June 24, 2009 / 7:05 PM / 8 years ago

Consumer watchdog idea hit as Congress eyes reform

5 Min Read

<p>President Barack Obama waves goodbye after making remarks on financial regulations in the East Room of the White House in Washington June 17,2009.Larry Downing</p>

WASHINGTON (Reuters) - Republicans lined up with the banking industry on Wednesday in attacking a Democratic proposal for a new U.S. Consumer Financial Protection Agency at a congressional hearing focused on a key component of the Obama administration's broad plan for financial regulation reform.

As Congress intensified its scrutiny of the Obama plan, Republican members of the House Financial Services Committee questioned the idea of splitting consumer protection from government oversight of the banking business' health.

"The wisdom of bifurcating consumer protection and safety and soundness regulation as is done in the administration's proposal is questionable," said Representative Spencer Bachus, the top Republican on the House committee.

But Democrats and supporters of creating a new agency replied that decades of combining those two roles -- within the Federal Reserve and elsewhere -- have failed to protect consumers from confusing and deceptive lending by banks.

"This structure has not worked," said Elizabeth Warren, a Harvard Law School professor who is also chairman of the Congressional Oversight Panel of the Troubled Asset Relief Program (TARP) set up last year to bail out distressed banks.

She urged lawmakers to set up a new, independent agency to protect consumers from "tricks and traps" set by banks.

President Barack Obama last week unveiled a sweeping package of reforms to rewrite the rules for banks and capital markets in response to a severe financial crisis that has dragged down economies worldwide for more than a year.

Representative Barney Frank, chairman of the House committee, said at the hearing that he expects the panel to write legislation next month on the proposed consumer agency, while also addressing several other reform proposals.

He told reporters outside the hearing that he tentatively expects the committee to be handling "anywhere between four and six" bills on financial reforms that would then "all go on the floor of the House in one bill."

Obama wants to enact new laws by the end of the year. Democrats have consistently said that could be done, although some analysts foresee debate on the matter running into 2010.

Subprime Mortgages

<p>Treasury Secretary Timothy Geithner gives his testimony about regulatory reform before the Senate Banking Committee on Capitol Hill, June 18, 2009.Jonathan Ernst</p>

A key issue in the financial crisis that engulfed the U.S. economy last year was the enormous amount of debt shouldered by Americans during a real estate bubble fueled by subprime mortgages that many borrowers could not afford or understand.

As defaults and foreclosures rose last year, exotic financial instruments backed by shaky mortgages broke down and the capital markets froze for a time amid sudden uncertainty about the condition of banks' balance sheets.

The combined effects helped drag the United States into a recession that continues.

The $700 billion TARP and other bailout programs have helped save the banks the problems they created for themselves. Now the administration is pushing for changes in regulation designed to prevent such issues from recurring.

Slideshow (4 Images)

One of the Obama plan's goals is to designate the Federal Reserve to monitor big-picture risks in the economy. Another is to empower the Federal Deposit Insurance Corp to apply its model for shutting down failed banks to financial firms that are not banks, but whose failure could endanger the economy.

The U.S. Securities and Exchange Commission, in line with administration objectives, on Wednesday proposed tough new rules for money market funds, while another congressional panel began writing legislation that would require more disclosure of fees charged by mutual fund companies.

Another major Obama goal is to do more to protect consumers by transferring consumer protection dealing with mortgages, credit cards, payday loans and other financial products out of 10 agencies and into a single, centralized agency.

The banking industry, sensing a potential threat to their profits, is fighting back hard against this initiative.

"We really don't believe that you can separate a bank from its products ... If you have separate regulators, you've separated the business from its product," said Edward Yingling, president of the American Bankers Association, at the hearing.

Representative Brad Miller, a Democrat who has introduced a bill in the House similar to the administration's proposal and a bill in the Senate, questioned the industry's position.

"If I could remember any time that I've been in Congress that (the banking industry) has favored anything to protect consumers, I'd be more persuaded by their argument this time," Miller, a committee member, told Reuters in an interview.

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Additional reporting by Rachelle Younglai and Kim Dixon; Editing by Kenneth Barry

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