Yesterday, the Senate was supposed to start voting on amendments to Sen. Chris Dodd’s (D-CT) financial reform bill, but the show was held up as Dodd and Sen. Richard Shelby (R-AL) worked out their differences on the $50 billion resolution authority fund that Dodd favored, but that Republicans have focused a hefty amount of (unjustified) criticism upon.
Dodd ended up dropping the fund, and since their talking point about “permanent bailouts” has been rendered moot by the deal, Republicans are going to have to find something else on which to focus their efforts. To that end, Shelby, with the backing of Minority Leader Mitch McConnell (R-KY), has been working on a consumer protection amendment that the GOP will offer as a substitute to Dodd’s proposal creating a Bureau of Consumer Financial Protection within the Federal Reserve.
The Wonk Room has obtained both the legislative language and a one-page primer that Republicans have put together on the amendment. The proposal involves creating a new consumer protection division within the Federal Deposit Insurance Corp., with an independently appointed director. But the real problem with the proposal is who the new division would have authority over:
The Division will have primary supervision and enforcement authority over large non-bank mortgage originators, and other financial services providers who have violated the consumer protection statutes. Primary supervision and enforcement for our nations’ banks, thrifts and credit unions will remain with their primary prudential regulator.
Politically, the Republicans are making a smart move in suggesting that the consumer protection division be housed in the FDIC, since it has a well-deserved reputation for watching out for consumers, as opposed to the Fed, which has a well-deserved reputation for ignoring consumer protection entirely.
But by limiting the division’s enforcement power to “large non-bank mortgage originators,” the GOP exempts nearly the entire financial system. Under this plan, the division can’t take any enforcement action against commercial banks, investment banks, credit card companies, car dealers, payday lenders, and non-banks that sell financial products other than mortgages (such as AIG). It can’t take any action against the worst actors in terms of firing up the subprime machine, like Washington Mutual or Countrywide.
In fact, Section 1024 of the legislation makes it abundantly clear that the division would be powerless to do anything to rein in an actual bank that was using predatory financial products. I’m actually hard pressed to think of a single financial company that fits the definition the GOP has set out, as all the large non-bank mortgage originators went bust when the subprime bubble burst. Instead, the traditional bank regulators will be relied upon for enforcement, despite their terrible track record.
At least the GOP has ceded that creating a consumer protection council, or some other coalition of bank regulators, would be worthless in terms of real consumer protection, and has chosen to support a new entity with an independently appointed director and its own budget. But this amendment is not a serious attempt to deal with the status quo in our financial system, which is that consumer protection takes a very obvious back seat to the ability of banks to earn heaps of money.