Cruel 'Joke': Consumer Protection to the Fed?

WASHINGTON — A tentative deal struck between Senate Banking Committee Chairman Chris Dodd and Sen. Bob Corker, R-Tenn., to entrust consumer protection to the Federal Reserve Board left observers, including fellow lawmakers, more confused than enlightened, and raised critical questions.

The most discussed was why Dodd, who has assailed the Fed repeatedly for its failure to protect consumers, would reverse course. House Financial Services Committee Chairman Barney Frank called the idea a "bad joke."

But the more important question was whether the Fed would really be in charge.

Sen. Richard Shelby, the No. 1 Republican on the Senate Banking Committee, told reporters Tuesday that he feared the new consumer protection division would operate with little to no input from the central bank.

"If the consumer protection unit or bureau is put at the Fed, FDIC or anywhere else … a prudential regulator should have a say in any rule that could affect the safety and soundness of the banking system," the Alabama lawmaker said.

Shelby added that prudential regulators should "absolutely" have power to veto consumer protection proposals. The Dodd-Corker plan would allow regulators to appeal consumer protection rules to a new systemic-risk council, which could override them with a two-thirds vote, but Shelby said that idea "would be silly."

"I think they should have to have some power there, otherwise you are just creating something that runs amok," he said. "We are looking at it now. We will probably make some suggestions. … If you house something at the Federal Reserve you've got the board of governors and the chairman. The board of governors ought to have the control, or the chairman or the board of the FDIC if that's where it were housed."

The latest version of the Dodd-Corker proposal would let the president appoint a Senate-confirmed director of a consumer protection division that would have the power to independently write rules for all banks and nonbanks. Under the plan, the division could only enforce those rules against banks with assets of more than $10 billion and large nonbank mortgage lenders. Banks with assets of less than $10 billion would still be examined by their primary regulator, with some type of backstop authority given to the consumer division.

Though the other banking agencies would have to be consulted before the division promulgated new consumer rules, they would not have the power to block them unless there was a two-thirds vote of the systemic-risk council. The head of the consumer division would be placed within the Fed's office of the chairman. These details were not final and may change.

Confronted by reporters Tuesday, Corker would only say that "talks are continuing to go well."

But other Republicans echoed Shelby's concerns over how much autonomy any new consumer protection regulator will have.

Sen. Judd Gregg of New Hampshire, who is one of the strongest Fed supporters on the Banking Committee, sounded the most supportive, saying that he preferred the idea of a division within the Fed to a stand-alone agency but that the central bank should have some power over the division.

Sen. Mike Crapo, R-Idaho, said he hadn't seen any details but was surprised that the Fed was being considered. Sen. Mike Johanns of Nebraska said he is more concerned about giving a consumer division too much power than where it is housed.

"For me it is the scope and extent of their powers," Johanns said. "There has to be a limitation here on what this group does, otherwise you just have a growing bureaucracy — I don't want to go there. I don't think that's the right approach."

Democrats, meanwhile, sounded even less enthusiastic about the idea.

Many were appalled at the idea of giving consumer protection duties to the Fed. Frank and Dodd have both denounced the central bank for failing to use its authority to protect consumers prior to the crisis.

"I was incredulous," Frank told Politico on Tuesday. "After all the Fed bashing we've heard? The Fed's such a weak engine, so let's give them consumer protection? It's almost a bad joke. I was very disappointed."

Frank added that, "I wouldn't ask the House to pass that."

Sen. Chuck Schumer, meanwhile, didn't flat-out reject the idea, but he didn't sound pleased by it either. "In my 20 years of trying to get the Federal Reserve to properly protect consumers, it has been an uphill, and very often unsuccessful, battle," the New York Democrat said. "I am very leery of any consumer regulator being placed inside the Fed."

Sen. Jeff Merkley, D-Ore., a member of the Senate Banking Committee, also said he was "very concerned about it being in the Fed."

"Monetary policy has had the penthouse of the Fed; safety and soundness had the upper floors; consumer protection has been stuck in the basement," he said. "The question I would raise is why the Fed when it has been so woefully neglected."

Sen. Jack Reed, D-R.I., appeared willing to give a new division to the Fed, but rejected Republican arguments that the central bank — or any regulator — should be able to veto new consumer rules.

"That's prepared to repeat what happened in the past," Reed said. "To essentially have the consumer agency as a subset of the regulators, that's what we've had for the last several decades."

It was a point echoed by outside observers, who noted that the Fed already has a consumer protection division that is substantially separate from safety and soundness oversight. Other than giving the division a presidentially appointed director, it wasn't clear if there was any substantive difference.

"Call me crazy, but I already thought there was a consumer division at the Fed," said Cornelius Hurley, the director of the Morin Center on Banking and Financial Law at the Boston University School of Law. "I've been struggling to find out what would change other than the fact the president would appoint it."

To others, the proposal smacked of desperation. "They're looking for politically easy solutions," said William Isaac, a former FDIC chairman who is now chairman of LECG Global Financial Services.

Still, it was clear some lawmakers were at least willing to bite.

Sen. Evan Bayh, D-Ind., said he hadn't seen the details but that the potential for a compromise could be Democrats' best bet for enacting legislation.

"It may represent the best hope of actually getting something done," he said. "I disagree with those who say we would be in a better position in January or February to get a stronger bill. If you look at the upcoming elections the more likely outcome would be a weaker bill."

Sen. Jon Tester, D-Mont., said it didn't matter where the consumer protection division was, as long as it had adequate powers.

"If we can make consumer protection work, I don't care if it's in the Fed or wherever it might be, then let's see if we can do it and do it," he said.

Sen. Richard Durbin, the No. 2 Democrat in the Senate and an original co-sponsor of the stand-alone consumer agency idea, said he was willing to hear Dodd out.

"I'm open to what he comes up with," the Illinois lawmaker said. "We need a strong consumer protection agency. I'm open to what Chris has to say. I'm not going to rule it out, but at the end of the day it has to be strong."