For consumer advocates, housing a new agency to protect Americans from financial-product abuse within the Federal Reserve would be a defeat after lobbying for an independent body. For banks, it would represent a victory. Barney Frank, Chairman of the House Financial Services Committee, called a Senate plan to house the proposed Consumer Financial Protection Agency at the FED “a joke.”
“Shielding consumers from harmful financial products is the most conspicuous failure by the FED.”
The Obama administration’s proposal for a consumer protection agency is part of the biggest overhaul of financial regulation since the 1930’s. Putting it inside the FED, instead of creating a standalone bureau, was a compromise proposed by republican Senator Bob Corker, and Banking Committee Chairman democrat Christopher Dodd.
Banks say placing the agency with the Fed alleviates their concern that an independent entity would ignore the health of the financial system. Consumer advocates say it’s a mistake because the FED didn’t succeed in curbing abuses during the subprime lending boom that contributed to the worst financial crisis since the Great Depression.
“We have all sorts of individual agencies that protect Americans, and none of them is subservient to the regulator that is in charge of looking out for the industry,” Lauren Saunders, managing attorney at the National Consumer Law Center in Washington, says.
“This agency has to be independent so that it can fix the problems the banking regulators failed to fix,” Saunders says, according to Bloomberg News.
Barney Frank, Chairman of the House Financial Services Committee, called a Senate plan to house the proposed Consumer Financial Protection Agency at the FED “a joke.”
Shielding consumers from harmful financial products is “the most conspicuous failure by the FED,” Frank said in an interview yesterday.
Frank, who oversaw legislation passed by the House in December that would create an independent agency, said the chamber wouldn’t accept the proposed deal. Senators joined in the criticism yesterday.
Jeff Merkley of Oregon said the Fed had an “abysmal” record on consumer protection. Richard Shelby, the top Republican on the Banking committee, says the entity shouldn’t be autonomous within the FED.
“If you have something at the Federal Reserve, the Board of Governors ought to have the control,” he says.
Federal Reserve spokeswoman Susan Stawick declined to comment yesterday.
Banking lobbyists say the FED’s knowledge of the banking system makes it well-suited to coordinate rules on credit cards and other consumer financial products.
“Regulation of the products should be connected to the regulation of the bank,” says Scott Talbott, senior vice president of government relations for the Financial Services Roundtable, which represents the largest financial institutions.
The financial-services industry has lobbied lawmakers to defeat the plan for a consumer agency. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon called the agency “just a whole new bureaucracy” on a December conference call with analysts.
The American Bankers Association, the largest trade group representing banks, organized hundreds of meetings with its members and Congressmen and spearheaded a campaign that encouraged almost 300,000 letters to be sent to Capitol Hill, all in opposition to the CFPA.
ABA spokesman John Hall said the organization wouldn’t comment on the FED idea until the proposal became official.
Consumer advocates say the FED didn’t use its authority to put in place stronger protections for home buyers as the subprime mortgage market began to expand earlier this decade.
The FED has the broadest authority of any regulator to write rules on lending practices and disclosure.
The Fed’s specific enforcement authority is limited to 800 state member banks. It wields much more clout as the supervisor of bank holding companies, such as Bank of America Corp., some of which had subprime mortgage lending subsidiaries.
Some $600 billion in subprime mortgages were originated in 2006, up from $310 billion in 2003, according to Inside Mortgage Finance, a trade publication.
The Federal Reserve began to hold hearings around the country in 2006, and consumer advocates provided details of abuse, transcripts from the meetings show.
“We were yelling at them in 2001 and 2002” to use their authority, says Michael Calhoun, president of the Center for Responsible Lending in Durham, North Carolina and the current chairman of the FED Board’s Consumer Advisory Council.
“It wasn’t like people didn’t know this stuff was going on.”
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