Cruel 'Joke': Consumer Protection to the Fed? Issue Is Less Where It Is Housed Than How Much Power It Has

By Kaper, Stacy | American Banker, March 3, 2010 | Go to article overview

Cruel 'Joke': Consumer Protection to the Fed? Issue Is Less Where It Is Housed Than How Much Power It Has


Kaper, Stacy, American Banker


Byline: Stacy Kaper

WASHINGTON - A tentative deal struck between Senate Banking Committee Chairman Chris Dodd and Sen. Bob Corker, R-Tenn., to entrust consumer protection to the Federal Reserve Board left observers, including fellow lawmakers, more confused than enlightened, and raised critical questions.

The most discussed was why Dodd, who has assailed the Fed repeatedly for its failure to protect consumers, would reverse course. House Financial Services Committee Chairman Barney Frank called the idea a "bad joke."

But the more important question was whether the Fed would really be in charge.

Sen. Richard Shelby, the No. 1 Republican on the Senate Banking Committee, told reporters Tuesday that he feared the new consumer protection division would operate with little to no input from the central bank.

"If the consumer protection unit or bureau is put at the Fed, FDIC or anywhere else ...a prudential regulator should have a say in any rule that could affect the safety and soundness of the banking system," the Alabama lawmaker said.

Shelby added that prudential regulators should "absolutely" have power to veto consumer protection proposals. The Dodd-Corker plan would allow regulators to appeal consumer protection rules to a new systemic-risk council, which could override them with a two-thirds vote, but Shelby said that idea "would be silly."

"I think they should have to have some power there, otherwise you are just creating something that runs amok," he said. "We are looking at it now. We will probably make some suggestions. ... If you house something at the Federal Reserve you've got the board of governors and the chairman. The board of governors ought to have the control, or the chairman or the board of the FDIC if that's where it were housed."

The latest version of the Dodd-Corker proposal would let the president appoint a Senate-confirmed director of a consumer protection division that would have the power to independently write rules for all banks and nonbanks. Under the plan, the division could only enforce those rules against banks with assets of more than $10 billion and large nonbank mortgage lenders. Banks with assets of less than $10 billion would still be examined by their primary regulator, with some type of backstop authority given to the consumer division.

Though the other banking agencies would have to be consulted before the division promulgated new consumer rules, they would not have the power to block them unless there was a two-thirds vote of the systemic-risk council. The head of the consumer division would be placed within the Fed's office of the chairman. These details were not final and may change.

Confronted by reporters Tuesday, Corker would only say that "talks are continuing to go well."

But other Republicans echoed Shelby's concerns over how much autonomy any new consumer protection regulator will have.

Sen. Judd Gregg of New Hampshire, who is one of the strongest Fed supporters on the Banking Committee, sounded the most supportive, saying that he preferred the idea of a division within the Fed to a stand-alone agency but that the central bank should have some power over the division.

Sen. Mike Crapo, R-Idaho, said he hadn't seen any details but was surprised that the Fed was being considered. Sen. Mike Johanns of Nebraska said he is more concerned about giving a consumer division too much power than where it is housed.

"For me it is the scope and extent of their powers," Johanns said. "There has to be a limitation here on what this group does, otherwise you just have a growing bureaucracy - I don't want to go there. I don't think that's the right approach."

Democrats, meanwhile, sounded even less enthusiastic about the idea. …

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