Treasury Gives Some Ground on Reg Reform

WASHINGTON — After months of holding the line on the Obama administration's plan to reform financial services oversight, Treasury Secretary Tim Geithner showed a willingness to compromise Wednesday, agreeing to relax some consumer protections.

House Financial Services Committee Chairman Barney Frank is expected to introduce a revised bill soon that embraces the administration's plan to create a new consumer financial protection agency but that would drop a requirement that banks offer a "plain vanilla" version of their products.

Testifying before the panel, Geithner endorsed that idea, saying better disclosure would be sufficient.

"We're very supportive of the changes by the chairman, including the" elimination of the "plain vanilla" product provision, he said. "We think it's a reasonable idea to try to make sure consumers have the ability to choose a simple product, not something they don't understand, and probably the most effective way to do that is to make sure you get disclosure right."

His agreement was a victory for the banking industry, which had argued that a vanilla standard would limit consumers' choices and stifle market innovations. Until Wednesday, the Obama administration had defended the concept, maintaining it was necessary to ensure consumers were receiving products they understand.

Though Geithner did not offer other concrete compromises, there are signs other changes are coming. Frank told reporters on Wednesday that he expected a fight among his committee members about the provision to effectively end national bank preemption. The legislation would give state regulators the power to enforce national and state laws against all commercial banks. Bank lobbyists are fiercely lobbying the issue, arguing that it would make it more difficult for a bank to operate in multiple states. It was unclear if the committee would water down or eliminate the provision.

"That's very much an issue that has to be dealt with and debated," Frank said. "It is not going to be a collegial decision."

According to a memo sent late Tuesday, Frank also plans to eliminate a "reasonableness" standard that would require financial institutions to determine if consumers comprehend the products and services they are being offered.

The memo also addressed concerns on overlapping and burdensome examinations by the creation of the new agency. Frank said he will propose that banks face simultaneous federal safety and soundness and consumer protection exams (unless otherwise requested). Banking agencies and the CFPA would be required to coordinate the timing, scope and results of examinations.

Frank also will call on nonbanks to be subject to assessments and specifies that neither small nor large banks would pay for the examination or supervision of nonbanks. Further, the Federal Reserve Board would fund the CFPA at a level that reflects the amounts the banking agencies currently pay for consumer protection supervision. Frank is also working on a way to resolve disputes between the banking agencies and the new agency.

In response to aggressive attacks by the U.S. Chamber of Commerce and the banking industry, Frank and Geithner agreed that the bill language should be tightened to exclude merchants, retailers and other nonfinancial businesses from the jurisdiction of the new consumer protection agency. Other businesses exempted include lawyers, auto dealers, accountants, consumer reporting agencies, communications providers and individual retirement account and pension plan providers.

The chamber of commerce has begun ads and a Web site to attack the CFPA and claimed it could cover bakers, butchers and teachers. "There was never the notion that butchers were going to be regulated," Frank said. "The chamber of commerce cleverly seized on some ambiguities ... It was always supposed to be for financial products."

Despite the Treasury's new willingness to negotiate, differences still exist between the administration and Congress. For example, Frank again rejected Geithner's argument that the government must identify systemically important companies, which would be designated as Tier 1 financial holding companies. "That would be a mistake," Frank said. "While those who proposed it in good faith thought it would be a kind of scarlet letter on them, in fact, others have seen it as a badge of honor."

But Geithner said a list is necessary.

"What we're trying to do is to make it clear that if you have this particular source of threat to the system, we're going to subject you to more conservative constraints on risk taking," Geithner said. "Now, you can't do that without identifying who those institutions are."

One of the biggest surprises from the hearing was how little attention was given to the Obama administration's plan to give the Fed oversight of systemically important institutions. Giving the Fed such power is politically unpopular, and Geithner barely mentioned the central bank in his testimony Wednesday.

Frank, meanwhile, continued to signal that he would instead give power to a proposed interagency council.

"I think what you are going to see is that there will be a council at the basis of it but there will then be some executive authority," Frank said.

Geithner did touch briefly on whether his plan would help curb the problem of "too big to fail" institutions. He argued that government resolution power and increased capital requirements would help.

But most of the hearing focused on the CFPA. Geithner and Democrats argued the existing bank regulators have a poor record on consumer protection and should be stripped of that authority, while Republicans and banking regulators warned of the dangers of separating consumer protection from safety and soundness obligations.

"I am struck by their newfound interest in consumer protection … I guess the threat of absence made their hearts grow fonder," Frank said.

At a separate panel, Frank grilled the heads of the banking agencies on the issue, arguing they are much more focused on safety and soundness than consumer issues.

But Federal Deposit Insurance Corp. Chairman Sheila Bair fought back, offering to take her testimony out to prove she had raised consumer issues in the past. She said the agency's examiners had done a good job of focusing on both consumer and safety and soundness issues.

"It's not banks that are doing it," Bair said. "There really needs to be a laser-like focus on the nonbank sector … you have to deal with it or you are not going to solve your problem."