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. But it's up against an industry with a track record of staying one step ahead of regulators.
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.
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.
"We think this agency is a mistaken piece of the overall program and not something that needs to be done," said Wayne Abernathy, who heads financial institutions policy at the American Bankers Association. "This agency is going to be deciding what products we should offer instead of our customers telling us what they want."
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.
Most industry objections ignore the problems exposed by the financial crisis, said Elizabeth Warren, head of a congressional panel overseeing the financial bailout and a key architect of the consumer agency.
"The government makes sure the products that are sold are readable, and it makes sure the products that they are sold are understood by the people who want them," Warren told The Associated Press. "I'm not sure why the banking industry would be resistant to that."
Banks are also spooked about other proposals, including one that would let state regulators issue even stiffer rules on consumer products than their federal counterparts. Banks may also find it harder to do so-called "regulator shopping" — the practice of picking the weakest agency to be their regulator.
Other 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."
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.
"Bank profits are under attack. There's no doubt about that," said Theodore Iacobuzio, an analyst who covers banking and payments at TowerGroup. "But banks will still figure out a way to make money off transactions."
He predicted the new agency could open the door for a host of new services for consumers, from paying for goods with mobile phones to using debit cards like charge accounts.
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.
Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, applauded the administration Thursday for including the new agency in its overhaul and lashed out at the banking industry's criticisms.
"The very people who created the damn mess are the ones now arguing that consumers ought not to be protected," he said.