Why Dodd Should Not Abandon An Independent Consumer Financial Protection Agency

Sens. Chris Dodd (D-CT) and Richard Shelby (R-AL)

Sens. Chris Dodd (D-CT) and Richard Shelby (R-AL)

Multiple media outlets are reporting that Senate Banking Committee Chairman Chris Dodd (D-CT) is considering dropping the proposal to create a new Consumer Financial Protection Agency (CFPA) from his regulatory reform bill. The CFPA has been the target of intense lobbying on the part of the banking industry, aided by Republicans and conservative Democrats, and according to Bloomberg News, Dodd “may agree to shelve the proposed agency…and replace it with a division within another federal agency to help advance the broader bill.”

Dodd’s reported deal would involve dropping an independent CFPA, in return for a beefed up consumer division within a bank regulator. According to American Banker, “sources pointed to the way the Office of the Comptroller of the Currency works with the Treasury Department. Though it is part of the Treasury, the OCC conducts its operations freely and is funded by assessments on the banks it regulates.”

If these reports are true, they are extremely troubling. The CFPA is one of the most important parts of the regulatory reform effort, and is meant to correct a deficiency in the current system, under which lots of agencies have consumer protection as part — but not the primary concern — of their missions. As Ezra Klein put it, “the whole point of the CFPA is that those other agencies tend to abandon [consumer protection] because it’s not core to their responsibility.”

We already have plenty of examples showing how consumers are forgotten by regulators with divided mandates. After all, the Federal Reserve was given consumer protection powers in 1994 that is simply never exercised. The Office of Thrift Supervision and the Office of the Comptroller of the Currency both have consumer protection responsibilities as well, but neither can credibly claim to have stopped banks from running roughshod over consumers.

“For years, the OCC has had the power and the responsibility to protect both banks and consumers, and it has consistently thrown the consumer under the bus,” said Harvard University Law School professor Elizabeth Warren. Federal Deposit Insurance Corp. Chair Sheila Bair confirmed yesterday that regulators were hesitant to rein in banks during the boom years, saying “it can be very difficult to take away the punch bowl when people are making money at it now.”

Mike Calhoun, the president of the Center for Responsible Lending, said that “we are skeptical that there is any structure other than a free-standing agency where the consumer regulator is not pressured by the same interests that produced the crisis that we are still trying to get out of.” Indeed, what would give a division housed within a bank regulator the power to overcome the inherent bias that regulators have shown toward banks and whatever practices they employ to make a buck? And if this division is really going to be so powerful that it can overrule the head of the agency in which it is housed, why not just break it out into its own agency?

At the end of the day, abandoning the CFPA may do wonders for expedience and getting some token Republican support for regulatory reform, but that is not worth once again relegating consumers to secondary status behind the financial titans.