Senate Banking Committee Chairman Christopher Dodd's decision to break off negotiations with Republicans and go it alone on financial regulatory reform legislation came as a shock to some reformers.
"To be honest, a lot of us were surprised," said one consumer advocate closely involved in financial reform efforts. "It seemed like a deal of some sort was imminent and on track."
The advocate noted that Dodd's decision was likely influenced by the outcry from progressives and other pro-reform groups who argued that Dodd, a Connecticut Democrat not seeking reelection this year, was giving Republicans and Wall Street-friendly Democrats too much sway over the legislation. Dodd's original reform proposal in November had called for a strong, independent consumer-focused agency to protect borrowers from predatory lenders.
"At the end of the day, though, there is only so much that reform advocates were willing to give on this," the advocate said. "And because of the context -- what the banks did to the economy and the bailouts -- reformers have a lot of high ground right now. Democrats just don't benefit from teaming up with the banks and losing the interest groups."
Dodd's partner in the negotiations, Sen. Bob Corker (R-Tenn.), reportedly pushed to exclude nonbank lenders like finance companies, payday lenders and pawnbrokers from the legislation's reach.
The Independent Community Bankers of America, the leading advocacy group representing the nation's community banks, wants tougher oversight of the largely under-regulated network of nonbank lenders.
"The last thing we want is the world we have today," Steve Verdier, senior vice president and director of Congressional relations for ICBA, said in an interview. "Community banks have examinations every 12 to 18 months. The rest of the financial industry doesn't have anybody. It's a terrible situation for consumers."
Reform-minded groups have strongly advocated for reining in nonbanks and banks alike.
"Let's just supervise them all, protect the consumers and not leave any loopholes," Verdier said.
But while the group -- among the most powerful on Capitol Hill -- supports strengthening consumer protection, it doesn't want an independent consumer-focused agency targeting community banks. Bank regulators should keep that authority, Verdier said. Federal bank regulators have been strongly criticized for their consumer protection record, which many have called lax and ineffective.
Dodd was reportedly willing to negotiate on these key points -- to the detriment of consumers, consumer groups and reformers argue.
On Thursday morning, in announcing his decision, Dodd said:
"The proposal that I'll offer on Monday does reflect a lot of the ideas that Bob Corker and others have brought to the table. It was important to put a proposal on the table, short of a proposal that reflects some broad bipartisan agreement."
The consumer advocate is concerned that Dodd may be watering down some reforms. "None of this is a matter of demanding perfection," he told HuffPost. "The advocates are just demanding some meaningful, sensible, and desperately needed changes and aren't interested in letting politicians build false confidence and have big press conferences while ignoring the central issues."
While the ICBA doesn't support a new agency, it does support other elements of the financial reform legislation, especially those targeting Wall Street megabanks.
Verdier said the group supports tougher regulation and monitoring of systemic risk, ending Too Big to Fail, giving regulators increased authority to shut down failing megabanks, and limiting banks' Wall Street trading activities (popularly known as the Volcker Rule).
"The challenge moving forward, of course, is that the industry seems to have in the neighborhood of 40 votes in the Senate," the consumer advocate told HuffPost. "And it won't stand for anything that isn't written by the lobbyists," the source added.
"That's how broken Washington is."