REPORT: A Closer Look At Consumer Protections In Dodd’s Financial Reform Bill

This post was co-written by David Min, Associate Director for Financial Markets Policy at the Center for American Progress Action Fund, and Pat Garofalo.

After months of intractable negotiations with Republicans that went nowhere, and growing impatience from Americans irate that regulatory reforms for Wall Street still had not been completed, Sen. Chris Dodd (D-CT) today introduced his latest financial reform bill. Consumer advocates are approaching the bill with caution, as the proposal lacks a stand-alone Consumer Financial Protection Agency (CFPA), such as was proposed by the Obama administration and passed by the House of Representatives.

The Dodd bill instead creates a Bureau of Consumer Protection inside of the Federal Reserve, which has been heavily criticized for its past regulatory failures and for a culture that is seen as apathetic or even antagonistic to the concerns of consumer protection. Much like West Berlin during the Cold War, the Dodd Bureau would be surrounded by a hostile culture, and the loss of even one element of its independence could cause its downfall.

So the key is whether the new Bureau will it be sufficiently empowered and isolated from that hostile culture to be effective. Longtime consumer protection advocate Elizabeth Warren has listed four criteria for an effective consumer financial protection regulator: 1) an independent director appointed by the President and confirmed by the Senate; 2) independent budget authority so it is not prone to the whims of the appropriation process; 3) independent rule-making authority; and 4) independent enforcement powers.


A close reading of the Dodd bill shows that his Bureau largely meets these tests (and, in fact, Warren has cautiously praised the new bill). Here is how Dodd’s Bureau compares to the CFPA included in the financial reform bill passed by the House last year and the Obama administration’s initial financial reform proposal.

ProvisionSenate Bureau of Consumer ProtectionHouse Consumer Financial Protection AgencyAdministration Consumer Financial Protection AgencyPresidentially Appointed DirectorYes, confirmed by the Senate.Yes, confirmed by the Senate.Yes, confirmed by the Senate.Independent source of fundingYes, from the Federal Reserve Board budget.Yes, from the Federal Reserve Board budget.Yes, with fees on “entities and transactions” within the financial system.Rule-making AuthorityWrites rules, but rules can be vetoed by a two-thirds vote of a newly created council of bank regulators.Full rule-making authority.Full rule-making authority.Covering Non-Bank Financial FirmsRules apply to all banks, non-bank home lenders, and other “significant” non-banks.Rules apply to all banks and non-banks, with some select exemptions (auto dealers, for example)Rules apply to all banks and non-banksEnforcement AuthorityOnly enforces rules for banks with more than $10 billion in assets. All others are overseen by their current regulator.Only enforces rules for banks with more than $10 billion in assets. All others are overseen by their current regulator.Full enforcement responsibilities.

Unfortunately, because the Bureau is going to be housed in the Fed, it is going to need every single one of those robust independence measures to ensure that it is not co-opted by a larger regulatory body that hasn’t historically been sympathetic to consumer concerns, and which is already dealing with a number of other major missions, including being designated the primary systemic risk regulator. In this environment, it is easy to see how a Fed-dominated Bureau would be ineffective.

Dodd’s Bureau as currently constructed is a good one, but if any of its key features are watered down, even a tiny bit, it will quickly become a bad proposal. So why go through all of these bells and whistles to establish independence for a Bureau within the Fed? Why not just establish a stand alone agency? And at the end of the day, how many Republican votes have been won by putting the Bureau within the Fed?


President Obama said Dodd’s bill “provides a strong foundation to build a safer financial system,” and Treasury Secretary Tim Geithner called it a “strong bill.”