WASHINGTON — Senate Democrats have rejected a Republican consumer protection plan that would have diluted a central element of President Barack Obama’s financial regulation package.
Democrats and the president argued that the GOP proposal would have “gutted” consumer protections. The vote was 61-38.
The Democrats’ Senate bill would create an independent consumer bureau within the Federal Reserve to police lending and other customer transactions with financial institutions.
Republicans said the Democratic bill overreached and would give a powerful consumer agency too big a voice in banking affairs. Their proposal created a consumer division within the Federal Deposit Insurance Corp., which would have to approve consumer protection regulations.
Earlier, President Barack Obama weighed into the Senate’s financial regulation debate by deriding the Republican consumer protection plan as “worse than the status quo.”
“Alternatives that gut consumer protections and do nothing to empower the American people by cracking down on unfair and predatory practices are unacceptable,” Obama said in a statement.
Democrats and Republicans sparred today over the consumer protection language in the bill. Democrats have proposed an independent bureau within the Federal Reserve to write and enforce regulations that would police lending. The Republican proposal would create an agency within the Federal Deposit Insurance Corp. The FDIC would have to approve regulations and enforcement would be left to bank regulators.
The legislation already contained some concessions to Republicans, and Democrats showed no willingness to cede any more ground. Republicans, in the minority, were unlikely to succeed with their proposal.
The dispute centers on a key element of Obama’s regulatory overhaul. It has been the point of greatest partisan friction and has prompted a massive campaign by the U.S. Chamber of Commerce and bank lobbyists to limit the reach of any consumer agency in the legislation. By personally stepping into the fracas, Obama underscored the importance he places on that aspect of the legislation.
Obama has called for a standalone independent agency — a proposal the House embraced in its version of the financial regulation bill. The Senate Democratic bill would place the agency in the Federal Reserve and would permit a council of regulators to veto its regulations.
But Republican senators said that even with those adjustments the legislation goes too far and they criticized the Democrats’ provisions as a government overreach that would undermine the safety and soundness of the lending business.
The bill would turn the U.S. financial system into “a social justice mechanism” by giving a powerful consumer agency a huge voice in banking affairs, said Sen. Bob Corker, R-Tenn.
Sen. Richard Shelby, R-Ala., said the Democrats go too far by allowing state laws to trump federal laws and he rejected claims that his alternative proposal is too weak.
Obama said the Republican plan would create exemptions for payday lenders, debt collectors and other financial service operations.
“I will not allow amendments like this one written by Wall Street’s lobbyists to pass for reform,” he said.
Senate Banking Committee Chairman Chris Dodd, D-Conn., dismissed the Republican plan as “a stimulus package for scam artists.”
In another departure from the pending Democratic bill, the Republican plan would continue the practice of having federal laws override state laws. Under the Democratic proposal, states would be allowed to write and enforce tougher laws, a provision opposed by the financial industry.
Creating a new consumer financial protection entity within the government is a central piece of the Obama administration’s regulatory package. Obama has said he would veto legislation that contained consumer protections he deems too weak.
Republicans have complained that the Senate Democratic proposal would be too sweeping and create a patchwork of state rules.
The debate has not been entirely contentious, however. Earlier today the Senate voted 98-0 to approve a proposal by Sens. Jon Tester, D-Mont., and Kay Bailey Hutchison, R-Texas, that would let small community banks pay a smaller assessment than large banks toward the Federal Deposit Insurance Corp.’s insurance fund.
The change would require the FDIC to determine bank payments based on the amount of risk banks engage in, a formula that would require larger banks to pay a higher premium.
The FDIC insures bank deposits up to $250,000.
The Independent Community Bankers Association estimates that the change will reduce assessments of 98 percent of banks with less than $10 billion in assets.
After a vote on consumer protections, the Senate was expected to take up a bipartisan amendment that would require the Federal Reserve to undergo a thorough audit by Congress’ investigative arm, the Government Accountability Office.
The measure, proposed by Vermont Independent Sen. Bernard Sanders, has populist support from across the political spectrum, from tea party activists to liberals and labor organizations. The Federal Reserve and the Treasury oppose the measure, arguing it could interfere with the Fed’s independence, a crucial element if the Fed is to carry out unpopular but economically essential policies.
The Fed’s decisions on interest rates can have immense consequences and its secretive nature often confounds and frustrates lawmakers. The House version of the financial regulations bill also requires a GAO audit of the Fed.
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