Financial Regulatory Forum

ANALYSIS-Crusading U.S. FTC faces financial reforms setback

July 1, 2009

    By Diane Bartz
   WASHINGTON, June 30 (Reuters) – A White House plan to create a new U.S. agency to enforce consumer protection rules for banks and mortgage lenders is a bitter pill for the Federal Trade Commission, which had sought more power to fight financial fraud, but could now see the job taken away altogether.
   The FTC, which enforces antitrust and some consumer protection laws, is one of six federal regulators that will be affected by the proposed Consumer Financial Protection Agency. The new agency would fight abusive practices employed during the recent housing and credit boom such as poor mortgage loan disclosures and “fee traps” on credit cards.
   “Every power that this (proposed) agency has comes from somebody else and that means turf war,” said Scott Talbott, chief lobbyist for the Financial Services Roundtable, which represents 100 major financial services organizations.
   “I think that there is a political wind to create this agency,” he said, arguing for a bill that would put consumer protection and bank solvency under the same agency.
   Created in 1914 as a trust-busting agency to prevent unfair business competition, the FTC also pursues consumer-oriented scams such as hidden fees in prepaid calling cards, credit repair scams and fake foreclosure prevention schemes.
   “One of the FTC’s normal strengths has been protecting consumers from various forms of fraud,” said Chul Pak, a veteran of the Federal Trade Commission now with law firm Wilson Sonsini Goodrich and Rosati. “I’m not sure why they would want to move it away.”
   The Obama administration’s legislative plan, if approved unchanged, would mean a loss of prestige for the FTC. Agency Chairman Jon Leibowitz went before a congressional panel on March 31 to ask for expanded power to bring civil penalties for deception or other misdeeds in financial services.
   The FTC was hurt by the Magnuson-Moss Warranty Act, a 1975 law aimed at slowing FTC rule making. It worked: In one notable case, it took 10 years to promulgate a credit practices rule.
   Still, the commission has argued it was best suited to make sure companies honestly advertise financial services and fully disclose all charges.
   “The jurisdiction is very Balkanized,” the commission’s Chairman Jon Leibowitz told Reuters in April. “If Congress looks to create one consumer protection entity … we believe that we are best-suited at the commission to play that role.”
   Under the bill, the agency could lose about 60 of the nearly 200 lawyers in its consumer protection staff, said Joel Winston, associate director of the FTC’s financial practices division.
   “It’s significant, but well less than the majority,” said Winston, who said the bill could mean the loss of enforcement authority aimed at preventing deception in mortgage lending, credit reporting, debt collecting and data security for financial institutions.
  
   A DIFFERENT DRUG WAR
   The proposal was released as the FTC moved aggressively on another front — opposing deals between brand name pharmaceutical companies and generic rivals that delay the entry of generic drugs to the marketplace.
   The FTC has sued companies that made the deals and recently released a report showing the settlements — which they say may violate antitrust law — cost U.S. consumers $3.5 billion per year. The campaign has raised eyebrows in the Washington antitrust community.
   “I think that the FTC’s position that reverse payments … are almost always anti-competitive, that’s mistaken,” said Bruce McDonald, a former Justice Department deputy assistant attorney general.
   McDonald, now with the law firm Jones Day, said the proposal to create a new agency was, “a setback for the FTC because they’ve been working hard to pursue their consumer protection agenda.”
   The FTC has made a big push recently on fraud and misrepresentation in loan modifications, mortgages and foreclosures, said David Turetsky of Dewey LeBoeuf LLP.
   “You always worry a little bit when things get reshuffled because you don’t want this kind of work to slow down or be interfered with,” said Turetsky.
   “In Washington, there’s a lot of focus on jurisdiction and who wins and who loses,” he added. “The real focus has to be on what’s good for consumers.”

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