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Consumer Financial Protection Agency Continues to Create Banker Angst

As the Consumer Financial Protection Agency moves nearer to reality, banks are left wondering just how much innovation will suffer at the expense of more oversight.

As President Obama attempts to overhaul the financial services regulatory regime, the one requirement that has met even more resistance than executive pay caps is the proposed financial services consumer watchdog agency. Will it mean more bureaucracy, stifled innovation and less consumer choice? Or will it give consumers a true advocate, pushing for continued innovation around fair products and a clearer definition of roles for all banking agencies? For that matter, how will the agency even monitor the banks?

The financial services industry has dug in its heels in hopes of at least helping to shape the plan into something more palatable. Even the regulatory agencies are engaged in turf battles over which of their powers will be stripped away if the proposed Consumer Financial Protection Agency (CFPA) comes into being. Treasury Secretary Timothy Geithner tried putting an end to this infighting in early August in an apparently expletive-laced tirade to the heads of these agencies, demanding they support the administration's regulatory proposals.

Everyone seems to have an opinion on the proposed agency. But when BS&T reached out to bank executives for their take on the agency, all but one declined to comment. Lani Hayward, EVP, creative strategies, with Portland, Ore.-based Umpqua Bank ($8.3 billion in assets), however, seemed unfazed by the controversy.

"It plays more for the big banks with big credit card portfolios and consumer lending than it does community banks," Hayward says of the CFPA. "All banks recognize there will be heavier regulatory oversight as a result of the financial crisis and that the oversight may be excessive before it levels out and we find the new normal."

Opposition From the Industry -- and Others

On the lobbying front, however, the industry at large has argued that the addition of the CFPA to the existing roster of financial services regulators will create further burdens on cash-strapped banks trying to pull themselves out of the subprime mess.

The Financial Services Roundtable, for example, says that while the drive to give consumers greater protection is warranted, creating a separate consumer protection regulator is the wrong approach. "In its current form, the legislation will have negative consequences for consumers, for sound financial institutions and for our financial system," the Washington, D.C.-based organization said in a statement. FSRound President and CEO Steve Bartlett instead recommended that "strengthening existing prudential regulators with guiding principles" is the best approach for both consumers and the economy.

Even Federal Reserve Chairman Ben Bernanke has begun speaking out against the plan for the CFPA in its current form. In a letter he reportedly sent to Rep. Spencer Bachus (R-AL) in August, the ranking Republican on the House Financial Services Committee, Bernanke stated that bank supervision and consumer protection should not be separated.

Todd Zywicki, a professor of law at George Mason University School of Law, says that creating an entity such as the CFPA hearkens back to the days when single-industry regulation was in vogue -- a model, he believes, that proved itself ineffective, such as with the airlines. "This agency looks like a throwback to the 1960s and '70s when industry-specific regulation was popular," he comments. "This model of regulation runs the risk of having tunnel vision and missing the broader picture."

Zywicki argues that there is no reason the Federal Trade Commission (FTC) or an existing financial regulator cannot handle the tasks with which the CFPA would be charged. "Protecting consumers is what the FTC does very well," he notes.

Support for Change

But Steven Adamske, the communications director for Rep. Barney Frank (D-MA), head of the House Financial Services Committee, contends that the existing federal banking agencies "didn't do their jobs" in protecting consumers from the ramifications of bad loans that led to the crisis. "[The CFPA] will be directly focused on the health of the consumer," Adamske says. "Are they getting the financial products they want? Are there any hidden fees? Will there be any changes to interest on existing card balances? We want to create a certain level of harmony between what people can afford and what banks offer."

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