Compromise would shield payday lenders, pawnbrokers and car dealers from oversight

By Binyamin Appelbaum
Washington Post Staff Writer
Thursday, March 11, 2010

Payday lenders, pawnbrokers, car dealers and other companies that make loans but do not hold bank charters would be shielded from the scrutiny of a proposed federal consumer protection regulator under the terms of a tentative compromise between senators who are attempting to craft a bipartisan bill.

Under the proposal, the regulator would hold broad authority to write rules protecting borrowers, but officials would make regular compliance checks only at banks and, for the first time, at mortgage lenders, a step that still would exclude some of the nation's largest and most controversial lending industries.

The Obama administration has pushed to place nearly all lenders under federal oversight for the first time, but Sen. Bob Corker (R-Tenn.) insisted on limiting the scope of the proposed consumer regulator as a condition of his negotiations over a broader package of regulatory reforms with Sen. Christopher J. Dodd (D-Conn.), the chairman of the banking committee, according to several people familiar with the negotiations.

Republicans argue that there is no reason for increased oversight, at considerable expense, of industries that played no role in the financial crisis.

But the proposed exclusion of those industries has drawn opposition from an unlikely alliance of consumer advocates and banking trade groups, who argue that the government should impose equal stringencies on all lenders, banks and non-banks alike.

"The point of the agency is to provide a cop on the beat that focuses where the problems are, not a cop that's fenced off from some of the worst actors," said Elizabeth Warren, a Harvard Law professor who helped to shape the administration's proposal for the new agency.

Even the Defense Department has chimed in, sending a letter to the Treasury Department urging oversight of auto lenders because of a pattern of abusive lending to military personnel.

"We believe the intervention of the [Consumer Financial Protection Agency] in overseeing auto financing and sales for service members will help protect them and will assist us in reducing the concerns they have over their financial well-being," Defense Undersecretary Clifford Stanley wrote in a letter dated Feb. 26.

Corker said in an interview Wednesday that he wanted to adopt a more consistent approach than the financial reform legislation passed by the House in December, which excluded some kinds of lenders, including auto dealers and pawnbrokers, from the new agency's jurisdiction.

"The House had all kinds of carve-outs," he said. "We wanted to take a more consistent approach, to make rule-making apply across the entire financial industry."

A Dodd spokeswoman declined to comment beyond noting that negotiations are still in progress.

Dodd's efforts to push reform legislation through the Senate continue to depend on his ability to command the support of at least some Republicans, which has forced him to seek a compromise with Corker on the shape of the new consumer regulator.

The key remaining issue is how differences should be resolved between the consumer regulator and agencies charged with keeping banks in good health. One proposal would create an appeals board, in part composed of other regulators, to resolve conflicts.

On other major issues, the outlines of a deal already are in place. The regulator would be led by a presidential appointee with independent funding and probably placed inside the Federal Reserve. It would have authority to write rules that apply to most lenders, consolidating powers now held by many agencies.

Under current law, only banks are subject to regular examinations for compliance with those rules. The Federal Trade Commission holds broad authority to pursue evidence of abuse by non-bank lenders, but it lacks the mandate and resources to conduct examinations. Corker's proposal, which Dodd accepted several weeks ago, would empower the new consumer regulator to examine mortgage lenders other than banks.

Aides to Sen. Richard C. Shelby of Alabama, the ranking Republican on the banking committee, proposed extending examination authority solely to the largest mortgage lenders during talks with Dodd's staff earlier this year. Dodd and Corker hammered out their compromise after those talks broke down. The deal also includes a provision that would allow the consumer regulator to seek oversight of particular companies or industries if it could show a pattern of consumer complaints or abuse.

Banking groups generally exert tremendous influence on Capitol Hill, and they are pressing senators to reconsider.

"These non-banks are making the same kinds of loans, they're dealing with consumers with a lot of the same types of products," said Steve Verdier of the Independent Community Bankers of America. "That proposal to cover the banks and the mortgage banks is fighting the last war. We don't know where the next problem is going to be, and if we leave a loophole open, we know it's going to happen somewhere else and the consumers are not going to be protected."

But opponents of increased regulation have pressed their case effectively.

Ed Tonkin, chairman of the National Automobile Dealers Association, said the practices cited by the Defense Department are already illegal.

"Creating new regulatory mandates on top of the numerous federal and state requirements that already govern auto financing will only drive up costs, limit vehicle financing options and, for many consumers, effectively eliminate their ability to obtain financing to meet their vehicle needs," Tonkin said.

Staff writers David Cho and Brady Dennis contributed to this report.

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