WASHINGTON — The Senate, with a strong push from the White House, rejected 61-38 on Thursday a Republican-led effort to dilute strong new protections for consumers who face problems with mortgages and other forms of credit.
The bill to overhaul U.S. financial regulation, written largely by Democrats, would create a new consumer finance protection agency. Republicans argued that the agency would have broad, dangerous power to dictate how small businesses operate.
"This is a massive new grant of authority that should give every American pause," contended Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee.
President Barack Obama argued otherwise, however, saying in a statement that the GOP effort would "gut consumer protections and is worse than the status quo."
Under the bill, the consumer protection agency would be housed at the Federal Reserve and would operate independently. Republicans instead wanted it placed inside the Federal Deposit Insurance Corp., which would approve any consumer-agency rules, which then would be enforced by bank regulators. Democrats said that would severely limit the consumer agency's clout.
Republicans said the consumer-protection agency would be lethal to small business.
"This is a bad, bad idea," Shelby said. "This is an incredible expansion of the government's reach without any basis in the current crisis," he charged, maintaining that dentists, car dealers and others would have to deal with new mounds of paperwork — and a new obstacle to raising capital.
Eleven groups, including the U.S. Chamber of Commerce, the National Retail Federation and the National Federation of Independent Business, circulated a letter to senators Thursday outlining their objections.
The bill's provisions, the letter charges, "would sweep a broad swath of our member companies into new regulations, new examination and supervisor requirements.''
Senate Banking Committee Chairman Christopher Dodd, D-Conn., called that argument without merit. The bill says the consumer bureau can't make, enforce or oversee any rule "with respect to a merchant, retailer or seller of nonfinancial goods or services that is not engaged significantly in offering or providing consumer financial products or services."
Shelby protested that "what Democrats won't tell you is that the word significantly is not defined."
Dodd disputed the idea that the new agency would affect most small businesses. "Nothing could be further from the truth," he said.
According to Banking Committee spokeswoman Kirstin Brost, "Extending credit is not enough" to be covered by the new law. "Extending credit would be incidental to the business of the orthodontist, the butcher or the local grocery store. But if your company makes big profits by making loans and collecting interest, they would be covered."
All 57 Senate Democrats, as well as two independents and two Republicans, Charles Grassley of Iowa and Olympia Snowe of Maine, voted against the GOP proposal to house the agency within the FDIC.
On another amendment, senators voted 98-0 to help smaller banks, allowing them to pay less than larger institutions do into the FDIC's ailing insurance fund. The fund, used to compensate depositors in failed institutions, has been drained recently because of the banking industry's troubles.
The change added to the legislation Thursday would base assessments on assets instead of deposits, a formula that should have larger institutions paying more.
The measure, said sponsor Sen. Kay Bailey Hutchison, R-Texas, "will put into the law that the FDIC deposit insurance will be based on a standard that levels the playing field for community banks, so that big banks don't have an advantage over our community banks.
"It is our community banks that are giving the loans to businesses throughout the country."
The FDIC insures deposits up to $250,000, and community banking officials estimated that the amendment adopted Thursday should lower premiums for most smaller banks.
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