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Centrist Dems To Press Concerns Over New US Consumer Agency

By Jessica Holzer, Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- Centrist Democrats in the House of Representatives are seeking to put their imprint on the proposed Consumer Financial Protection Agency, an effort that could result in changes favored by the banking industry.

A bill to create the new agency, a centerpiece of the White House plan to rewrite financial-industry rules, will be the top priority of the Financial Services Committee this month before it takes up other parts of the plan.

Panel centrists will be pushing to undo a key part of the proposal: A provision allowing individual states to enact tougher rules that exceed the " floor" set by the new agency. These lawmakers want to ensure that federally chartered banks have to adhere to just one federal standard around the country, rather than having to adhere to varying state laws.

The issue is likely to ignite a battle with liberal Democrats, who argue that the subprime-mortgage mess could have been avoided if states had been allowed to crack down on federally chartered institutions.

"The crisis occurred in part because states were not allowed to proceed with laws that were passed," said Travis Plunkett, chief lobbyist for the Consumer Federation of America.

Centrists hold considerable sway over any final bill that passes through the committee. Fifteen members of the business-friendly New Democrat Coalition, as well as a handful of Blue Dog Democrats, sit on the panel.

Several of them, such as Reps. Dennis Moore of Kansas and Melissa Bean of Illinois, have staked out strong positions in favor of federal preemption for banking rules, backed by votes in recent years. These lawmakers may be unwilling to backtrack on the issue, a situation that could pit them against their liberal colleagues, particularly those from California, who have long pushed to curb federal preemption.

Proponents of federal preemption argue that, without it, national banks would have to comply with a patchwork of 51 standards, raising costs on consumers. Plunkett disputes this assessment, contending that a high federal standard will ensure many states follow suit.

"What I don't see from moderate Democrats is the questioning of some of the facts behind these claims," he said.

Democratic opponents of preemption may have a powerful ally in Federal Deposit Insurance Corp. Chairman Sheila Bair. Though a skeptic of the new agency, she favors rolling back federal preemption of state consumer protections.

"It has now become clear that abrogating sound state laws, particularly regarding consumer protection, created an opportunity for regulatory arbitrage that frankly resulted in a 'race-to-the-bottom' mentality," Bair wrote in the September issue of Financial Stability Review, a French central bank publication.

Aside from the preemption issue, panel centrists will also argue for other changes to the legislation, heeding the concerns of the banking industry, according to a Democratic aide.

They will be pushing to have a bank's federal safety and soundness regulator take charge of enforcing rules handed down by the new agency. As proposed, the new consumer agency would have broad powers to both write and enforce consumer protections.

Centrists will also demand that banks aren't forced to offer what are known as plain-vanilla products that would be defined by the agency. House Financial Services Chairman Barney Frank, D-Mass., recently rejected a White House idea to require firms to offer such products alongside more complex products.

However, committee staff are now considering providing legal protection to banks that offer plain-vanilla products, according to people familiar with the matter.

Industry lobbyists say this amounts to a de facto mandate that will kill innovation. "What banker in his right mind would want to leave the safe harbor?" Independent Community Bankers of America President Camden Fine argued. "All that does is squelch innovation and limit consumer choice."

-By Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@ dowjones.com

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