LaFalce Sees Compromise as Reform's Best Hope

If Congress finally enacts financial reform this year, a mid-February breakfast in the House dining room will be viewed as a crucial turning point.

At the table were House Banking Committee Chairman Jim Leach and the panel's ranking Democrat, Rep. John J. LaFalce. The New York Democrat initiated the meeting-a gutsy move, considering that he had just introduced legislation to rival Rep. Leach's financial reform bill.

"I fleshed out what I thought he had to have and what I thought I had to have," Rep. LaFalce explained in a recent interview. "It was always my intent to use my bill as a means of sitting down with the chairman and crafting something we could work out together that could receive bipartisan support."

Indeed, the 90-minute meal led to a joint statement that afternoon pledging cooperation, and it laid the groundwork for House Banking's 51-to- 8 vote in favor of a compromise bill on March 11.

Now, as the legislation edges slowly to the House floor, one of Rep. LaFalce's primary tasks will be getting rank-and-file Democrats to support the legislation. That is a tall order because many are disgruntled after casting tough votes last year only to watch the bill die in the Senate- where it may stall again this year.

"We are elected to walk the plank on issues, tough issues," Rep. LaFalce said, describing the message he is delivering to colleagues.

He acknowledged that some Democrats would rather delay action in hopes of retaking the House in the 2000 elections, but Rep. LaFalce said that would be a mistake. Democrats can already take ample credit for strong community reinvestment requirements, mandatory fee disclosures on automated teller machines, and privacy protections in the bill, he argued.

"Our fingerprints are all over this bill when it comes to consumer protection," he said. "Lookit, when you have good legislation, you pass it. You don't put it off to another day because you never know what is going to happen that other day."

But the bill could be rewritten by the House Commerce Committee before it gets to the floor. The Commerce Committee held its first hearing on the legislation Wednesday and is supposed to vote by May 14. (See story on page 1.) The panel is expected to tamper with some of the provisions that Rep. LaFalce considers most important, including broader powers for bank operating subsidiaries.

"We will see what they do," Rep. LaFalce said. "We have bent over backward on the op-sub issue. I think we've bent as far as we can bend."

Besides, many remedies remain before a final vote, he said. Rep. LaFalce made clear that he is counting on Rep. David Dreier, the new Rules Committee chairman and a co-sponsor of the original LaFalce proposal. The Rules Committee decides which version of a bill goes to the House floor and whose amendments may be proposed there.

Rep. LaFalce declined to say which amendments he would offer. However, he is expected to take another shot at eliminating the ban on new unitary thrifts. His attempt to strike any limits on unitaries beyond current law failed 30 to 29 in committee.

The model of cooperation in the House is not being followed in the Senate-at least not so far. Senate Banking Committee Chairman Phil Gramm and ranking Democrat Paul S. Sarbanes have been locked in combat over Community Reinvestment Act requirements in the legislation.

That House Banking's leaders worked things does not surprise some observers.

"Both Leach and LaFalce are moderates and centrists within their own parties," said Karen Shaw Petrou, president of the ISD/Shaw consulting firm here. "So they don't approach each other from political extremes. You have to have both personal and political rapport for these compromises to be viable."

Rep. LaFalce gained leverage by authoring legislation that was supported by President Clinton and Republicans such as Rep. Dreier and respected Banking Committee member Richard H. Baker.

But the final compromise-which kept the Leach bill's number, HR 10- required concessions by both sides.

Rep. Leach gave in on operating subsidiaries, letting them underwrite securities and conduct merchant banking but not underwrite insurance or develop real estate.

It also permitted the Federal Reserve Board and Treasury Department to override each other's rulings on new powers for bank subsidiaries or holding company units. A similar deal had been included in the LaFalce plan and endorsed by Treasury Secretary Robert E. Rubin.

Rep. Leach also accepted tougher CRA requirements. The compromise bill required banks that wanted to merge with insurance or securities firms to have and maintain "satisfactory" or better CRA ratings. The Leach plan did not require a "satisfactory" rating to be sustained.

Rep. LaFalce conceded on several major issues too. He accepted Rep. Leach's tougher limits on bank sales of insurance and gave up on letting banks and commercial firms own each other. Rep. Leach is strongly opposed to this so-called mixing of banking and commerce.

The compromise also prevents commercial companies from chartering new unitary thrifts. (It also prevented commercial firms from buying existing thrifts, but that provision was struck during the committee vote.)

The deal almost unraveled March 10 as Republicans tried to undo one of the Democrats' amendments and abruptly cut off debate. Rep. LaFalce slammed the desk in protest and predicted the bill would die if such tactics continued.

"We would have lost the Democrats," he explained last week. "I saw that as disastrous. I thought: The only way I can prevent this from happening is to prevent a vote.

"I had to erupt. I did that deliberately to save the bill-honestly."

At that point the committee quit for the day. Cooler heads prevailed, and the bill was overwhelmingly approved the next morning.

Rep. LaFalce gave the credit to Rep. Leach.

"Jim has grown tremendously as chairman since he first took the gavel," Rep. LaFalce said. "I think he is much more open to Democrats' perspective. ... He is more trusting now."

Beyond financial reform, Rep. LaFalce said, he wants to crackdown on credit card practices. He plans to attach to bankruptcy reform a bill barring credit card issuers from fining customers who pay their balance in full each month or canceling their accounts. It also would expand disclosure requirements. For instance, on monthly statements lenders would have to note the total cost and number of months it would take to retire the debt if the customer only made the minimum payment.

Rep. LaFalce dismissed criticisms by credit card companies that such calculations would be onerous. "Bull, bull, bull," he said. "I have talked with some bankers who laugh at that. ... It's the simplest thing in the world."

The 26-year House veteran also wants to increase privacy protections for bank customers. He said he would offer a bill later this year but declined to discuss details. Unlike some fellow Democrats, he wants to keep the privacy debate separate from financial reform. "I prefer to see it dealt with on its own," he said. "The more we add to financial modernization, the more burdensome the bill becomes."

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