Backers of President Obama's cornerstone financial regulatory reform proposal pushed back Monday against the Blue Dog Coalition, which is promoting a counter-proposal to the Consumer Financial Protection Agency in the House Financial Services Committee.
The proposal, being championed by Blue Dog Walt Minnick (D-Idaho) and reported in Monday's Politico, would create a "council" consisting of regulatory agencies that would make suggestions to Congress regarding what abusive practices might need to be curtailed. Minnick told Politico that Committee Chairman Barney Frank (D-Mass.) was open to it.
"As soon as I saw the story, I called Minnick and said, 'You've really gotta retract it,'" Frank told HuffPost, saying he was "absolutely opposed" to the proposal and told Minnick as much when they spoke about it last week. A Minnick spokesman didn't return a call.
The CFPA, which is still headed for a committee vote in October, Frank said, would be tasked with rating financial products and could restrict or ban those that it found to be deceptive and unsafe for consumers. It is fiercely opposed by both community banks and large financial institutions.
Consumer groups were blindsided by the Blue Dog plan. "We did not know this was coming," said Rep. Brad Miller (D-N.C.), the lead sponsor of the CFPA in the Financial Services Committee.
"An advisory committee is a long way from a watchdog agency with the power to set rules and enforce them," Miller said.
The proposal is potentially something that opponents of sweeping reform could support without feeling the wrath of Wall Street or small bankers in their home districts.
"It's no different from what we have today," said Ellen Harnick, senior policy counsel with the Center for Responsible Lending. "Today the various agencies issue guidances to the banks they regulate, setting out the standards they expect the banks to adhere to. There were a lot of people urging current regulatory agencies to issue guidance reining in some of these practices. Their response, as we all know, was totally inadequate."
In fact, the proposal could even be seen as a step backward. Under the current regime, once the many agencies agree on a regulatory reform, it can be implemented. Under the Blue Dog plan, the agencies would instead make a proposal to Congress. For a look at how quickly Congress moves, just look at the fate of the CFPA itself.
"The last thing we want is for Congress to be outlawing every new abusive practice. Congress is notoriously slow on its feet," said Miller. "The phrase 'It takes an act of Congress' is one I've heard all my life, but I really understand it now. I first introduced legislation in 2004 to regulate sub-prime mortgage lending, and Congress has still not adopted that. The House has passed it twice, and it's gone over to the Senate and not been heard from still. So if it takes Congress rather than agencies making a rule to adopt a policy on new abuses, the new abuses will absolutely go on for a very long time with very dire consequences before Congress budges."
White House senior adviser Larry Summers, not typically found on the wrong side of Wall Street, has been pushing vigorously for passage of the CFPA. The Chamber of Commerce is running a $2 million ad campaign saying that the CFPA won't let your butcher give you a slab of meat on credit -- ads that Summers blasted as being morally equivalent to the claims that Obama's health care plan includes "death panels."
Frank said that the committee will tighten the bill's language to make it clear what is being regulated. "We're not regulating butchers," he said.
The Blue Dogs' constituency for their counter-proposal consists of Wall Street-backed Democrats.
"What's the old phrase? If you like this kind of thing this is the kind of thing you'll like," said Miller. "The members who didn't want to be for the CFPA anyway will probably be for this."
"It's set up to fail in the same way that the agencies have failed to date," said Harnick. "So if you like the current system, you'll like the council of regulators idea."
Frank said that the Minnick proposal was also likely unconstitutional, in that it gave a new body authority to "make new rules selectively." Some agencies can currently make rules, but only as authorized by specific statutes. But Frank's primary objective, he said, is that it simply wouldn't work.
"The key problem is it would leave [consumer protection] in the hands of the bank regulators and even the good ones, their main job is bank regulation and safety and soundness [of the institution] and these consumer concerns are doomed to be secondary at best and tertiary most of the time," he said.
Steve Verdier, senior vice president and director of congressional affairs for the Independent Community Bankers of America, said he hadn't been involved with the creation of the proposal but he liked the sound of it from the report.
"I think the Blue Dogs are trying to find a way to accomplish the purposes of the CFPA without imposing an undue or unnecessary burden on community banks,"said Verdier.
Wall Street banks lost credibility on Capitol Hill with the financial collapse and the bailout. They have taken to teaming up with community banks to oppose Obama's reform agenda, using the community bankers' local cred and relative innocence. Many of the smaller banks never engaged in the more abusive lending practices and didn't create the derivatives and other esoteric financial products that nearly blew up the system.
We shouldn't be punished for Wall Street's greed, they argue.
"These Democrats understand that...the whole meltdown was not caused by community banks, so why do community banks suffer the consequences: higher regulatory costs, even more strict regulation? What's the logic in that?" Verdier said.
Some advocates for broad financial regulatory reform argue that the only path forward for Democrats is to split community bankers from the bigger banks. Their interests are aligned in opposition to the CFPA but are in opposition on some other issues, such as the regulation of derivatives or leverage ratios.
"Our banks are very carefully supervised. We have federal agents come into our banks once every year. We understand why they do that. But what we don't understand is why they don't do that for other parts of the financial industry. So we would want to see this proposal as strong in that area as it can be," said Verdier.
The community banks, said Frank, have a right to be angry that they're roped in with Wall Street. He's looking for ways to address their concerns but isn't abandoning the CFPA. "Look, the community banks are angry. And they should be. If only community banks had made mortgages we wouldn't be in this shithole," said Frank.