A New Push for Obama's Consumer Finance Agency
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.
"In a financial system that has never been more complicated, it has never been more important to have a watchdog function like the one we've proposed," Obama said. "And yet, predictably, a lot of the banks and big financial firms don't like the idea of a consumer agency very much. In fact, the U.S. Chamber of Commerce is spending millions on an ad campaign to kill it. You might have seen some of these ads—the ones that claim local butchers and other small businesses will somehow be harmed by this agency. This, of course, is completely false—and we've made clear that only businesses that offer financial services would be affected by this agency."
Frank has already tightened the language of the bill to make clear that small businesses in general would not be affected—only those, such as banks, credit-card companies, or mortgage brokers—whose principal business is providing credit would be regulated by the new agency.
But that hasn't been enough to tamp down the still vigorous opposition of the financial-services industry or the Chamber.
Expand the Powers of Current Regulators? "The Chamber strongly agrees with the President that consumers need more effective protections. Our disagreement is about the best approach to achieve this goal," David Hirschmann, president and CEO of the U.S. Chamber Center for Capital Markets Competitiveness, said in a statement released three hours before the President spoke. He said the powers of existing regulatory agencies should be expanded rather than creating "a massive new federal agency with unprecedented powers over vast segments of the business community."
The White House decision to bring in the heavy artillery—a Presidential speech—comes as debate over the bill moves into a critical phase. Frank is expected to take up consideration of the proposal as early as Oct. 14.
Analysts say momentum for the new agency has slowed as the White House has been heavily focused on health care and other issues. They haven't done enough to counter the opposition, Glaser says. Without a stronger push from the Administration, the bill that emerges could be seriously watered down. Yet it's a critical issue for the White House, as well as for many Democrats who are up for reelection next year.
With many voters still upset about the bank bailouts and executive bonuses for bailout recipients, the Democrats badly want a victory on an issue that will resonate on Main Street.
"They need to be able to go back to the electorate and show some evidence that they've responded to the financial crisis," says Gardner. "How do they do that? Legislation to control the securitization market doesn't ring a bell with the public. Systemic risk? Doesn't ring a bell. But what does ring with the public is consumer protection."