The wrangling over the fate of the Consumer Financial Protection Agency took another turn with the revelation that it may end up within the Federal Reserve.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., has been locked in negotiations with Republicans on his committee over how to pass the financial regulatory reform legislation that has been awaiting action in the Senate. The House passed its version of the bill in December, but Dodd’s committee has so far not produced a bill.

He first tried negotiating with ranking member Richard Shelby, R-Ala., but after months of talks they reached an impasse, mainly on the question of the CFPA. Dodd, like the Obama administration, wanted the agency to be separate and able to police financial services firms and other businesses that are apt to engage in predatory lending practices, such as payday loans and the like. Shelby insisted that the CFPA would just be another government bureaucracy, and he pushed for including it within an overall systemic risk regulator that would oversee the health of the financial sector.

Having reached an impasse last month, Dodd switched to a more junior Republican on the committee, Bob Corker, R-Tenn. They have been locked in negotiations over the CFPA and other matters of concern to the banking and financial industries in recent weeks. Dodd proposed subsuming the CFPA within the Treasury Department, but Corker has reportedly rejected that suggestion. Now the most likely scenario appears to be that Dodd will agree to have the CFPA exist within the Federal Reserve, which already has some consumer protection functions, at least in theory.

Unfortunately, it would come as a surprise to most consumers that the Fed has a role in protecting their interests vs. the banks, as it has not been known for doing a great deal of outreach in this direction. The Fed has mostly been recognized for setting interest rates and more recently playing a large role in bailing out the banks and related businesses. Its failure to protect consumers from subprime mortgages and predatory lending practices is one of the reasons why the U.S. became the first domino to fall in the financial crisis, leading much of the rest of the world into the crisis as well.

Dodd is reportedly insisting that the Fed allow the CFPA to exist independently and with its own budget and appointment powers. The Obama administration is likely to go along with this approach if it will get the Republicans on board with the legislation. However, there are still many stumbling blocks ahead, not only with convincing Republicans, but also House Democrats, whose version of the legislation included an independent CFPA.

The House version of the bill exempted accountants from the CFPA’s oversight, along with a number of other non-banking industries, including automobile dealers, retailers, merchants, real estate brokers and agents. Some would argue that some of these businesses should never have been exempted, particularly in the automobile and real estate industries. The Senate will have to decide if it will still exempt them. Industry associations, including the AICPA, have heavily lobbied Capitol Hill for the carve-outs.

The House bill also allows federal regulators in some cases to preempt state consumer protection laws. That’s a provision consumer advocates hope to see left out of whatever legislation ultimately emerges from the Senate.

Giving the Federal Reserve the authority to preempt state consumer protection laws is certainly an unsettling prospect. President Obama will soon have the opportunity to remake the Fed, with Federal Reserve Vice Chairman Donald Kohn planning to retire in June, and two other vacancies on the seven-member Federal Reserve Board of Governors also needing to be filled.

However, if the CFPA is going to become semi-autonomous, it will need to be independent of not only the Fed board, but of the banks that dominate the Fed’s activities. In Washington, though, the CFPA is likely to be lobbied heavily by the banking and financial industries, no matter where it ends up being shoved.


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