House Holds Hearing on "Enhancing Consumer Financial Products Regulation"

By W. Bernard Mason

On June 24, 2009 the House Financial Services Committee held a hearing to consider the merits of both the Administration's proposal to establish the Consumer Financial Protection Agency and H.R. 1705, the "Financial Product Safety Commission Act of 2009". The Committee heard from three witness panels: the first panel consisted solely of Rep. William Delahunt (D - MA), the co-author of the House bill. Appearing on the second panel were Harvard Professor Elizabeth Warren; William F. Galvin, Secretary of the Commonwealth of Massachusetts; Ellen Seidman, representing the New America Foundation; Edmund Mierzwinski, Consumer Program Director for the U.S. Public Interest Research Group; Edward Yingling, President of the American Bankers Association; and, Alex Pollock, representing the American Enterprise Institute. The third panel contained further consumer advocates along with witnesses specifically concerned about federal oversight of insurance industry products and services.

Committee Chairman Barney Frank (D - RI) commenced the hearing by noting his past frustration in getting adequate responses to consumer complaints. In his view, consumer concerns "get crowded out", due to the other safety and soundness responsibilities shouldered by prudential regulators. He observed that when a bank regulator's role is the health of the banks, consumer protection becomes secondary. In his view, the Federal Reserve "has been literally ignoring" its consumer responsibilities. So Chairman Frank believes the proposal to create a separate entity, charged with protecting consumers from abuse, is a very good one.

Ranking Member Spencer Bachus (R - AL) stated that the Administration's proposal outlines fundamental changes to the current regulatory regime. He said the Congress has to consider whether these changes have the potential to reduce consumer choice, limit innovation, and exacerbate the credit crisis. He further stated that the House Republicans have offered a consumer plan that closes gaps in some of the present consumer protection laws by consolidating regulatory and consumer enforcement protection in a single agency and streamlining the complaint process for consumers and investors. He said the Republican plan would also give regulators more investigative and enforcement tools. He further noted that the Republican plan is based on the premise that the best way to protect consumers is not through creation of another bureaucracy accountable to no one, but by consolidating the regulatory system in place today and holding regulators accountable for both consumer protection and safety and soundness regulation. Rep. Bachus said his primary question is the wisdom of bifurcating consumer protection and safety and soundness regulation, as is suggested in the Administration's proposal.

Chairman Frank followed up with comments noting that, in ABA President Yingling's written statement, he says that CRA has not led to material safety and soundness concerns and that such lending is prudent and safe for consumers. Chairman Frank said Mr. Yingling's comments, representing the ABA, were "a very impressive refutation of those who say CRA was a major part of the crisis". (The Republican plan referred to by Rep. Bachus cites CRA as one of the factors contributing to the crisis.) Chairman Frank is concerned about resolving the issue of whether enforcement of CRA should be included within the authority of a new consumer protection agency, or left with the safety and soundness regulators.

Rep. Luis Gutierrez (D - IL) said he wants to be certain that the new agency serves as the primary federal regulator for payday lenders, money remitters, and other money services businesses and that the White House commits to establishing that the agency will aggressively use its supervisory and enforcement powers to regulate these industries.

Most of the minority Committee membership voiced concern over the potential reduction in consumer choice, the increase in regulatory burden for service providers, and the cost of operating yet another federal financial regulatory agency. Most Republican members also shared Rep. Bachus' concerns regarding the separation of consumer protection from prudential supervision. Rep. Jeb Hensarling (R - TX) pointed out that there was not a lack of regulatory authority over consumer protection, but he said an argument could be made that regulatory authority was not properly exercised.

In response to questioning, Elizabeth Warren stated that she did not want to mandate specific products, she merely wants meaningful disclosure of those products that are offered. She wants disclosure to be more effective. She cited the many pages of material required at mortgage loan closings and the fact that borrowers are not given time to review the documents before signing as an example of non-meaningful disclosure. She said separating consumer protection from bank regulation was logical, stating that agencies "are conflicted internally". She pointed to the Federal Reserve's important role in overseeing monetary policy, and indicated that consumer protection had been given a secondary role within that agency.

Rep Mel Watt (D - NC) asked Mr. Yingling how Congress could be assured that the regulators would do an adequate job in the area of consumer protection, given the Federal Reserve's recent record on failure to address issues related to the current crisis. Mr. Yingling responded by saying Congress needed to ensure better agency appointees, better coordination, better laws, and more reporting and accountability to Congress. Mr. Yingling added that it would be unfair to put banks in the middle of two regulators who might be pulling them in two different directions.

Rep. Judy Biggert (R - IL) asked about the concept of consumer responsibility and whether financial literacy might be a key factor in ensuring adequate disclosure. Ms. Warren responded that she was in favor of making products transparent enough so consumers can make informed decisions. "Literacy will not solve the problem of reading a 30-page credit card contract", she said. Mr. Pollack added that "good disclosure enables personal responsibility".Ms. Warren stated her view that the Administration's proposal will help smaller banks - those that were not the cause of the problem. She said the current cost of the compliance burden can be crippling for smaller institutions, so the idea is to "slim-down" the requirements to reduce burden and make them less costly. She further said smaller banks often offer cleaner products, better products; however, markets don't enforce the use of these. Instead, those institutions that can afford multi-million dollar advertising campaigns can force consumers into more complicated, expensive and high-risk products that not only injure consumers, they injure smaller banks. A new regulatory regime would level the playing field not only between bank and consumer but between large and small bank.
Ellen Seidman added that a combination of consolidation and consistency in regulation in one agency will create a preference for quality products that most community banks provide. Mr. Yingling countered that, to his knowledge, there is not a community bank in the country that believes such a statement. In his discussions with banks, Mr. Yingling said that community banks believe creation of a new consumer regulatory agency will mean additional regulation and more examiners. In response to another question, Mr. Yingling stated his view that the Federal Reserve already has the authority necessary for consumer protection; further legislation is unnecessary. Rep. Guttierrez later responded to this point by stating that legislation was passed in 1994 mandating Federal Reserve action in the consumer area, but it took that agency until 2009 to issue regulations.

Mr. Yingling stated a major concern for the ABA is how a new consumer protection agency would interact with state-regulated (and in some cases - unregulated) entities. He pointed out that most of the subprime problems were outside the regulated industry. He is concerned that any new federal regulation "stops at the state line" and places trust in the state regulatory authority. This could subject banks to tough regulation while allowing laxity regarding the unregulated. Professor Warren responded that regulation must shift from "who issued the product" to "what the product is", so there is level regulation.

Responding to a different question, Professor Warren again emphasized that she was not advocating banning products. She pointed out that complicated disclosures don't work, and part of the problem has been caused by a bad regulatory structure. Under the Administration's proposal, the new agency would combine all existing regulatory requirements and create a slimmer, more effective set of regulations that apply across the board to all products. She said this new proposal sets a federal regulatory floor "in response to the fact that the OCC in particular has used its federal power to protect the financial institutions from any effective regulation, including preventing the states from enforcing their own laws on fraud".

Rep. Paul Kanjorski (D - PA) argued that, particularly with respect to the offering of insurance products, a separate consumer protection regulator was a bad idea. He said that "anything that has the title 'consumer' seems to get an express ticket", but he feels this proposal could be very expensive and, regarding the insurance industry, could perhaps impede what some are attempting to achieve - creation of a federal insurance charter.Chairman Frank stated that it is his intention to move for a July mark-up of this proposal. He stated that, ultimately, financial regulatory reform will be consolidated into one final House bill.

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W. Bernard Mason is the Regulatory Relations Liaison for The Risk Management Association. He may be contacted at bmason@rmahq.org.