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It looks like a stalemate – again - on regulatory reform, as another effort to craft a bipartisan agreement on a Senate bill appears to have crashed and burned.

Sen. Christopher Dodd (D-CT), chairman of the Senate Banking Committee, announced last week that he is going to present a draft bill to his committee this week, without the Republican support he has been struggling for months to secure.  Sen. Richard Shelby (R-AL), the committee’s ranking Republican, stopped negotiating with Dodd several weeks ago and began working on his own version of the bill.  Sen. Bob Corker (R-TX) stepped up to see if he could close the divide.  But those discussions apparently stalled, too, leading Dodd to decide, once more, to go it alone.

The major stumbling block with Shelby and again with Corker was the Consumer Financial Protection Agency (CFPA).  Although Dodd made many concessions - including an agreement to house the agency in the Federal Reserve instead of making it the stand-alone, independent regulator that the Obama Administration and that consumer advocates demanded ¾ he was unable to carve out common ground with either Shelby or Corker on how the agency should be structured and, critically, on the powers it should have.  Dodd insisted that the agency should have independent rule-making authority; Republicans (and industry lobbyists) insisted that regulators should be able to sign off on any rules the consumer agency issues to ensure that safety and soundness concerns aren’t marginalized. 

On that question – whether a separate consumer regulator would compromise safety and soundness -- more than half (54 percent) of the economists surveyed recently by the National Association of Business Economists said those concerns were unjustified; 25 percent shared the banking industry’s concern.

Dodd’s announcement that the recent bipartisan deliberations had stalled came after several weeks of increasingly optimistic statements from both sides about the progress they were making.  Industry analysts speculated that Dodd broke off the negotiations because he was taking too much heat from consumer advocates and liberal Democrats on the Banking committee, who though he was making too many concessions to the Republicans and weakening the consumer protection goals in the process.  A breaking point, some said, was Corker’s apparent success in excluding non-banks, including payday lenders, from the CFPA’s oversight.

Consumer advocates weren’t the only ones who screamed when that detail was leaked to the press; community banks cried foul, too, insisting that bringing currently unregulated financial institutions within the regulatory framework should be a key goal of financial reform.

“The last thing we want is the world we have today,” Steve Verdier, senior vice president and director of congressional relations for the Independent Community Bankers of America, told Huffington Post.  “Community banks have examinations very 12 to 18 months,” he added.  “The rest of the financial industry doesn’t have anybody.  It’s a terrible situation for consumers.”  

WHITHER THE FED?

While the outlook for the Consumer Financial Protection Agency (CFPA) remains murky, the future role of the Federal Reserve, as defined by regulatory reform legislation, is becoming clearer, and looking a lot less bleak for the agency than was the case a few weeks ago. 

Questions about the Fed’s role in a new regulatory structure have floated in the background of the regulatory reform debate from the beginning, and it appeared initially that the Fed’s fate ¾ as a secondary player, at best, on the regulatory stage ¾had been sealed. 

Long before work began on regulatory reform, legislators had been excoriating the agency, first for its failure to protect consumers from predatory lending practices and then for its failure to identify and respond quickly to signs of the financial meltdown.  Anger at the agency reached something of a boiling point when Fed Chairman Ben Bernanke won Senate confirmation for another term by the narrowest margin ever for that position. 

But over the past four or five weeks, the tide appears to have turned, and, at least in part because of strong lobbying by the Obama Administration, support for preserving a strong regulatory role for the Fed has grown.  Following a meeting Treasury Secretary Timothy Geithner had called with representatives from the eight largest banking industry trade associations, Steve Bartlett, president of the Financial Services Roundtable, told the New York Times, “There was widespread agreement on the need to strengthen the Fed, not weaken it.” 

An unidentified participant in that session confirmed that reading, telling the Wall Street Journal, “All eight of us said it was unthinkable to have the central bank of the United States not have supervisory authority over the financial industry.”

Joining that support-the-Fed chorus, Camden Fine, president of the Independent Bankers of America, vowed that his organization “will fight tooth and nail to preserve the Fed’s role in bank regulation.  In our view,” Fine told American Banker, “it is absurd to blind the Fed to 8,000 community banks on main Street America. That is very poor public policy.”  

Since his confirmation, Bernanke has become more outspoken in making the case for preserving and possibly expanding the Fed’s supervisory role. During a recent Congressional hearing, he told lawmakers that it would be “a grave mistake” to eliminate or weaken the Fed’s supervisory authority. “It is hard for me to understand why in the face of a crisis that was so complex and covered so many markets and institutions, you would want to take out of the regulatory system the one institution that has the full breadth and range of the skills [needed] to address those issues,” Bernanke said.

His arguments apparently are finding a receptive audience, even among some of the Fed’s harshest critics.  “They have not been perfect,” Sen. Evan Bayh (D-IN), said of the agency. “But my strong impression is they’ve learned from that, which makes it likely they will do a much better job moving forward,” he told the Wall Street Journal, adding, “It is important not to scapegoat the Fed.”

 Noting those expressions of support from Bayh and other lawmakers, including members of the Senate Banking committee, Wall Street Journal reported that the Fed was likely to emerge “as the primary regulator of the country’s largest financial firms.” 

GSE REFORM – EVENTUALLY

When Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, called for the “abolition” of Fannie Mae and Freddie Mac during hearing a few months ago, he expressed surprise at the amount of news coverage his comment received.  “I don’t think I know anyone who thinks Fannie and Freddie should continue as they are,” he told reporters.  “I ‘m surprised anyone thinks that’s news.”

But it was news, by any definition of that term not just because the fate of the two Government Services Enterprises (GSEs) has been an open question for at least the past two years, but also because Frank had been among the staunchest supporters of the two companies and the central role they have played in the financing of home mortgages.   But that was before the accounting scandals that shook both companies (and public confidence in them), and before the financial market implosion that pushed both to the brink of failure, requiring a government rescue  that confirmed the arguments of critics, who had warned for years that the secondary market giants would someday require a taxpayer bailout.  

At this point, Frank told the New York Times recently, there is no question that Fannie and Freddie and the entire housing finance system needs overhauling.  “I can’t say when and I don’t have any idea what the new system will look like.  No one, I believe, knows.  All we really know,” Frank said, “is that we need something new.”

Legislative efforts to create that new structure will continue a long-standing debate between those who think the federal government should continue to play a role, albeit, perhaps, a more limited one, in the housing finance arena, against those who insist that government should play no role at all in the private housing market.    Both positions, and variations on them, are reflected in several proposals that are being circulated around Capitol Hill in anticipation of the congressional deliberations to come. 

That debate hasn’t yet taken center stage in Congress. It has been unfolding primarily in the press and on the sidelines, as an adjunct to efforts to enact broad regulatory reform legislation. Republicans have been pressuring the Obama Administration to propose a plan for dealing with the GSEs (which have been operating under federal conservatorship for more than year), while keeping up a steady drumbeat of criticism, blaming the GSEs for contributing to the implosion of the subprime mortgage market that triggered the financial meltdown. 

Despite broad agreement that “something” must be done about Fannie and Freddie, Administration officials are in no apparent rush to tackle that task.  The GSEs were conspicuous by their absence from regulatory reform proposals,  there was no mention of the companies in the FY 2011 budget  the Administration introduced to Congress and Treasury Secretary Tim Geithner said recently that  it will probably be next year before the Administration introduces in legislative proposals for overhauling the GSEs.  “We are completely supportive and agree completely with the need to take a cold, hard look at what the future of those institutions should be in our country,” Geithner said in January interview on PBS’ The News Hour.  But creating a blueprint for that future “is a complicated thing to get right,” he noted.

Restructuring the GSEs, a complex challenge before the financial meltdown, has become infinitely more complicated since, because of the central role Fannie and Freddie are playing in the Obama Administration’s efforts to combat mortgage defaults and foreclosures that are impeding the housing market recovery. 

"Any suggestion now about future changes could destabilize the market," said Karen Shaw Petrou, managing director of analysis firm Federal Financial Analytics and a longtime observer of housing finance policy. "The U.S. mortgage market is so fragile that all Treasury needs to say is ‘boo’ and it could fall apart,” she told the Washington Post recently.

Underscoring that concern, Geithner announced recently that the Administration was lifting the $400 billion ceiling on federal aid to the GSEs (part of the conservatorship plan) and would provide whatever aid is needed to support them through 2012.  

Even the GSEs’ critics acknowledge that unraveling the government’s relationship with Fannie and Freddie and its dependence on them, is more easily demanded than achieved.  Peter Wallison, a fellow at the American Enterprise Institution (a conservative think tank) and a strong advocate of privatizing Fannie and Freddie, acknowledged that radical reform may not be the most likely outcome of the GSE debate.  In a recent Wall Street Journal interview, Wallison predicted, “Congress will say, ‘we have something we know worked in the past and we don’t have anything right now.’“  Lawmakers, he said, will face strong pressure “to re-establish” Fannie and Freddie, rather than to reconfigure or eliminate them.

CREDIT CARD RULES

The Federal Reserve has proposed a package of new credit card rules, including restrictions on the penalty fees credit card issuers can impose and specifically capping the late fees they can charge.  The new rules, the latest in a series of protections mandated by the Credit Card Accountability, Responsibility and Disclosure Act Congress approved last year would take effect August 22. 

Under the Fed’s proposal, penalty fees could not exceed the amount of the violation triggering the fee – targeting a frequent complaint of consumers and consumer advocates whose anger over “abusive” credit card practices prompted Congressional action. The rules would also:

  • Ban inactivity fees;
  • Prohibit multiple penalty fees based on a single late payment or single violation;
  • Require issuers who increase a card-holder’s rate to explain the reason for the action; and
  • Require issuers who have increased rates since January 1, 2009 to assess whether the circumstances triggering the increase have changes, and if appropriate, to reduce the rate. 

The Fed will accept comments on the proposed rule for 30 days before making it final.  Banking industry executives have warned that the retractions could increase consumers’ costs and reduce their access to credit; consumer advocates have complained that the Fed’s rules don’t go far enough to prevent future abuses.

Separately, a recent survey suggests that consumers are almost as confused about the details of the new credit card protections as they are angry about the industry practices that triggered them.  The survey, commissioned jointly by the Credit Union National Association (CUNA) and the Consumer Federation of America, found that while more than 60 percent of consumers are aware that Congress has mandated new protections, 65 percent don’t know the new rules take effect this month and don’t understand what they entail. 

More than one third (35 percent) of the respondents assume incorrectly that the new law caps late fees at $35, 31 percent assume (also incorrectly) that the law imposes a 20 percent cap on rates, and 42 percent think the law prohibits issuers from increasing the rate on one card because of the payment history on another card (the law requires advance notice of such changes, but does not prohibit them).  

While many consumers think the law provides protections it does not offer, others are unaware of the protections that are included, with fewer than half aware of the provisions requiring card companies to apply monthly payments to higher-interest debt first and barring over-limit fees unless consumers authorize over-limit transactions. 

“We are especially concerned that some consumers will base their future credit card use on protections that don’t exist,” Stephen Brobeck, executive director of the CFA, said in a press statement. 

More encouraging, Brobeck said, were indications that consumers are responding appropriately to adverse changes in their credit card rates or terms, by using their cards less frequently, repaying balances more quickly, or halting use of the cards entirely.  More than half of the respondents indicated they have received notice of a change in their credit card terms since Congress approved the new credit card protections. 

“The new rules are leading to changed behavior” by card companies, Bill Hampel, CUNA’s chief economist said.  “Considering all the credit card mailings they typically receive and the complexity of some of these disclosures, it’s a positive sign that many consumers have noticed the changes,” Hampel added, and a positive sign that many are responding by changing their use of the cards or shopping for better deals.   

YES, WE HAVE NO SAVINGS

Denial, as the saying goes, is not just a river in Egypt.  Recent reports indicate that it also describes a state of mind for many Americans contemplating their retirement future. 

The Employee Benefit research Institute’s annual Retirement Confidence Survey found that U.S. workers have become slightly more confident about having sufficient resources for retirement, even though the number of workers who have saved little or nothing for their retirement years increased for the third consecutive years. Forty-three percent of survey respondents said they have less than $1,000 in their retirement accounts, up from 39 percent in 2009, while the percentage with less than $1,000 increased to 27 percent from 20 percent.  Despite that negative trend, 16 percent of the respondents said they are “very confident” about their retirement prospects, the second-lowest rate in the survey’s 20-year history, but up from 13 percent last year. 

“You have a real non-sequitur going on,” Jack VanDerhei, research director for EBRI and one of the report’s authors, told Bloomberg News. 

That apparent disconnect – between retirement reality and hope  - may reflect the number of workers who are planning to continue working past the age of 65.  But that’s a dangerous assumption, VanDerhei noted, given the risks of health problems and employment setbacks they may face. 

Although workers are concerned about both issues – health and job security – the survey found that only 46 percent have actually tried to calculate their retirement income needs. 

“People just don’t want to think about this,” VanDerhei told reporters.  “Everybody thinks they’re too young to think about it, until suddenly they’re too old to do anything about it.”

ET TU, WALL STREET JOURNAL?

Suggestions that “walking away” or “defaulting strategically” might be a rational choice for homeowners whose mortgages exceed the value of their homes are surfacing with some regularity in discussions of the continuing fallout from the financial meltdown and the recession it triggered.  And the idea is cropping up in some unusual places – such as the Wall Street Journal.  Homeowners who find themselves “underwater” on their loans “need to stop living in a dream world and give serious thought to walking way from the debt,” WSJ columnist Brett Arends advised in a recent article. “You shouldn’t’ feel bad about it and you shouldn’t feel guilty, he said, noting that “lenders would do the same to you - in a heartbeat. You need to put yourself and your family’s finances first.”

Arends acknowledged that defaulting on a debt has serious consequences and is not necessarily the right answer for everyone.  But all consumers who have seen their home values plummet should “do the math, Arends says, and they should approach the calculation as objectively and as unemotionally as lenders approach decisions to foreclose on delinquent borrowers, or to walk away from their own failed transactions. 

“Whether we like it or not, walking away from debts is as American as apple pie. Companies file for bankruptcy all the time, and their lenders eat the losses…. Limited liability, after all, is one of the main reasons every business from your local dry-cleaner to a major multinational gets incorporated in the first place,” Arends argues, adding, “They're not shy about protecting themselves if things go wrong. You shouldn't be either.”