Banking Industry Rushes To Support Giving Consumer Protection Powers To The Federal Reserve

Sens. Chris Dodd (D-CT) and Bob Corker (R-TN) are working on a regulatory reform proposal that, instead of creating an independent Consumer Financial Protection Agency (CFPA), would place a consumer protection division inside of the Federal Reserve. Several Democratic members of the Senate Banking Committee are pushing back on this idea, noting that the Fed has been a dismal failure with regard to its already existing consumer protection responsibilities.

“In my 20 years of trying to get the Federal Reserve to properly protect consumers, it has been an uphill, and very often unsuccessful, battle. I am very leery of any consumer regulator being placed inside the Fed,” said Sen. Chuck Schumer (D-NY). “Why put consumer protection back in the Fed after it’s been so woefully neglected?” asked Sen. Jeff Merkley (D-OR). Dodd himself has also said that the Fed was “an abysmal failure” when it came protecting consumers.

House Financial Services Chairman Barney Frank (D-MA) called the proposal a “bad joke.” And it’s not only Democrats questioning the idea. Sen. Mike Johanns (R-NE), who opposes creating an independent CFPA, noted that “a few days ago, the Fed was in some degree of disfavor. The talk was giving it less power, not more. So what an unusual phenomenon has developed over the last few days.”

But there is one group that is thrilled with the idea of the Fed keeping its power — the banks:

Banks say placing the agency with the Fed alleviates their concern that an independent entity would ignore the health of the financial system…Banking lobbyists say the Fed’s knowledge of the banking system makes it well-suited to coordinate rules on credit cards and other consumer financial products.

“Regulation of the products should be connected to the regulation of the bank,” said Scott Talbott, senior vice president of government relations for the Financial Services Roundtable, which represents the largest financial firms in the country.

The huge amount of support that banks are lavishing on the Fed should be telling. In a new letter to the Senate Banking Committee, six groups representing the financial industry are asking that the Fed not be stripped of any of its regulatory authority. Could it be because the Fed consistently sided with them and failed to crack down on their deceptive yet profitable lending?

As Demos’ Heather McGhee said, leaving consumer protection responsibilities with the Fed “would codify consumer protection’s secondary status in federal financial regulation.” “Consumer abuses were one of the root causes of the financial crisis and regulatory reform legislation should address this problem,” added Andrew Gray, a spokesman for FDIC Chairman Sheila Bair. “The FDIC has been on the record that the ideal way to do this is through an independent agency with the power to write rules for the banks and non-banks alike.”

Last year, commercial banks spent more than $50 million lobbying, “not to mention the money they donated, through PACs and individual donations, to candidates.” Will all that money buy them a reprieve from a new agency explicitly meant to prevent their worst practices?