March 18, 2010 2:00 am
A US bank regulator joined financial executives yesterday in calling for changes to consumer protection rules proposed by Chris Dodd, the chairman of the Senate banking committee.
"In every case consumer protection has the edge and will trump safety and soundness and I think that is backwards," said John Dugan, the comptroller of the currency, at an American Bankers Association conference.
Mr Dugan, whose office regulates national banks, said a Consumer Financial Protection Bureau proposed in Mr Dodd's financial regulation bill, which was published on Monday and is to be revised next week, was too strong.
The comments were unusually forthright from an influential regulator and came amid a surge of lobbying from regulators and banks before next week's mark-up of the bill in the banking committee.
Mr Dugan said the Dodd bill used insufficiently pre-emption - the mechanism where federal regulators overrule state counterparts - compared with a version passed last year by the House of Representatives.
Pre-emption is a big issue for some regulators and banks who argued that 50 different enforcers could create confusion and bureaucracy that led to higher prices.
"It's important that we don't have a patchwork quilt of regulation," the American Bankers Association said.
The issue was highlighted frequently by the US Chamber of Commerce, which has spent several million dollars in advertising to water down the consumer agency.
Andrew Pincus, a lawyer at Mayer Brown who has advised the chamber, argued this week that small businesses would face a "significant diminution of credit" if the Dodd bill was made law.
Banks are also arguing that the chairman of the CFPB, which would be housed inside the Federal Reserve, has too much independence and is not answerable to a board.
They are also urging lawmakers to limit the new bureau's remit, saying a mission to crack down on "abusive" products is too vague. The combination of a politically powerful chairman and an ill-defined remit could be damaging, they argue.
But not everyone agrees. Not only consumer advocates but the state attorneys-general and some community banks are unconvinced that a lack of pre-emption is a problem for the system.
"At issue is whether consumer protection laws will for the first time be enforced in an effective way," said Tom Miller, the attorney-general of Iowa, who was one of 40 attorneys-general who sent a letter to lawmakers in November urging stronger state oversight. "The question is will senators be on the side of the big banks and give them special protection or on the side of the public?"
Mike Menzies, chairman of Independent Community Bankers of America and chief executive of Easton Bank and Trust Company in Maryland, noted that banks had to contend with "all these different states with all these different attorneys-general and all these different state laws", but nonetheless pre-emption was not among his concerns.
He was more worried about the uncertainty and bureaucracy that a new regulator might bring and the potential for mortgage brokers and other non-bank lenders to escape from the CFPB as amendments were made in Congress. "They are the ones that deserved to be reined in in some shape or form," he said.
Consumer groups pointed out that it was unusual for states to pass entirely different laws and said the price of not prosecuting large banks who violated the law was too high to ignore.
Lauren Saunders, the managing attorney of the National Consumer Law Center's Washington office, estimates that, in 2006, $700bn of the riskiest loans were made by banks that could ignore state law.
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