WASHINGTON — The Obama administration on Friday scrambled to salvage major elements of its plan to overhaul the nation’s financial regulatory system in the face of significant criticism from the financial services industry and its allies in Congress.
Earlier this week, senior Democrats in the House conceded that they would not be able to complete work on the proposal to create a new consumer protection agency for financial products like credit cards and mortgages before the lawmakers left for their August recess at the end of next week.
The Democrats had hoped to complete action on the legislation this month. But because of opposition to the proposal, Representative Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee, said on Friday that the committee would work on the proposal in September.
A second major component of the Obama plan, to give the Federal Reserve more authority to supervise large companies for risks they may pose to the financial system, came under attack by senior Senate Republicans earlier this week. That proposal has also been questioned by Senator Christopher J. Dodd, the Connecticut Democrat who heads the Senate Banking Committee.
Appearing this morning before the House Financial Services Committee, the Treasury secretary, Timothy F. Geithner, tacitly acknowledged the criticism. He urged the lawmakers not to delay or bow to industry pressure, but to move swiftly.
“Over the past five weeks, in Congress and in the press, among legislators and business leaders, academics and advocates, the administration’s proposals have spurred an important and sometimes heated debate about how best to reform the financial regulatory system,” Mr. Geithner said in his prepared testimony. “We understand that on any issue this complex and this important there will be areas where parties genuinely disagree, and we look forward to refining our recommendations through the legislative process. But there should be no disagreement on the need to act.”
Mr. Geithner added in his written testimony: “As a country, we now know that our financial system failed in its most basic responsibility to be stable and resilient enough to provide credit while protecting consumers and investors cash advance no fax.”
“We now know that millions of Americans were left without adequate protection against financial predation, especially in the mortgage and consumer finance areas; and that many were unable to evaluate the risks associated with borrowing to support the purchase of a home, a car, or an education.”
Mr. Geithner methodically tried to make the case for a new Consumer Financial Protection Agency. He noted that mortgage brokers and large mortgage companies, which played a central role in the financial crisis, are now virtually unregulated by the federal government. He said that even though financial oversight exists in other areas involving consumer protection, companies have been able to select their regulators, a practice that had led to “the least restrictive oversight of consumer protection.”
And he noted that the banking agencies responsible for enforcing consumer protection have typically had higher priorities.
Large and small banks and their trade associations in Washington have waged a major lobbying effort to kill the proposal or least substantially water it down so that the new agency would not be able to write new regulations and also enforce them. The banks have maintained that the creation of a new agency would lead to burdensome and duplicative regulation of the banks.
The lawmakers will hear testimony this afternoon from Ben S. Bernanke, the chairman of the Federal Reserve, and from senior regulators, who have disagreed among themselves about several aspects of the plan. The new consumer financial product commission, for instance, would take over many of the functions that are now done by the Federal Reserve, a prospect that Mr. Bernanke has opposed.
And Sheila C. Bair, the head of the Federal Deposit Insurance Corporation, who will also be testifying this afternoon, has suggested a lesser role for the Federal Reserve as the systemic risk regulator and a greater role for an advisory council that includes the head of the F.D.I.C.