When the economy was booming, banks doled out credit to consumers like candy. People who could never afford to live their dream found pay option adjustable rate mortgages and other easy-access loans just a signature away. Credit cards put the pain of payment off to another day — never mind the fees hidden in the fine print.
On Wednesday, President Obama proposed creating a federal agency that would require banks, mortgage lenders and credit card companies to provide consumers with a more nutritious diet, financially speaking.
But what is good for consumers may not always square with what is good for banks. And the banking industry — which says it stands to lose billions of dollars — is bracing for a fight as the administration’s plan to overhaul the way the industry is regulated heads to Capitol Hill.
Banks "are really dumbfounded by the scope of this agency," Edward L. Yingling, the president of the American Bankers Association, said. "It’s not like the current regulators don't have all the authority they need. You don’t have to blow up the system."
The Consumer Financial Protection Agency is the brainchild of Elizabeth Warren, a Harvard Law School professor who has come to prominence on consumer matters after years of studying the rising toll of consumer debt. She argues that the banking regulators have an inherent conflict of interest between ensuring the safety and soundness of institutions and protecting consumers.
If the administration gets its way, the agency, a sort of Food and Drug Administration for financial products, would be empowered to tell banks to tidy up their offerings and make sure consumers have the information they need to make sound financial decisions, while being protected from scams.
It could, among other things, dictate standards for some products before banks could bring them to market, and push banks to favor plain vanilla loans over more exotic home loans, which could be required to carry warnings. Unfair terms and practices among credit card issuers would also be weeded out.
If Congress approved the agency, it would be the first time that consumers would have a seat at the banking regulatory table.
"The argument for doing that is you'll have an agency that's only focused on protecting consumers," said Donald G. Ogilvie, chairman of the Deloitte Center for Banking Solutions. "The argument against that is you’ll have an agency that’s only interested in protecting consumers."
But it also sets up a potential turf battle among the myriad agencies that are currently tasked with protecting consumers, including the Office of Thrift Supervision, the Office of the Comptroller of the Currency and the Federal Reserve, which the banks would like to see maintain this oversight.
Banking groups are concerned about the costs a new layer of regulation might impose, and the prospect of more examiners crowding into their banks.
"You are talking about an agency that is authorized to design financial products and, in fact, say that they must be offered first, over the banks' own products," said Mr. Yingling.
In an interview on Wednesday, Ms. Warren said the new agency could have implications beyond consumer protection. Protecting consumers from risky products ultimately protects the entire financial system, she argued.
"This crisis started one mortgage at a time," said Ms. Warren, who, as the chairwoman of the Congressional panel that oversees government spending on the financial bailout, has the ear of many lawmakers. "The bad products that were sold household by household not only destabilized families. When they were sliced and diced and passed along through mortgage-backed securities, they magnified risk throughout the economy."
The agency would most likely be harder on banks that profited from high-risk products, Ms. Warren said. But it may benefit banks that offer more consumer-friendly products that are "lost in the storm of advertising" for riskier products, she said.
While banks will lobby to water down the agency’s proposed powers in Congress, the devil will be in the details. One important question is how the agency would be financed. A spokesman for the Treasury said it would be paid for in part through "fees assessed on entities and transactions across the financial sector." While he was not more specific, there could be conflicts of interest if, for example, banks paid fees directly to the agency to seek approval for their products.
Another issue will be the division between state and federal power. State attorneys general have often cracked down on mortgage fraud, high credit card rates, payday lending and other consumer financial protection issues that the new agency would take up. Mr. Yingling, of the American Bankers Association, expressed concern that financial companies might receive uneven treatment at the state and national level.
It may also be difficult to separate "consumers" from "investors," leaving uncertainty about whether some financial products fall under the purview of the new agency or the Securities and Exchange Commission, which monitors many investor products. A spokesman for the Treasury said the S.E.C. would maintain its power over investor protection.
The president’s proposal resembles legislation introduced a few months ago by Senator Richard J. Durbin, Democrat of Illinois. He acknowledged the idea of an agency faced a fight on Capitol Hill.
"Never underestimate the banks," he said.