Consumer Financial Protection Goes to the Fed

In something of a surprise, the House has lost the battle to create a completely independent consumer financial protection agency. Instead, it will settle for the Senate's conception of the new watchdog, which would place it in the Federal Reserve. This can't please advocates for the new regulator. The move shows that the moderate view is winning in conference.

Back in March, House Financial Services and conference committee Chairman Barney Frank (D-MA) claimed he wouldn't support the agency in the Fed, saying:

My main objection to housing this critical function in the Federal Reserve has been the central bank's historical failure to implement consumer protection as a central part of its mission and role.

Indeed, the Federal Reserve already has the charge of protecting consumers. But that obviously didn't go too well during the subprime mortgage bubble, when lots of bad loans were pushed on unsuspecting Americans. The question is whether this new agency will be independent enough to really put consumers first, or if they will continue to come second to the Fed's chief concern -- banks.

The way the Senate bill is written the agency does appear quite independent. Its head doesn't appear to answer to the Fed chief, but is appointed by the President. In most ways, it looks pretty similar to the House's version, except for technically being located under the Fed umbrella. Yet if there's no difference other than this formality, it's a little hard to understand why Republicans and moderate Democrats pushed for this detail. Perhaps they're hoping that any conflicts between consumer and prudential regulation within the Fed will be solved internally, resulting in systemic risk treated as the top priority.

At first, this development might appear to indicate that the Senate wields more power than the House in negotiations. It couldn't have been clearer that Rep. Frank didn't want this regulator put in the Fed. And as far as members of the House go in this process, no one has more power than he does. Yet even he couldn't successfully push for a truly independent agency.

But that isn't quite right. In other disagreements, we're seeing the House move the Senate's dial too, like with the rating agencies and Fed audit. Instead, it looks more like the moderate view is winning out, and whatever chamber of Congress is more in line with that view is claiming each battle. If this continues, we should expect a Volcker Rule with key loopholes and less aggressive derivatives regulation than the Senate bill sought.