When House leaders went behind closed doors last week to craft a compromise financial reform bill, they faced a wrenching choice between consumer privacy and commercial freedom.
Momentum seemed to favor privacy. Protests against the government's know-your-customer proposal were still echoing off the walls.
In the end, however, lawmakers jettisoned the most onerous initiatives and fashioned a privacy standard scarcely different from current law.
Under the agreement, still being wrapped up Friday, banks could continue to share information with affiliates. They also could freely share information with third parties, though customers could block any data transfers related to marketing.
Quietly, big bank lobbyists claimed victory.
"Only a very small percentage (of customers) will ever opt out," said one.
"This compromise appears workable for financial firms and would add a lot to consumer protections already on the books," said Alfred M. Pollard, senior legislative affairs director at the Financial Services Roundtable.
Indeed, compared to what could have happened, banks dodged a bullet, if not a weapon of mass destruction.
The bill approved June 10 by the Commerce Committee, one of two considered by House negotiators, would have let customers block all information-sharing with third parties and affiliates, with few exceptions.
Industry trade groups called the Commerce language a catastrophe, undermining even the most routine bank practices.
Say, for example, a customer came to a bank seeking a mortgage. Typically, the bank would make the loan and then sell or securitize it.
Not so fast, under an opt-out regime. Because the sale or securitization of a mortgage would involve transferring loan and customer data to another party, the bank would have to notify the customer and give him the chance to block it.
Notification itself would be costly, industry representatives said. But the bigger question is, what if the customer says no?
Presumably, the bank could not sell or securitize the loan, said Karen Shaw Petrou, president of the consulting firm ISD/Shaw. "It would totally destroy the mortgage-backed securities market," she said.
At this point, the bank might be tempted to forgo the loan. But doing so might be forbidden, Ms. Petrou added. After all, the customer was simply exercising a privacy right.
"There'd be an interesting legal issue there," she said.
Hiring an outside agency to collect on a bad loan might also be a problem, said Karen M. Thomas, director of regulatory affairs for the Independent Community Bankers of America.
Under an across-the-board opt-out regime, she said, a bank customer could refuse to let his account information be transferred to a third-party collection agency.
Theoretically, an account holder could also prohibit his bank from sharing data with an outside auditor, a check printer, a credit card or data processor, an automated teller network, an appraiser, the buyer of a bank branch, or even a bank examiner, Ms. Thomas said.
Nessa E. Feddis, senior federal counsel at the American Bankers Association, said an opt-out regime could wreak havoc on a holding company's plans to provide customers with consolidated financial statements.
It could also prohibit loan officers from referring rejected applicants to a subprime affiliate, or referring subprime customers with good payment histories to prime-rate lenders.
In many cases, industry representatives say, it is the customers who would be hurt.
Few bank customers, for example, would opt out if they knew it meant they could not use a credit card, write a check, or withdraw cash from an automated teller machine. In recent days, lawmakers proved sympathetic to that argument, said Joe Belew, president of the Consumer Bankers Association.
But not everyone supports the House's privacy compromise.
Community bankers argue that the distinction between affiliates and third parties puts them at a disadvantage.
"If you're a Citigroup, which has everything under one umbrella, you can share that information and market to your customer" without ever telling them, one lobbyist said.
By contrast, small banks and thrifts that want to achieve synergies with outside insurance or securities firms will have to notify their customers and let them block any information-sharing.