Feature

Issue of the week: A watchdog for financial consumers

The idea of an independent agency that would protect consumers from predatory lending may be jettisoned in favor of one that would become a part of the Federal Reserve.

The score so far looks like this: “Bankers one, consumers nothing,” said John Schoen in MSNBC.com. More than a year after risky bets on mortgages and other loans brought the financial system to the brink of collapse, Congress is drafting a new set of rules for banks and other lending institutions. The new rules are meant to achieve two clashing goals: protecting consumers while maintaining the banks’ freedom to take risks. And the banks are getting the better of the contest. With the help of their army of lobbyists, the banks have beaten back all attempts to set up an independent agency that would crack down on predatory lending practices and stop banks from using government-guaranteed deposits to make speculative financial bets. Senate Banking Committee Chairman Christopher Dodd of Connecticut is now set to introduce a bill that jettisons “the idea of a new, standalone agency” and instead proposes “gluing the new agency” to the Federal Reserve, which has overseen the banking system for the past century.

Once again, the Obama administration has overpromised and underdelivered, said Dave Lieber in the Fort Worth Star-Telegram. Last year, when Obama first proposed a Consumer Financial Protection Agency, he assured Americans it would be tough and independent, with the power to punish unscrupulous lenders. But the administration has signaled that it supports the Dodd bill, which would embed the consumer agency within an institution that historically has protected the interests of banks over those of consumers. Democratic Sen. Richard Durbin of Illinois, who favors a tougher approach, says he’s not too surprised at the way the battle has shaped up. “The banks—hard to believe, in a time we are facing a banking crisis that many banks created—are still the most powerful lobby on Capitol Hill.”

Don’t blame the lobbyists, said Mark Calabria in Investor’s Business Daily. The Democrats are on the defensive because their proposed agency would do more harm than good. The demand for such an agency is based on the notion that “failures in consumer protection were behind the financial crisis.” That’s just wrong. The meltdown was the result of the housing bubble, “driven by easy credit and a mistaken belief that housing prices would rise forever.” Any agency with a bias toward consumers over banks is likely to make it harder to protect “the safety and soundness of our financial institutions.” Besides, said The Wall Street Journal in an editorial, the heaviest regulatory burden will fall on small community banks, not on the big ones, which can easily afford “the lawyers and lobbyists to guide them through all the new red tape.” As a result, “Main Street will pay the bill for this experiment for years to come.”

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