The battle over a Consumer Financial Protection Agency

The CFPA: How a crusade to protect consumers lost its steam

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By Robert G. Kaiser
Washington Post Staff Writer
Sunday, January 31, 2010

At a time when the country is deeply divided over the proper role of government, what is Capitol Hill's appetite for a new, independent agency with broad power to police the financial industry and protect consumers from the risky lending practices that contributed so much to the financial crash of 2008?

Not as hearty as the Obama administration had hoped last year when it turned a Harvard Law professor's crusade for a Consumer Financial Protection Agency into a major element of its regulatory reform initiative. After months of tinkering, the House last month finally endorsed the creation of a CFPA, but the Senate Banking Committee hasn't found this particular ingredient to its liking.

Particularly worrisome for the White House: The disagreements over the proposed agency go beyond mere partisanship, echoing the enduring national debate over whether government intervention is more a solution or a problem. That debate has sharpened since the Democrats lost a Senate seat in Massachusetts last week, a result that suggested voter frustration with Obama's government-oriented approach.

Yet, in the wake of that defeat, Obama proposed new and stiffer controls on the size of big banks, a new complication that is likely to slow progress on the rest of the regulatory reform package.

The origin of the CFPA proposal may help explain why it has become so controversial. The idea for a new agency with broad powers to police the marketplace for borrowing -- mortgages, credit cards, payday loans and other forms of consumer credit -- came from a 2007 article that Harvard Law professor Elizabeth Warren wrote for Democracy, a liberal policy journal with a circulation of 5,000.

In June, the Obama administration adopted her concept for its package of regulatory reforms. Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) was an early supporter. He called consumer protection "our first priority" and urged approval of "an independent consumer protection agency whose sole focus is the financial well-being of consumers."

But Sen. Richard C. Shelby (R-Ala.), the banking committee's ranking Republican, said he wouldn't support the creation of an independent agency, calling it "a folly and dangerous" and an expression of the paternalism he thinks government should avoid. Yet Shelby, who likes to call himself "something of a populist," also said he favored new consumer protections. "Consumers are not likely to participate in our markets . . . unless they know they are protected against fraud and unfair dealings," he said last summer.

Ultimately, agreement between Dodd and Shelby is the only obvious route to a bipartisan deal. In recent days, according to Senate sources, they have been discussing alternatives to an independent agency as part of an overall compromise.

Dodd, according to the sources, is willing to consider a consumer protection office under a presidential appointee within an existing agency. He also wants consumer protection to have a dedicated source of funding to better insulate it from budget pressures, with regulators empowered to write and enforce new rules on non-bank institutions such as mortgage brokers.

An advocate and her crusade

Compromise wasn't part of Warren's agenda when she floated the CFPA idea in 2007, more than a year before the crash. At the time, she was a crusading outsider with an outside-the-box idea who then found important Democratic allies in the White House and Congress. Since November, she has headed the congressional oversight panel established to monitor the federal bailout of the U.S. banking industry. Senate Majority Leader Harry M. Reid (D-Nev.) named her to that job.

She unabashedly favors a restructuring of the relationship between lenders and borrowers. Why not be as tough on financial products as the government is on dangerous consumer goods? she asked.

"It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house," she wrote in Democracy. "But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street -- and the mortgage won't even carry a disclosure of that fact to the homeowner."


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