WASHINGTON — The original goal of providing uniform protections for all consumer credit is getting lost to lawmakers' preoccupation over where to place a new regulator.
Consumer group advocates, analysts, lawmakers and some bank representatives said that recent Senate proposals would leave glaring holes in consumer protection and set up an uneven playing field that could leave banks at a competitive disadvantage.
Though the details are in flux, the latest proposal would create a new division inside the Federal Reserve Board that would write new rules for all lenders but have little to no enforcement powers against nonbanks, including check cashers, payday lenders and title insurers.
"How could you possibly create a CFPA to regulate bank and nonbank products but not give it authority to examine and enforce its rules against predatory nonbank products?" said Ed Mierzwinski, the consumer program director for the U.S. Public Interest Research Group.
Though such a plan would hurt banks, the industry has been more focused on killing the consumer division outright or carving out an exception for smaller institutions than ensuring parity with nonbanks.
"We know that the banks will be regulated. If there isn't effective regulation of the others, then it creates a competitive problem," said Douglas Elliott, a fellow with the Brookings Institution and a former investment banker with JPMorgan Chase & Co. "They are instinctively looking for a relatively weak agency here, but if it ends up being a weak agency that allows a lot of nonbanks to compete through fraudulent or near-fraudulent behavior, that's not good for the banking system."
To be sure, the proposal being debated by Senate Banking Committee Chairman Chris Dodd and Sen. Bob Corker, R-Tenn., is still being hammered out. But the consensus among consumer groups, bank industry representatives and other sources is that the proposed consumer division's focus is primarily on rulewriting, with only limited enforcement capability.
Though the standards would theoretically apply to all consumer credit providers, including banks and nonbanks, it would keep in place the current enforcement mechanism for virtually everyone — a system many observers believe failed in the lead-up to the financial crisis.
Banks with assets of up to $10 billion would be examined by their primary federal regulators, while most nonbank lenders would keep their sporadic state enforcement and remain subject to the Federal Trade Commission, which primarily responds to complaints and does not examine lenders routinely.
Based on what is known, the proposed consumer division would have enforcement authority for nonbank mortgage lenders and financial institutions whose assets top $10 billion.
Lawmakers are primarily fighting over where to house the division, and how much power it should have relative to the agency in which it is housed. That debate has clouded the basic tenets of reform, observers said.
Calling it "a bunch of drama," Mierzwinski said all the versions he has seen put consumer protection "under failed regulators, don't cover payday lenders and others of its ilk, which I find unacceptable."
Consumer groups, many of whom met Wednesday with Treasury Secretary Tim Geithner, said the consumer division must have power over all parties that issue credit, including check cashers, payday lenders, rent-to-own stores and title insurers.
"A crucial lesson of the crisis is that the bottom feeders in the financial services industry are attracted to regulatory gaps, and if we don't cover both banks and nonbanks uniformly the same problems will rise again," said Travis Plunkett, the legislative director for the Consumer Federation of America. "What's interesting is that some members of Congress have pointed fingers at the nonbanks, but now refuse to give a consumer regulator the authority it needs to either write rules or enforce them against nonbanks."
Rep. Brad Miller, D-N.C., and a House Financial Services Committee member, said the exemptions in the Senate proposals go too far.
"I'm as much concerned about the lack of necessary powers for the agency as I am about where it's put," he said.