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Bair pitching for consumer agency

By Marcy Gordon
AP Business Writer / March 1, 2010

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WASHINGTON—The head of the Federal Deposit Insurance Corp. pitched again Monday for a new agency for consumer financial protection, now a key sticking point in Senate talks in legislation to overhaul the finance system.

FDIC Chairman Sheila Bair said a new agency was needed and she believes it "would help community banks, not hurt them."

The banking industry overall opposes creation of a new agency, which would enforce rules and police the fine print of credit cards, mortgages and other financial transactions. Bair said she was hopeful a bipartisan agreement can be reached in Congress on the issue.

"I don't think we've done a good job protecting consumers in financial services," Bair said in remarks to a conference of the National Association of Attorneys General.

Attorneys general in several states have actively prosecuted mortgage fraud and other financial violations in the wake of the financial crisis that struck in late 2008.

Bair, an independent regulator, has endorsed creation of a consumer protection agency -- a key pillar of the Obama administration's plan to reconfigure the financial system.

The White House signaled Thursday that it could bend from its original proposal and accept a consumer entity that is not independent of other federal agencies. But it set conditions that Republicans might still find objectionable.

A proposal being discussed in negotiations between Sen. Christopher Dodd, D-Conn., the Banking Committee chairman, and committee Republicans would create a bureau within the Treasury Department or within a new overarching bank regulator that would have authority to write consumer-protection rules.

The recently accelerated tempo of negotiations has raised hopes that Dodd might be able to announce a bipartisan bill this week, more than a year after a panic swept Wall Street nearly causing a financial collapse. At the same time, with several pieces unsettled, the talks could still fall apart.

The banking industry opposes a new consumer agency, contending that current federal regulators can handle the task. Community bankers won a major concession, however, in the financial overhaul bill that passed the House in December: Banks with less than $10 billion in assets would not have to undergo a separate examination by the proposed consumer protection agency.

Bair also touched on two themes she has recently emphasized. Citing the historically large drop in bank lending last year, she said most of the decline has come from big banks while community banks have been "hanging in there better" than the large Wall Street institutions.

Big banks "need to step up to the plate here, too," she said.

U.S. bank lending in 2009 posted the steepest drop since 1942, with the volume of loans falling by $587.3 billion, or 7.5 percent, from 2008.

Bair also refuted accusations by lawmakers and business owners that overly strict directives by bank regulators and examiners have dampened banks' lending to local businesses.

The FDIC has encouraged its examiners to "take a balanced approach" to bank supervision and not to overreact in a climate of mounting loan losses and bank failures, Bair said. The word to banks is, "If it's a good loan, make the loan," she said.

But Chris Cole, senior regulatory counsel for the Independent Community Bankers of America, who spoke after Bair, said community banks "are really in a bind here."

"The regulatory pendulum has swung too far over in the direction of overregulation," said Cole, who spoke to the state attorneys general after Bair. The economy won't fully recovery until the pendulum swings back, he said.