Overhaul Rules Stuck On Financial Protection Agency

Senate Democrats and Republicans are trying to work out differences over how to overhaul financial regulations following the financial crisis. One of the big sticking points is the proposed Consumer Financial Protection Agency. Democrats, including President Obama, want a separate and independent agency. Republicans want it to be part of an existing agency but Democrats say that's been tried and didn't work.

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RENEE MONTAGNE, host:

This is MORNING EDITION from NPR News. I'm Renee Montagne.

This morning, we're reporting on two efforts to repair the holes left in a tattered economy. In a moment, we'll check in with Elkhart, Indiana, the town where, a little over a year ago, President Obama pitched his economic stimulus program.

But first, to the Senate. Democrats and Republicans have been struggling behind closed doors to agree on a way to rewrite financial regulations. Today, Senate Banking Committee Chairman Chris Dodd says he'll unveil a new plan on Monday, hoping to bridge remaining differences in the full committee. The major sticking point remains: how to do a better job of protecting consumers from products like subprime mortgages.

NPR's John Ydstie reports.

JOHN YDSTIE: President Obama proposed an independent consumer financial protection agency to shield consumers from overly risky and complex financial products. The House embraced the idea, and its overhaul bill passed late last year. But in the Senate, the banking industry is lobbying hard to block the idea. Scott Talbott of the Financial Services Roundtable says putting consumer guardians in an agency separate from existing bank regulators is a mistake.

Mr. SCOTT TALBOT (The Financial Services Roundtable): If you separate them out, instead of having one regulator with all the information, you have two regulators with half the information. The fate of the institution and the fate of its consumers are inextricably linked, and we think the regulation of the two of those should be, as well.

YDSTIE: Consumer advocates say that's the way it was before the crisis. Indeed, bank regulators like the Federal Reserve, who were supposed to protect consumers, didn't. While Senate Democrats generally support an independent consumer agency, Republicans generally oppose it. That's forced Democrat Christopher Dodd, chairman of the Senate Banking Committee, to try to broker a compromise behind closed doors that Republicans will agree to. Among the most recent ideas circulating is creating a new consumer bureau inside the Fed.

Mr. DOUGLAS ELLIOTT (Fellow, Brookings Institution): It should be an independent agency. I don't think it's going to be.

YDSTIE: That's Douglas Elliott, a former investment banker, who is now a fellow at the Brookings Institution.

Mr. ELLIOTT: There are bureaucratic reasons why if it ends up as part of a so-called safety and soundness regulator like the Fed, it's likely to get short shrift. That's just how things work.

YDSTIE: But Senator Dodd, and even the White House, seem ready to allow the consumer agency to be at least housed with another regulator. They say it's not the address that matters, it's whether its powers remain intact. Consumer advocate Ed Mierzwinski of the U.S. PIRG, the Public Interest Research Group, says that formula might work.

Mr. ED MIERZWINSKI (Consumer Advocate, PIRG): If the agency has a presidentially nominated and Senate confirmed director with its own budget and it is not subject to the authority of some other agency, we'll look very closely at that option.

YDSTIE: It can be in another agency, but not under it, says Mierzwinski. And he says the consumer guardian would have to have authority over all financial products. But drafts circulating in the Senate suggest it might not have full authority over institutions like payday lenders, who give short-term loans to consumers with effective annual interest rates of 300 percent or more.

Mr. MIERZWINSKI: That's simply unbelievable that payday lenders, rent-to-own stores, debt collectors and others that are part of the system that really is unfair to consumers in a lot of ways, wouldn't be covered by a new agency, even though no federal regulator covers them now.

YDSTIE: Payday lenders have mounted a big campaign in the past few years to protect their business from federal regulation. Both Democrats and Republicans on the Banking Committee have taken tens of thousands of dollars in campaign contributions from the industry. But Mierzwinski thinks ultimately the payday lenders will be disappointed.

Mr. MIERZWINSKI: I'm looking forward to a floor vote on whether the payday lenders get a get-out-of-jail free card in the United States Senate. In the back rooms of the United States Senate, they've obviously got an ability to influence senators that they shouldn't be regulated.

YDSTIE: But in a public vote on the Senate floor that should come eventually, Mierzwinski thinks senators will side with consumers.

John Ydstie, NPR News, Washington.

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