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March 2, 2010 3:55 am
The Federal Reserve would receive additional consumer protection responsibilities as part of a proposal circulated on Monday by Chris Dodd, the Senate banking committee chairman, in a surprising reversal of the central bank’s political fortunes.
The new division, if approved, falls short of an independent Consumer Financial Protection Agency originally proposed by the Treasury. Designed to regulate the sale of products such as credit cards and mortgages, the CFPA became one of President Barack Obama’s most cherished reform proposals.
But even a watered-down version would allow Democrats to claim that they are bolstering consumer rights and could secure bipartisan agreement for a financial regulation bill after weeks of talks between the parties in the Senate.
The Fed risked losing its consumer protection responsibilities after it was widely criticised for failing to crack down on the mis-selling of mortgage products and the expansion of subprime lending in the run-up to the financial crisis.
Senior Republicans led by Richard Shelby, the senator from Alabama, are considering the proposal which, according to people involved with the negotiations, would see the Fed house a new semi-autonomous consumer protection division with rule-writing responsibilities.
Mr Dodd and Mr Shelby have been trading proposals for alternatives to CFPA amid widespread hostility among Republicans, and some Democrats. The US Chamber of Commerce has been campaigning heavily against the proposed agency.
”Senator Dodd is keeping members informed on how things are progressing as he has throughout this process,” said a spokeswoman for the banking committee. ”We do not have an agreement yet. He hopes to have a consensus bill in the coming days.”
Republicans may claim that they have stopped the creation of an agency that would have trampled over free markets and conflicted with regulators’ duties to protect the safety and soundness of the banking system.
Mr Shelby had suggested housing new consumer protection responsibilities within the Federal Deposit Insurance Corporation, while Mr Dodd had suggested placing it within the Treasury. Elizabeth Warren, the Harvard law professor and chairman of the Congressional Oversight Panel, which scrutinises the government’s bail-out programme, has said that only an independent agency can be a sufficient safeguard of consumers.
Only weeks ago, the reconfirmation of Ben Bernanke as chairman of the Fed was in doubt and the central bank looked likely to lose its main bank supervisory role. Mr Bernanke has now been reconfirmed and Mr Dodd has relaxed his demand that the Fed lose its bank supervision powers under pressure from Tim Geithner, the Treasury secretary and a determined advocate of the Fed.
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