A New Push for Obama's Consumer Finance Agency

With support flagging, the President lashes out at financial-industry opponents of his plan for a new regulator to protect the public

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Those weren't olive branches President Barack Obama was tossing at the financial industry at the White House on Oct. 9. In an effort to jump-start his faltering proposal for a Consumer Financial Protection Agency, the world's newest Nobel Peace Prize winner lobbed some verbal grenades at industry opponents—particularly the U.S. Chamber of Commerce, which has led the charge—and called for a new push to get his proposal passed.

It's going to be a hard slog. Financial companies are afraid the plan would curtail their marketing of many high-margin products, so the industry is spending a lot of money and effort trying to kill it or water it down. One of the tactics is to refocus the debate around small business owners and the small community banks that serve them.

"The concept of a consumer-protection agency has fairly wide consensus among Democrats, and you would think they'd be jumping on board," says Howard Glaser, a former Clinton Administration housing official and chief lobbyist for the Mortgage Bankers Assn. who now runs his own firm. "But there's been a very effective lobbying campaign coming from the other side arguing that it will be too intrusive and limit all kinds of products available to consumers."

Obama's opponents have had some success. Last month, Representative Barney Frank (D-Mass.), the head of the House Financial Services Committee, proposed changes to the Administration proposal that would weaken the agency, such as dropping a requirement that all financial-services providers offer "plain-vanilla" product offerings in all categories they operate in.

Resistance from the New Democrat Coalition

But now, Frank and the Administration are running into more serious opposition—particularly from a block of moderates known as the New Democrat Coalition—than they expected on two key issues.

First is how much enforcement power the new agency would have. While the President wants it to be able to enforce any new rules it sets, the moderates want enforcement powers to remain with existing banking regulators.

An even bigger fight is brewing over whether banks would have to comply with state consumer laws when they are stricter than whatever the new federal agency comes up with.

This issue, known as federal "preemption," has become a big sticking point for the moderate group. Under the bill as currently written, federally chartered institutions, which typically operate in more than one state, would have to comply with stiffer consumer laws in individual states that go beyond federal protections. That's a reversal of the status quo, in which federal laws trump state laws.

The moderates, led by Representative Melissa Bean (D-Ill.), want to maintain that status quo and are in negotiations with Frank. She argues that the whole point of the new agency is to set uniform national standards that would apply evenly to the institutions that operate throughout the country.

The New Agency as Referee

"There's a lot of skepticism amongst moderates and Republicans over the sense that eliminating preemption goes way too far," says Brian Gardner, a Washington policy analyst for brokerage firm Keefe, Bruyette & Woods (KBW). "They're sympathetic to the need to provide more consumer protection, but they don't think it makes sense to create one federal agency and then let rules in 50 states apply."

With the skirmishing over those issues getting under way on Capitol Hill, Obama used his Friday afternoon statement to try to refocus the fight as a battle between big companies and the little guy—with the new agency as referee.