The Senate might break its impasse on financial overhaul if it moves forward with a proposal that would put a consumer financial protection watchdog inside the Federal Reserve.
But such a move could water down the impact of a such a consumer watchdog, especially when compared to the stand-alone agency first proposed by President Obama. It would also be a big reversal for the Senate Banking committee, which has accused the Fed of letting down consumers, contributing to the economic meltdown.
Housing a new consumer regulator in the Fed is not set in stone, but lawmakers on the Senate Banking panel are talking it over these next few days, say sources who are not authorized to speak about the negotiations.
Protecting consumers who buy financial products like mortgages, credit cards and even auto loans has been the big sticking point holding up Senate progress on legislation to overhaul the financial system.
Senate banking Chairman Chris Dodd, D-Conn., has been working with Sen. Bob Corker, R-Tenn., on consumer protection, after it became clear that Dodd couldn’t make headway with the ranking Republican member on that panel, Sen. Richard Shelby, R-Ala.
The new consumer protection proposal is poised to, again, delay the Senate banking panel from releasing final draft legislation until later this week or early next week, sources say. While the Senate has been working for months on the issue with little success, the House has already passed legislation, which includes a stand-alone consumer agency.
Hoping to push things along, Dodd conceded that the agency didn’t have to stand alone, as long as it had teeth. Committee staff have also said that Dodd has been less concerned about where the agency is housed and more concerned with how much power, independence and funding the regulator would have.
Details about that have yet to be released. What is known is the new consumer regulator would write rules governing financial products like mortgages and credit cards.
Bank lobbying groups and banking analysts are withholding final judgment until they see details, but some signaled tentative support for the general idea of housing a consumer regulator at the Fed. Their position has been to fight anything that separates consumer protection from those who watch for the safety and soundness of banks.
"Structurally speaking, the idea has merit," said Scott Talbott, chief lobbyist for the Financial Services Roundtable, a bank lobbying group.
But most consumer groups called the idea of moving a new consumer regulator into the Fed a "grave mistake."
They point out that the Fed’s failure on consumer protection is exactly what prompted the push for a new consumer protection regulator in the first place.
"It would belie common sense to even make that suggestion, given the history of the Fed in not enforcing the fair lending and consumer protection laws that were already under its aegis," said John Taylor, president of the National Community Reinvestment Coalition.
"It’s time for Senator Dodd to stop negotiating with Senators who have dug into battle trenches with the big banks in their attempt to block any meaningful consumer protections, and move a bill that will give the rest of the Senate a chance to vote for Main Street and support real reform," said Carmen Balber, Washington director for Consumer Watchdog, an advocacy group.
