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Battle Brewing On Capitol Hill Over Obama's Proposed Consumer Protection Agency

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Consumer groups welcomed President Barack Obama's proposal to create a Consumer Financial Protection Agency as part of his sweeping overhaul of financial regulations on Wednesday. But they worried that the victory could be short lived as the powerful Wall Street lobbies prepare to go to battle to protect their own.

"The financial industry is sharpening its knives, and the question is, will Congress be able to withstand a sustained assault?" asked Travis Plunkett, the legislative director of the Consumer Federation of America.

In anticipation of the confrontation, a coalition of 200 consumer groups announced a day earlier the creation of Americans for Financial Reform, which will fortify their allies in Congress and will work to protect the president's proposal for the new consumer agency.

"The new coalition is what the broad public interest community needs to work together and win," said Ed Mierzwinski, consumer program director of US Public Interest Research Groups.

Consumer groups are applauding the proposed agency, which has been dubbed the CFPA, for strengthening consumer protections. "It is a game changer," said Mierzwinski, "It's the biggest thing since deposit insurance."

Supporters pointed out three key elements in the proposal that will protect consumers -- the stronger role of states in enforcing consumer protection laws, which banks have tended to disregard; the new oversight authority across all types of Wall Street financial products; and the elimination of the long-standing conflict between the needs of financial firms and consumers.

"This proposal provides strong federal oversight, but it also restores the ability of states to enforce strong consumer protection laws," said Kathleen Day, a spokeswoman for the Center for Responsible Lending. States have long been sidelined in the fight for consumer protections because many banks that sell financial products to consumers are federally chartered, and so are only subject to federal oversight.

"What happens currently is that regulators passed rules that said they were the only ones with regulatory oversight over certain banks, and so state laws were preempted," said Ira Rheingold, the executive director of the National Association of Consumer Advocates. "But now, the way we read this, the new consumer agency can declare a floor of basic consumer protection, but the states to take that even further if they choose."

The funding mechanism for the new consumer protection agency is being widely applauded also. Most regulatory bodies are funded from fees paid by the financial institutions they oversee, creating the possibility of a conflict of interest. This can mean that regulatory agencies hungry for funds may offer less oversight in an effort to convince companies to join their charters. Under Obama's plan, this race to the bottom could be eliminated because firms across Wall Street will have to pay fees to the CFPA.

"Companies would often change their charter to be regulated by a more lenient agency, but under Obama's plan, from what we gather, everyone has to pay across the board, eliminating companies from going regulator shopping," Day said.

Supporters of the CFPA also say it will eliminate conflicts of interest among regulators who now wear two hats: regulating for consumer protection, while also overseeing the safety and soundness of the financial firms.

While consumer groups rejoice at what Plunkett calls "an extremely strong proposal," the financial industry has, not surprisingly, been vocal in its opposition.

The American Bankers Association issued a statement that it was "strongly opposed" to the new agency, noting that "banks would be subject to conflicting regulation between safety and soundness and consumer regulation in many instances." It added that the new agency represents "an unprecedented grant of power to mandate business practices" because it can require that certain financial products be made available to consumers while others be barred from consumer consumption.

The US Chamber of Commerce held a press conference earlier this week, denouncing the CFPA in advance of Obama's speech. The Chamber's statement charged that the new consumer agency "cannibalizes regulatory expertise and adds yet another regulatory layer."

Despite this apparent opposition, sources at some banking groups say there are so many aspects of the Obama plan to tackle, they aren't convinced that all of their guns will target the CFPA. Opposing a consumer protection agency, said one official wryly, "sounds really terrible, no matter how you try to spin it."

That said, consumer groups aren't taking any chances at losing the CFPA.

"We have quite a battle on our hands," said Rheingold. "What the consumer agency will end up looking like, and how we isolate the proposal from political influences, will be key."

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