WASHINGTON — Federal bank regulators sparred before Congress on Friday, trying to maintain their current powers as the Obama administration seeks to strip them of the authority to regulate consumer credit and give it to a new watchdog agency.
The heads of the Federal Reserve, the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the Office of the Comptroller of the Currency all testified for and against portions of the administration's complex proposals to revamp the regulation of the financial sector with an eye toward protecting consumers.
These agency chiefs took a back seat to Treasury Secretary Timothy Geithner, who testified ahead of them and warned that their concerns reflected agencies interested in guarding turf.
"They are not enthusiastic about giving up that authority," Geithner told the House Financial Services Committee. "They are doing what they what they should, which is defend the traditional prerogatives of their agencies."
Geithner proposes creating a Consumer Financial Protection Agency, which would have the power to write and enforce rules governing consumer credit, including mortgages, credit cards and payday loans. His reasoning? At least seven or eight federal agencies had some responsibility for protecting consumers from fraud and predatory lending and failed to do so adequately.
Weakened lending standards and poor policing of Wall Street allowed for an explosion of consumer credit earlier this decade. This led to a collapse of home prices, record credit card defaults and a global financial crisis.
Federal Reserve Chairman Ben Bernanke, whose predecessor, Alan Greenspan, failed to tighten rules on mortgage lending during the housing boom, argued Friday that the writing of rules for consumer credit should remain in the hands of an experienced Fed.
"In the last three years, the Federal Reserve has adopted strong consumer protection measures in the mortgage and credit card areas. These regulations benefited from the supervisory and research capabilities of the Federal Reserve, including expertise in consumer credit markets, retail payments, banking operations, and economic analysis," Bernanke said in prepared remarks. "Involving all these forms of expertise is important for tailoring rules that prevent abuses while not impeding the availability of sensible extensions of credit."
FDIC Chairman Sheila Bair, whose agency protects bank deposits, didn't much care if the Fed lost its powers to write the rules but suggested that enforcement shouldn't be farmed out to a new consumer watchdog agency.
"By freeing the CFPA from direct supervision and enforcement of depository institutions, the CFPA would be able to focus its examination and enforcement resources on the non-bank financial providers that provide financial products and services that have not previously been subject to federal examination and clear supervisory standards," she said in detailed prepared remarks.
Those non-bank players are mortgage brokers and non-bank lenders such as the now-defunct New Century Financial Corp. Both were behind the surge in subprime mortgages, which were given to the weakest borrowers and have since imploded. Both were mostly regulated, albeit spottily, on the state level thanks to enforcement gaps.
Republicans warn the proposed new agency would be given "draconian" powers that could leave it lording over the private sector.
Rep. Barney Frank, D-Mass., the committee chairman, dismissed those concerns Friday as hyperbole and called the agency heads appearing before his panel "born-again consumer protectors." He repeated the need for a revamping of the current regulatory structure.
Legislation to this effect will not move until after the August recess, Frank confirmed Friday.
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