The question of where to house a proposed new consumer protection agency has garnered at least as much attention as whether there is a genuine need for such an agency.
The latter point seems almost moot to many, especially those who fall under the broad category of consumer advocate.
Exhibit A in their argument for a more focused effort on preventing lending fraud and predatory practices among financial services firms is the millions of dubious mortgages granted during the past decade to borrowers seeking the American dream of homeownership.
Exotic loans that required little or no money down allowed people with the scantest of credit histories and threadbare proof of a steady income to obtain access to large sums of money, funds they almost certainly could not pay back.
When, predictably, these borrowers began to default on those loans it represented the first domino to fall in what would grow into the worst financial crisis since the Great Depression.
Fallout from that crisis has generated considerable momentum for broad reform of the U.S. financial system Democratic Senator Chris Dodd’s sweeping legislative proposal unveiled on Monday would, among other things, create a new agency to protect consumers from getting in over their heads due to sneaky mortgage or credit card pitches.
Under Dodd’s bill, the agency would be granted ostensibly independent authority for writing rules related to consumer protection. The agency’s authority would cover banks and credit unions with less than $10 billion in assets and all mortgage-related businesses. Included under that broad umbrella would be lenders, servicers, mortgage brokers, payday lenders, debt collectors, consumer reporting agencies, and foreclosure prevention operators.
The big firms – Citigroup, JPMorgan Chase, Goldman Sachs, Bank of America, et al., – would still fall under the Fed’s purview.
Leading consumer advocacy groups such as the Center for Responsible Lending and Consumer Watchdog have offered qualified praise for Dodd’s bill. The Center for Responsible Lending, for instance, issued a statement calling Dodd’s bill a “step in the right direction.”
The praise from consumer advocates was qualified, however, primarily because many of these groups take issue with Dodd’s recommendation that the new agency be housed within the Federal Reserve, the powerful regulatory body charged with oversight of the nation’s banking system.
Criticism of the new agency being housed at the Fed essentially begins with criticism of the Fed’s response early last decade to the rapidly expanding housing bubble. According to its critics, the Fed kept interest rates too low for too long, turned a blind eye to increasingly lax lending standards, and then denied that there was in fact an impending crisis.
What’s more, even the after the crisis exploded, the Fed seemed reluctant to acknowledge the importance of stepping up consumer protections to prevent another crisis, say the critics.
“The Fed has a dismal record on consumer protection,” said Carmen Balber, director of Consumer Watchdog’s Washington, D.C., office.
Consumer Watchdog supports a stand-alone consumer protection agency. “We have argued from the start that to be truly independent, a consumer protection agency needs to be a stand-alone entity,” said Balber.
Balber said Dodd’s bill attempts to insulate the proposed agency from undue influence within the Fed by allowing the president to appoint its leadership and by making its budget wholly separate from the Fed’s budget.
There are other well-intentioned “firewalls” designed to curtail Fed influence, according to Balber. “But it’s not enough,” she said. “At the end of the day it’s hard to see a bureau of the Federal Reserve that’s not influenced by Ben Bernanke.”
In lieu of a significant change in Dodd’s bill that would create a stand-alone agency, Barber said the way to ensure – or at least increase – independence within the Fed is to limit the authority of a proposed Financial Stability Oversight Council over the consumer protection agency.
As proposed by Dodd, that body, which would include the heads of all the government’s primary financial regulatory agencies, would have veto power over recommendations by the new consumer protection agency.
Balber said Consumer Watchdog’s position is that many of those regulatory agencies have proven themselves too close to the banking industry to be trusted with consumer protection.
Those agencies, she said, have “failed over the years to protect consumers” because “their primary focus year after year has been to protect bank profitability rather than consumer’s pocketbooks.”
Other consumer advocates have taken an even stronger position against housing the agency in the Fed.
“Embedding consumer protection in the Fed could be worse than imperfect. By giving the imprimatur of a consumer protection office to an agency that has long resisted consumer protection, Congress risks creating a false sense of security among policy makers and the public. The Fed’s politically reactive posture is the exact opposite of the sustained care that consumer financial protection demands,” wrote Harvard professor Daniel Carpenter in an op-ed piece in The New York Times.
For its part, the Obama administration has supported the idea of a freestanding consumer agency.
Fed Chairman Ben Bernanke has not publicly addressed Dodd’s specific proposal for a new consumer protection agency, but he has argued in the past that despite lapses, the Fed’s consumer protection duties should not be carved out and given to a stand-alone entity.