U.S. regulators prep to defang new consumer agency

By Kristina Cooke and Karey Wutkowski

WASHINGTON (Reuters) - U.S. regulators are gearing up campaigns to preserve their consumer protection roles as the Obama administration marshals efforts to create a new agency, but face the political risk of appearing to side with Wall Street at the expense of consumers.

As part of the biggest revamp of financial regulation since the 1930s, the Obama administration has proposed a new Consumer Financial Protection Agency to shield consumers from abusive lending practices. The politically popular plan is a way lawmakers can show they are looking out for average Americans.

Many lawmakers argue that consumer protection has not been enough of a priority for existing financial regulators and that efforts in this area have come too little, too late.

Existing regulators, ranging from the Federal Reserve to the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, plan to respond by highlighting their strengths in protecting consumers.

The Federal Reserve, criticized for failing to stop mortgage-lending practices that helped fuel the U.S. housing bubble, has pointed to its much improved track record on consumer issues over the past couple of years.

It may also argue it has the needed in-house expertise, including an in-depth understanding of the economy and markets, as it seeks to retain authority to write consumer protection rules on products such as mortgages and credit cards.

Other bank regulators such as the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency -- which have examination and enforcement but no rule-writing authority -- are already making their case to lawmakers behind closed doors that regulating a bank and regulating the products it markets to consumers should go hand in hand.

Yet regulators have to be careful to avoid looking as though they are allying themselves with the banks they regulate.