White House OK with limit on new consumer agency

The Obama administration said Wednesday it won’t challenge Democratic plans on Capitol Hill to scale back the president’s proposed consumer protection agency, bowing to growing pressure from the banking industry and dissent within Mr. Obama’s own party.

House Financial Services Committee Chairman Barney Frank this week announced he would propose legislation to create a Consumer Financial Protection Agency (CFPA), but without the administration’s wish that it require banks to offer customers “plain vanilla” financial products, such as 30-year, fixed-rate mortgages.

The Massachusetts Democrat also said he will call for “non-financial” businesses, such as merchants and retailers, to be exempt from CFPA oversight.

Treasury Secretary Timothy F. Geithner, testifying before the House panel, said he supports Mr. Frank’s efforts to narrow the scope of the proposed agency - a centerpiece of Mr. Obama’s plans to tighten the rules governing financial institutions.

The secretary called the chairman’s proposals a “pragmatic, helpful way to make sure that you have a better balance of choice for protection.”

“There are lots of different ways to make sure that you don’t create too much unbridled authority that would be damaging to what’s an important part of our financial system,” he said.

The administration’s proposed “plain vanilla” mandate was intended to help prevent banks and other financial institutions from excessively pushing risky “exotic” financial products - particularly subprime mortgages that typically offer low introductory payments that later balloon in size. These loans have been blamed for soaring default rates that helped spark last year’s global financial crisis.

Mr. Frank also promised his plan would give the government the power to dismantle large financial institutions in order to prevent future government bailouts. Such authority could have prevented the $180 billion federal bailout of failing American International Group (AIG) because the government was powerless to unwind the company without threatening the economy.

“There is no one magic bullet that does away with too-big-to-fail, but you will have an ability to resolve them in ways that protect taxpayers and give [companies] a disincentive to get into that situation,” Mr. Frank said.

Mr. Frank’s revised plan still would create a new agency with many new powers. It would monitor the fine print on such products as mortgages and credit cards, and require that lenders be upfront about the cost of their products.

It also would consolidate many of the regulatory duties that are spread over several agencies, such as the Federal Reserve, the Office of Thrift Supervision, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.

But the financial-services industry has waged an aggressive advertising campaign against the proposed agency, saying it would stifle investment and innovation in the financial world and possibly slow down the flow of capital.

Republicans, along with some moderate and conservative Democrats, also worried that the agency would constitute an overreach of government powers.

Democrats have said they want to pass by the end of the year legislation reforming financial regulations, though some have acknowledged the effort could slip into next year.

Mr. Frank, however, disputed reports that the bill won’t be ready for a final vote by the end of the year.