WASHINGTON — Consumer advocates love the new consumer protection agency included in the financial industry overhaul that Senate Banking Committee Chairman Christopher Dodd, D-Conn., proposed this week.
"It's quite strong," said Edmund Mierzwinski, the consumer program director at U.S. Public Interest Research Groups, a federation of liberal state research groups. "A consumer-friendly bill," added Chuck Collins, a senior scholar at the Institute for Policy Studies, a liberal research center.
While their side has momentum and political clout right now, banking and business interests — as well as conservatives — are raising serious reservations, however.
Dodd's proposal, which is nearly identical to consumer-protection terms in Democratic legislation that's pending before the House of Representatives, would create a strong, independent Consumer Financial Protection Agency to oversee the sale and use of most financial products, such as mortgages and credit cards.
Dodd hopes that his committee, which has 13 Democrats and 10 Republicans, will begin writing a bill early next month.
Douglas Elliott, a fellow in economic studies at Washington's Brookings Institution, a center-left research center, liked the idea of a separate consumer financial protection agency, but with reservations.
"Existing regulators did a terrible job," he said. "And you can't just say OK, we'll change the people. There were also structural reasons" for the industry's problems.
Financial regulators tend to look more at preserving the safety and soundness of financial institutions, he said, and that often conflicts with consumer interests. However, Elliott added, a separate consumer agency could overreach and "sometimes over-regulate to protect consumers from all risks."
Opponents of a separate consumer agency agreed.
"The current debate should not be about more regulation, but smarter regulation," said David Hirschmann, the U.S. Chamber of Commerce's president for capital markets.
American Bankers Association spokesman Peter Garuccio argued that it's important for the same regulator to be able to consider an institution's safety and soundness as well as consumer interests.
"It's not a good idea to separate the two," he said. "Otherwise, you'll have this new (consumer) agency restricting or mandating practices without a complete picture of how it impacts the safety and soundness of an institution."
David John, a senior fellow at the Heritage Foundation, a conservative Washington research center, would prefer creating a consumer-protection council composed of representatives from current regulatory agencies. That would make it more sensitive to broader industry issues, John argued, rather than perhaps not understanding how consumer products fit into the overall financial services industry.
Such arguments, though, are heard only faintly so far. The White House is pushing for sweeping changes in the financial regulatory system, the House is expected to act next month and the Senate effort is being led by Dodd, who faces the toughest re-election campaign of his 29-year Senate career next year.
Dodd came under fire last year when it was revealed that he'd refinanced two home mortgages in 2003 by participating in a VIP program with now-defunct Countrywide Financial Corp. He was identified as a "Friend of Angelo," Countrywide Chief Executive Officer Angelo Mozilo.
The Senate Ethics Committee in August cleared Dodd of any wrongdoing, and found that being labeled a VIP or special friend got him no special deal.
However, committee members wrote, a program "with the name VIP should have raised red flags for you."
Dodd has received about $4 million in campaign contributions from the securities and investment industries so far in this Senate campaign cycle, which began in 2005, and another $849,244 from commercial banks, according to the Center for Responsive Politics, which studies campaign funding.
He's trailing former Rep. Rob Simmons, a Republican who leads the GOP primary field, by 49 to 38 percent in the Nov. 3-8 Quinnipiac University poll of 1,236 registered Connecticut voters.
Dodd says that his re-election challenge "has nothing to do with this" financial overhaul bill.
Dodd's proposed new consumer agency, which would replace the maze of regulators that deal with consumer protection now, would be led by a five-member board with an independent director.
The agency would have authority not only over financial institution practices that affect consumers but also over the shadow banking industry, such as mortgage brokers and payday lenders. States would be permitted to enact even tougher laws.
The House bill's terms are virtually identical.
"The House and the Senate are singing from the same songbook," said Reid Cramer, a financial services expert at the New America Foundation, a moderate to liberal Washington research group.
That frightens a lot of business interests; the bankers' Garuccio said the proposed consumer agency's mission was "ill defined."
However, Lauren Saunders, the managing attorney of the National Consumer Law Center's Washington office, said that the agency "really consolidates pieces of consumer protection (offices) and puts it into one place."
The proposed agency's oversight could focus on little-noticed practices.
"You might not recognize the changes," Cramer said, because they could involve barring institutions from charging high overdraft fees or selling mortgage products with low "teaser" rates that suddenly double.
Consumer groups are particularly pleased with how the agency probably would be funded through a combination of federal budget money and assessments on financial institutions.
"Dodd has set this up as well as possible," said Travis Plunkett, the legislative director of the Consumer Federation of America.
However, he and other consumer advocates are mindful of the experiences of two earlier federal consumer agencies: the Food and Drug Administration and the Consumer Product Safety Commission. Both have been in and out of favor with consumer interests over the years; often their missions have been strengthened or diluted depending on the politics of the day.
"You can't legislate will, and bad leadership trumps everything," Plunkett said.
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