When the Obama administration announced its regulatory-reform package, I was nervous. Not because the proposal doesn't do enough to reform the financial sector -- conventional wisdom was right to predict a pragmatic approach that moved the ball forward but not far enough. I was nervous because the strongest part of the proposal, the Consumer Financial Protection Agency, seemed like a sitting duck for bank lobbyists who have made an art of foiling any and all attempts to keep their industry in check.
But now the administration seems ready to fight, promising unequivocally to create the agency as part of its regulatory-reform push. White House spokesperson Jen Paski told the Prospect that the administration is approaching the legislation to create the agency, sent to Capitol Hill last week, with "a high level of engagement. … The president is committed to signing a regulatory reform bill by the end of the year, and we look forward to working with Congress to get that done." That's a new tone from the administration, but it will take more than that to pass a bill that the financial lobby adamantly opposes.
Representatives of the industry that gambled its way into the crisis have been unapologetic -- and ungrateful -- as they've opposed every restriction on their activities that came with the government's rescue of their sector. They've fought and killed legislation to protect mortgage holders from foreclosure during a bankruptcy -- colloquially known as "cramdown," it would have eliminated an egregious loophole in current law that favored mortgage lenders. The administration even had to put its plan to reform student lending into a special congressional procedure called reconciliation to protect it from an inevitable filibuster prompted by financial interests.
So when the Consumer Financial Protection Agency emerged as a part of the administration's regulatory overhaul plan, many left-leaning observers were skeptical that the proposed agency would make it through Congress intact. There were reports that the CFPA barely made it into the final draft -- Treasury Secretary Timothy Geithner was initially lukewarm about the consolidated regulator, but he was eventually convinced of its merits by other Treasury officials and Larry Summers, the president's top economics adviser.
The CFPA, first described by Harvard law professor Elizabeth Warren, would be a significant improvement in consumer protection: It would take consumer regulatory responsibility of financial products from seven other agencies and centralize it in one office that is empowered to make rules, examine balance sheets, issue subpoenas, and regulate not just banks but any institution that proves consumer financial products, including payday lenders and mortgage brokers. By making the agency's sole goal protecting everyday borrowers, the administration hopes to avoid the lax approach taken in recent decades by regulators like the Fed, which have focused more on monitoring the soundness of banks rather than on the way they treat their customers. If the CFPA is led by a sufficiently committed staff, it could enact sweeping changes -- some that could have prevented our current crisis (imagine a housing bubble without the worst sub-prime loans) and others that would prevent basic injustices (ending predatory payday lending).
But the agency also presents a bull's-eye for bank lobbyists; while most of the administration's regulation plan is focused on complex rules and products only financial experts understand, most people think they know a thing or two about their credit cards. Dow Jones reports that lobbyists from the banks are plotting "Harry and Louise"-style political ads, a reference to the industry ads against health care reform in 1994, that will feature consumers airing worries about how the agency will run their lives and hurt their finances. At the first hearing on the legislation held by Rep. Barney Frank's Financial Services Committee in the House, American Bankers Association President Ed Yingling predicted "burdensome" regulations and warned of the perils of separating consumer protection from other regulatory duties.
The banks allies in congress are stepping up to the plate, as well. At the same hearing, Rep. Jeb Hensarling, a Republican from Texas, painted a dark picture of big government telling his constituents what kind of bank accounts they would be allowed to have. He then demanded panelists raise their hands if they wanted to outlaw different financial products, an intentionally simplistic approach that plainly irritated the collected experts.
"It's seriously misguided," Steve Adamske, Frank's spokesperson, says of the banker's efforts to undermine consumer protections. "You would think customers are sort of their bread and butter."
It doesn't matter that consumers shouldn't be worried about the CFPA. The financial lobby will push reluctant legislators as hard as it can to eliminate the CFPA or, more likely, render it toothless. So when the administration's proposal first came out, I called up a Treasury spokesperson and asked whether the administration was ready to fight. He downplayed concerns about opposition from the financial-sector lobby, saying it didn't have a leg to stand on. Well, what about the cramdown legislation? He hadn't heard of it -- admittedly, it wasn't part of his issue portfolio, but it worried me. Nonetheless, he said, CFPA will pass "without a doubt."
A week later, after the CFPA legislation dropped, I talked to the same official. He had heard of cramdown by then, but he was still confident in the administration's clout and commitment -- the bank lobby's growing campaign against the legislation was a good sign, indicative of the lobby's own worries.
"I don't think it's a surprise that big banks and institutions that benefited from the status quo want to keep it that way," Deputy Treasury Secretary for Financial Institutions Michael Barr said at a briefing the day the bill was introduced. "It's unacceptable to us. It is a very hard argument for a big bank to make that the status quo on consumer protection was enough, that consumers were protected enough during the financial crisis. I think that's a horrible position for them to be in."
So is there something different about CFPA, particularly when compared to cramdown, the last serious effort to protect consumers? For one, this effort comes entirely from within the administration; cramdown was included in the government's plan to limit foreclosures but was never considered central (erroneously, in the view of many independent analysts). Officials within the administration never considered cramdown to be their bill to pass. Another difference is the pressure on lobbyists: During the cramdown debate, the administration told bankers their position on the bill but did little else to push it. This time around, Barr got on the phone with a group of lobbyists to tell them the administration would fight to pass the bill.
It will take more than statements to get the bill passed. Frank and his committee plan have the bill on the House floor by the end of the month, and there's little reason to believe that his version won't be a strong one. (The House passed similarly tough legislation reforming mortgage regulations a few months ago.) As always, the real challenge will be navigating the Senate without compromises that significantly weaken the new agency. The administration gets a bonus with the seating of the 60th Democratic senator, Al Franken, a strong progressive, and can expect to have some luck selling CFPA as part of broader regulatory reform that few senators will want to oppose. However, 12 Senate Democrats voted against cramdown. If the banks attempt a broad public-relations campaign to make the public uneasy about the plan, the administration may have to send Treasury Secretary Geithner or the president himself out to make a public case for the changes and dispatch top aides to the Hill to chide reluctant senators into supporting the legislation.
The administration and especially the Treasury department have long labored under criticisms, fair and unfair, that their policy agenda has been co-opted or obstructed by the financial sector's political representatives. The consumer-protection program they rolled out in the last few weeks is strong evidence that this is not the case -- if they can pass it. The fight for this legislation could answer lingering questions about whether the administration has the will and the capacity to push back against the banks. Make no mistake: this time, it's their bill.