New Senate Bill Would Strip Fed of Credit Card Oversight

By Eva Norlyk Smith, Ph.D.

Senator Christopher Dodd, the head of the Senate Banking Committee, on Tuesday introduced new legislation, which aims to strengthen consumer protections by creating an independent watchdog agency to oversee financial products, including credit cards and mortgages.

If passed, the bill would strip the Federal Reserve of its powers as the primary financial regulator, and take away bank-supervising responsibilities from the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC).

The Senate bill proposes to instead establish an independent Consumer Financial Protection Agency, whose sole role would be to protect consumers from fraudulent and deceptive financial practices, and make sure consumers get clear disclosures about financial products, including credit cards, mortgages, and other types of loans.

By creating a single watchdog agency, the Senate bill aims to eliminate the current issues arising from the fact that several agencies share responsibility for regulatory oversight. This often makes it difficult to determine which agency is responsible for what, particular when new issues arise, which haven’t been previously tackled by any of the regulatory agencies.

In the press release accompanying the proposal, Senator Dodd comments that the credit crisis and the resulting economic downturn was driven by an across-the-board failure to protect consumers, and states that the new bill aims to restore confidence among Americans in the regulatory system. Taking direct aim at the Fed, Dodd further notes that the Federal Reserve “has repeatedly failed to act despite repeated demands from Congress.”

“When consumer protections are handled by regulators whose primary responsibility is to safeguard the profitability of the companies they regulate, consumer protections don’t get the attention they need,” Dodd notes in the statement. “The result has been unfair, deceptive, and abusive practices being allowed to spread unchallenged, nearly bringing down the entire financial system.”

The new Consumer Financial Protection Agency would consolidate consumer protections currently handled by several regulatory agencies into one, independent commission led by a 5-member board. It would centralize the rule-writing, supervision, and enforcement of consumer protections, and the new watchdog agency would have extensive powers to look into and pursue financial abuses. In particular, the agency would be proactive and have the powers to address bad business practices, without having to wait for Congress to pass new consumer protections.

The bill also proposes to create a new Office of Financial Literacy and introduce regulations for the shadow banking industry, such as mortgage brokers and payday lenders. The bill also seeks to create tighter regulatory oversight for credit rating agencies, executive pay, hedge funds, over-the-counter derivatives, and mortgage-backed securities.

In a news conference, Dodd said that he is expecting debate on the new bill to begin in the Senate Banking Committee in early December. The bill is not expected to gain support from Republicans, and it is unlikely that any version of the bill will be passed by the Senate until sometime in 2010.

Two other proposals for overhauling the financial regulatory system are in the works, the Obama administration and the House are both working on bills, which would introduce a less far-reaching overhaul of bank supervision. The Dodd proposal is in line with a proposal introduced by the Obama administration to create a Consumer Financial Protection Agency that would regulate financial products, including credit cards and mortgages, but it departs from the proposals of both the House and the Obama Administration in its aim to radically consolidate banking regulatory agencies.

Published: November 12, 2009