Dodd’s Not-Independent Consumer Watchdog

Dodd’s Not-Independent Consumer Watchdog

Dodd’s Not-Independent Consumer Watchdog

 Dodd’s bill puts a strong cop on the beat. But the same regulators who’ve already failed us would look over its shoulder.


Sen. Chris Dodd came out swinging today to defend his revamped proposal for fixing the financial regulatory system, and he’s won cautious support from some key reformers. Bailout watchdog Elizabeth Warren, who has been the most vocal Beltway advocate of an independent agency to protect consumers, called the bill an “important step” and no Democratic members of Dodd’s Banking Committee have rejected it. Check out the bill’s summary here.

The primary complaint, however, remains Dodd’s choice to house a new Consumer Financial Protection Agency inside the Federal Reserve rather than make it a stand-alone regulator. It’ll be a bureau, not an agency. Dodd strongly defended the move, arguing that creating a bureau inside the Fed strengthens rather than weakens the effort. As Huffington Post reports, Dodd’s main point is budgetary: The bureau would be funded through the Fed’s money and thus shielded from the political whims of congressional appropriation. “Look at Equal Employment Opportunity Office, what happens when you starve a budget,” Dodd told HuffPo. “You can have all the wonderful laws on the books; if you don’t have a budget that allows you to operate, you die.”

Fair enough. And the director will be presidentially appointed for five year terms. But critics point to a provision that allows an oversight board to rein in the bureau if it treads too heavily on the “safety and soundness” of the banking sector. Who sits on that board? The existing regulators, who failed to stop the subprime predation and risky lending that started all of this. The new bureau would also have to confer with existing regulators before making rules and would have to publish those regulators’ feedback. Of course, the whole point of a consumer protection agency is that existing regulators have an outsized interest in the health of the banks, not their customers and certainly not the financial wellbeing of our neighborhoods.

As the National Community Reinvestment Coalition points out, all of this sets up a tall job for the new bureau’s chief. “Does anybody believe that the director of the CFPA will be ‘independent’ with Secretary Geithner and Chairman Bernanke breathing down their neck?” asked NCRC head John Taylor, who’s been another vocal advocate for an independent agency. “The moment you don’t have a strong director, this agency will be forever changed,” adds NCRC’s David Berenbaum. “It’s like the Civil Rights Commission. It used to be very effective.”

Berenbaum also notes that Dodd’s legislation doesn’t appear to explicitly put the Community Reinvestment Act under the new watchdog’s purview. The CRA is the federal answer to redlining — it forces banks to lend in any community from which it takes deposits. That’s one area Dems could improve upon the bill. Another is to peel back the regulator-stacked oversight board’s veto power.

Two important positives in Dodd’s bill, however. He appears to have closed the carve outs in the House bill that put nonbank lenders, like auto dealers and payday joints, beyond the new regulator’s reach. And states have clear authority to take their own action on behalf of consumers, which is something banks have lobbied heavily to prevent.

Cross-posted at Racewire.

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