Dropping from an "A" grade to a "B" in a class might be a bit disappointing, but it's hardly a disaster.
Supporters of a new consumer protection agency publicly offered the same kind of mixed reaction this week when Sen. Chris Dodd, D-Conn., finally unveiled his plans for the new regulator as part of a financial reform package.
Dodd's plan downgrades the proposed Consumer Financial Protection Agency (CFPA) to the Consumer Financial Protection Bureau (CFPB). In other words, instead of the stand-alone advocate for bank account holders and borrowers approved by the House of Representatives last year, Dodd's version calls for a bureau that's part of the Federal Reserve.
The new model had been signaled for weeks, with supporters of the concept hoping the change meant little more than a change of address. Elizabeth Warren, the Harvard bankruptcy expert who first proposed the new regulator and is widely expected to be its first chief, said that as long as the regulator enjoyed real independence, she didn't care what logo went on its letterhead.
But there has been great concern that, after a year of intense lobbying, the financial industry would manage to de-fang the new watchdog. And now there is real concern that important reforms will be managed by an agency that failed to safeguard consumers during the housing bubble.
While the legislation includes about a dozen or so hotly contested provisions -- such as the possible limiting of states' rights to enforce their financial regulations -- the war of words has centered on a debate pitting so-called "safety and soundness" protection against consumer protection. The financial industry and some regulators say that the financial strength of banks is so critical to the economy that it must be paramount in any regulation, and that consumer protection cannot be instituted independent of concerns over a bank's financial health. Supporters of the new agency counter that consumers can't be effectively protected from mistreatment if the rules defer to the needs of banks' balance sheets. Dodd's new proposal is an attempt to balance these interests.
After spending a week searching for the devil that might be hiding in the 1,000-page legislation, most consumer advocacy groups say they can live with the new arrangement. Warren offered a tepid public approval; other agencies offered positive-sounding statements calling Dodd's bill a "good start." The Center for Responsible Lending's Michael Calhoun called the bill a "step in the right direction." The Consumer Federation of America said it "applauds" Dodd for "moving forward."
And the Oregon State Public Interest Research Group said it was satisfied that, in its current form, the new legislation creates a bureau that would "simply be in, but not under, the Fed, with a firewall against the Fed controlling its actions." The bureau would be self-funding, for example, and its head would be a presidential appointment.
But those groups also offered a long string of caveats. Chief among them: A council of regulators drawn from existing agencies would have veto power over new rules proposed by the bureau. It would take a two-thirds majority of the nine-member body to overturn them.
"We don't like the veto, even at the high standard it is currently at," said Ed Mierzwinski, consumer program director the Public Interest Research Group. Any veto power given to agencies that are seen as friendly to banking interests would severely dilute the new bureau's ability to carry out its mission, he said.
Even more worrisome, said Mierzwinksi, is the possibility that the veto power will be strengthened as the package goes through the legislative process.
"The bill is just a draft and hasn't gone through the sausage machine yet," he said. "We expect the industry ... to work to lower the standard, a lot, making it easier to trump (the new agency)."
Carmen Balber, Washington's director of Consumer Watchdog, was not as positive about the proposal as most other advocates.
"An autonomous regulator must have the authority to write rules without fear of rejection by existing regulators, whose refusal to enact consumer protection rules helped cause the financial crisis," she said. "An effective regulator must have the ability to enforce the rules that it writes or be little more than a paper tiger."
Another more practical problem is the arrival of spring. Congress will go on recess in a week, and the highly charged health care debate and fallout from a potential vote will chew up much of that time. When it returns after the break, concerns about the fall election will begin to monopolize legislators and could trim their desire to pass yet another controversial reform package.
"Dodd is running out of weeks," to move the bill forward, Mierzwinski warned. Still, he thinks that the U.S. public remains very positive about financial reforms, and that liberals in Congress might welcome the regulation debate after the expected bitter health care vote.
Of course, Dodd's bill is just another step in the long process toward creating a new agency designed to protect consumers, and the legislation remains a moving target. What really matters are the details, and the devil that might lurk in them and find their way into the final version.
"The House has passed its version of reform, but we now face a phalanx of bankers seeking to weaken this bill in the Senate," said Jon Bartholomew, spokesman for the Oregon PIRG. "Will senators vote with Main Street to improve this package or weaken it for Wall Street?"