WASHINGTON Industry lobbyists accept that they are unlikely to stop the creation of a new consumer protection agency, but many are confident they can curtail its powers.
Before the House Financial Services Committee votes on the issue next week, industry representatives are working to convince lawmakers that new agency should not have the power to examine and enforce rules against banks. They are also trying to soften language requiring lenders offer "plain vanilla" products before alternatives. Also on the table: ensuring state consumer protection laws are preempted and lenders are shielded from legal liability.
Lawmakers are listening.
"We are looking at several things," Rep. Mel Watt, a co-sponsor of the bill and the House Financial Services Committee's monetary policy subcommittee chairman, said in an interview Monday. "What we are trying to figure out, No. 1, are they legitimate concerns? And if they are, how do you address them in a way that doesn't create more disruption?"
At the top of his list, the North Carolina Democrat said that he believes the committee needs to consider how to divvy up powers among consumer protection and safety and soundness regulators, how enforcement will work, how conflicts would be resolved, what the costs are, and how to handle personnel shifts from the existing agencies to the new one.
But while the banking industry and its regulators are lobbying hard to leave current enforcement authorities over financial institutions alone and merely let the new agency write consumer protection regulations, Watt is not convinced.
"You've got to put rule writing and enforcement in the same place," he said. "There are people who are out there advocating separating the two, but I don't think you can separate those two functions without doing jeopardy to what you are trying to do."
But Watt said lawmakers are still weighing "if any of the existing regulatory agencies should retain any consumer protection responsibilities."
"If so, how do you keep those things that get retained from having potential conflicts with the part of the same issue that gets transferred?" he said. "It may be better for all or none in that context of consumer protection issues."
Still, industry representatives said they are continuing to press the point, arguing that giving a consumer agency enforcement authority will leave lenders caught in the middle between the new agency and existing supervisors.
"The fundamental question is if we are going to split prudential regulation and consumer protection. I believe that's the direction that the chairman is headed," said Bill Himpler, an executive vice president for the American Financial Services Association. "We believe as long as that's the direction that is a fundamental flaw. Everything is nibbling around the edges on a fundamentally flawed approach."
Himpler contends that lawmakers have expressed reservations about what happens to existing consumer protection laws and potential complications that a transition to a new agency might incur. "We believe members have concerns about the scope of the new authority and what that does to existing regulations such as Truth in Lending, HOEPA, UDAP and others," he said. "It gives the new CFPA the primary responsibility over a number of the provisions in each of those regulations. At the same time, it's going to take a new agency three to four years to get up and running. So what happens in the interim? This raises more questions."
Scott Talbott a senior vice president with the Financial Services Roundtable, agreed many lawmakers share industry's concerns with the bill.
"There are number of members that have issues," he said. "In fact, I can't find anybody who is completely happy with it. It raises a lot more questions than answers. Some of the concerns are on the lack of uniformity, that it's not a uniform national standard, that it's not preemptive. Then all the way down are the nuts and bolts of how it would actually work. Who would pay for it? How would products be rolled out?"
Watt said that potential conflicts between the new agency and banking regulators may not be as big a problem as bankers are suggesting.
"I've been trying to understand the extent if any to which the consumer issues conflict with the other safety and soundness and prudential regulators responsibilities that the existing agencies have," he said. "The regulated people keep saying that there is this potential conflict but I haven't really been able to identify what that conflict is."
But the North Carolina Democrat acknowledges other complaints, including whether employees from the banking regulators would be transferred to the new agency "and what disruption that would create."
"Then there is the question of how you pay for the agency," Watt added. "The existing regulators have a built-in fee schedule with the entities and this new consumer agency wouldn't necessarily have that same built-in fee structure."
Observers said many of the details may be left for the Senate to resolve. House Financial Services Committee Chairman Barney Frank has pledged to pass the bill through his panel by the end of next week.
One of the biggest questions is whether lawmakers will end preemption. Under the bill, the new consumer agency would set a minimum for lenders that states could exceed. State authorities could also examine covered institutions and enforce all federal and state standards.
Industry representatives have made little traction in arguing to keep preemption intact among House lawmakers, but observers say they will likely receive a stronger reception in the Senate.
"I don't think you can get much at the House level; they seem to be going their own way," said Laurence Platt, a practice area leader of K&L Gates' financial services practice. "I don't see as much of a concern about balancing the interests of industry and consumers at the House level. So I think there might be a more temperate approach at the Senate level."
Industry representatives are more hopeful about curbing restrictions that would require lenders to offer so-called vanilla products before attempting to sell more creative alternatives.
Banking lobbyists are also looking for protection from legal liability if they offer a nonstandard product. They fear that under the bill as currently written, any product that is not "vanilla" could result in a lawsuit claiming the product is unfair or deceptive.
"There would be no reason to offer anything other than a plain-vanilla product. It's just the uncertainty. If a plain-vanilla product is not very nice you are subject to fines up to a million dollars a day. How do you maneuver within that kind of a framework?" Platt said.
But Platt said lawmakers are likely to add language that would require the new agency to take into consideration the availability of credit and potential legal liability problems. "At some point you have to look at the regulatory impact of the rule on the availability of credit, so my hope is that construct is built into the rulemaking process," he said.
