Sen. Chris Dodd (D-Conn.) (EPA/ZUMApress.com)

Last week, the Senate passed a sweeping overhaul of the regulation of banks and financial institutions. The bill, authored by Sen. Chris Dodd (D-Conn.), does not just focus on Wall Street firms, changing leverage limits and capital requirements. It focuses on Main Street banks and lenders as well. The bill empowers a new oversight council to create and enforce rules specifically on behalf of regular consumers: the Consumer Financial Protection Agency, housed in the Federal Reserve in the Senate bill and an independent federal agency in the House bill, which now need to be merged.

[Economy1]By and large, consumer watchdogs — some of the bill’s fiercest critics and biggest supporters — were happy with the final Dodd legislation. “We are pleased the Senate has passed this momentous bill that will rein in big banks’ reckless behavior and bring transparency to our financial system and protect consumers,” Heather Booth, the consumer advocate and director of the Americans for Financial Reform, said in a statement. “[This bill] ensures the financial system operates to support needs of working families, promotes business growth and economic mobility rather than the interests of the speculators who view the economy as a huge casino.”

But as the Dodd bill heads to conference committee — where members of Congress will reconcile the Senate financial regulatory reform proposal with the House’s bill, passed last year — consumer advocates have identified loopholes and weak points where a merged bill could be watered down, leaving American workers and families overpaying for financial services or otherwise vulnerable. Consumer advocates primarily cite the purview of the CFPA — the companies it will be able to regulate, and the extent to which it will be able to enforce rules — as the primary yardstick of real reform.

Travis Plunkett, the legislative director of the Consumer Federation of America, points to investor protections as the “big hole” remaining in the bill. “The House legislation is stronger on making sure that financial professionals are responsible for the advice they give,” he says. But the CFA is also focusing on ensuring a strong, independent CFPA comes from the conference committee process. He named a loophole in the Senate bill regarding the CFPA’s ability to monitor small non-bank lenders, like payday lenders, as problematic. “We’d like to see the House language triumph there,” he said, noting that the difference would amount to millions for low-income Americans.

The Center for Responsible Lending, a nonpartisan research group, cites whether auto lenders are under the CFPA’s oversight as an issue to watch. The Center estimates that consumers spend $20 billion more a year on their car loans because they borrow through dealerships — whose contracts can be usurious and difficult to understand — rather than banks or credit unions. Kathleen Day, a spokesperson for the organization, notes that the House bill exempts auto lenders from CFPA regulation and that car companies are lobbying hard to keep it that way in the final legislation.

Sen. Sam Brownback (R-Kans.) attempted to push the same exemption into the Senate bill, but the Senate ultimately did not vote on his amendment. Today, the Senate plans to take a nonbinding “sense of Congress” vote on the measure. “It isn’t binding, but these things are taken into account in conference committee,” Day says. “Currently, the Senate bill is better than the House bill on that, so we don’t want to see a shift there.” Plus, it is a point of hard lobbying. Last year, Ford Motor Company alone made more than $1 billion through its financing arm.

Day also says the CRL hopes Congress removes a Senate provision allowing small non-bank companies to preview and comment on CFPA rules “before they see the light of day.” “That’s behind the scenes, and would lead to the kind of cozy relationships between regulated companies and regulators that led to this crisis in the first place.”

Consumer watchdogs also cite preemption — the ability of the federal government to quash strong local rules — as a major issue to watch as the bills are merged. “It [is] really in the weeds,” Day says, “and a hard one to tamper with, but important.”

Mike Konczal, a fellow at the Roosevelt Institute and specialist in banking regulation, explains that reformers want states to retain the ability to create and enforce strong consumer-protection standards within their borders — and had to fight for the provision in both the House and Senate. “The New Democrats [in the House] could have probably killed the CFPA or at least turned it into a toothless panel,” he says. “But they let it go and then pushed hard [for] pre-emption, which would allow the Office of the Comptroller of Currency” — a primary government banking regulator — “to break state consumer protection laws.”

Therefore, preserving the ability to police consumer protection at the local level remains a priority for advocacy groups in Washington.

But Brian Beutler of Talking Points Memo reports that Republicans are pushing to put the entire process on C-SPAN. That would be good for people looking for strong consumer protections and a strong bill more generally — making sure auto dealers providing loans come under scrutiny from the Consumer Financial Protection Agency, making sure loopholes are closed, making sure the derivatives language remains strong.

Why? For one, no senator wants to be out in public defending banks or watering down reforms. Second, the bill remains enormously complex, and allowing cameras in will provide consumer groups and others the chance to push back before deals are made.

The Council, which has generally drawn little public attention, was created by Congress in 1976 as the public’s link to the Fed, and it includes about 30 members, representing consumer advocates, the financial services industry, government, and academia. The CAC’s purpose is to give input and advice to the Fed on consumer protection issues. It meets three times a year.

Of course, the financial crisis — and the Fed’s inaction on regulating subprime mortgages — probably gives a clear glimpse into just how effective the CAC has been. Some 18 former and present members of the council earlier this month urged Sen. Christopher Dodd (D-Conn.), who chairs the Banking Committee, to fight for an independent consumer financial protection agency. They pointed out that the Fed largely ignored their worries about high-rate mortgages, credit card fees, and other lending abuses — not to mention their recommendations to remedy them over the years.

It’s a little worse than that. Some members also say the CAC is supposed to the consumer’s voice, but things never quite worked out that way. Their specific complaints: Over the years, industry officials outnumbered the consumer representatives at the meetings. Consumer reps felt their concerns weren’t heard.  And the industry reps used their memberships on the CAC to lobby for their positions against regulation.

Dodd’s latest proposal calls for the CFPA to be an independent entity within the Fed — but existing bank regulators would have veto power over some of its decisions, including a Fed representative. That’s left more than a few regulatory reform watchers concerned.

I’m going to follow up with some public transcripts of CAC meetings — you can judge for yourself.

Colin Hanna (YouTube: letfreedomringusa)

In early July, settled in at one of Grover Norquist’s conservative movement breakfast meetings, Colin Hanna and Peter Roff had a brainstorm. Hanna, who commutes to Washington from the Wilmington, Delaware offices of his organization Let Freedom Ring, speculated that Americans were concerned about Congress considering a health care bill that not every member had read. Roff, a senior fellow at the libertarian Institute for Liberty, suggested that there was a way to take advantage of this. Members of Congress could be put to the test: No vote on health care unless they’d read the entire bill.

Image by: Matt Mahurin

“The credit for the actual idea, I want to give to Peter,” Hanna told TWI on Wednesday. “From there we refined the language and we came up with our respective pledges for members of Congress.”

The respective pledges–a “Pledge to Read” from Hanna’s group, which is racking up signatures, and a “Truth in Voting Initiative” –have been smash hits. Ninety-eight Republicans in the House and Senate have signed onto Hanna’s pledge, which demands that members read any health care bill “personally, in its entirety” and make sure it’s available on the Internet for 72 hours before a vote. More importantly, they have changed the tone of the health care debate as members prepare to head home for a five-week recess during which liberal and conservative pressure groups will fight to lock up or break up support for a far-reaching reform bill.

On Tuesday, 180 members of the House Democratic conference met for two hours to listen to a read-through of the current version of the party’s health care legislation; after the meeting, Rep. C.A. “Dutch” Ruppersberger (D-Md.) told reporters that “no one’s going to say we haven’t read the bill.” On Wednesday, Barack Obama told a town hall in North Carolina that a month-long delay on a health care vote might be a good thing, because it would give members “time to read” the bill.

All of this represents a small but important messaging success for conservative opponents of current Democratic health proposals. And it’s the latest example of how an Obama campaign promise, of more transparency in government, has been turned against the administration and congressional Democrats.

“Democrats remember that they lost control of the health care debate in 1993 and 1994 when people read the bill and reacted to what they were reading,” said Michael Franc, vice president of government relations at the Heritage Foundation. “People hear about a crazy proposal and they ask themselves: if this one proposal that sounds kind of crazy is in there, what else is in there? The details are seen as a real danger for proponents of this bill. They wanted to do this in a hurry, working off talking points and executive summaries.”

According to Republicans in Congress, the groundwork for this campaign and this argument was laid years ago. In 2006 and 2007, Republican opponents of immigration reform legislation picked apart the bill sponsored by Sen. Ted Kennedy (D-Mass.) and Sen. John McCain (R-Ariz.) and highlighted portions such as Z-visa limits and scholarships for the children of naturalized citizens to drive up conservative outrage and the debate dragged on. In December 2007, Sen. Jim DeMint (R-S.C.) roasted Democrats for claiming that there had been ample time to read an omnibus spending bill because it had been posted online, without much fanfare, for two days. And this year, Republicans have repeatedly, theatrically waved around the thick bills they were voting against to argue that Congress was rubber-stamping junk, waste, and earmarks.

The short-lived outrage over the bonuses paid out to employees by the bailed-out American Investment Group was not enough to help Republicans win a special election for a House seat in upstate New York, but party strategists have not forgotten how it flummoxed Democrats or how it introduced the question of what Democrats such as Sen. Christopher Dodd (D-Conn.) knew when they voted for the economic stimulus package. “I think we’ve reached a tipping point,” suggested Hanna.

“We’ve had too many huge pushes by Washington to ram through these enormous bills in short periods of time,” explained DeMint’s spokesman Wesley Denton. “Members go home and their constituents know more than they do about these bills. That’s why the ‘read the bill’ movement is registering. Between the amnesty, the bailouts, and the stimulus, politicians showed that they didn’t understand what they had voted for.”

It’s a simple message that comes with the trappings of a good-government reform idea. Americans for Prosperity, a conservative group that has been helping organize anti-spending “tea parties” and anti-health care reform rallies, has prepped for the upcoming recess with a softer message; a TV ad telling voters to ask their members of Congress whether or not they’ve read the bill. The news of Democrats girding themselves for those questions with a special health care cram session was treated as a small victory by AFP. “It shows that our message is getting through,” said Amy Menefee, a spokeswoman for the group.

Obama’s guarded comments about the value of reading the bill hinted at the politics at work; demanding more transparency is a more subtle and powerful way of pressuring Congress into delaying or killing a health care vote than cries of “socialism” or a mounting “government takeover.”

“I don’t see anything mischievous or Machiavellian about this,” said Mickey Edwards, a former Republican congressman who is now vice president of the non-partisan Aspen Institute, and who has been critical of Republicans in opposition. “Passing bills without reading them has been a problem for decades. When I was a congressman and this came up at town halls–someone asking me about some obscure provision in a bill I’d supported–I used to defend myself by admitting, well, I didn’t read that part.”

While Republicans have not-so-quietly cheered delays in the health care bill mark-up process, seeing a prolonged debate during the recess as the best chance of tabling the most expansive version of reform, they’re careful not to present the “read the bill” campaign that way. “Just because you want to slow the process down doesn’t mean want to you want to kill something, necessarily,” said Matthew Specht, a spokesman for Rep. Jeff Flake (R-Ariz.).

At the same time, Republicans were cheered by Obama’s comments on Wednesday. One GOP staffer told TWI that after the president suggested that he would “go line by line” through the health care bill with any senator or representative who asked, staffers joked about heading up to the White House, carrying take-out pizza, taking up him up on his offer.

“Was that a sincere offer to go through the bill line by line?” laughed Hanna. “I hope he’s reserved plenty of time. There are a lot of people who’d take him up on that.”

Sen. Chris Dodd (R-Conn.) (WDCpix)

As housing foreclosures top the 1.5-million mark this year, the Obama administration has openly abandoned cramdown as a strategy for tackling the crisis.

That approach — which would empower homeowners to avoid foreclosure through bankruptcy — was once a central element of the administration’s plans to stabilize the volatile housing market. Some financial analysts say the strategy would prevent 20 percent of all foreclosures. But, appearing before a Senate panel Thursday, two White House officials said that current policies are enough to address the problem.

Illustration by: Matt Mahurin

“We have enough tools,” Herbert Allison, the Treasury Department’s assistant secretary for financial stability, told members of the Senate Banking Committee. “The challenge is to roll them out.”

The tools Allison invoked are several federal programs that offer financial incentives to mortgage lenders and servicers — the companies that buy the rights to manage loans — to modify the terms of mortgages in efforts to help homeowners escape foreclosure. Yet those programs rely largely on the cooperation of the finance industry to alter the loans voluntarily. Many lawmakers and consumer advocates argue that the companies aren’t doing enough to comply with the modification programs. The carrots without a strong stick, they say, just aren’t working.

“Why am I still reading stories about homeowners, community advocates, even my own staff acting on behalf of constituents, shuffled from voicemail to voicemail as they attempt to help people stay in their homes?” asked Sen. Christopher Dodd (D-Conn.), chairman of the Banking Committee.

It wasn’t supposed to work out this way. When the Obama administration unveiled its Making Home Affordable program in February, it estimated that the initiative would entice servicers to modify loans helping between 3 million and 4 million families keep their homes. To date, 325,000 modifications have been offered under the program, according to Allison. Of those, 160,000 are currently in a three-month “trial-modification” period. If borrowers prove they can meet the terms of the modifications over that span, then the changes become permanent.

Under a separate program to help underwater borrowers refinance their loans, just 43,000 homeowners have been helped, Allison said.

Those numbers pale in comparison, however, to the wave of foreclosures that continues to wash across the country. In the first half of this year, more than 1.5 million homes have entered into the foreclosure process — up 15 percent from the same period last year, according to the latest figures from RealtyTrac, an online foreclosure database. More than 336,000 filings occurred in June alone, RealtyTrac found — a jump of about 15,000 from the month before.

And the numbers are expected to increase alongside rising unemployment — a trend that’s expected to continue through the end of the year.

For supporters of cramdown, the numbers offer compelling evidence that the voluntary programs aren’t doing enough to stem the foreclosure crisis. Providing homeowners with the option of bankruptcy, they say, would offer the threat to accompany the administration’s incentives, empowering judges to reduce, or “cramdown” the rates and principals of primary loans. Under current law, that option is available to owners of vacation homes, yachts and almost any other material possession, but family homes are exempt.

Mary Coffin, executive vice president of Wells Fargo’s mortgage servicing division, said the bank has already helped nearly 1 million homeowners this year with refinancings and loan modifications. In June, Coffin noted, 83 percent of the modifications resulted in lower payments for homeowners.

The cramdown issue is hardly new to Capitol Hill. In March, the House passed a cramdown bill that was widely expected to sneak through the Senate on its way to becoming law. It didn’t happen. Instead, the bill fell 15 votes short of upper chamber approval — a failed effort occurring while the White House watched in silence from the sidelines.

Last week, House Democrats on the Financial Services Committee staged a hearing to rue the bill’s failure in the Senate. But upper-chamber lawmakers appear resigned to the fact that it simply doesn’t have the votes to pass.

“Obviously, it would have been better to have the stick of bankruptcy involved,” Sen. Charles Schumer (D-N.Y.) said of Washington’s anti-foreclosure efforts. “But it’s not in the cards.”

Indeed, during Thursday’s three-hour Banking hearing, Schumer’s words marked the only explicit mention of cramdown at all. Afterward, Sen. Robert Menendez (D-N.J.), who chairs the Banking Committee’s housing subpanel, said bankruptcy reform was among “the quickest and least costly” ways to stem foreclosures, but supporters lacked “the political capital to make it happen.”

Allison declined to take questions following the hearing, and the White House did not respond to additional calls for comment.

The lack of interest on Capitol Hill could spell bad news for millions of homeowners around the country. The White House hopes to have their programs running at full throttle by the fall, Allison said. But he warned that they are multi-year efforts, and the administration anticipates “millions” more foreclosures, even if the programs underway meet all of their goals.

A Credit Suisse report unveiled in December found that cramdown would prevent 20 percent of foreclosures — a number that remains relevant, one author of that report said Thursday.

Hampering efforts to tackle the crisis, there remains some disagreement over why lenders and servicers have been reluctant to repackage loans so that they become affordable. Paul Willen, senior economist at Boston’s Federal Reserve, had perhaps the simplest theory.

“The most plausible explanation for why lenders don’t renegotiate,” Willen said, “is that it simply isn’t profitable.”

Willen suggested a foreclosure-prevention program in which the borrowers receive direct assistance — either through grants or affordable loans — rather than offering the incentives to the servicers to help homeowners only if they choose to. “If such a program existed, Willen said, “we would have solved this problem by now.”