Banks Calling the Shots on Bank Reform?


This isn’t the way that consumer advocates envisioned it, but the U.S. Senate plan for a consumer financial protection agency has the Federal Reserve calling the shots.

Historically, the Federal Reserve has been pretty cozy with big banks lately, so consumer advocates are wondering if bank customers will really get a fair shake.

The seeds of the Consumer Financial Protection Agency were planted in the run-up to the Great Recession. While regulations were in place to warn banks and lenders about issuing high-risk loans to customers who didn’t understand the terms of their contracts — or who weren’t in a good position to honor them — they largely went un-enforced.

Thus the need for a stricter set of rules for what financial institutions can and cannot do when dealing with financial consumers.

Elizabeth Warren, Harvard University professor and chief of the Congressional Oversight Panel that oversees the government’s $700 billion Troubled Asset Relief Program, says that a watchdog gency is a good first step — but only if it has some “bulldog” in it. Speaking at a recent New America Foundation conference in Sacramento, Calif., Warren told her audience, “When it snarls, you want to see its teeth.”

But the Senate version of the new agency, crafted by Connecticut Sen. Chris Dodd, would house it inside the Federal Reserve, which has consumer advocates howling. The move, they charge, is akin to giving John Dillinger the keys to Fort Knox.

U.S. Congressman Barney Frank, Chairman of the House Financial Services Committee, called the move to house the new consumer agency inside the Federal Reserve “a joke”. In a March 2 interview with Bloomberg, Frank said shielding consumers from harmful financial products is “the most conspicuous failure by the Fed.”

Proponents of the decision to move the CFPA inside the Fed say that it consolidates consumer finance regulations under one roof, with complete oversight by Congress (the new agency doesn’t have the authority to enforce its own rules — that responsibility falls to Congress). Before, government regulations of the financial industry were spread across an alphabet soup of agencies. If banks needed a favorable ruling, all they needed to do was find a ruling by one of the many financial agencies, cite the regulation and go about its business.

But critics say the Federal Reserve, one of those government institutions responsible for regulating Wall Street, fell asleep at the switch in the early 2000s, when advocates were calling on banks to put the breaks on risky lending practices. Sen. Jeff Merkely of Oregon went on record this week as saying the Federal Reserve had an “abysmal” record on shielding consumers from shady financial deals.

Frank promises that the proposal to house the CFPA inside the Federal Reserve is dead on arrival.

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