WASHINGTON (Reuters) - U.S. Treasury Secretary Timothy Geithner argued forcefully on Wednesday for creating a government watchdog for financial consumers, while giving cautious support to paring back its scope.
Amid stiff resistance by banks and Republicans to the proposed Consumer Financial Protection Agency, Geithner told a House of Representatives committee the CFPA is needed to fix failures starkly revealed in the global financial crisis.
“The need for a dedicated, consolidated consumer protection agency is clear. The current consumer protection system failed,” he told the House Financial Services Committee.
The CFPA would be a central consumer protection overseer handling laws now vested in several existing agencies, including the Federal Reserve, which have been criticized widely for their past performance.
Committee Chairman Barney Frank said existing regulators’ record on consumer protection is “abysmal.”
But critics have said the CFPA would only tangle businesses in more government red-tape at greater cost to taxpayers.
Representative Spencer Bachus, the committee’s top Republican, said it would be “a massive new government bureaucracy ... which consumers will ultimately pay for, on top of the regulatory patchwork that currently exists.”
The CFPA is the next piece of President Barack Obama’s complex financial reform puzzle to gain headway in Congress.
Credit card reform has been accomplished and a restructuring of the troubled student loan market is close to Senate consideration, having already won House approval.
Other, more difficult pieces still await action, such as creating a systemic risk regulator, finding new ways to deal with failing financial firms, and regulating other areas of the financial world that last year ran off the rails.
Obama said on Wednesday that financial regulation needs strengthening to end the “greed, excess and abuse” that caused the financial crisis that began late last year, slamming the brakes on economic growth around the world.
Regulatory reform will headline this week’s meeting of the Group of 20 economic powerhouse countries in Pittsburgh, to be attended by Obama and Geithner.
Their reform agenda in recent months has bogged down in Congress, with lawmakers still far apart on central issues and distracted by other topics such as healthcare reform, even as markets bounce back and the economy show signs of recovery.
“We can’t let the momentum for reform fade as the memory of the crisis recedes,” Geithner told the committee.
Geithner said the Obama administration is open to changes to the CFPA proposal put forward on Tuesday by Frank.
Seeking to improve the CFPA’s chances for passage, Frank wants to kill a controversial part of the CFPA -- a provision that would force banks to offer so-called “plain vanilla” versions of financial products, such as mortgages.
In draft legislative language obtained by Reuters, Frank also is calling for exempting a wide range of businesses from CFPA oversight, such as accountants, lawyers, securities, commodities, and investment and general insurance products.
“The broad thrust of those proposals look very encouraging and promising to us. And there’s nothing in there, at first glance, that troubles me significantly in terms of its practical value,” Geithner said of Frank’s draft language.
Lawmakers have also debated whether the CFPA should be able to both write and enforce consumer protection rules.
Geithner said separating those powers “would risk creating an agency that is weak and ill-informed.”
The hearing marked an intense push in coming weeks by the committee on financial reform. Frank said he expects a House vote on legislation in November.
Additional reporting by David Lawder and Karey Wutkowski; Editing by Neil Stempleman