Senate Banking Committee Chairman Chris Dodd (D-CT) has decided to float 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. The move seems aimed at garnering some Republican support for regulatory reform, since the proposal comes from Sen. Bob Corker (R-TN), but Dodd is now starting to receive some pushback from other Democrats.

Until yesterday, Dodd had been rightly critical of the Fed’s utter neglect of its consumer protection responsibilities, calling it “an abysmal failure,” and noting that “for far too many years, far too many risky and abusive subprime loans were made.” Other Democrats evidently still feel the same way:

– Sen. Chuck Schumer (D-NY): [I]n 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.

– Sen. Sherrod Brown (D-OH): We’ve seen in the past that it hasn’t worked when consumer protection is not primary for any agency, for any group, that it get shuttled aside.

– Sen. Jeff Merkley (D-OR): The question I would raise is, why the Fed? Why put consumer protection back in the Fed after it’s been so woefully neglected?

I asked earlier today whether Dodd was expecting House Financial Services Chairman Barney Frank (D-MA) to go along with his plan, after Frank worked very hard to get an independent CFPA through the House over opposition from Republicans and conservative Democrats. The American Prospect’s Tim Fernholz tracked Frank down, and it turns out that he is not pleased:

“I don’t like it. On the consumer agency think it is much too weak; when I heard it would be lodged in the Federal Reserve, I thought it was a bad joke,” Frank says. “The limitations over the powers, and the [exclusion of] pay day lenders — I’m not happy with what I’ve seen so far…“If the Senate were to send us what I’ve seen so far, I wouldn’t bring it it to the House [floor],” Frank says.

Schumer, Merkley, and Brown are all on the banking committee, where Dodd’s bill has to clear its first hurdle, so it’s unclear how Dodd envisions this moving forward. Plus, the committee’s ranking member, Sen. Richard Shelby (R-AL), said putting a consumer protection division within the Fed would be akin to “moving the Department of Agriculture to the Pentagon and housing it over there and yet be autonomous.” In one final complication, Sen. Jack Reed (D-RI), yet another banking committee member, has promised to propose an amendment on the Senate floor creating a strong CFPA, if Dodd somehow gets his bill out of committee.

Today, Sen. Jim Bunning (R-KY) continued his stand against a bill that would temporarily extend unemployment benefits that expired over the weekend, once again objecting to a unanimous consent motion to move the bill forward. Bunning has been receiving heat not just from Democrats in Congress, but from the press about his stand, so he took to the Senate floor to try to respond to those wondering why this particular bill is the one that he decided to throw himself in front of:

The question I’ve been asked mostly is ‘why now’? Well why not now? What better time for it than to stand up when the Majority Leader has the ability to do exactly on this bill what he has done on 25 bills in the last five months. File cloture, fill the tree, and vote yea or nay. Get the sixty votes, pass the bill, and extend these temporary benefits.

Watch it:

So instead of relenting, Bunning would prefer that Reid file for cloture, which turns what should be a short process into one that takes days, with at least 30 hours of debate. And of course, there are plenty of reasons for “why not now” when it comes to blocking benefits. For one thing, over the weekend, 400,000 workers lost their unemployment benefits, at a time when there are six unemployed workers for every job opening. Another 1.1 million workers will lose their benefits this month.

But its not only unemployment benefits that Bunning is obstructing. The bill also included an extension of highway funding, which means that 2,000 federal highway workers are currently furloughed and construction projects across the country have halted. The bill also included a provision to prevent a 21 percent cut in Medicare payments to physicians as well as money for the Federal Flood Insurance Program. The Des Moines Register noted that Bunning’s blockage of flood insurance comes just “days after the National Weather Service warned that all of Iowa is at risk for ‘significant flooding.’”

Several Republicans — including Sens. Bob Corker (R-TN), John Cornyn (R-TX) and Jeff Sessions (R-AL) have supported Bunning’s filibuster — but today, Sen. Susan Collins (R-ME) admonished Bunning “on behalf of numerous members of the Republican caucus who have expressed concerns.” Watch it:

Today, the Lexington Herald-Leader, from Bunning’s home state of Kentucky, said that Bunning’s stand “shows callous contempt for the more than one in 10 working Kentuckians whose jobs disappeared in the economic meltdown.” CNN today “tried to get Bunning to comment more extensively on the controversy but the senator emphatically declined.” But, hey, at least he didn’t flip anyone off this time!

After weeks of going back and forth, members of the Senate Banking Committee are reportedly close to crafting a compromise regarding the creation of a Consumer Financial Protection Agency (CFPA). Instead of forming a new independent agency — which was the Obama administration’s proposal and included in the regulatory reform reform bill passed by the House last year — the compromise entails placing a new consumer division inside the Federal Reserve.

The Republican-initiated proposal was crafted by Sen. Bob Corker (R-TN), who has been negotiating with Banking Committee Chairman Chris Dodd (D-CT), and it constitutes a complete turnabout from the Fed bashing that has occurred in the Senate for the last year. Anti-Fed sentiment led to Chairman Ben Bernanke receiving the most votes against confirmation in Fed history, yet now a bunch of senators want to turn to the Fed to protect consumers.

However, the problem with the proposal is that the Fed has had consumer protection responsibilities for years, which it has completely neglected. And Dodd has forcefully acknowledged this, calling the Fed an “abysmal failure” when it came to protecting consumers:

“I really want the Fed to focus on its core enterprise and do what it was designed to do, which is monetary policy,” Dodd said. “We saw over the last number of years when they took on consumer protection responsibilities and regulation of bank holding companies, it was an abysmal failure.” [11/20/2009]

“[The CFPA] will take on the consumer protection rulemaking authority currently held by the Federal Reserve, which failed for over 14 years to put an end to the predatory mortgage lending practices that led to the financial crisis.”[6/11/2009]

In a statement, Dodd said federal law “requires the Federal Reserve to write rules to protect home borrowers from unfair or deceptive practices”…”For far too many years, far too many risky and abusive subprime loans were made without a reasonable analysis of the borrower’s ability to repay the loan.” [5/17/2007]

Corker also used to recognize that the Fed is a failure in terms of consumer protection, saying “‘sometimes it’s very difficult for the Fed’ to penalize lenders because Fed examiners work at the banks’ offices every day and can become co-opted.”

To review the history, the Fed was granted the ability to police mortgage lending in 1994, but it wasn’t until September 2006 that the Fed finally released its Guidance on Nontraditional Mortgage Product Risks, which is only a list of suggestions and not a ban of the most pernicious lending practices. In 2004, the Greenlining Institute warned the Fed that “unscrupulous” lending practices were spreading, and in 2005, Federal Reserve Board governor Edward Gramlich tried to warned his colleagues “of the decline of lending standards and the dangers that this posed.”

Despite all this, the Fed did nothing. Even Former Fed governor Frederic Mishkin has said that “the Federal Reserve should give up its role as a consumer protection regulator…The skills and mindset required to operate as a consumer protection regulator is fundamentally different from those required by a systemic regulator.”

So why is Dodd turning to the Fed as the best location for an enhanced consumer protection division? And does he think that House Financial Services Chairman Barney Frank (D-MA), who pushed very hard to get an independent CFPA through the House, will go along with this plan? While it may lead to political expedience (though even that is questionable, as Banking Committee ranking member Richard Shelby (R-AL) is a well-known Fed skeptic), this new proposal certainly does not seem like the best deal for consumers.