WASHINGTON (Reuters) - The Obama administration wants to create a U.S. agency to protect financial consumers, but the idea is in jeopardy due to deep resistance from banks and from existing regulators protecting their turf.
Since the White House introduced the proposal in mid-June, not only businesses, but existing U.S. bank supervisors, as well, have criticized it as a threat to innovation, on the one hand, and to bank supervision effectiveness, on the other.
The proposed Consumer Financial Protection Agency (CFPA) has become a core piece of a broad plan by the administration to tighten banking and capital markets regulation in response to the 2008-2009 financial crisis, the worst in generations.
Treasury Secretary Timothy Geithner on Wednesday said the CFPA is essential, as are requirements on how much capital financial institutions need to maintain.
He admitted in an interview with National Public Radio that the administration was having a “tremendous fight” in Congress because of the deep resistance from the financial community.
Ryan McKee, senior director at the U.S. Chamber of Commerce, the nation’s largest business lobby, said: “We are working to kill the (CFPA) bill. It’s a bad piece of legislation that will harm the economy and hurt small businesses.”
In addition, bank regulators that now have responsibility for protecting consumers under various laws, such as the Federal Reserve and the Federal Deposit Insurance Corp., have criticized the CFPA. They have said that regulating both the institution and its products and services are complementary.
The CFPA would take over consumer protection duties dealing with mortgages, credit cards, loans and other products from at least three federal regulators, including the Fed.
It would be able to write rules and enforce them, as well as prevent the kinds of risky lending that pushed borrowers into loans they could not repay during the real estate bubble.
Geithner said the country could not “afford to let the financial system go back to where it was in the peak of the boom ... That would be a terrible mistake,” he told NPR.
Democratic Representative Barney Frank has already introduced a bill in the House that largely mirrors the Obama administration’s proposal. However, the Senate Banking Committee, which is responsible for writing companion legislation, has yet to follow suit.
The Senate panel plans to introduce a comprehensive bill that will include all aspects of the administration’s plan to overhaul the regulatory system. But the sheer complexity of some of the issues, such as regulating the $450 trillion over-the-counter derivatives market and supervising financial risk, is likely to hinder the committee’s efforts.
Further, Congress is distracted by the administration’s push to reform the country’s healthcare system.
Despite the congressional hurdles, the White House is still pushing for legislation before the end of the year.
“The president has said it’s important for legislation to be enacted this year... That’s what we are pushing forward to do,” Treasury Department Deputy Secretary Neal Wolin told reporters in New York late in August.
“I don’t think differences of view among the regulators on this or that issue will delay that time schedule,” he said.
A wide swath of industry groups have joined forces to try to water down the CFPA’s scope, including the Real Estate Roundtable, the Financial Services Roundtable, the Consumer Electronics Association and the U.S. Chamber of Commerce.
One of their main concerns with the administration’s proposal is a provision that would give states the ability to adopt and enforce stricter laws for all types of institutions.
This has the potential to create even more layers of regulation and would make it even harder and more expensive for businesses to comply with federal and state rules, they say.
States would be free to “pile on additional regulations,” said the Consumer Electronics Association, which represents more than 2,000 U.S. technology companies.
Industry also abhors a provision that could require regulators to define standards for so-called ‘plain vanilla’ products, such as mortgages and credit cards with simple terms and contracts.
Banks and other companies that offer financial products worry that this would ultimately crimp profits because consumers would seek out the government-approved products over industry’s creations.
Reporting by Rachelle Younglai with additional reporting by Kristina Cooke in New York; Editing by Andrea Ricci