Tensions over privacy surfaced at the opening of House- Senate negotiations on financial reform.

Sen. Richard C. Shelby, R-Ala., broke ranks this week with Senate Banking Committee Chairman Phil Gramm and called consumer privacy protections an "integral part" of the bill. Recent industry behavior-such as letting telemarketers debit accounts without customer knowledge-demands a strong reaction, he said.

"If these are the kinds of abuses that are happening today, what will happen when we let these financial conglomerates run wild in this brave new world of modernization?" Sen. Shelby said. "If the responsibility of this conference committee is to set the game rules for the 21st century, so too is it our responsibility to identify what is 'out of bounds.'"

Senate Banking's No. 2 Republican previously disagreed with Sen. Gramm over which powers should be extended to direct bank subsidiaries. But the two are allied against the Community Reinvestment Act, indicating how complex the politics of these negotiations are likely to be as they go behind closed doors for the next months.

Sen. Shelby's comments "got the attention of more people in the conference room ... than any other remarks of the day," said John H. Hanley, a lobbyist for the Independent Community Bankers of America.

Sen. Gramm strongly urged lawmakers to exclude the House bill's requirement that customers be able to block information-sharing with third- party marketers and other privacy protections not found in the Senate bill.

"It is too important to be a rider on this bill," he said. "This ought to be dealt with separately."

But Rep. John J. LaFalce, the ranking Democrat on the House Banking Committee, warned that the privacy provisions in the House bill are essential to enactment.

"We worked hard to reach a reasonable consensus with affected industries on this issue," Rep. LaFalce said. "If any industry representatives who indicated their support now try to strip the provisions, they are not welcome in my office."

With Congress set to go on recess next week, financial reform is expected to enter an inactive period until September. House Banking Committee Chairman Jim Leach recommended that legislative staffers work during the break on resolving smaller issues, but observers say that the obstacles to enactment can only be decided by top lawmakers.

"It would be hard for the staffs to resolve major issues," said Edward L. Yingling, chief lobbyist for the American Bankers Association. Until breakthroughs are made on the principal sticking points, this could be a long process that goes well into the fall."

Others are predicting it could take longer. "Odds are this bill is going to go into next year," said Bert Ely, a financial services consultant based in Alexandria, Va.

Commercial bank lobbyists rejected Sen. Gramm's proposed compromise on unitary thrifts, but America's Community Bankers, the thrift trade group, called the proposal "a very positive suggestion."

The Senate bill would bar commercial companies from buying these thrifts, but Sen. Gramm said Tuesday that the Senate might accept the House provision with a major exception. The Federal Deposit Insurance Corp., not the Federal Reserve Board, should decide whether commercial firms could buy unitaries, he said.

"We are extremely disappointed by what Sen. Gramm had to say and would oppose any such solution," Mr. Hanley said, predicting that most Senate conferees would oppose Sen. Gramm on this proposal. "To move it to the FDIC further dilutes an already unworkable plan."

Mr. Yingling said he detected in Sen. Gramm's comments room for compromise on community reinvestment requirements.

Sen. Gramm played down the differences between the House bill's extension of CRA and the Senate bill's partial rollback, expressing hope for consensus. And he highlighted the least controversial provision: a requirement that banks disclose any payments made to community groups as part of CRA commitments.

The disclosure mandate could be the core of a settlement on CRA, Mr. Yingling said, possibly in exchange for a weakening of penalties for banks whose CRA ratings drop below "satisfactory" after they merge with insurance or securities companies.

Also at the conferees' meeting, Sen. Gramm raised a procedural objection. He noted that because House Banking's Democrats have different individuals negotiating separate parts of the bill, Democrats outnumber Republicans on the conference overall. Rep. Leach said multiple Democrats are sharing single committee slots, meaning they get no voting advantage. House and Senate parliamentarians plan to discuss the issue.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.