The proposed Consumer Financial Protection Agency, a key feature of the new financial overhaul legislation currently being negotiated in the U.S. Senate, may be about to get the axe, according to the Wall Street Journal. The watch dog agency was originally proposed to protect consumers from deceptive practices in the marketing and servicing of credit cards, mortgages, and other types of financial products.
As part of reaching a deal in the ongoing panel negotiations about financial reform, Sen. Chris Dodd (D-Conn), chairman of the Senate Banking Committee, is said to be leaning towards dropping the proposed financial watch dog agency. A key priority of the Obama administration, the proposed agency were to take over key consumer protection responsibilities currently handled by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and other federal agencies.
The Senate bill aims to address the current limitations in regulatory oversight, which are thought to have contributed to the credit crisis debacle in the fall of 2008, which led to the current economic recession. In particular, the Federal Reserve has been criticized for being lax in discharging its regulatory duties; many analysts attribute the financial meltdown of 2008 and early 2009 to insufficient oversight by the Federal Reserve.
“An institution assigned too many roles cannot fulfill them all well,” Senator Dodd said in a blog post in December, around the time the new bill was announced. “We must . . . . develop an architecture for financial regulation that can better predict and prevent the next crisis. Loading up the Federal Reserve with too many responsibilities dilutes attention from its core duties and exposes it to dangerous politicization that threatens its independence.”
In a testimony to a Congressional committee last summer, Travis Plunkett, legislative director of the Consumer Federation of America, charged that the Fed has failed to protect consumers in several ways over the last two decades. According to Plunkett, the Fed failed to step in early enough to halt the predatory lending practices, which contributed to the subprime mortgage meltdown in the second half of 2008. Plunkett also charged that the Fed failed consumers by not curbing unfair credit card practices and by allowing credit card debt to balloon. In particular, the Fed stayed by the sidelines as card issuers aggressively expanded into high-risk, low-income populations; a group of consumers, which tend to have less financial literacy and therefore are more liable to end up struggling with high-interest credit card debt.
The aim of the Consumer Financial Protection Agency was to create one central body with powers to address those issues as well as numerous others deceptive financial practices involving how financial services are marketed and sold to consumers. The proposed agency has long been heavily opposed by banking lobbyists and Republicans, including Senator Richard Shelby, the top Republican on the Banking Committee.
According to the Wall Street Journal, Dodd may agree to a bill, which proposes strengthening the consumer protection powers of other agencies, or creates a consumer protection division within one federal agency.
The bill currently under negotiation in the Senate banking committee also contain provisions to regulate derivatives oversight and institute measures that will prevent a repeat of the near-systemic failure, which threatened to bring down the entire economy in the aftermath of the credit crisis debacle.
