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Financial reform bill hangs on consumer protection

By Brady Dennis and Binyamin Appelbaum
Washington Post Staff Writer
Friday, February 26, 2010; A17

Liberal senators and advocacy groups cautioned Thursday that they would not support a compromise on financial reform legislation unless it sufficiently empowered a proposed federal regulator to protect consumers of mortgages, credit cards and other loans.

The chairman of the Senate banking committee, Christopher J. Dodd (D-Conn.), and the White House have moved away from insisting on a stand-alone consumer protection agency, which is strongly opposed by Republicans and some moderate Democrats.

Instead, Dodd is attempting to negotiate the creation of a new consumer protection department within an existing agency. One possibility is the creation of a single banking regulator with two divisions -- one responsible for protecting consumers, the other for ensuring the safety and soundness of banks.

That idea has raised concerns among Democrats who fear that banks would have the upper hand under such a model. They note that it closely resembles the current arrangement, in which banking regulators responsible for both jobs have often neglected consumer protection.

"If a structure is in place that ensures that financial firms will not be able to deploy tricks and traps while regulators look the other way, that will be a big step forward," said Julie Edwards, spokeswoman for Sen. Jeff Merkley (D-Ore.), a member of the banking committee. "However, what we have seen in the past is that when the mission is split, so is the attention. And consumer protection tends to take the backseat. We need an agency that will see protecting consumers as its number one priority."

Staff members for at least three other Democratic senators also said their bosses' support for the legislation depends on whether the new consumer regulator would have enough power to write and enforce tough rules.

Meanwhile, consumer advocates ramped up their rhetoric, urging Dodd and administration officials to stand firm.

"There is real danger that the rules could get even worse if there isn't an independent watchdog with real teeth," said Elizabeth Warren, chair of the Congressional Oversight Panel, which is monitoring the federal bailout of the financial industry.

Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group, said consumer advocates were holding out for an agency with an insulated funding source and an independent leader not beholden to another regulator. "We are looking for an independent agency, not something that is subservient to any other regulator, any other person," Mierzwinski said.

The Obama administration said that it continues to share those goals. "Our top priorities on CFPA are ensuring the bill includes independent appointment, an independent budget, and an independent ability to set and enforce clear rules of road to protect American families," White House spokeswoman Jen Psaki said.

Conservatives, meanwhile, warned that their support could be lost if Dodd only agrees to cosmetic changes.

"This new proposal is nothing more than a wolf in sheep's clothing," said Ryan McKee, senior director of the Chamber of Commerce's Center for Capital Markets Competitiveness. "Putting the CFPA within a federal agency and giving it the same regulatory authority as a stand-alone agency would not fix our broken system and would still harm consumers' and businesses' accessibility to credit."

Efforts to complete a Senate version of the reform legislation that passed the House in December seem to have gathered steam in recent days. Negotiations between Dodd and Sen. Bob Corker (R-Tenn.) have progressed on key issues, and staff members hammered out a working draft of the measure last weekend. On Thursday, Treasury Secretary Timothy F. Geithner summoned officials from eight trade groups representing the financial industry to a meeting and offered a central message: Let's find a way to get a worthwhile bill finished.

Industry representatives who attended the meeting said they shared that goal.

"We all supported the idea that it should be enacted as quickly as possible," said American Bankers Association President Edward Yingling, who attended the meeting. "There is a need for certainty in the markets and for individual firms."

But the idea that something must be done on regulatory reform appears to have far more support than any particular proposal. In addition to the debate over consumer protection, senators still must resolve whether the Federal Reserve will retain supervisory authority over certain financial companies.

To reduce the number of remaining roadblocks, the updated bill Dodd plans to release next week will be a slimmed-down version of his initial draft last November, said congressional and industry sources. They added that the restructured bill could set aside proposals regarding corporate governance, investor protections and securities issues.

"I do expect it to be narrower," said one Senate aide. "This is still a massive undertaking."

Dodd turned to Corker after negotiations with the committee's ranking Republican, Sen. Richard C. Shelby (R-Ala.), twice hit dead ends. But staff members said Thursday that Dodd and Shelby have re-engaged in discussions over the financial overhaul. A spokesman for Shelby said the men had met as recently as Wednesday night "and will continue to seek common ground."

Staff writer David Cho contributed to this report.

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