08/21/2009 05:12 am ET Updated May 25, 2011

Under Wall Street Pressure, House Dems Punt On Reform

Intense lobbying pressure from Wall Street has slowed the progress of a major piece of financial regulatory reform legislation. Financial Services Committee chairman Barney Frank (D-Mass.) informed committee members Monday night that a vote on the creation of the Consumer Financial Product Safety Commission will be pushed back until September.

"We wanted to give consumer groups and their allies time to work with their members, organize and get their message out," said committee spokeswoman Elizabeth Esfahani. "So far in this debate, we've only heard from one side, the banking lobbyists, so we want to give both sides time to be heard."

The setback is a wake-up call for Democrats, said Rep. Brad Miller (D-N.C.), an original sponsor of the measure.

"Now some of those who thought with a conciliatory approach we might get agreement, I think they now know that it's going to be a battle," said Miller.

Backers of the bill need help battling the banks, Miller said, calling on President Obama and his progressive allies to join in.

"The consumer groups and civil rights groups and labor groups that are part of the coalition supporting it need to get in the fight because the industry is pretty much in the fight already," he said. "And the Obama administration needs to get in the fight."

On Monday, a gang of 23 interest groups wrote a letter to Frank asking him to delay consideration of the bill. The coalition includes banks, realtors, advertisers, home builders, insurers, car dealers, the Chamber of Commerce and even the electronics industry. The full list is below, following the letter.

"The precarious state of the economy makes it a particularly dangerous time to enact legislation without a clear understanding of its full impact on the business community at large," they wrote. "The scope of the legislation is very broad, granting unprecedented power and authority to a new agency with very few checks on that agency's power."

For Miller, the banks want more time for one purpose only: to kill the bill. All of the same industry groups that said 'Hell no' before any words were put on paper, just opposed the idea, are now saying, 'Gee, we need time to think about this.' I do wonder, cynically, whether they need more time to think about it or just need more time to fight it. It doesn't sound like there are any tweaks that are going to bring them around," he said.

There are 42 Democrats on the committee and 29 Republicans. That may sound like an overwhelming advantage, but in practice it means that banks need only flip seven of those 42 Democrats and hold the GOP to block legislation. The committee dynamic highlights the pitfalls of top-down political action. Though the bill has high-profile support, banks have so far been able to butcher it in the trenches because the coalition behind it doesn't have the same resources or organization to defend it.

The banking, insurance, and real estate industries have built longstanding relationships with lawmakers and continue to do so with freshman. Earlier this month, for instance, Rep. Suzanne Kosmas (D-Fla.) skipped a hearing on the regulatory reform bill and instead attended a Wall Street fundraiser. Rep. Maxine Waters (D-Calif.) took her to task in a later hearing for missing the hearing, a rare public upbraid from one Democrat to another.

During the battle over bankruptcy reform earlier this session, Sen. Dick Durbin (D-Ill.) concluded of Congress that banks "frankly own the place." In May, they were able to defeat a key piece of reform that would have allowed homeowners to renegotiate mortgages while in bankruptcy. The White House and progressive advocacy groups largely stayed out off the field, an absence that allowed banks to run up the score.

Without the reform in place, foreclosures have continued to soar, surprising the White House, if not advocates of reform such as Durbin. Pushing through the Financial Product Safety Commission will be the next test of Wall Street strength.

But it's a test that will have to wait while Democrats focus their energy on health care. "The biggest fight in the next three weeks is going to be health care," said Miller. "So there may be a limit to... how much room there is for two pitched battles to be going on at the same time. And obviously health care is the issue of the moment."

The delay is a result of power and politics, not a need to finish reading the bill. "I don't think comprehending a 160-page bill over a five-week period for members in an exclusive committee is that heavy a lift," said Miller. "The big fight is not over the details; the big fight is over the big picture."

Harvard Prof. Elizabeth Warren, who heads the commission overseeing the disbursement of bailout funds, proposed the commission earlier this year. The body would have oversight of mortgages and other financial instruments just as other commissions regulate the safety of toys, drugs or airplanes.

"In America, we don't say 'buyer beware' when people are buying prescription drugs or when they're concerned about lead paint in toys," said Durbin (D-Ill.), a cosponsor of the bill, when it was first introduced.

Warren, during a press event in March marking the introduction of the bill, highlighted how the commission would work and how it could have prevented the current crisis.

She offered the example of a loan with a low "teaser rate" and an obscured prepayment penalty. "Prepayment penalties are a way to try to fool [borrowers] into thinking the price is $1100 dollars a month -- that's the teaser rate -- when in fact the real price of this product is the equivalent of $1900 dollars a month. And if you try to refinance out of the product, you'll pay a prepayment penalty. That's how the company will make its money. You'll either pay higher interest later on, or you'll pay a prepayment penalty to get out of it."

When the price rises to $1900 a month or higher, the borrower can't refinance, can't make the payment, and goes into foreclosure.

"If there had been an agency, like the Financial Product Safety Commission, that had said, 'You just don't get to fool people on pricing,' then what would have happened is," she said, "there would have been millions of families who got tangled in predatory mortgages who never would have gotten them."

Preventing the proliferation of those loans could have stopped the housing bubble from forming -- and then popping.

"It never would have been as profitable for mortgage brokers and others in the financial services industry to market these products, because they would not have been such high-profit products. If we never would have started at the front end, we never would have fed them into the financial system. So there never would have been this expansion in the housing market, this housing bubble. And more importantly, never the fodder that went in, ultimately, to the mortgage-backed securities that created the credit default swaps and so on through the system," Warren said.

The battle will be fierce for just that reason - profit.

"This is a huge fight with the most powerful industry in America, that has been making enormous profits that they could not possibly make if consumers were able to make informed decisions and comparison-shop," said Miller. "If consumers were able to make informed decisions, it would squeeze profits, it would squeeze costs, and that means compensation. And the profits in that sector just a couple years ago were more than 40 percent of all corporate profits and the compensation was almost twice what it was for the average American worker. So this is a big fight for them."

Read the letter:

Dear Chairman Frank and Ranking Member Bachus:

We write today as a broad group of trade associations representing millions of businesses of all sizes across the country from diverse sectors of the economy, in regard to H.R. 3126, the "Consumer Financial Protection Agency Act of 2009."

While we commend your commitment to passing comprehensive financial regulatory reform legislation, including enhanced and effective consumer protection, we are very concerned that this legislation could advance without sufficient time to fully assess the cost to consumers and impact on businesses from all sectors of the economy. The scope of the legislation is very broad, granting unprecedented power and authority to a new agency with very few checks on that agency's power.

For example, there are numerous questions that have not been sufficiently answered regarding which entities and types of business activities are covered by H.R. 3126. In addition, the intended benefits to consumers of many of the bill's provisions are unclear. Both of these shortcomings raise a very real probability that there will be significant dangerous, unintended consequences if the legislation is enacted in its current form. In fact, it appears that many of the most critical decisions about the full scope of and manner in which this agency will define and exercise its expansive authority are delegated by Congress and left up to the new agency without significant oversight.

While we understand the importance of moving forward in response to the current economic and financial crisis, we urge you to pursue a thorough deliberative process on this legislation. There needs to be adequate time for all stakeholders, including Congress, the business community and consumers, to fully understand this bill's implications, how it will impact consumers and their access to credit, the true costs of creating such an agency, and whether a new stand-alone consumer protection agency is necessary or whether enhancing the regulatory power of existing regulators can accomplish the same goal. The precarious state of the economy makes it a particularly dangerous time to enact legislation without a clear understanding of its full impact on the business community at large.

On behalf of our members, we strongly urge you to delay your Committee's consideration of H.R. 3126 until after the August recess in order to provide due time for all stakeholders and decision-makers to fully understand the legislation's scope and its potential economic and legal impacts. Thank you for your consideration of this request.


American Association of Advertising Agencies
American Financial Services Association
American Institute of Certified Public Accountants
American Land Title Association
American Resort Development Association
Association of National Advertisers
Building Owners and Managers Association International
Business Roundtable
Consumer Bankers Association
Consumer Data Industry Association
Consumer Electronics Association
Direct Marketing Association
Financial Services Institute
Financial Services Roundtable
Interactive Advertising Bureau
National Automobile Dealers Association
National Association of Home Builders
National Association of Mutual Insurance Companies
Property Casualty Insurers Association of America
Real Estate Roundtable
The National Business Coalition on E-Commerce and Privacy
U.S. Chamber of Commerce's Institute for Legal Reform
U.S. Chamber of Commerce