NEW YORK — Of all the financial regulatory changes the Obama administration has proposed, one stands tallest as a threat to bank industry profits: the creation of an agency to protect consumers from risky products.
Banking lobbyists are already trying to curb the agency, which is fast becoming the first big battleground over the financial overhaul.
If approved by Congress, the Consumer Financial Protection Agency could curtail or ban a host of dubious — but lucrative — bank practices such as ballooning mortgages, excessive credit card interest rates and surprise overdraft fees.
The administration says such safeguards could have minimized the meltdown's damage. But a concerned banking industry is taking aim at the proposed watchdog.
As a centerpiece of Obama's financial overhaul, the consumer agency would be an independent body. It would oversee virtually all banking transactions, including mortgages, credit cards, and checking and savings accounts.
In creating the agency, the government would remove some consumer oversight duties from the Federal Reserve. The Fed had been criticized for its failure to crack down on shady mortgage practices.
Speaking Thursday on Capitol Hill, Treasury Secretary Timothy Geithner said the new agency's mission would be to look out for consumers by promoting "plain vanilla" financial products "with straightforward pricing."
That could cut into the already grim profit picture for banks and mortgage lenders, which made billions leading up to the meltdown on so-called gotcha fees: mortgages that spiked after a couple of years or credit cards with skyrocketing interest rates.
Saying they're being unfairly cast as the villain, banks fear a new agency would create conflicting layers of regulation — and give outsiders broad sway over their products and services.
"This agency is going to be deciding what products we should offer instead of our customers telling us what they want," said Wayne Abernathy, who heads financial institutions policy at the American Bankers Association.
Abernathy said his group, which represents most of the nation's estimated 8,000 banks, would push the administration to "replace" the agency with another entity.
In response, about 200 consumer protection groups are joining forces to defend the proposed agency. Their success could determine how sweeping and long-lasting the financial overhaul turns out.
Other banking industry advocates argue that the agency will create a conflict between the goals of traditional regulators (to safeguard the banking system) and consumer regulators (to monitor the products). They say the two sides might disagree on whether a product is good for both consumers and banks.
"And there's no way to know who would win out," said Scott Talbott, a lobbyist with the Financial Services Roundtable, which represents the biggest U.S. financial firms. "If they couldn't agree, no one would win."
Consumer advocate groups reject the gridlock claim.
"This is the exact same industry that used those arguments to bring our economy to a screeching halt," said Kathleen Day, a spokeswoman for the Center for Responsible Lending. "It's not patchwork (regulation). It's checks and balances."
Ed Mierzwinski, consumer program director of U.S. Public Interest Research Groups, said the goal is "to encourage innovation of safer products."
"Banks are going to have to compete based on which one has the best products, not the best way to cheat consumers," he said.
Despite the industry's opposition, most experts expect the agency to win approval in Congress, possibly by year's end.
One possible obstacle: the Federal Reserve, which is expected to resist giving up its consumer protection powers. Fed officials share oversight of mortgages, credit cards and other products.
But Congress is unlikely to yield to the Fed's efforts.