without a single Republican vote. Dodd's move could help get a bill through the Senate but could create problems in the House, Rep. Barney Frank (D-Mass.) warned Monday.
"A watering-down of the consumer agency . . . will not be helpful as far as getting something worked out," said Frank, the chairman of the House Financial Services Committee and a strong backer of a consumer agency.
Still, it appears increasingly clear that Obama and Democratic supporters of a financial regulatory overhaul will have to compromise on a consumer agency to get the legislation enacted.
"I think there's no question that a stand-alone agency is not going to pass the Senate," said Stephen Verdier, director of congressional affairs at the Independent Community Bankers of America, a trade group that represents small banks.
White House Press Secretary Robert Gibbs did not comment on Dodd's proposal, but he indicated that Obama could support something short of a stand-alone agency if it had "strong, independent authority."
Under Dodd's plan, the Bureau of Financial Protection would have a director appointed by the president, a dedicated budget and autonomous authority to write federal consumer protection rules.
But its independence would be limited. A new council of financial regulators could send consumer protection rules back to the bureau to be rewritten, or could veto them outright if it believes the rules would threaten the safety and soundness of financial institutions. And the bureau would have no direct role in examining most banks and credit unions -- those with assets of $10 billion or less -- for compliance with consumer protection rules, leaving the job to banking regulators unless they're found to be failing at the job.
In the face of strong opposition to a separate consumer agency from Republicans and the financial industry, Dodd is frantically trying to craft a compromise with Sen. Bob Corker (R-Tenn.), and a new comprehensive bill could be unveiled within days. Corker has said a stand-alone agency is a non-starter with him. And Corker appears to be Dodd's last best chance to find a Republican backer for his bill in the committee after talks with the panel's top Republican, Richard C. Shelby of Alabama, reached an impasse last month.
Senate aides said Corker and Shelby rejected Dodd's proposal, but negotiations continue. Dodd and Corker have been working for about two weeks to hammer out a comprehensive regulatory overhaul that would give the government broad new powers to monitor the financial system for signs of major risk and dismantle major firms in danger of failure to avoid future bailouts.
Dodd and Corker left the issue of a consumer agency to the end of their negotiations because it is the most controversial. Republicans, along with financial industry groups and the U.S. Chamber of Commerce, warn that a stand-alone agency would limit credit to consumers and small businesses by enacting rules that don't properly take into account the effect on banks. They strongly oppose removing consumer protection rule-writing and enforcement authority from the Fed and other banking regulatory agencies, saying it could jeopardize the fiscal health of financial firms.
"Just having it housed in Treasury doesn't mean you're eliminating it as a stand-alone independent agency," said Ryan McKee, senior director of the Center for Capital Markets at the U.S. Chamber of Commerce, which has helped lead the intense lobbying campaign against a consumer agency. Dodd's proposal would still place too much authority over consumer products outside the banking regulatory agencies, she said.
Shelby floated two counterproposals Monday. One would establish a beefed-up consumer protection division within the Federal Deposit Insurance Corp. The other would create a financial products consumer protection council, overseen by a three-person panel that would include two banking regulators.
"Committee Republicans reject the Treasury/bureau proposal because it does not meet the principle they've expressed all along -- that consumer protection must be appropriately balanced and integrated with safety and soundness," said Jonathan Graffeo, a spokesman for Shelby.