Republican Proposes Independent Consumer Protection Agency -- Kind Of

Staff members for Senator Richard Shelby, ranking Republican on the Senate finance committee, have said he will support an independent consumer finance protection agency -- but with limitations, including an outside commission that could override CFPA rules. There are not many more details in the Washington Post article that breaks the story this morning.

It's surprising to hear a Republican advocating for an independent consumer agency, but it's worth evaluating the meaning of the word independent in this case. After all, Sen. Shelby is the guy who just three weeks ago told a gathering of the American Banking Association that "safety and soundness trumps everything. It trumps the consumer finance whatever." In a more sober moment with PBS' Judy Woodruff, he said "I think you have got to have a balance between sound banking regulations and sound banks, banks that are going to be here for the consumer, and what a freestanding or an independent agency would put on them. I think you have got to have a balance."

To understand what Shelby means by "balance," it's important to back up and remember that one central conflict in the debate over consumer protection is the trade-off between banks' safety and soundness (profitability) and consumer protection against practices that are seedy, but profitable. In the current consumer protection smorgasbord, the safety and soundness concern has the clear upper hand for at least two reasons. First, a plethora of regulators at the federal and state level encourages arbitrage among regulators jostling for bank charters by softening their rules. Second, consumer protection is divided among a number of alphabet soup agencies most of whose first order of business is looking after the "safety and soundness" of banks.

That's why consumer protection advocates say that a strong agency would both be independent and have full rule-making authority over banks and and non-bank entities, like payday and auto lenders. Shelby's deal would give the agency nominal independence without true independence to write rules that offer simple disclosure to consumers of financial products like student loans and credit cards.

The most important questions are to come, as my colleague Dan Indiviglio pointed out to me. First, will Dodd agree to a CFPA that fudges the meaning of the word independent and essentially recasts Shelby's previous counter-offers to give the CFPA glorified recommendation status? Second, will the White House -- which has gone from lukewarm to crusading on the consumer protection issue -- respond to Shelby's offer with clear approval or disapproval?