If there were any question that the stakes are high for financial reform, consider this: Even the Defense Department is getting into the fight.
Pentagon brass want a new consumer watchdog agency to regulate auto dealers so they don't rip off troops with predatory sales and shady financing deals. Democrats are hoping it'll be hard for Republicans to oppose something Pentagon leaders want, at a time when troops are in harm's way.
And there's more: Payday lenders, check-cashing outfits and rent-to-own stores operate, for all practical purposes, free from federal regulation - and President Barack Obama wants to change that with a consumer agency that spans the world of finance from high to low.
The business community and some influential Republicans are fighting back. The U.S. Chamber of Commerce has launched an ad campaign focused on limiting the reach of any new consumer regulatory agency, saying that a far-reaching entity would wreak havoc on a lot of mom and pop businesses that had nothing to do with the financial meltdown in the first place.
And so far, that argument is carrying the day. The draft legislation being hammered out by Senate Banking Committee Chairman Chris Dodd of Connecticut and Republican Sen. Bob Corker of Tennessee is widely expected to shield most nonbanks from the enforcement powers of the new consumer protection body.
The enforcement carve-out is clearly a concession to Republicans, since Dodd's original draft bill, unveiled in November, would have created a stand-alone consumer financial protection agency that would cover banks and nonbanks alike, as the Obama administration proposed.
Some critics said they believe Corker, Dodd's top Republican negotiating partner, has pushed for the exemption because Tennessee is home to powerful payday-lending interests - one of the sectors that would benefit from the enforcement exemption.
Corker's office declined to comment, saying he wouldn't discuss ongoing negotiations.
Payday lending was actually born in Tennessee, and Cleveland, Tenn., continues to serve as the headquarters of one of the largest payday-lending companies in the country, Check Into Cash, which has more than 1,000 outlets in some 30 states, according to the website of its parent company, Jones Management. Jones Management is parent to several other consumer credit operations, and its chairman and CEO, Allan Jones, donated $7,000 to Corker's leadership political action committee between 2007 and 2008, as well as to Corker's election campaign.
Jones has donated in recent years to other key Banking Committee members, including Dodd, South Dakota Democrat Tim Johnson and Alabama Republican Richard Shelby.
In total, the industry's giving to both sides has doubled over the past three campaign cycles, to more than $1.5 million during the 2008 campaign, according to a 2009 study by Citizens for Responsibility and Ethics in Washington.
Johnson and Shelby are among the top Senate recipients of payday industry donations. Shelby has received $8,600 from the PAC of the Community Financial Services Association of America, a top payday-lending trade group, since it was formed for the 2008 election. Johnson has taken in $4,000 from the same PAC, while it has given Corker only $1,000.
Payday lenders - like other groups seeking to escape the reach of a new consumer entity - contend they didn't cause the financial crisis and therefore shouldn't be punished for it. They also argue that burdensome new regulations will only raise the costs of borrowing for consumers.
"What started out as an attempt to regulate industries responsible for last year's economic meltdown - mortgage companies and too-big-to-fail banks - has turned into an overreaching bill that seeks to impose federal rules over industries traditionally regulated by the states," said D. Lynn DeVault, board chairwoman of the Community Financial Services Association.
The big worry, said Douglas Elliott, a Brookings Institution fellow and a former investment banker, is that if policymakers exclude too many sectors from the oversight of the consumer body, the bad lending practices the government wants to stop will continue - and the unregulated players will grow in number and scope.
By one measure, the federal government currently spends 15 times more resources supervising and enforcing federal consumer laws against banks than nonbanks. If the consumer entity can't enforce its rules on nonbanks such as payday lenders, these companies would remain subject only to the Federal Trade Commission - a weak, resource-starved and reactive entity that has only 70 employees to cover more than 100,000 nonbank financial services firms.
Such an uneven playing field would also hurt those financial institutions that do have strong federal regulators - that is, banks - which have been busy fighting for their own anti-CFPA agendas.
Meanwhile, these banks - especially community banks - should be fighting for their nonbank competitors to be covered, advocates said.
"The banks have a lot at stake, and it's hard to imagine that they would accept a consumer regulator with little authority over the check cashers, payday lenders and other nonbank lenders," Harvard University professor Elizabeth Warren, a top CFPA proponent, told POLITICO.
Elliott said, "There's a financial advantage for anybody who isn't under them because they can do things that are more profitable but would not be allowed by that agency. The banks will be harmed if they're under a strong regulator and competitors of theirs are not."
"The original intent of the CFPA was to provide one-stop consumer protection wherever you bought your financial product - at a bank or a nonbank, you'd be covered," said Ed Mierzwinski, director of U.S. PIRG's consumer program. "And you'd be covered by the full sweep of CFPA power: It would write the rules, it would examine companies for compliance with the rules, and it would enforce the rules."
But Mierzwinski said he's not worried that the Dodd-Corker draft might come out without strong coverage for payday lenders, though he concedes consumer advocates may lose fights like the one with the auto dealers. He said he's confident there will be amendments in committee or on the floor to remedy the situation and that when facts about the industry are revealed, it will be easy to frame those votes as predatory lenders vs. victims.
"I look forward to seeing how many senators want to vote to exempt predatory payday lenders from the new CFPA," he said.
Auto dealers, a powerful local constituency with outlets across the nation, won the first round of their own battle against new consumer protection rules, successfully lobbying House members for an exemption from oversight by the stand-alone consumer financial protection agency.
The Pentagon's concerns were raised in a Feb. 26 letter from Clifford Stanley, undersecretary of defense for personnel and readiness. He said that "unscrupulous" lending by auto dealers has hurt troops - and has even prevented them from being deployed, as some groups have documented. That may blunt the sympathy the National Automobile Dealers Association members received during the House debate.
"Predatory lending affects our military preparedness. That's how outrageous it is to not include these guys" in the consumer entity's oversight, Mierzwinski said. "It explains that this is not just some liberal position."
The auto dealers aren't taking it lying down.
"It is no surprise that Obama's Department of Defense is endorsing the creation of an agency proposed by Obama's Department of Treasury," said Bailey Wood, a spokesman for the NADA.
"The practices enumerated in the DoD letter - ‘bait and switch' financing, falsification of loan applications, loan ‘packing,' etc. - are already illegal under both federal and state laws. The CFPA will not make these practices any more illegal. Creating new regulatory mandates on top of existing federal and state statutes will likely drive up costs, limit vehicle financing options and, for many consumers including service members, effectively eliminate their ability to obtain financing to meet their vehicle needs," Wood said.