[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]





                  REGULATORY RESTRUCTURING: ENHANCING
                 CONSUMER FINANCIAL PRODUCTS REGULATION

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 24, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-49







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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel









                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 24, 2009................................................     1
Appendix:
    June 24, 2009................................................    71

                               WITNESSES
                        Wednesday, June 24, 2009

Delahunt, Hon. William, a Representative in Congress from the 
  State of Massachusetts.........................................     9
Galvin, Hon. William Francis, Secretary, The Commonwealth of 
  Massachusetts..................................................    13
Hughes, Gary E., Executive Vice President & General Counsel, 
  American Council of Life Insurers (ACLI).......................    55
Keest, Kathleen E., Senior Policy Counsel, Center for Responsible 
  Lending........................................................    52
Mierzwinski, Edmund, Consumer Program Director, U.S. Public 
  Interest Research Group........................................    17
Plunkett, Travis, Legislative Director, Consumer Federation of 
  America (CFA)..................................................    51
Pollock, Alex J., Resident Fellow, American Enterprise Institute.    20
Seidman, Hon. Ellen, Senior Fellow, New America Foundation.......    15
Tyler, Hon. Ralph S., Commissioner, Maryland Insurance 
  Administration, on behalf of The National Association of 
  Insurance Commissioners........................................    54
Warren, Elizabeth, Leo Gottlieb Professor of Law, Harvard 
  University.....................................................    11
Weatherford, Catherine J., President and Chief Executive Officer, 
  NAVA, The Association for Insured Retirement Solutions.........    57
Wilson, Cliff F., Southeast Arizona Insurance Services, on behalf 
  of The National Association of Insurance and Financial Advisors 
  (NAIFA)........................................................    59
Yingling, Edward L., President and CEO, American Bankers 
  Association....................................................    19

                                APPENDIX

Prepared statements:
    Bachmann, Hon. Michele.......................................    72
    Carson, Hon. Andre...........................................    73
    Speier, Hon. Jackie..........................................    75
    Delahunt, Hon. William.......................................    78
    Galvin, Hon. William Francis.................................    81
    Hughes, Gary E...............................................    87
    Keest, Kathleen E............................................    94
    Mierzwinski, Edmund..........................................   118
    Plunkett, Travis.............................................   118
    Pollock, Alex J..............................................   174
    Seidman, Hon. Ellen..........................................   179
    Tyler, Hon. Ralph S..........................................   189
    Warren, Elizabeth............................................   199
    Weatherford, Catherine J.....................................   206
    Wilson, Cliff F..............................................   224
    Yingling, Edward L...........................................   235

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    Written statement of the Independent Community Bankers of 
      America (ICBA).............................................   248
    Written statement of the New York City Department of Consumer 
      Affairs....................................................   250
    Written statement of the National Association of Federal 
      Credit Unions (NAFCU)......................................   265
    Written statement of the Property Casualty Insurers 
      Association of America (PCI)...............................   267
Bachus, Hon. Spencer:
    Written responses to questions submitted to Elizabeth Warren.   270
Gutierrez, Hon. Luis:
    Written statement of the American Financial Services 
      Association (AFSA).........................................   277
Sherman, Hon. Brad:
    Written responses to questions submitted to Catherine 
      Weatherford................................................   279
Speier, Hon. Jackie:
    Written responses to questions submitted to Edward Yingling..   281

 
                       REGULATORY RESTRUCTURING:
                      ENHANCING CONSUMER FINANCIAL
                          PRODUCTS REGULATION

                              ----------                              


                        Wednesday, June 24, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:07 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Waters, 
Gutierrez, Watt, Sherman, Moore of Kansas, Capuano, Clay, Baca, 
Miller of North Carolina, Scott, Green, Cleaver, Ellison, 
Klein, Wilson, Foster, Carson, Speier, Minnick, Kosmas, Himes, 
Maffei; Bachus, Castle, Royce, Lucas, Manzullo, Biggert, Miller 
of California, Hensarling, Garrett, Neugebauer, Bachmann, 
Marchant, McCarthy of California, Posey, Jenkins, Lee, Paulsen, 
and Lance.
    The Chairman. The hearing will come to order. I apologize 
for being late. Let me make a request of my colleagues. I guess 
we will go to the opening statements. I will begin. We have 10 
minutes each. One of my frustrations as the ranking member, as 
the chairman and even previously has been the problem of 
getting adequate response to consumer complaints. It has been 
my experience that when you have an ongoing responsibility for 
broad systemic issues, consumer complaints can get crowded out. 
It is also the case that when you, and it has been my 
experience, have bank regulators whose primary role is the 
health and safety and soundness of the banks, consumer 
regulation, again, tends to get crowded out. We certainly have 
the history of the Federal Reserve previous to the co-chairman, 
who has been a great improvement, literally ignoring their 
consumer responsibilities.
    So I think the proposal that has come forward for a 
separate entity charged with protecting consumers from abuse is 
a very good one. The fear that this will be some out of control 
entity ravaging the financial sector is unsupported by anything 
in American history. There is no pattern of overregulation that 
I can see in the consumer area, and I don't see one here. So I 
am very pleased that the Administration sent us this 
recommendation.
    I am glad that we have with us one of the original authors 
of it, if not the original author, Professor Warren from 
Massachusetts. And I will just say as a matter of schedule, we 
will be spending a good deal of time between now and the rest 
of this congressional session dealing with the question of 
financial regulation. This is an important piece of it. It is 
my intention that following this hearing, we will be moving in 
July when we return to a mark-up on this. Ultimately, the 
financial regulation is going to be one bill, in part because 
of the United States Senate. Let me say, I was invited to speak 
on a project involving an entity that is going study the 
Senate.
    And I said, I thought that was going to be both important 
and fairly easy because it is a very significant institution 
with very few moving parts, which makes it somewhat easy to 
study it. But I do believe in the interest of this committee's 
doing its job the best it can that we should mark these up 
individually. So I do want to announce that this is a hearing 
that will lead to a mark-up in the period between the 4th of 
July and the recess at the end. So I urge members to pay very 
close attention. With that, I now recognize the gentleman from 
Alabama for 2 minutes.
    Mr. Bachus. I thank the chairman. Mr. Chairman, today we 
are having a hearing on the creation of an independent consumer 
protection, or Consumer Financial Protection Agency. And there 
is no question that consumer protection is a legitimate 
government responsibility. However, there is and needs to be a 
serious dialogue over how that function should be properly 
undertaken to be effective. The proposal that was outlined in 
the Administration's White Paper proposes very fundamental and 
profound changes to the current financial regulatory regime. We 
have to ask ourselves whether those changes have the potential 
to reduce consumer choice, limit innovation, and exacerbate the 
credit crunch that consumers and small businesses are currently 
facing. When you tell people that they cannot make certain 
loans, then it always has the potential to restrict credit.
    The House Republicans have offered a consumer protection 
plan that closes gaps in the enforcement of our present 
consumer protection laws by consolidating the regulatory 
enforcement and consumer protection functions in a single 
agency and streamlining the complaint process for consumers and 
investors. It would also strengthen antifraud enforcement by 
giving regulators more investigative and enforcement tools. The 
Republican consumer protection proposal is built 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.
    Probably my main question early on is the wisdom of 
bifurcating consumer protection and safety and soundness 
regulation as is suggested in the Administration's proposal. I 
am not the only one who has raised these concerns. A Virginia 
Democrat, Mark Warner of the Senate Banking Committee said, ``I 
need some more convincing of the creation of this Consumer 
Protection Agency. Will this new consumer agency have the 
knowledge because it won't have the kind of day-to-day exposure 
to financial products or the industry if this agency was 
actually housed inside the day-to-day prudential regulator.''
    Mr. Chairman, I look forward to working with you and the 
Administration to develop a consumer protection framework that 
fosters innovation in financial products, and benefits and 
protects consumers without creating unintended potentially 
adverse consequences for consumers and the financial services 
industry. I also thank Congressman Delahunt for his work on the 
issue.
    The Chairman. I will next recognize the chairman of the 
Financial Institutions Subcommittee, Mr. Gutierrez, for 2 
minutes.
    Mr. Gutierrez. Thank you, Mr. Chairman. I am pleased the 
committee is beginning the process of evaluating regulatory 
restructuring legislation with a hearing that focuses on 
protecting consumers. I strongly support the concept of an 
independent agency that concentrates solely on consumer 
financial services issues, and I am especially excited by the 
prospect of having an agency that focuses on the Community 
Reinvestment Act enforcement and approaches the issue solely 
from a consumer's perspective. But my support for such an 
independent agency is contingent upon its serving as the 
primary Federal regulator for nonbank institutions. The 
Administration's White Paper outlines the Consumer Financial 
Protection Agency's jurisdiction as encompassing both banks and 
nonbanks. But I will be seeking confirmation from the 
Administration that it intends for the CFPA to be the primary 
Federal consumer regulator for payday lenders, money remitters, 
and other money services businesses. And that the White House 
commit that the CFPA will aggressively use its supervisory and 
enforcement powers to regulate these industries.
    In addition, I have several questions and concerns about 
some of the provisions that are in the Administration's White 
Paper on this topic. Specifically from a banking perspective, I 
am concerned about how the Consumer Financial Protection 
Agency's board authority will mesh with the authority of the 
safety and soundness regulators. There is a real potential here 
for conflicting regulations from different bank regulatory 
bodies. I thank the chairman for the time.
    The Chairman. The gentleman from Texas, Mr. Neugebauer, for 
2 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. Like everyone 
here, I support consumer protection. I also support protecting 
consumers' ability to choose financial products and services 
that best fit their needs. Action we take in Congress shouldn't 
harm consumers by reducing their choices and increasing the 
cost and fees. Certainly the information consumers receive can 
be disclosed better. I have been a strong advocate of better 
disclosure, clearer disclosure, and shorter disclosure. But the 
government's role here is not to decide what products and 
services are available; the government is here to ensure 
transparency and integrity in the marketplace. Our Republican 
plan calls for a simplification of consumer protection, not 
duplication and creation of a new bureaucracy. We need to keep 
safety and soundness regulators and consumer protection 
regulation in the same house because these two missions are 
connected and because this helps hold the regulators 
accountable.
    We have had some regulators quite honestly who didn't do 
their job, and this Administration plan does not hold them 
accountable. We had consumers who made poor decisions and 
lenders who made poor decisions. We had regulators who didn't 
do their job, didn't see that some of these products were 
curtailed. But one of the things we know is that the 
government's role here, and we need to be very careful as we 
start to throw this big regulatory blanket over the 
marketplace, is to send a signal to the American investors or 
people using financial products that the government will keep 
things from going up or keep them from going down, but it will 
not keep people from losing their homes. That is not the role 
of the government; the government cannot do that. When we say 
that we are going to regulate safety, I think sometimes we can 
send a signal there that somehow the government is going to 
make all of these investments safe. But what we do not need to 
do is start taking away the choices that the American people 
have for financial products. And I look forward to a debate 
where we can do something that is good for the American people 
but not reduce their choices.
    The Chairman. Next, the prime sponsor of the bill here on 
the committee, the gentleman from North Carolina, Mr. Miller, 
for 2 minutes.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. One 
of the issues arising from the financial crisis that this 
committee must address is how compensation in the financial 
industry created incentives for taking immediate profits while 
ignoring only slightly less immediate risk. We will consider 
how to adjust compensation to ally the long-term interests of 
companies with the interest of those who work for them. The 
issue before us today is more difficult and more important, how 
to ally the interests of the financial industry with those of 
society. The financial industry has defended every consumer 
credit practice, regardless of how predatory the practice 
appeared to those unsophisticated in finance, like me, as an 
innovation that made it possible to extend needed credit to 
those who were excluded from traditional lending.
    And the industry's innovations resulted in inflating the 
housing bubble, evading existing consumer protections, trapping 
the middle class in unsustainable debt, and creating risk for 
financial companies that were dimly understood by regulators, 
by investors, and even by the investors and CEOs of the 
companies that created them. And it plunged the country and the 
world into the worst recession since the Great Depression. The 
regulatory system we are considering is less restrictive than 
the regulation of many industries that have done much less 
damage. At bottom, the question is this: Are consumer lending 
practices that the industry celebrates as innovation actually 
useful to society, or are they just a way to make more and more 
money by betraying the trust of the American people? Other 
regulators don't just take the regulated industry's word for it 
that their products are beneficial, and neither should the 
regulation of the financial industry. I yield back my time.
    The Chairman. The gentleman from California, Mr. Royce, for 
2 minutes.
    Mr. Royce. Thank you, Mr. Chairman. Well, beyond the 
problems with bifurcating consumer protection and solvency 
protection, a fundamental question remains. And that is, would 
a consumer financial products agency have stopped the issuance 
of subprime mortgages to consumers or Alt-A mortgages to 
consumers? I think it is fair to say the regulators we had in 
place, many of whom were responsible for consumer protection, 
were assisting in rather than hindering the proliferation of 
these subprime products, the proliferation of what are now 
called ``liar loans.'' In fact, it was because of regulators in 
Congress that these various products came into existence and 
thrived in the manner that they did. Subprime mortgages came 
out of CRA regulations, according to a former Fed official.
    And Fannie Mae and Freddie Mac purchased subprime and Alt-A 
loans to meet their affordable housing goals set by their 
regulators and by Congress. They lost $1 trillion doing that. 
The consumers frequently lost their homes as a result of the 
collapse of the boom and bust that was thus created. Instead of 
adding another government agency, and unwisely separating 
solvency protection from consumer protection, we should take a 
step back and look at the artificial mandates we place on 
financial institutions that inevitably distort the market which 
ends up in the long-term walloping the consumer and creating 
the kind of housing problem that we have today. Thank you, and 
I yield back, Mr. Chairman.
    The Chairman. Next, the gentlewoman from California, Ms. 
Waters, for 2 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman, for holding 
this hearing. Judging from the proliferation of all kind of 
exotic products such as the no-doc loans, option ARMs, and 
other subprime mortgages and payday loans, our current 
regulatory framework inadequately protects consumers. One of 
the issues is jurisdiction. There are several types of consumer 
financial products which because they are offered by nonbanks 
fall into what may be classified as the shadow banking 
industry. These products and institutions escape Federal 
regulation yet often lead to Federal problems such as our 
current economic and foreclosure crisis.
    A prime example of this is mortgage servicing. Mortgage 
servicing is an important part of the housing market and 
consumers often have more contact with their mortgage servicers 
than they do with their mortgage broker, real estate agent, or 
bank combined. However, lately many services have been unable 
to properly assist consumers for all kinds of reasons. There 
are liability issues and basic lack of capacity. There is 
currently no Federal agency with specific jurisdiction over the 
mortgage servicing industry, and therefore no mechanism for 
anyone to address this pressing issue.
    Keeping this in mind, an agency that merely examines up-
front disclosure will not offer adequate protection to 
consumers who enter into transactions for financial products 
only to find that those products lack proper servicing and 
support. I am of the firm belief that if we are to truly 
protect consumers, we must go beyond the mere questions of 
disclosure in plain language and also investigate whether 
interactions between consumers and financial services providers 
are efficient and sound. That is why any Consumer Financial 
Protection Agency must have broad authority to examine both 
products and practices. Thank you, Mr. Chairman. I yield back 
the balance of my time.
    The Chairman. The gentlewoman from Illinois is recognized 
for 3 minutes.
    Mrs. Biggert. Thank you, Mr. Chairman. Today's hearing 
really is about consumers. And there is no question that 
Federal financial regulators dropped the ball on many fronts. 
But the Administration's plan to strip the authority to protect 
consumers from the functional regulator and instead create a 
whole new bureaucracy jeopardizes the safety and soundness of 
financial institutions, promotes risky behavior, puts taxpayers 
on the hook, and threatens our economy. Instead of 
strengthening our current system and improving communication 
among regulators, holding regulators regularly accountable for 
their existing mandates to protect and empower consumers, I am 
afraid the Administration's proposal sets up an additional 
layer of Federal regulation that will have the power to dictate 
what products businesses offer and tell consumers what products 
they can or cannot have.
    If that is not big government, I don't know what is. I 
think the Administration's proposal takes us down a slippery 
slope. On the other hand, to protect consumers against fraud 
and help consumers make informed decisions, I think the 
Republican proposal empowers consumers. Our proposal also puts 
taxpayers first and points towards smarter stronger regulators 
and regulations that promote transparency, accountability, and 
competition.
    Specifically, our plan streamlines the complaint process 
for consumers and enhances consumer information, it maximizes 
restitution for fraud victims, and makes it easier for 
financial regulators to assist in investigating and prosecuting 
violations of financial laws. I think we have a lot of 
discussion that needs to take place on this issue and I look 
forward to hearing from the witnesses. I yield back.
    The Chairman. The gentleman from North Carolina for 2 
minutes.
    Mr. Watt. Thank you, Mr. Chairman. Mr. Chairman, a number 
of my colleagues have pointed out that this discussion takes 
place against the backdrop of a financial meltdown in which the 
regulators actually were in charge of consumer protection. And 
so, in addition to today's hearing that will focus on the 
Administration's proposal to address that failure in our 
system, we intend to provide one of the regulators, the Fed, 
which had primary jurisdiction to protect consumers in one part 
of our industry with an opportunity to explain to us how they 
can both provide this consumer protection that is expected and 
pick up additional responsibilities in the newly proposed 
regulatory framework at the same time.
    So this hearing is not disconnected from another hearing 
that will be taking place in the subcommittee with jurisdiction 
over the Fed to give them an opportunity to explain how, if 
they think they could do it better, how they both failed and 
how they could do it better going forward.
    So I just wanted to take an opportunity to point out that 
in addition to this hearing, which is an important way to move 
us forward, we do want to give at least one of the regulators 
the opportunity to evaluate where and how they failed, and if 
they believe it should be done a different way, how they would 
do it better going forward. I thank the chairman and I yield 
back.
    The Chairman. The gentleman from Texas, Mr. Hensarling, for 
3 minutes.
    Mr. Hensarling. I thank you, Mr. Chairman. The subject 
matter of today's hearing is disappointing to me. The goal 
should not be enhancing regulation; the goal ought to be 
enhancing consumer protection. The hearing title assumes that 
the magic elixir to our Nation's economic woes is simply more 
regulation and more regulators. Regulators who now apparently 
will be given sweeping powers to decide which financial 
products are best for ourselves and our families. The 
underlying legislation essentially says that when it comes to 
financial products if we will only yield our freedoms, if we 
will only yield our consumer choices, if we will only yield our 
market-driven innovations to a group of unelected philosopher 
kings, they will undoubtedly rule us with wisdom and justice.
    Forgive me, but I do not buy it. The way to protect 
consumers is to ensure competitive markets, effective 
disclosure, consumer choice, innovation, and a modicum of 
personal responsibility. Now, the underlying legislation tells 
us that this unelected group of people to form this Commission 
will have full powers to unilaterally and subjectively ban a 
product from the market that it deems unfair or anti-consumer. 
Unelected bureaucrats will now decide for us what mortgages we 
can have, they will decide what bank accounts we can open, they 
may even decide whether or not we can be trusted with a credit 
card.
    To that I say, if you do not know the Rodriguez family of 
Mesquite, Texas, do not presume to choose their bank account 
for them. If you do not know the Laird family of Athens, Texas, 
do not believe that you can decide what mortgage is best for 
them. If you don't know the Shane family of Coffman County, 
Texas, please don't deign to decide whether or not they can use 
a credit card to meet their family's needs to find their 
version of the American dream.
    Now, to those who say the Administration's financial reform 
plan lacked any originality, they are clearly wrong. To 
functionally create a commission of consumer punishment, not 
consumer protection, this is an original idea, it is an 
originally bad idea. And for those who say that, well, we have 
an economic crisis therefore we must act, you cannot point to 
any other consumer product but a subprime mortgage as having 
anything connected to the economic crisis, yet the Federal 
Reserve has acted, Congress has acted. You can also not point 
to any lack of regulatory authority. You may not believe that 
the regulatory authority was exercised properly, maybe not 
aggressively, it is not a lack of regulatory authority. We need 
better enforcement, smarter enforcement, but we must preserve 
economic liberty and consumer choice, and I yield back the 
balance of my time.
    The Chairman. The gentlewoman from California, Ms. Speier, 
for 3 minutes. There will be one more 3-minute on the other 
side and then we will get to our witness.
    Ms. Speier. Thank you, Mr. Chairman. When the Consumer 
Product Safety Commission was proposed in 1972, toaster 
manufacturers, toy companies, and car makers all screamed foul, 
much like the financial services industry is screaming about 
the Consumer Financial Protection Agency that we are discussing 
today. But thank God for the CPSC. It has resulted in safer and 
more consumer-friendly products and boosted American confidence 
that the products that they bring into their homes will not 
kill them.
    The proposal for a Consumer Financial Protection Agency 
that we are talking about today is, I believe, one of the most 
important reforms to come out of this economic meltdown. A 
landscaper in my district who works for the City of San 
Francisco and earns $60,000 a year got a $600,000 mortgage. He 
now has an $800,000 balance because his ``pick a payment'' loan 
allowed him to short his monthly payment and feed the balance 
back onto the principal. At this point, his yearly mortgage is 
$51,000 a year, more than his take-home pay. How did he get a 
loan like this, a bank gave it to him. It is far too generous 
to say that financial institutions were simply opportunistic 
for selling exotic mortgages to working people and pushing 
credit cards on students who were unlikely to be able to repay. 
Amazingly, many in the financial services industry argue that a 
consumer protection agency is unnecessary. Not only should 
consumers just trust their bankers, they also argue that the 
financial services industry is too complex for a consumer 
protection agency to understand. Really? Does anyone really 
want to make the argument that the status quo works. Let's be 
clear, existing regulators could have stopped the liar loans, 
the subprime steering, the option ARMs that nearly brought our 
economy down. The status quo could have jumped in at any time 
but it didn't. If a product is marketed with total disregard 
for a consumer's ability to repay, if it is purposefully 
written so you need to hire a lawyer to understand the terms, 
if it is manipulated so its customer is more apt to be in a 
costly product than in one they are entitled to, you can't 
blame that on the complexity of the system.
    Regulators stood by while credit card companies used clever 
tricks to draw customers into even deeper debt with cheaper 
rates and balance transfers and ``convenience checks'' all the 
while burying the real credit terms on page 30 in fine type. 
Now, more than 50 million American families can't pay off their 
credit cards every month. It is essential that this new agency 
have real power, that they have flexible rulemaking authority, 
that it be adequately funded, not subject to the starvation by 
Congress, and that it have real enforcement authority. 
Financial institutions will say that they cannot possibly 
function in the kinds of restrictions proposed here, to which I 
ask them why are you afraid of letting consumers understand the 
terms of their mortgages and credit cards. We have spent 
hundreds of billions of dollars taking care of the largest 
banks in our country. It is time to do something for the 117 
million American families as well. I yield back.
    The Chairman. The gentleman from New Jersey for 3 minutes.
    Mr. Garrett. I thank the chairman, I thank the ranking 
member for holding this hearing, I thank the members of this 
panel, and I thank the other members of the panel after that as 
well for coming out today. You know, the Administration claims 
that its proposal seeks to address and reform the main areas in 
our financial system that are responsible for the credit crisis 
and the recession. When you think about it, I don't see 
anything in the proposal to stop the Federal Reserve, their 
very loose monetary policy, nor is there anything in there to 
address the conflicts of interest in the Fed in their dual 
roles as monetary policy czar and safety and soundness 
regulator.
    I don't see anything in their proposal to prevent the 
misallocated credit decisions by the government through Fannie 
Mae and Freddie Mac and CRA. In fact, and this is important, as 
with the CRA a goal of the proposal before us today, and if you 
look at the President's proposal, it is out on page 55, it 
says, ``it is to ensure traditionally underserved consumers in 
communities have access to lending, investment and financial 
services.''
    So just like the CRA, its meeting such a goal could 
possibly exacerbate systemic risk by requiring firms to engage 
in practices that are risky in the name of consumer protection, 
something that basically brought us here in the first place. 
And finally, I don't see anything that will avert human error 
in the regulatory agencies tasked with that responsibility of 
overseeing financial institutions. And when you think about 
that, think of all the panels and experts that we have had come 
here to say uniformly that it was not for lack of authority but 
merely human error when such things as the SEC missed the 
Madoff situation and didn't listen to the information when the 
regulators over at AIG didn't look deep into it and looked at 
the Financial Products situation.
    They admitted human error there rather than lack of 
authority. And so here the subject of a hearing today would be 
a creation of yet another regulator, again with human error 
actually encouraged by separating regulatory decision. And this 
point also is important; you are going to be separating the 
regulator's decision, you are going to create duplication from 
an already limited expertise found at prudential regulators. In 
other words, you are potentially working at cross purposes. It 
was a policy by the government that largely got us into these 
problems and I don't believe that creating more government 
agencies, perhaps those even with an Orwellian, heavy-handed, 
government bureaucrat knows best mentality will ultimately 
misallocate credit is the appropriate solution. The 
Republicans, on the other hand, have often an alternative 
reform package that takes steady aim ensuring no more bailouts 
by ending the government's practices of picking winners and 
losers, reducing counter government participation in private 
markets, appropriately streamlining and restructuring 
government oversight and restoring market discipline and 
consumer empowerment. I really think that is the change that 
people are asking for. I yield back.
    The Chairman. We will now begin the hearing with my 
colleague from Massachusetts, Mr. Delahunt, who has been a long 
time advocate for this position. And as a former law 
enforcement official of great distinction in the Commonwealth 
of Massachusetts, he is someone who is very well versed in how 
rights are protected and laws are enforced. Mr. Delahunt?

 STATEMENT OF THE HONORABLE WILLIAM DELAHUNT, A REPRESENTATIVE 
          IN CONGRESS FROM THE STATE OF MASSACHUSETTS

    Mr. Delahunt. Thank you, Chairman Frank and Mr. Bachus, for 
allowing me to testify today. There should be no doubt that we 
need a new regulatory framework and as importantly sustained 
supervision of the financial system. The current system failed 
us and we must avoid a repeat. While the near collapse of the 
financial system began on Wall Street, it quickly spread to 
Main Street, taking a devastating toll on families everywhere. 
Consumers have lost trillions in investment income and home 
equity. Investors both domestically and internationally have 
lost confidence. But I am confident that with your leadership 
and the excellent work of this committee, coupled with the 
commitment from the White House, we can extricate ourselves 
from this mess and move forward.
    Let me speak to the proposed Consumer Financial Protection 
Agency in the President's plan. It creates a consumer watchdog 
and in many respects reflects a proposal put forth by my friend 
and colleague from North Carolina and a member of this 
committee, Brad Miller. It is charged with ensuring that 
financial products sold to consumers are safe, responsible, 
accountable, and transparent. I also want to acknowledge the 
presence of the intellectual author of this concept, Harvard 
Professor Elizabeth Warren, who will testify on the next panel.
    There are currently 10 different Federal regulators that 
have some responsible for protecting consumers from predatory 
or deceptive financial products, but none have consumer 
protection as their simple sole primary objective. As a 
consequence, debt instruments have become increasingly risky. 
American families have been steered often deceptively into 
overpriced credit products including credit cards, car loans, 
and subprime mortgages. And as a result, Americans are 
overwhelmed with debt. These levels of personal debt have not 
only played a significant role in the financial crisis, but 
represent a significant impediment to full economic recovery.
    Today, one in four families are worried about how they will 
pay their credit card bill each month and nearly half of all 
credit cardholders have missed payments in the past year. There 
are more than 2 million families who have missed at least one 
mortgage payment and one in seven families are currently 
dealing with a debt collector. Like other government agencies, 
the Consumer Financial Protection Agency would seek to shield 
the consumer from unreasonable risk. The Agency would review 
financial products for safety, modify dangerous products before 
they hit the market, establish guidelines for consumer 
disclosure, and collect and report data about different 
consumer loans. I am sure Professor Warren will outline the 
specific provisions of the proposal. Undoubtedly credit helps 
dreams come true. Consumers can buy homes, cars and pay for a 
college education. But when seeking a loan consumers should not 
have to understand the nuances of complex financial instruments 
just as they don't need to understand how a toaster works, how 
a drug acts in our bodies or whether the food they eat is safe. 
By creating an agency whose primary role is to help the 
consumer people can again borrow with confidence that they are 
protected from fraudulent unsafe credit products. This will 
increase overall consumer confidence, will create demand, and 
stimulate the markets and spur investments.
    It is a win-win, not just for the consumer, but I believe 
will accelerate the recovery that is our common goal. Let me 
conclude with this: The Congress has attempted to enact reforms 
in the past but to no avail. Sensible reforms were thwarted by 
special interests and some will come before this committee to 
say that our regulations go too far, that this is simply too 
much. I say to them, give me a break. Just look at what has 
occurred. For too long, we have frankly let the American people 
down by failing to create a prudent regulatory regiment to 
protect the consumer from dangerous financial products. And we 
have seen the results. We can't let it happen again. And the 
consequences are simply too profound. Thank you, Mr. Chairman.
    [The prepared statement of Representative Delahunt can be 
found on page 78 of the appendix.]
    The Chairman. I thank the gentleman. I would just note that 
after 22 years as a district attorney, being able to say to 
somebody else, give me a break, probably is a role reversal for 
you.
    Mr. Delahunt. I used to hear that frequently, Mr. Frank.
    The Chairman. We are going to break. Now, there has only 
been one vote. So instead of waiting, let's get over and get 
back quickly. I intend to vote, come right back and start right 
away with our witnesses, so let's move quickly.
    [recess]
    The Chairman. The hearing will reconvene. We will begin 
with Professor Elizabeth Warren, who is a Leo Gottlieb 
Professor of Law at Harvard University. By the way, without 
objection, any documents that any of the witnesses wish to 
submit will be made a part of the record today. And if, after 
the hearing, you decide you have some supplemental material, we 
will take that as well. Professor Warren?

 STATEMENT OF ELIZABETH WARREN, LEO GOTTLIEB PROFESSOR OF LAW, 
                       HARVARD UNIVERSITY

    Ms. Warren. Thank you, Chairman Frank, for inviting me 
here. Thank you, Ranking Member Bachus. I also want to thank 
Congressman Delahunt and Congressman Miller who were able to 
put together the first version of this and introduce it in this 
House. I appreciate the invitation to appear. I should note, I 
speak only for myself, not on behalf of any other group or as a 
lobbyist for anyone. I am here to deal with a problem that can 
be explained in blunt words: the consumer credit market is 
broken. This is not about people who went to the mall and 
charged up what they couldn't afford to pay, and this is not 
about people who bought five bedroom houses that they can't 
make the payments on. Those people should deal with the 
consequences. This is about people who get trapped by credit 
agreements themselves.
    Everyone in this room recognizes the problem. Consumers 
cannot compare financial products because the products have 
become too complicated. Make a comparison between four credit 
cards, put the papers on the table, and you would have more 
than 100 pages of dense, fine-print text to work through. And, 
quite frankly, even if you invested the hours to do it, I don't 
know if you would be able to understand it. I say that only 
because I teach contract law at Harvard Law School, and I can't 
understand many of the terms.
    You can't tell which card is cheaper, which card is safer. 
That is not choice. Companies compete today by offering nominal 
interest rates and free gifts and then loading tricks and traps 
in the fine print where nobody else can see them. The result is 
that bad cards produce more profits than good cards and the 
market can't drive consumers toward cheaper, lower-risk 
products. Healthy markets thrive with information and level 
playing fields, not with tricks and traps. Broken credit 
markets also tilt the playing fields between big and small 
lenders. Local banks and credit unions may offer better 
products, but when the customers can't make easy comparisons 
the smaller banks, the ones with the smaller advertising 
budgets lose out. Broken credit markets also feed excessive 
risk into the system. Bad products carry very high default 
rates. And this is true across-the-board. Aggregated together, 
this can bring down families, bring down banks, bring down 
retirement funds, and ultimately bring down our whole economy.
    Systemic risk regulation starts by not feeding high risk 
products into the system. A Consumer Financial Protection 
Agency can fix a broken market. An agency that focuses on 
transparency can promote, for example, a plain vanilla product. 
Consider if we had a Consumer Financial Protection Agency, 2-
page plain vanilla, credit card agreement. You could put four 
of them on the table, the differences between them, the 
interest rates, the penalties, what causes the penalties, even 
the free gifts can be put out there in bold. That means that in 
less than a minute, you can tell which one is cheaper, which 
one is riskier and how much those free gifts actually cost you. 
That is choice, that is a meaningful choice made possible by 
regulation that repairs a broken market. Agencies can also 
reduce overall regulatory burdens for lenders.
    I think everyone in here agrees we should remove the layers 
of contradictory and inefficient regulation. By putting things 
in a single place and by promoting plain vanilla safe harbor 
mortgages, credit cards and other products that automatically 
pass regulatory muster, we make it very cheap for issuers to 
issue these products. They are already through the regulatory 
process. Banks can offer something else, but they have to show 
that what they offer meets basic safety standards, which in 
this case means a customer can read it and understand it in 5 
minutes or less.
    Regulatory agencies are not perfect, but they can do a lot 
of good. In the 1920's, anyone with a bathtub and some bottles 
of chemicals could sell drugs in America. The FDA put a stop to 
that. Dirty meat could be sold to families. The Department of 
Agriculture put a stop to that. In the 1960's, babies' car 
seats collapsed on impact, 8-year old boys shot out their 
cousins' eyes with BB guns, and infants chewed on toys covered 
in lead paint. The Consumer Protection Safety Commission put a 
stop to that. We have tried for 70 years to combine consumer 
protection with other financial service regulatory functions. 
This structure has not worked.
    To talk about keeping these two together is to say we are 
satisfied with the system and want it to go on as it has 
before. I think it is time for change. We need someone in 
Washington who cares primarily about families, who cares about 
consumers, who looks at the products not from the point of view 
exclusively of bank profitability but who looks at these 
products in a much larger sense about what they mean to the 
family, what they mean to communities, what they mean to the 
economy as a whole. This is an historic moment. You can repair 
a broken market, you can take the first steps in preventing the 
next financial crisis, and most of all, you can put a Consumer 
Financial Protection Agency in place to stop the tricks and 
traps that are robbing American families every day. Thank you, 
Chairman Frank.
    [The prepared statement of Professor Warren can be found on 
page 199 of the appendix. ]
    The Chairman. Next, we have the Honorable William Francis 
Galvin, Secretary of the Commonwealth of Massachusetts, who, 
for people not familiar with the intricacies of the laws of the 
State of Massachusetts, he is the securities regulator for the 
State of Massachusetts, so has been deeply involved in 
regulation. Mr. Galvin.

 STATEMENT OF THE HONORABLE WILLIAM FRANCIS GALVIN, SECRETARY, 
               THE COMMONWEALTH OF MASSACHUSETTS

    Mr. Galvin. Thank you, Chairman Frank, Ranking Member 
Bachus, and members of the committee. I want to thank you for 
this opportunity to testify on these important issues of 
consumer and investor protection. As Secretary of the 
Commonwealth, as has been noted, I am the chief securities 
regulator. The Congress is now considering an array of 
initiatives to improve consumer and investor protection. These 
include proposals in the White House, a White Paper on 
financial regulatory reform, as well as bills proposing the 
creation of the Consumer Financial Protection Agency. I commend 
and support the President's plan to strengthen and rationalize 
financial regulation, to provide greater protection against 
systemic risk in the financial markets, and to create a Federal 
agency to protect consumers in credit transactions.
    I support the proposal to strengthen the U.S. Securities 
and Exchange Commission that will enable the SEC, along with 
the States, to oversee the securities markets and to protect 
consumers. I also applaud other elements of the White House 
plan that would directly improve investor protection such as 
making securities brokers fiduciaries. True consumer protection 
requires that financial firms be fiduciaries for their 
consumers whether they are licensed investment advisors or 
brokers. We need to act now on the issue of mandatory 
arbitration. The documented problems in that area should be an 
indication that this should be optional for investors rather 
than mandatory. Too many investors have faced a stacked deck in 
arbitration. Most especially hedge fund registration, whereas 
that both hedge fund managers and the funds themselves should 
register with the SEC.
    Hedge funds are often low visibility but high impact 
participants in the financial markets. Hedge funds have also 
been the source of abusive trading in the commodities and 
securities markets, including trades that have distorted the 
oil and food markets. Wild speculation in these basic 
commodities during the past year has robbed millions of 
Americans of billions of dollars at the gas pump and the 
supermarket. I urge Congress to protect our now fragile economy 
from further damage. We support the creation of a Consumer 
Financial Protection Agency to enhance the protection of 
consumers when they enter into credit savings and payment 
transactions.
    Sadly, this hearing on the creation of this agency is 
necessary because existing regulatory agencies dropped the 
ball. While some proposals have slipped through the cracks--
some problems have slipped through the cracks of existing rules 
too often regulators fail to maintain their independence in the 
industries they regulate and they fail to use their powers to 
promulgate and enforce rules to protect the public. 
Massachusetts and other States have a distinguished record of 
protecting retail investors and consumers. As financial 
regulation is redesigned, I urge you to preserve and enhance 
the abilities of the States and State regulators to protect 
investors and consumers. There is an acute need for this 
protection. Retail investors and savers have been forced into 
the risk market to meet their basic financial goals.
    Investors and consumers are particularly harmed when the 
States have been preempted from protecting their interests. 
These include the preemption of State usury laws, predatory 
mortgage lending laws, and security law preemption. The 
National Securities Markets Improvement Act of 1996 preempted 
State authority in key areas where the States protected 
investors. NSMIA removed the State's ability to require 
enhanced disclosure in mutual funds. NSMIA created a regulatory 
blind spot for hedge funds selling securities pursuant to the 
Rule 506 exemption. And NSMIA prevented a State enforcement 
action against large investment advisors even when the 
violation involved unfair or deceptive practice. Massachusetts 
and other States have taken the lead in bringing enforcement 
actions and recovering funds for investors. These include 
auction rate securities, illegal market timing of mutual funds, 
and false security analyst reports and pyramid and Ponzi 
schemes.
    The States are close to the investing public and have time 
and time again demonstrated that they can act quickly and 
effectively to help investors. The States have added value but 
precisely because they are independent of other agencies and 
self-regulatory organizations. States have been another set of 
eyes watching the market. States have also served as a 
backstop, protecting the interest of investors in important 
cases when other regulators have not taken action. We urge the 
Congress not to make the States subject to the authority of the 
Financial Services Oversight Council or the Federal Reserve. 
Similarly we urge the States not be made subject to the 
Consumer Financial Protection Agency. The independence of the 
States means that they are less likely to yield to pressure 
from regulated entities and they are much less likely to be 
captured by the firms and the industries that they regulate.
    In this regard, I must emphasize the record that States 
have of cooperating with the SEC and FINRA and this record will 
continue. The States will cooperate and coordinate with the 
Consumer Financial Protection Agency that is proposed. However, 
it is crucial the States not be under the CFPA's authority. The 
States' independence is vital and it is the key to our record 
of success. To be effective, the States need the tools we need 
to regulate effectively. We need to restore States' authority 
over nonpublic offerings, particularly hedge funds, which are 
particularly sold pursuant to the exemption under Rule 506. We 
need to permit the States to police larger federally registered 
investment advisors for unethical and dishonest practices. The 
rights for investors to sue for violations of State and Federal 
securities laws is also a powerful tool that should be 
reconsidered. I urge the Congress to review the impacts of the 
private security litigation reforms. We need to strengthen, not 
weaken, investor remedies. Thank you, Mr. Chairman.
    [The prepared statement of Secretary Galvin can be found on 
page 81 of the appendix.]
    The Chairman. Next, we will hear from Ellen Seidman, who is 
a senior fellow at the New America Foundation and a former 
Federal regulator.

 STATEMENT OF THE HONORABLE ELLEN SEIDMAN, SENIOR FELLOW, NEW 
                       AMERICA FOUNDATION

    Ms. Seidman. Thank you. Thank you Chairman Frank, Ranking 
Member Bachus, and members of the committee. I appreciate your 
inviting me here this morning. In addition to being a senior 
fellow of New America Foundation, I am also executive vice 
president at ShoreBank Corporation, the Nation's largest 
community development financial institution. My views are 
informed by my current experience, although they are mine 
alone, not those of New America or ShoreBank, as well as by my 
years at the Treasury Department, Fannie Mae, the National 
Economic Council, and as Director of the Office of Thrift 
Supervision.
    The Administration has proposed creation of a very broad-
based and powerful Consumer Financial Protection Agency that 
would have regulatory, supervisory and enforcement authority 
over consumer protection in the financial services sector and 
also over the Community Reinvestment Act. The Administration's 
recognition of the seminal importance of consumer protection 
financial services is a critical reversal of the trends over 
the last several decades and builds on the work this committee 
has done. I agree with the Administration that the time has 
come to create a well-funded single Federal entity with the 
responsibility for authority over consumer protection and 
financial services. The Administration has also focused on the 
importance of CRA.
    Access to high-quality financial products at fair terms and 
reasonable prices is an important element of consumer 
protection that requires both leveling the playing field by 
having consistent regulations across all entities providing 
similar products and encouraging financial institutions to 
responsibly serve all communities and consumers. I am 
concerned, however, about two elements of the Administration's 
proposal. First, I believe that prudential supervisors, in 
particular, the Federal and State banking regulatory agencies, 
should retain primary supervisory responsibility for consumer 
protection as well as for safety and soundness over the 
entities they regulate.
    I suggest, however, that Congress make changes to the 
organic banking statutes to emphasize the importance of 
consumer protection, elevating it to a higher place in the 
supervisory system. Second, I am concerned that what has been 
in many ways the most consistently successful element of CRA, 
namely investment and community development finance, such as 
affordable rental housing, community facilities and lending 
both with and through CDFIs, may get lost in an agency devoted 
to consumer protection.
    In my written statement, I suggest some ways to increase 
the likelihood that if CRA is part of the CFPA, service to all 
communities and community development will be a robust part of 
its mandate.
    The current crisis has many causes, including an 
overreliance on finance to solve many of the needs of our 
citizens. Those needs require broader social and fiscal 
solutions, not financial engineering.
    Nevertheless, there were three basic regulatory problems. 
First, there was a lack of attention and sometimes 
unwillingness to effectively regulate products and practices 
even where regulatory authority existed. Second, there were and 
are holes in the regulatory system, both in terms of 
unregulated entities and products and in terms of insufficient 
statutory authority.
    Finally, there was and is confusion for both the regulated 
entities and consumers and those who work with them. The 
solutions are not easy. Financial products, even good ones, can 
be extremely complex. Many, especially loans and investments, 
involve both uncertainty and difficult math over a long period 
of time. The differences between a good product and a bad one 
can be subtle, especially if the consumer doesn't know where to 
look. And different consumers legitimately have different 
needs.
    The regulatory framework, of course, involves both how to 
regulate and who does it. With respect to how, I suggest three 
basic guiding principles that I believe are fully consistent 
with the Administration's proposal. First, products that 
perform similar functions should be regulated similarly no 
matter what they are called or what kind of entity sells them.
    Second, we have to stop relying on consumer disclosure as 
the primary method of protecting consumers. While such 
disclosures can be helpful they are least helpful where they 
are needed the most, when products and features are complex. 
Third, enforcement is important. While much attention has been 
given in the week since the President's proposal was announced 
to enforcement and depository institutions, the fact that the 
proposal would make fairly stunning changes and improvements in 
consumer protection for nondepositories has largely been left 
unsaid.
    With respect to who should regulate, it is time to 
establish a single Federal entity dedicated to consumer 
protection. If properly funded and staffed, this agency will be 
more likely to focus on problems that are developing, to take 
action before they get out of hand. This is not separating 
regulation writing more than it currently is. Most banking 
consumer protection regulations are written solely by the Fed. 
The other prudential regulators enforce someone else's 
regulations. That is exactly the system that there would be in 
this case.
    Centralizing the complaints function will give consumers 
and those who work with them a single point of contact and the 
regulatory body early warning of trouble. The CFPA will also 
have the opportunity to become expert in consumer understanding 
and behavior to regulate effectively without necessarily having 
a heavy hand, and it could also become a focus for the myriad 
of Federal efforts surrounding financial education.
    How will the new regulator be funded and at what level?
    It is essential that this entity be well-funded. If it is 
not, it will do more harm than good as those relying on it will 
not be able to count on it. This almost certainly requires a 
dedicated revenue source in addition to general fund 
appropriations.
    What will be the regulator's supervisory and enforcement 
authority?
    I believe that the prudential supervisors can do this. 
Regulators who engage in prudential supervision with on-site 
examinations should be expected to exercise that authority. 
Retaining primary supervisory and enforcement authority with 
the prudential supervisors makes use of existing structures and 
resources, and keeps consumer protection and safety and 
soundness together, but having backup authority in the CFPA 
would be extremely important.
    In my testimony, I explain that I think that there are 
revisions to the organic banking statutes that could make an 
enormous difference in making sure that this works better than 
it has. The current crisis is an enormous opportunity to make a 
big difference that will benefit consumers, financial 
institutions, and the economy.
    The President has put forth a bold proposal, and now is the 
time to act. Thank you.
    [The prepared statement of Ms. Seidman can be found on page 
179 of the appendix.]
    The Chairman. We are going to be having a lot of votes. 
Members can go and vote. I may or may not go. After 53 votes 
last week, I think I can miss an adjournment vote or two, so I 
may well keep going. If members want to go and come back, we 
are going to keep going.
    Mr. Mierzwinski.

  STATEMENT OF EDMUND MIERZWINSKI, CONSUMER PROGRAM DIRECTOR, 
              U.S. PUBLIC INTEREST RESEARCH GROUP

    Mr. Mierzwinski. Thank you, Mr. Chairman.
    I am Ed Mierzwinski with the U.S. Public Interest Research 
Group. Along with Travis Plunkett on the next panel, of the 
CFA, we are submitting joint testimony, written testimony, on 
behalf of over a dozen community and civil rights organizations 
in support of the Consumer Financial Protection Agency as first 
proposed by Professor Warren, then introduced by Mr. Brad 
Miller and Mr. William Delahunt, and now part of the 
President's comprehensive blueprint to reform our financial 
system.
    In our written testimony, we went into great detail as to 
why this new agency will protect consumers from unfair credit 
payment and debt management products no matter what company or 
bank sells them and no matter what agency may serve as their 
primary regulator.
    I want to also point out that our coalition recognizes that 
there are a number of other problems that your committee will 
be addressing over the next year and that those problems, 
including systemic risk, including the bad incentives for 
executive pay, including the shadow banking system, and other 
issues, are all covered in our Americans for Financial Reform 
platform, which is available at ourfinancial security.org, and 
we intend to work closely with the Congress to make sure that 
as strong as possible recommendations are enacted.
    The idea of a Federal financial consumer protection agency 
is a critical part of the President's plan, and we urge you to 
recognize that it must be given authority to make the rules, to 
supervise compliance with the rules, and to finally to enforce 
those rules.
    In the area of enforcement of the rules, we are very 
appreciative that the President has proposed that not only will 
this agency enforce the rules but that State supervisory 
regulators and the State Attorney General will be able also to 
enforce the rules. We will reinstate Federal law as a floor, 
not as a ceiling, also that private rights of action will be 
allowed, that consumers will be able to enforce the consumer 
laws. The provision also provides the President's provision 
that arbitration, forced arbitration clauses in banking 
contracts, be eliminated as a way to make it easier for private 
enforcement of the consumer laws. We also propose, in the 
writing of the legislation, that you ensure that consumers be 
allowed to enforce the rules, not only the laws.
    I want to start out by saying that we have a system that is 
broken, and what we are trying to do is fix it. The current 
system does not work. It is possible to create a new system 
that will work. Let me look really quickly at some of the 
failures of the current financial system.
    First, the Fed had 15 years in which it did not write rules 
about HOEPA. Second, the OCC spent most of its time and energy 
preempting the States for 15 years instead of enforcing the 
laws. By the way, there is one law that the States still are 
allowed to enforce, which are fair lending laws, and before the 
Supreme Court now is the case where the OCC has sued New York 
because it tried to enforce those fair lending laws.
    On credit cards, we know the answer to that one. They slept 
while the credit card problem got worse, and Congress had to 
step in and solve the problem. The Fed has allowed a shadow 
banking system of prepaid cards outside of the current 
financial protection laws that target the unbanked and 
immigrants. The OTS allows bank payday loans to continue on 
prepaid cards. The Fed has refused to speed up check 
availability. The list goes on and on. The Fed has supported 
the position of payday lenders and telemarketing fraud artists 
by promoting and permitting remotely controlled checks to 
subvert consumer rights under the banking laws. These 
regulators do not look at consumer protection as something that 
they should be doing.
    There are basically six arguments that the other side will 
use against this agency. They will argue the regulators already 
have the power. Well, they have the power, but they do not use 
it, partly because of their culture, partly because of charter 
shopping, and partly because safety and soundness trumps 
consumer protection. That is why they must be separated. They 
will argue it will be a redundant layer of bureaucracy, that it 
will take away bureaucracy. We have 7 regulators enforcing 20 
different laws. That is the wrong way to go.
    I have already discussed that we can separate consumer 
protection from supervision. The proposal from the President 
talks about a council of regulators with a prudential regulator 
on the board of the new agency. The President also talks about 
making sure that there is the sharing of information. We are 
looking for a new system. We are not looking to take this 
agency and to cut it off at the knees. We can separate the two.
    The agencies will argue and the banks will probably argue 
that small banks will be hurt. We have a detailed appendix in 
our testimony. Small banks are actually part of the problem. 
They promote payday loans. They do a lot of things that are not 
good.
    Finally, as I already discussed, the opponents of the 
proposal will argue that taking away Federal uniformity is 
somehow the wrong thing to do. We think it is the right thing 
to do.
    Thank you very much.
    [The joint prepared statement of Mr. Mierzwinski and Mr. 
Plunkett can be found on page 118 of the appendix.]
    The Chairman. Next is Mr. Edward Yingling, who is the 
president and chief executive officer of the American Bankers 
Association.

 STATEMENT OF EDWARD L. YINGLING, PRESIDENT AND CEO, AMERICAN 
                      BANKERS ASSOCIATION

    Mr. Yingling. Thank you, Mr. Chairman, Mr. Bachus, and 
members of the committee for inviting me to testify on behalf 
of the banking industry.
    Members of this committee are looking at this consumer 
agency proposal from the point of view of consumers, who should 
be paramount in your deliberations, but today I would also ask 
you to take a look at this issue from an additional point as 
well. While banks of all sizes would be negatively impacted, 
please think of your own local community banks. These banks 
never made one subprime loan, and they have the trust of their 
local consumers. As this committee has frequently noted, these 
community banks are already overwhelmed with regulatory costs 
that are slowly but surely strangling them.
    Yet last week, these community banks found the 
Administration proposing a potentially massive new regulatory 
burden. While the shadow banking industry, which includes those 
most responsible for the crisis, is covered by the new agency, 
their regulatory and enforcement burden is, based on history, 
likely to be much less. The proposed new agency is to rely 
first on State regulation and enforcement. Yet we all know that 
the budgets for such State enforcement will be completely 
inadequate to do the job. Therefore, the net result will be 
that the community banks will pay greatly increased fees to 
fund a system that falls disproportionately and unfairly on 
them.
    The new agency would have vast and unprecedented authority 
to regulate in detail all bank consumer products. The agency is 
even instructed to create its own products, whatever it decides 
is plain vanilla, and mandate that banks offer them.
    Further, the agency is urged to give the products it 
designs regulatory preference over the bank's own products. The 
agency is even encouraged to require a statement by consumers 
that the consumer was offered and turned down the government's 
product first. Thus, community banks, whether it fits their 
business model or not, would be required to offer government-
designed products, which would be given a preference over the 
bank's own products.
    On disclosure, the proposal goes beyond simplification, 
which is badly needed to require that all bank communication 
with consumers be ``reasonable.'' This term is so vague that no 
banker would know what to do with it, but not to worry. The 
proposal would allow, even encourage, thousands of banks and 
others to preclear communications with the agency. So, before a 
community bank runs an ad in the local newspaper or sends a 
customer a letter, it would apparently need to preclear it with 
the regulator to be legally safe.
    CRA enforcement is also, apparently, to be increased on 
these community banks, although they already strongly serve 
their communities, and that is not to mention the inherent 
conflicts that will occur between the prudential regulator and 
the consumer regulator with the banks caught in the middle.
    Please recognize that all of this--cost, conflicting 
requirements, and uncertainty--would be placed on community 
banks that in no way contributed to the financial crisis. More 
generally, the fundamental flaw in the proposal is that 
consumer regulation and safety and soundness regulation cannot 
be separated. You cannot separate a business from its product.
    A good example is check hold periods. Customers would like 
the shortest possible holds, but this desire needs to be 
balanced with the complex operational issues in clearing checks 
and with the threat of fraud, which costs banks, and ultimately 
consumers, billions of dollars.
    Another example is the Bank Secrecy Act, which protects 
against money laundering and terrorist financing. These 
critical regulations must be coordinated with consumer and 
safety and soundness regulation. Take the account opening 
process. A consumer regulator would focus on simplicity in 
disclosures, while the prudential regulator would also want to 
consider the potential for fraudulent activity and for 
implementing the Bank Secrecy Act to protect against terrorist 
financing. What is the bank in the middle supposed to do? What 
about conflicts over CRA lending?
    We agree that CRA has not led to material safety and 
soundness concerns, but that is because it is under one 
regulator. There is often debate about individual CRA loans as 
to the right balance between outreach and sound lending. 
However, that debate, that tension, is resolved in a 
straightforward manner because the same agency is in charge of 
CRA and of safety and soundness. To separate the two is a 
recipe for conflicting demands, with the bank again caught in 
the middle.
    The great majority of consumer problems, as has been noted 
by both Democrats and Republicans on this committee, occurred 
outside the highly regulated traditional banks, but there are 
legitimate issues relating to banks as well. In that regard, my 
written testimony outlines some concepts that we hope you will 
consider to address the banking side of it.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Yingling can be found on 
page 235 of the appendix.]
    The Chairman. Next, Mr. Alex Pollock, who is a resident 
fellow of the American Enterprise Institute.

    STATEMENT OF ALEX J. POLLOCK, RESIDENT FELLOW, AMERICAN 
                      ENTERPRISE INSTITUTE

    Mr. Pollock. Thank you, Mr. Chairman, Ranking Member 
Bachus, and members of the committee.
    I have both experienced and studied many cycles of 
financial bubbles and busts, including the political reactions 
which inevitably follow, and this forms my perspective on 
today's questions.
    I think we can all agree that the Consumer Financial 
Protection Agency, as proposed, would be a highly intrusive, 
large, very expensive bureaucracy with broad, rather undefined 
and potentially arbitrary powers, which would impose large 
costs on consumer financial services while, as Mr. Yingling 
just said, also imposing requirements which would be highly 
likely to conflict with those of other regulatory agencies. We 
differ on whether we like this idea or not.
    When it comes to so-called plain vanilla products for all 
providers and intermediaries, a vast jurisdiction apparently 
unrelated to any charter in definitions, the proposed agency 
would be able to dictate part of the business across this wide 
jurisdiction. This strikes me as an amazing assertion. A more 
sensible proposal would be to define certain financial products 
as plain vanilla and require disclosure that this is or is not 
a plain vanilla financial product suitable for an 
unsophisticated customer. This idea, which strikes me as 
reasonable, would not require a new agency.
    For financial institutions, the CFPA would be an additional 
parallel regulatory system, representing a major burden, a 
potentially punitive approach and significant, undefinable 
regulatory risk. This is quite at odds with the intense desire 
of the United States Government to attract additional capital 
into the banking system.
    Discussions that I have read about the formation of this 
agency make me think a lot of those that preceded the Sarbanes-
Oxley Act. I see Mr. Oxley smiling down at me up there. That 
was the first major regulatory overreaction of the 21st 
Century, and the Sarbanes-Oxley Act has proved highly 
successful at generating costs and bureaucracy while apparently 
having no influence at impeding the build-up of risk, as we see 
from the result. It created and still creates disproportionate 
burdens on small and venture businesses, and I believe we would 
see a similar pattern for the CFPA.
    Professor Warren and Mr. Yingling both mentioned the 
special role of community financial institutions, and I think 
in any kind of body of this kind, should it be created, it 
would be reasonable to exempt community financial institutions.
    The Administration's proposal, in my view, emphasizes one 
extremely good idea--ensuring clear, simple, straightforward, 
informative disclosures.
    In congressional testimony in the spring of 2007, while 
sitting at this table, I proposed a one-page mortgage form so 
borrowers could easily focus on what they really need to know. 
It remains my opinion that something like that would be a huge 
improvement in the way the American mortgage system works.
    By far the most important reason for good disclosures is 
for borrowers to be able to decide for themselves whether they 
can afford the debt service commitments they are making. In my 
view, that is much more important than choosing among products. 
The key is: Can you afford the commitments you are making? In 
the ideal case, the borrowers would be able to complete the 
one-page form on their own.
    In this context, it seems remarkable to me that the idea of 
building personal responsibility on the part of consumers seems 
to be missing from the Administration's proposal, which seems 
to me to be a major failure.
    The Administration's White Paper gets to Fannie Mae and 
Freddie Mac, and it seems to lose courage. As everybody knows, 
Fannie and Freddie made a huge contribution to inflating the 
mortgage bubble. They plunged into low-quality mortgage credit, 
and pushed the top of the market much higher, and the bust 
subsequently became much worse, of course, including their own 
insolvency. Without addressing Fannie and Freddie, we cannot 
address the mortgage market.
    The new agency is proposed to have sole authority to 
evaluate institutions under CRA and to ``promote'' community 
development investment. As others have said, I believe this is 
a truly bad idea. Whenever credit risk and investment risk are 
involved, it is necessary to balance community investment and 
safety and soundness. Thus, in my view, it is imperative for 
these to be combined in one regulatory agency. To have credit 
risk and investment risk being promoted by people with no 
responsibility for safety and soundness would be an obvious 
mistake.
    Others have suggested that the idea of centralizing 
consumer protection is still a good idea. I think it probably 
is, along with these disclosure responsibilities. We can make 
use of a logical existing organization. My vote would be to use 
the Fed and to just drop the notion of the CFPA.
    As a final thought, I would like to repeat that any 
proposals which substantially increase the regulatory burden 
and undefinable regulatory risk must be considered in the light 
of the government's intense need to attract very large amounts 
of additional private equity capital into the banking system.
    Thanks very much for the chance to share these views.
    [The prepared statement of Mr. Pollock can be found on page 
174 of the appendix.]
    The Chairman. Thank you.
    Let me say at the outset to my former colleague, Secretary 
Galvin, that I do not think there is any likelihood that we are 
going to increase any preemption. In fact, many of us on both 
sides were opposed to the breadth of the OCC's preemption of 
all State banking laws, and I believe we will address that. I 
had previously spoken to the Secretary of the Treasury, and we 
had initiated conversations with the Comptroller of the 
Currency, with the State attorneys general and with State bank 
supervisors. I think we will have resolved that. I know there 
is a pending court case, but I think we may moot the case by 
dealing with it.
    Next, Mr. Yingling, I just want to say that I welcome and 
appreciate your comments. I am going to talk about the CRA 
issue, which is an interesting one, as to how we deal with it. 
I want to start at the bottom of page 7 of your written 
testimony. You said it orally, and I think it is very 
important:
    ``We agree that CRA''--``we'' is the American Bankers 
Association because there has been this effort to blame CRA for 
many of the ills of the world in terms of lending. ``We agree 
that CRA has not led to material safety and soundness concerns 
and that bank CRA lending was prudent and safe for consumers.'' 
That doesn't mean every loan made there was right, but I think 
that is a very impressive reputation of those who would say CRA 
was a major part of the crisis.
    It is also important when you say, ``Bank CRA lending was 
prudent and safe for consumers.'' The relevance to that is that 
there is no non-bank CRA lending, because CRA explicitly, by 
its terms, only applies to banks. So this is a very impressive 
statement on your part.
    Let me now ask others. Ms. Seidman also had this, and I do 
think that raises an important issue about CRA. I understand 
you say that is because it is within the current context.
    Let me ask Mr. Mierzwinski and Professor Warren: What is 
your view about the notion of moving CRA? Is there a problem 
there? You do have this issue where CRA is enforced, to the 
extent that it is--and it is not exactly the toughest 
enforcement mechanism. It is enforced by the regulators in 
terms of denying a right of a change of ownership. How do you 
make these two work together? That is the one conflict which I 
do think needs to be addressed.
    Professor Warren?
    Ms. Warren. Well, I would make one point about it. It 
surprised me to see this particular proposal, but there is 
something to be said for having someone who worries about how 
financial products are read and understood by consumers looking 
at CRA. No one is helped if what happens under CRA is that bad 
loans are made that ultimately cause families to lose their 
homes.
    So to the extent that this injects in the CRA some element 
of the quality of the loan-making, the quality of the financial 
decisions that the families are making who were at least 
supposed to be benefited. I like that aspect of it.
    The Chairman. You were surprised that this was not part of 
your original proposal?
    Ms. Warren. No, Congressman.
    The Chairman. Let me ask Mr. Mierzwinski.
    Mr. Mierzwinski. Mr. Chairman, I think that Ellen Seidman's 
testimony makes some very good points about some of the issues 
that are framed with moving the agency. The consumer groups and 
the other community groups are looking at making sure--
    The Chairman. I appreciate it.
    Professor Warren, I think you are right. It is possible to 
have input from this agency without the kind of transfer. I 
will say that I met yesterday with the community bankers, and 
they had that same issue. It does seem to me that there is a 
legitimate issue here about how best to improve CRA. I do, 
again, say that in the context of thanking you, Mr. Yingling. I 
know you will hear complaints about your evaluation of CRA and 
how it was not a major cause of the problem, but I thought I 
would thank you for it before you get criticized for it.
    Let me ask as to one last issue. I invited Secretary Galvin 
even though he is the securities regulator because he has been 
a staunch supporter of not having preemption, and we did go 
through that in a number of cases. The premise here is that we 
will leave securities enforcement to the SEC. Correct me in the 
sense that I do think that investor protection is a bigger part 
of the SEC's mission than consumer protection is of the OCC's.
    Does anyone dissent from the notion of--it is my own view 
that we might want to try and beef up the SEC. Does anyone 
dissent from the recommendation to focus just on bank products 
and not on the SEC, banks and others?
    Mr. Yingling?
    Mr. Yingling. We dissent in the sense that you have 
products that compete with each other, and we think that they 
ought to be subject to the same type of regulatory issues.
    The Chairman. That is a reasonable point for you to raise. 
Any other comments?
    Mr. Galvin. Mr. Chairman, the only thing I would point out 
is there are a number of products that sort of fall into 
multiple categories. Annuities come to mind. Mutual funds 
products come to mind.
    The Chairman. Well, let me just say on annuities, the 
insurance issue also comes up, and that is why I decided that 
we needed a separate panel. So we will be talking about that. 
That is another issue. I think Mr. Yingling makes a reasonable 
point. So you get a couple, but I do think that those are 
things we will work on.
    I thank the panel, and it is a busy day. So let me now 
recognize the gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman.
    Professor Warren, I have been reading your interviews with 
different news organizations, and you said sometimes that one 
of the first things you will do--and just tell me of these 
different things what you see as maybe priorities.
    Now, you testified you want to eliminate the most 
destructive practices, you know, high-risk products. You want 
to establish minimum safety standards; is that correct? Are 
those two of the different things you want to do?
    Ms. Warren. Yes, Congressman.
    Mr. Bachus. Then, I think, one of the third ones was to 
require lenders to make pure vanilla, or standardized financial 
products, available.
    Ms. Warren. Actually, Congressman, no. I have never 
suggested requiring anything of anyone.
    Mr. Bachus. Oh, okay.
    Ms. Warren. What I have suggested is an agency that offers 
plain vanilla products that provide a safe harbor on 
regulation. That is, if you will use an off-the-shelf, page-
and-a-half credit card agreement or a one-page mortgage 
agreement, then you have met all regulatory obligations at that 
point, making it cheap for you and easy for the consumer to 
understand.
    Mr. Bachus. What are some of the most destructive high-risk 
practices or products that you see?
    Ms. Warren. Well, actually, I found it interesting that you 
listed those as separate entities. The real point, in my view, 
is when customers cannot follow what you are doing, I regard it 
as extremely destructive, as high-risk, when you dump 30 pages 
on a customer and you call that a credit card contract and when 
only after the customer has used the credit card, discovers 
terms in it when those terms are charged against the customer.
    I think that is extremely destructive. I think it is 
destructive to show up at a mortgage closing and be handed 
literally hundreds of pages with stickers saying, sign here, 
sign here, sign here, and the advice, ``you cannot read it.'' I 
think that is destructive. I think it is destructive when there 
are changes over time--when you are quoted one price on a 
mortgage, but when you show up after you have already sold your 
house and after you have already gotten all the furniture in 
the moving truck and are told that the interest rates will be 
different or that there are prepayment penalties. I think those 
are very destructive practices.
    Mr. Bachus. Well, other than disclosing them, though, would 
you stop some of those practices?
    Ms. Warren. The point, Congressman, as I see it, is that it 
is all about disclosing them. That is really the whole point 
here. We have now played the game over and over and over of, 
add 10 more paragraphs, 4 more pages, 20 more pages. That is 
not disclosure.
    Mr. Bachus. Well, I understand what you are saying, but 
would you actually choose the terms--
    Ms. Warren. No.
    Mr. Bachus. --or would you just require--
    Ms. Warren. I am not interested in picking terms. What I am 
interested in is putting terms out where customers can see them 
and compare products.
    Mr. Bachus. But sometimes it would be destructive. Some 
practices would be destructive.
    Ms. Warren. Well, you know, let me put it this way, 
Congressman: I was testifying a year-and-a-half ago in the 
Senate when one of the Senators asked the principal officer 
testifying for one of the major banks to explain double-cycle 
billing. The person from the bank started, stopped, moved over, 
started again, stopped. He finally laughed and said, ``I cannot 
do it.'' Well, my view is, if you cannot explain it, then you 
probably should not sell it to customers. I think that is 
destructive.
    Mr. Bachus. So that would be one of the principles?
    Ms. Warren. Yes, that would be a key principle for me.
    Mr. Bachus. But what about some of these high-risk 
products? What if you could explain it, but what if the terms 
were bad? Would you prevent those?
    Ms. Warren. Well, you know, my view is we used to do this 
by usury laws. We simply said, there is a cap. There it is.
    Mr. Bachus. Right. Is that sort of what you want to return 
to?
    Ms. Warren. No. That is exactly what I am talking about. 
There was no reason to develop a business model that put tricks 
and traps in back and you pretended to compete on things that 
were not real. So we have two choices going forward. One 
alternative is you could return to a day of usury caps. The 
second way we can do it is we can do it through an agency. I 
have also sat in these hearings time after time--
    Mr. Bachus. What would the agency do?
    Ms. Warren. Well, this is what we just talked about.
    The agency could say if you will issue a page-and-a-half 
credit card contract that is readable, a one-page mortgage that 
is readable and make the blanks clear--the interest rate, the 
penalty rate, what triggers the penalty, and how you get your 
free gift--if you will put those in bold where someone could 
read them, you are relieved of other regulatory obligations.
    Now the consumer can make a good choice. That is meaningful 
choice, I believe, Congressman.
    Mr. Bachus. So you are not going to want to set anything. 
You are just going to want to require--
    The Chairman. We only have time for the gentleman to make a 
final comment. So without repeating the question, do you have a 
final comment? We are over the time.
    Mr. Bachus. Well, this would apply to consumer loans. How 
about bank fees? As long as they reveal those--
    The Chairman. We are way over time. We cannot get into a 
new dialogue. I just said the gentleman could wrap up.
    Mr. Bachus. Oh, okay.
    The Chairman. Professor Warren, if you want to answer the 
question, we will find some opportunity to do so later on 
within her allotted time.
    The gentlewoman from California.
    Ms. Waters. Thank you very much, Mr. Chairman.
    I would like to start with kind of a basic question about 
oversight and regulation. I sincerely believe that there are 
some products. They have often been referred to, because of 
this subprime meltdown that we have had, as ``exotic products'' 
that were offered in the markets, such as Alt A loans and 
option adjustable rate mortgage, etc.
    There appears to be a feeling or an understanding or a 
basic way that the financial services community works that says 
you cannot deny products, that you can regulate them, no matter 
what someone decides to market that it is no so bad that it 
could be banned, that it could be stopped, that it could be 
disallowed, but whatever comes on the market, we will regulate 
it.
    How many of these products can reasonably be regulated?
    We discovered that there was very little regulation going 
on with these exotic products that came on the market. There 
was no real oversight. Nobody seems to have had to introduce 
them to any agency to say, you know, this is what we are about 
to do. They did not seem to know what was going on.
    What about that? Are there any products that are so bad 
that there needs to be some way to stop them altogether or do 
we go along with the idea that, well, if new products come on 
the market--1,000 of them or 2,000 of them--it does not matter, 
and we will regulate them?
    I would like someone to speak to that. Let me ask Ms. 
Seidman what you think about that?
    Ms. Seidman. Thank you, Congresswoman Waters.
    You know, I think one of the questions that we have to ask 
is: What is a ``product'' and what is a ``term?''
    So, clearly, no one would ban mortgages or credit cards. On 
the other hand, I think we have a system that recognizes that 
banning terms is very much within the power of the regulator. 
In fact, interestingly enough, the Fed actually banned double-
cycle billing, which Professor Warren just described.
    Are there some products that are so bad they should not be 
allowed? You know, I think there are, but I also think it is 
incredibly important that we understand what the needs of the 
population are and how those needs are going to be met.
    I do not happen to like payday lending. When I was at OTS, 
we made sure that the institutions we regulated did not do 
that. On the other hand, in a world in which we have 
discouraged savings, in a world in which we do not make saving 
easy, in a world in which there are a lot of people, immigrants 
and nonimmigrants, who do not have easy access to our 
mainstream financial institutions, we need to figure out 
something else so that they can have access to well-priced, 
well-structured, short-term credit. There are both mainstream 
institutions, credit unions in particular, some banks and some 
non-banks that are doing that.
    So the question is: What is the function that needs to be 
served, and how can that function be served in a responsible 
way? That is the question that this new agency is going to have 
to answer, and I think it is a creative way and a really 
important way to think about consumer protection.
    Ms. Waters. Thank you.
    Mr. Yingling, we are being told--and it is being whispered 
and talked about in the back rooms and in other places--that 
the bankers are going to have a big pushback on this agency as 
to what it stands for and what it is supposed to do.
    What is it about the agency that would cause the bankers, 
one, not to have a consumer protection agency as you understand 
it?
    Mr. Yingling. Thank you, Ms. Waters.
    First, let me say that I agree with you. There are products 
that should be banned. Part of the answer to your question is 
to point out that there are currently authorities within the 
regulatory agencies that could have addressed and that can 
address in the future those types of products.
    I testified earlier before this committee, and the chairman 
and I had a dialogue in which he pointed out very clearly that 
the Fed was not aggressive enough on HOEPA and should have been 
more aggressive, that HOEPA could have addressed a lot of this. 
Now, with the new authorities that are being implemented under 
UDAP, Unfair and Deceptive Practices, the regulators have even 
more authority. We support what this committee approved in the 
last Congress, which is to extend the UDAP authority to all of 
the bank regulators.
    Our major concerns are twofold. One is that we really do 
not believe you can separate the business from its products and 
that to have these two regulators will put banks in the middle 
or they will be pushed and pulled, and we gave a number of 
examples about that.
    The other is that this authority from the Administration, 
as they have proposed it, goes well beyond just setting up an 
agency. I was interested that Professor Warren said she did not 
believe that you should mandate products. Let me read from page 
66 of the Administration's proposal:
    ``We propose that the regulator be authorized to define 
standards for plain vanilla products. The CFPA should be 
authorized to require all providers and intermediaries to offer 
these products prominently.''
    So, basically, they design standards. We think that goes 
too far.
    Ms. Waters. Thank you very much.
    The Chairman. The gentleman from Texas.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Professor Warren, I want to just kind of follow up on that 
same line of questioning because when I look at the 
Administration's proposal and when I listen to you talk and 
when I listen to Ms. Seidman talk, I get to thinking that you 
do not agree with the Administration's proposal because you are 
talking more about transparency and integrity and not about 
regulation.
    You know, I think many of us believe that the American 
people are pretty smart and that if they understand what 
product they are buying and they understand the principles and 
the contractual rights that they have and the person providing 
the credit that they are very, very able to make that choice.
    So would you think that maybe a better road to go down then 
is, let's work on disclosure, and then let's make sure that the 
regulatory agencies that oversee these entities are, in fact, 
enforcing that disclosure?
    Ms. Warren. Well, Congressman, that sounds like a good plan 
except that is what we have been doing for the last 70 years, 
and it has not worked very well. We have done it specifically 
since 1994. The real point is there is no one who wants to make 
disclosure effective. Congressman Delahunt talked about 10 
different agencies that have pieces of this. The Fed has had 
the power to move in.
    What I really think is that it is time to talk about 
disclosure in a way that means something. It is not disclosure 
to add more pages of incomprehensible text. I will tell you 
about my own credit card. On the pricing term, there are 47 
lines to explain how the price will be calculated on my credit 
card. The very last line says: ``Notwithstanding the foregoing, 
the company reserves the right to charge any amount at any time 
for any reason.''
    I assumed the 46 lines that preceded that line were simply 
there as camouflage in the hopes I would never see the last 
one.
    Mr. Neugebauer. Let me interrupt you there.
    I agree. What I am talking about is, let's do the 
simplified. I have supported--and I know Mr. Pollock and I have 
had this conversation--a one-page disclosure. If you cannot get 
the big terms, as I call it, on one page, then, you know, 
possibly you have a product that people ought to be concerned 
about. If it takes 40 pages to explain your product, then maybe 
people would not sign up for it.
    Yet you admit and everybody admits here that we have had a 
regulatory failure. The question is: If we have had regulatory 
failure, how is adding more regulation going to fix it? What we 
ought to be doing is putting people in place who are 
regulators, and we need to make sure they do their jobs. The 
government always says, well, gosh, if we have people who are 
not doing their jobs, let's go get some more people who will 
not do their jobs, and that will fix it. I am tired of that.
    Ms. Warren. I am tired of it, too. So here is how I see the 
problem. Why is it that for 70 years we have had power and no 
action? Indeed, we have had the kind of inaction that has 
brought us into a crisis. My view is we have a structural 
problem, and the structural problem is when the Fed has 
monetary policy and consumer protection it cares about monetary 
policy. When the OCC has profitability of the banks and 
consumer protection, it cares about profitability of the banks.
    The problem we have is that these agencies are conflicted 
internally. The people who are attracted to these agencies--I 
do not mean this in a bad way. We need people like this, but if 
you want to do--who goes to the Fed? People who want to do M-1, 
M-2. Who goes to the OCC? People who are bankers and who really 
want to engage in the banking process. If you really care about 
consumers and the economic health of the American consumer, you 
tell me, where do you go in Washington? There is no home.
    We built an Environmental Protection Agency, and now we 
have people who care about environmental law, and they have a 
place to go to develop nuanced, healthy, smart responses. That 
is what we need for consumers.
    Mr. Neugebauer. Well, I think if you will look at the plan 
we have laid out, we agree with you. We think the Fed ought to 
focus on monetary policy, and we think we ought to streamline 
the regulatory process, and we think that the financial 
institutions ought to have one person who is sitting down and 
who is having dialogues. Within the organization, you have the 
consumer part. You have the safety and the soundness part. You 
have to make sure that--and for example, in the 
Administration's plan, it does not eliminate anybody looking at 
consumer products. The States still look at it. Other Federal 
agencies do that, and so now you have all of these different 
opinions on what is a safe product. Why isn't it better to keep 
all of that under one roof? If those folks are not going to do 
their jobs correctly, we will take action here in this 
committee to encourage them to do that.
    The Chairman. The gentleman from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman. I want to address only 
one question to Mr. Yingling and to Mr. Pollock, I think, but I 
want to do a little background here.
    On March 31, 2008, before all of the meltdown, Secretary 
Paulson at that point issued a Blueprint for Regulatory Reform. 
In that, he said that he was proposing three kinds of 
situations--a model that would have three regulators: a 
regulator focused on market stability across the entire 
financial sector; a regulator focused on the safety and 
soundness of those institutions supported by a Federal 
guaranty; and a regulator focused on protecting consumers and 
investors. He went to some length to describe his consumer-
investor-regulator role, very similar to the one that is on the 
table now, by the way, and he outlined it in some detail.
    On July 10, 2008, this committee had a hearing at which 
Secretary Paulson testified, and it was supposed to be about 
his blueprint, but he did not mention the word ``consumer'' but 
one time in his testimony. When I had the opportunity to ask 
questions, I asked him: How can these regulators do what they 
are supposed to do--protect safety and soundness and whatever 
else they are supposed to do--without making consumer 
protection a second-rate obligation? It was the same question 
that Ms. Warren was just asked, by the way, in response to a 
question.
    Now, the Administration is talking about giving more 
authority to the Fed and to the regulators in addition to the 
authority that they already had. What I am trying to figure out 
is, if they could not do the consumer protection part of what 
they were supposed to do when they did not have this increased 
authority, how can we reasonably expect them with new authority 
and with new responsibilities to do the consumer protection? 
How can we get somebody to put consumer protection over and 
above all of the other things that are going on in the 
financial system without doing this proposal?
    Can you explain that to me?
    Mr. Pollock. Thanks, Congressman. I was not a supporter of 
Secretary Paulson's plan at the time, and I am not now.
    Mr. Watt. Nobody seems to be.
    Mr. Pollock. I think he is, at best, one for three. I think 
the so-called--
    Mr. Watt. Please do not spend my time talking about 
Secretary Paulson. Just talk about the question I asked, 
please.
    Mr. Pollock. Well, I am just putting it in the context of 
your question, Congressman.
    The systemic risk regulator is a bad idea. I think the 
separate agency, as we are talking about today, is a bad idea. 
Potentially, it is a good idea to think about putting all of 
the consumer protection and disclosure requirements in one 
place. I do agree with that.
    Mr. Watt. Okay. Well, that is good.
    Mr. Yingling, it sounds like you agree with Secretary 
Paulson at least on that theoretical proposition.
    Go ahead, Mr. Yingling.
    Mr. Yingling. Well, again, we disagree with much of the 
Paulson proposal. I think it is a good question. I think it is 
a good question as to how you get more focused on consumer 
issues in the regulators.
    Our problem is that, if you have separate regulators, you 
have separated the business from its product, and we do not 
think that it is the way to go. We think you ought to go more 
directly at--
    Mr. Watt. My question is: How do you make the product, the 
consumer part of it, as important as the product part of it?
    Mr. Yingling. I think you do that, one, by whom you 
appoint. Who did the previous Administration appoint? Maybe 
they appointed people with a certain philosophy that you would 
not agree with. I think you can do it by beefing-up 
coordination. I think you can do it by writing laws on plain 
disclosure. I think you can do it by having regular reports to 
this committee, like the Humphrey-Hawkins report, where they 
would have to come before you and say what they have done on 
consumer regulation.
    I think there are a lot of things you could do, but it is 
really hard to put a bank in the middle where they have 
regulators who will be pulling them in different directions. I 
have given a number of examples of that where you are going to 
have the banker in the middle with one regulator saying go this 
way and the other regulator saying go that way.
    Mr. Watt. Thank you, Mr. Chairman.
    The Chairman. At this point, I will insert into the record 
statements from: the Property Casualty Insurers Association of 
America; the National Association of Federal Credit Unions; 
Jonathan Mintz, who is commissioner of the New York City 
Department of Consumer Affairs; and the Independent Community 
Bankers Association.
    Next, we have Mrs. Biggert from Illinois.
    Mrs. Biggert. Thank you, Mr. Chairman.
    You know, one of the things that I really care about is 
financial literacy and education, and we have worked with the 
Federal agencies and with the private sector through our caucus 
with Mr. Hinojosa.
    Ms. Warren, shouldn't we concentrate on improving financial 
education and regularly reviewing consumer testing and 
improving product disclosures which would result in an 
efficient and innovative market instead of so much government 
control?
    Mr. Pollock mentioned personal responsibility, and I think 
that he is right and that nobody has really mentioned that. 
There is a role for the consumer to really take responsibility 
when they are getting into a product and to really do the 
research. Are we just saying, well, the government can do it 
for us? Should we mandate financial literacy in the schools?
    You know, we have tried to stay away from that while really 
going forward with it. Is this something that should actually 
be a course in the schools?
    Ms. Warren. Well, Congresswoman, I actually would like to 
say I also talked about personal responsibility in my direct 
testimony. I will make the point that this is not about people 
who go to the mall and charge up thousands of dollars that they 
cannot afford or who buy five-bedroom houses that they never 
had a hope of paying for. This is about people who get trapped 
by the products themselves.
    I am completely in favor of making these products 
transparent enough that people can read them, understand them, 
and make smart financial decisions. Literacy is not going to 
solve the problem of reading a 30-page credit card contract.
    Congresswoman, I have assigned these contracts in the past 
to my own classes at Harvard Law School. Everyone in the room 
has a college diploma, at least 2 years of law school, and has 
me as a reason that they had better read carefully, and they 
cannot figure out the terms.
    Mrs. Biggert. In Illinois, though, lawyers are at the 
closings and really work with their clients, and part of their 
responsibility is to explain that. Maybe it is all legalese. We 
have already suggested so many times to have a one-page 
disclosure, to have RESPA as a one-page or as a three-page so 
that people can understand that.
    So just to make a whole new agency based on that because--
well, it is kind of like we kid around here that sometimes we 
have our staff, and we call this assisted living for Members of 
Congress. You have to take the responsibility yourself.
    Maybe, Mr. Pollock, could you say a little bit more about 
personal responsibility?
    Mr. Pollock. As I said in my testimony, Congresswoman--
    Mrs. Biggert. I am sorry. I missed it because we had to go 
vote.
    Mr. Pollock. --the best reason to have really good 
disclosure--and I completely agree with you, Professor Warren, 
about good disclosure--is that it enables personal 
responsibility. The main question, in my opinion, which should 
be addressed by all credit disclosures is to the customer: Can 
I afford the debt service commitments I am making? How much 
risk can I take?
    I am not against people deciding to take risks, but they 
ought to know and understand what risks they are taking.
    Mrs. Biggert. Thank you.
    Then, Ms. Seidman, you state in your testimony that the CRA 
should be left with the prudential regulator. Why is that when 
it seems like part of that was really the problem? You know, we 
have 92, 93, 94 percent of people paying their mortgages on 
time, and they really did not have a problem with this. We had 
the CRA and the pressure on the banks to loan to people who 
maybe should not have even been in the market yet, and you take 
that out of what could have had a regulator for a consumer 
protection and leave that with the other regulator.
    Ms. Seidman. Congresswoman, I think you are asking two 
questions. One is the question of whether CRA caused the 
problem.
    Mrs. Biggert. That is right.
    Ms. Seidman. As Mr. Yingling testified, the answer to that 
is no. I also believe the answer to that is no. A good deal of 
recent research by the Federal Reserve has demonstrated just 
how little effect CRA actually had in generating high-cost 
loans in low-income communities, which is the only thing that 
CRA counts.
    The second question that you are raising, though, is 
whether CRA belongs in this agency. In my testimony, I suggest 
that it may not be. A piece of CRA is, indeed, the whole issue 
of access to good-quality consumer financial products, which 
the CFPA would deal with. But a very big and very important 
piece of CRA is community financial investment--the charter 
schools, the affordable rental housing, the community centers. 
All of those kinds of investments are really not a consumer 
protection issue.
    I also agree with Mr. Yingling that CRA is written very 
appropriately to say that these actions must be taken in a 
manner that is consistent with safe and sound operation. That 
is what the prudential supervisors do.
    Thank you.
    The Chairman. The gentleman from Kansas.
    Mr. Moore of Kansas. Thank you, Mr. Chairman, and thank 
you, Professor Warren, for your leadership as Chair of the 
Congressional Oversight Panel for TARP.
    I appreciate the points you make in your testimony, 
including the need for personal responsibility, the need for 
fixing broken markets for hardworking and play-by-the-rules 
families, and for noting that this new agency should be putting 
consumers in a position to make the best decisions for 
themselves. I also appreciate your point that we are not 
looking for more disclosures. We just need to make disclosures 
and make sure that those are written so people can understand 
them.
    I believe many of our constituents may not have a good 
understanding of several parts of the financial regulatory 
reform package Congress considers; for example, systemic risk, 
derivatives or resolution authority; but this proposed consumer 
protection agency is an idea that everyone can easily 
understand the need for.
    Professor Warren, you point out that regulatory costs can 
put enormous financial pressure on a small institution. For the 
small banks in Kansas and in other parts of the country that 
did the right thing and did not make irresponsible loans and 
were not overleveraged, what will this Consumer Financial 
Protection Agency mean to them? Will it help level the playing 
field?
    Ms. Warren. Thank you very much, Congressman.
    I think that that is the most critical question here as we 
move forward. I see it helping the smaller banks--the community 
banks, the regional banks, who, as you rightly point out, were 
often not the cause of the problem but are now being forced to 
pay for it. I see it helping them in two principal ways.
    The first one is in the direct cost of compliance. Our 
complex structure right now, while it is ineffective for 
consumers, is nonetheless very expensive for financial 
institutions. Now, if you are a huge financial institution, you 
can hire a team of lawyers and spread that cost across millions 
of credit card products or home mortgage products, and it will 
come out okay for you. For small institutions, I believe the 
current burdens can be crippling. So the idea here is to slim 
these down, to make them effective for consumers but much 
cheaper for the financial institutions.
    The second way I think it is helpful for the smaller banks, 
for the community banks, is that it is my belief that often, 
not always but often, they offer cleaner products. They offer 
better products, but in a world in which all of the products 
are 20-, 30-pages long--the home mortgages are stacks and 
stacks--we do not create the appropriate functioning market so 
that the good products get rewarded and the bad products get 
driven out. Instead, the folks who can afford the multimillion 
dollar advertising campaign can drive consumers to the more 
expensive, high-risk products. Ultimately, that is not only to 
the injury of the consumer; it is to the injury of the small 
financial institutions.
    So, I see this as leveling the playing field, not just 
between the customer and the bank but between the really big 
banks and the smaller banks.
    Mr. Moore of Kansas. Thank you very much.
    Ms. Seidman or Mr. Yingling, do you have any comments?
    Ms. Seidman. I agree with Professor Warren. I think that 
this is one of those situations where the immediate reaction 
is, oh, no, another regulator; but in fact, when you look a 
whole lot deeper, you realize that what can happen here is a 
combination of consolidation and consistency in regulation that 
does not exist now, and it is providing a preference for 
quality products, which are the products that most of the 
community banks do in fact provide.
    Mr. Moore of Kansas. Thank you.
    Sir, do you have any comments?
    Mr. Yingling. Yes. I would say there is not a community 
banker in the country who believes that. I have talked to 
dozens of community bankers since this proposal came forward. 
They all think it will be additional regulation. They think it 
means another examiner will be in. For example, right now, they 
have an examiner who comes in and looks at all of their 
compliance training. The ABA offers dozens of courses that are 
compliance training for frontline people in banks, but those 
are coordinated. They have to take sometimes a dozen different 
courses, but they are coordinated with one regulator.
    Now we are going to have two regulators coming and saying, 
I do not like what your other regulator told you. I want you to 
offer these other courses. When they go to account openings, 
you are going to have one examiner who comes in and says, the 
way your frontline people are opening accounts, from my point 
of view, should be this way because I am the consumer 
regulator. You are going to have another examiner who comes in 
and says, the way you are opening accounts should be the other 
way because I am a safety and soundness examiner. I am worried 
about fraud, and I am worried about the Bank Secrecy Act.
    Mr. Moore of Kansas. Ms. Seidman, do you have a comment 
very quickly?
    Ms. Seidman. Yes.
    As my testimony points out, I actually agree with Mr. 
Yingling on this second point. On the first point, the reason 
the ABA has all of those courses is there are too many 
regulations, many of which are not consistent with each other.
    Mr. Moore of Kansas. Thank you.
    Mr. Mierzwinski. Could I add a quick comment?
    The Chairman. The time has expired.
    The gentleman from Texas.
    It is another adjournment resolution. Members can come and 
go as they wish. For now, I am going to keep the hearing going.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Listening to a lot of the testimony, I kind of had deja vu 
all over again. I was invited to the White House, that doesn't 
happen often in my case, to hear the President unveil his 
capital markets reform plan. And I was struck by the fact that 
I could have given 80 percent of the President's speech, and I 
agree with about 20 percent of his legislation.
    So, as I listened to the testimony here, I find myself in 
agreement with the overwhelming majority of the testimony, but 
when I look to at the underlying legislation, H.R. 1705, the 
Durbin companion bill in the Senate, there just seems to be a 
big disconnect.
    Number one, I want to agree with most of the panel; 
consumer disclosure is broken. I think there is a fairly 
unanimous opinion about that. Now, there is a debate as to the 
causes. And I believe there is certainly merit in the idea of 
gaining better expertise about consumer marketing, consumer 
understanding, even happy to propose that in one, in a new 
agency. But as I read H.R. 1705, I see something that goes way 
beyond simply empowering a consumer with more effective 
disclosure.
    I mean, again, what I see is an unelected body granted the 
legal authority to ban from the marketplace any consumer 
financial product, practice, or features it considers, 
``unfair'' or ``anti-consumer.'' And then, in section 10 of the 
bill, both civil and criminal penalties may apply to officers, 
directors, and employees of firms that produce products that 
are judged ``unfair'' or ``anti-consumer.'' I mean, this just 
strikes me as incredibly draconian and a disconnect from the 
testimony that I hear.
    So my first question is--first, can I safely assume that 
all are familiar with Mr. Delahunt's bill, H.R. 1705? If you 
are not, could you raise your hand?
    Seeing no hands, I assume people have familiarity with the 
bill.
    Ms. Warren. It depends what you mean by familiarity. I am 
somebody who gives out pop quizzes, and I can say right now I 
don't want to take a pop quiz on that bill.
    Mr. Hensarling. Professor Warren, if you were here for 
Congressman Delahunt's testimony, he gave you credit for being 
the mother of the idea. Have you abandoned your child?
    Ms. Warren. I don't want to be cross-examined on a 
particular provision. I am saying I didn't read it before I 
came in here this morning.
    Mr. Hensarling. Fair enough. The others seem to have 
familiarity.
    For those who are familiar with the bill, do you support 
it?
    Mr. Pollock?
    Mr. Pollock. I think you are absolutely right, Congressman, 
and I don't.
    Mr. Hensarling. Mr. Mierzwinski, do you support the 
legislation?
    Mr. Mierzwinski. The consumer group is strongly supportive 
of it.
    Mr. Hensarling. Okay. I thank you.
    Mr. Mierzwinski. I just want to say quickly that it is not 
just consumer disclosure that is broken; it is consumer 
protection that is broken.
    Mr. Hensarling. Forgive me, I have a short amount of time.
    Ms. Seidman, do you support the legislation?
    Ms. Seidman. Yes, I do. And I also--
    Mr. Hensarling. Let me ask this question then, if I could, 
for those particularly who support the legislation. I want to 
talk about a few financial products and ask if you believe they 
are unfair or anti-consumer. And if you would raise your hand 
if you believe they are unfair or anti-consumer. If you don't 
believe or you don't have an opinion, you can leave your hand 
down.
    Negative amortization ARMs, does anybody believe those are 
unfair or anti-consumer? Okay. We have a couple of hands there.
    Subprime mortgages, the entire universe of subprime 
mortgages?
    Ms. Warren. Congressman, I can't understand this without 
seeing what the paperwork is that accompanies them and what the 
disclosure is that is given to the consumer.
    Mr. Hensarling. That is fine, Professor.
    So, again, you are saying some you would support; some you 
wouldn't.
    ATM fees, does anybody believe they are per se unfair or 
anti-consumer? We have one hand.
    Ms. Seidman. A $30 fee for a $5 overdraft is unfair.
    Mr. Hensarling. I am asking for your opinion.
    Noninterest bearing checking accounts, does anybody believe 
they are unfair or anti-consumer?
    Unfortunately, my time is waning, but again, among this 
body of ostensibly studied people, very intelligent people, 
people who know a lot about this subject, clearly the terms 
``unfair'' and ``anti-consumer'' are most subjective. And now 
people are advocating legislation to turn over this incredible 
power to these people to potentially ban products.
    I mean, there is no grandfathering that I can find in this 
clause, under my reading of this then. Does anybody believe 
that this panel would not have the legal authority, for 
example, to ban ATM fees?
    Has anybody interpreted the bill otherwise?
    Mr. Yingling, if the panel banned ATM fees, would we have 
fewer ATM machines available to consumers, in your opinion?
    Mr. Yingling. Well, you would have almost none in airports 
and places like that.
    I would say you don't need to get there. You have unfair 
and deceptive practices. This committee passed a bill last 
Congress to spread that over all the regulators. And if you 
look at the way the Fed interpreted that in the credit card 
area, the authority is there. You don't need this new vague 
open-ended authority.
    The Chairman. The gentleman from California.
    Mr. Baca. Thank you very much, Mr. Chairman.
    Thank you very much for holding this hearing. I would like 
to follow up on the last question. I don't think the question 
is in reference to the products we are banning. It is about 
fairness and knowledge. I think this is what we are talking 
about.
    I think you have to be fair in terms of letting the 
consumer know exactly what they are getting. I think that is 
really the issue here. It is not about banning a product. It is 
not about the ability to provide assistance. It is letting the 
consumer know exactly what they are getting into in a 
simplified form. And I think that is what we need to do right 
now.
    And so my question is, in reference to compliance, 
monitoring and criteria that has to be, and then the funding 
aspect; we have to make sure that the funding is there if we 
are going have oversight, regulators and others. Because other 
than that, we can come up with any kind of legislation, but if 
the funding to monitor exactly what goes on; what are the 
penalties for individuals who violate the law in terms of not 
complying with another mandate?
    And here, again, we all talk about mandates; do we fund a 
mandate, or do we come up with another mandate without the 
funding dollars that are necessary? And how do we hold them 
accountable? How do we begin to hold them accountable? What 
kind of oversight or regulations do we need to implement?
    Ms. Warren, could you please respond to that?
    Ms. Warren. I will give my own thoughts on funding. I think 
that this is an area where a per account fee makes a lot of 
sense. So, for example, if we said it will be a nickel a year 
for every open credit card account that a financial institution 
has that has to go to this agency, a penny a year for open car 
loans, maybe a dime a year for open mortgages, because they 
take more regulatory oversight, that gives the agency an 
independent source of funding. It doesn't push up costs. It 
keeps it low and keeps this agency funded based on how much it 
has to supervise, how much is going on out there. I advance it 
at least as one option.
    Mr. Baca. Because remember that the American people trust 
what we are doing and what we are coming up with. And that was 
part of the problem, I guess, that we had with Alan Greenspan, 
is that he assumed that people were going to do the right 
thing, but people didn't do it, and it got into a greed, how 
much profit can we make. And so then the consumer ended up 
having to pay for it, not knowing what was in the document 
itself. So people took advantage of that.
    And I think that is what we are trying to stop right here, 
right now, is to try to find a balance or a means where it is 
still profitable but at least people know exactly what they are 
getting into.
    Mr. Yingling, would you want to answer that?
    Mr. Yingling. I would just like to say I agree with your 
introductory comments. And this may come as a surprise, but we 
are concerned that the agency might be funded in a way--and Mr. 
Gutierrez just came back in, and I want to pick up on a point 
he raised in his introductory remarks.
    A major problem for us is going to be how this agency would 
interact with State regulated, and in some cases unregulated, 
entities. The great, great, great majority of the subprime 
problem was outside the regulated banking industry. It was 
primarily mortgage brokers and others.
    And we are concerned that this agency stops at the State 
line and says, initially at least, we are going to trust that 
to State regulation. Well, we don't think the State regulation 
is going to deal with it, so we think our banks, our community 
banks, are going to be regulated hard on it, and we will be 
right back where we were with the unregulated, the less 
regulated, sector doing bad things which draw us all into the 
fire.
    So one of our questions, Mr. Gutierrez, as you correctly 
raised it in my opinion, is, how would such an agency or how 
would the Federal Government interact with all these 
unregulated or less regulated entities that, while banks are 
not perfect, are the major cause of the problem?
    Mr. Baca. Ms. Warren, you were going to respond?
    Ms. Warren. Thank you.
    I want to say, the introductory paragraphs to the paper I 
first wrote about what was then the Consumer Financial Product 
Safety Commission, I think, I have forgotten the name, was 
about this very question, and made the point that regulation 
must shift in the financial services area from who issued it to 
what the product is. So there is level regulation across-the-
board for mortgages, for credit cards, for payday loans, for 
whatever, student loans.
    Mr. Baca. I believe that we all want a fair level playing 
field for everyone, and we believe that unions, community banks 
and others shouldn't have been to pay for what somebody else 
committed. And it seems like they are being put into a category 
because someone else took advantage of that greed and then 
passed it on to the consumer, and the consumer didn't know 
exactly what they are getting into in a document that you 
needed a thesis to determine what it said.
    The Chairman. The gentleman's time has expired.
    We will finish with Mr. Posey.
    Mr. Posey. Thank you very much, Mr. Chairman.
    I was a little bit confused, Professor Warren, by a couple 
of your answers or discussions with Mr. Bachus. And so I am 
going to ask a series of questions, because we have a lack of 
time, and if we run out of time, you can respond to them in 
writing, if you would be kind enough. You don't have to. If we 
have time left, we will go down the row, but I don't think we 
are going to have that kind of time left.
    If I heard you correctly, you mentioned banning certain 
products, and I was wondering specifically what products you 
recommend to be banned. You indicated that some products are 
complicated to understand, but agree that complicated 
disclosures are ineffective. I am not sure if you oppose the 
high risk or if you oppose the way they have been described, 
and if you could clarify that, please.
    You mentioned a safe harbor for pure vanilla, and I was 
just wondering where you draw the line on what is pure vanilla 
and what is not with the wide variation of experiences and 
knowledge that the citizens of this great country have. Some 
people seem to be asserting that our citizens are incapable of 
managing their own risk, and it makes one wonder, who will 
decide on our behalf what is an acceptable range? And who is 
going to tell me what risk I am allowed to take and what risk I 
am not allowed to take, what I can pay and what I can't pay?
    Much of the complicated disclosures that everybody has been 
beating to death today are a result of congressional or State 
regulations that were as well intended as what is before us 
now. And the result is, you tell a company they have to 
disclose something, and if it takes 45 lines to do it, they are 
going to do it. They don't particularly care if you like it or 
not. You told them to do it, and that is what it takes to keep 
them out of court with the lawyers that you are training up 
there.
    You know, it sounds like we are talking about an agency 
that we should probably change their name to; we should 
probably be talking about a Federal Department of Reward 
Without Risk or a Guaranteed Reward Without Risk, which is kind 
of an oxymoron since that is the principle upon which our 
financial system was built on and the free enterprise system 
seems to evolve on.
    And then if that doesn't work, maybe we can have a Federal 
Department of Prosperity Without Risk or Work. One wonders 
where this is all going to stop if we continue trying to think 
the government is going to solve everything by taking 
responsibility away from people to make their own decisions.
    I think we all want them to make informed decisions, but 
where do you draw the line about intruding into my ability to 
decide what kind of a mortgage I want, what kind of a fee is 
acceptable to me. There are people who get better credit deals 
than I do because they have more money, and there are people 
who have maybe less opportunity because they don't pay their 
bills. I mean, are you going to take that latitude away from a 
lender to make those kind of decisions, and ultimately, what 
kind of consequences do you think the market is going bear? And 
do you think there are going to be no consequences in the 
overall cost of the consumer?
    When we talk about the consumer, first and foremost, before 
we talk about a single credit card holder or we talk about a 
person taking out an individual mortgage, I look at a 
consumer's--400 million people in this country, they are all 
consumers. They are consumers of what we make here. Some of 
what we make here is good for them. Some of what we make here 
is bad for them, but they are all different. And the typical 
government approach that one size fits all, this is the way you 
have to do it, and everybody has to live with this, doesn't 
seem to be a real service, I don't think, to our consumers most 
of the time.
    Ms. Warren. Thank you, Congressman.
    I will start by saying the person who was talking about 
banning products actually wasn't me; it was Mr. Yingling who 
embraced that notion.
    Mr. Yingling. I was quoting the Administration's proposal.
    Ms. Warren. I thought you said that you believed in banning 
certain products, certain credit products.
    Mr. Yingling. All right. I am sorry, I agree with that.
    Mr. Posey. But it is in your proposal as well.
    Ms. Warren. Well, and he said he embraced banning certain 
products.
    You asked about complicated disclosures. That was exactly 
my testimony. Complicated disclosures don't work. We have a 
problem now, and part of the problem is brought on by a bad 
regulatory structure.
    Mr. Posey. I heard that. My question to you was, you said 
that some of these products are very complicated, and so 
obviously, the disclosure of them is going to be very 
complicated. Oftentimes, you can't simplify a disclosure of a 
complex equation. And so my point is, were you talking about 
disallowing the complex items themselves or the complex--
    The Chairman. The gentleman's time has expired. There won't 
be time to answer the question.
    I am going to excuse this panel now. We are going to 
impanel the second panel. We are going to begin where we left 
off in the questioning.
    The gentleman from California has a quick question.
    Mr. Miller of California. Did I miss the panel by voting?
    The Chairman. Well, if you can do it quickly. We do have a 
second panel.
    Mr. Miller of California. Thank you very much.
    Professor Warren, I really enjoyed your comments on the 
transparency and disclosure and simplified forms. Is somebody 
other than an attorney going to draft these?
    Ms. Warren. I am sorry, is someone other than an attorney--
    Mr. Miller of California. Well, I really enjoyed, you talk 
about transparency and disclosure and simplified forms. But a 
fair question is, is somebody other than an attorney going to 
draft these?
    Ms. Warren. Well, I think, at least what I hope, is this 
will be done in consultation with the industry and with 
consumers.
    Mr. Miller of California. So we are going to put attorneys 
on it, so we can understand what they are saying.
    Ms. Warren. So part of the point here is so that we 
understand that we have products that consumers can understand. 
If consumers can't understand them, then they don't meet 
regulatory muster.
    Mr. Miller of California. If you look at GSEs, they have 
various programs, and then they constantly evolve different 
products in that program. They might evolve products daily to 
meet the consumer demands. And I am concerned about how what 
you are going to do might impact that. And I guess the most 
important question I have, have you ever read legislation that 
comes out of Congress?
    Ms. Warren. I am sorry.
    Mr. Miller of California. Have you read the legislation 
that comes out of Congress and how we mandate and regulate the 
financial services industry in banks?
    Ms. Warren. Yes, sir, I teach it.
    Mr. Miller of California. How do you apply that to a 
simplified form?
    Ms. Warren. Well, I think the point is--
    Mr. Miller of California. Now, give consideration to RESPA, 
mortgage closings, and then you have State law to deal with. I 
am not trying to argue. Just having been a Realtor and a 
builder and a State legislator, you are going to have the 
States involved here, too; how is all this going to work in a 
simplified form?
    Ms. Warren. Congressman, as I see it, what this agency does 
is it picks up all of those regulatory burdens that are there 
now. It puts them into one agency, and it comes up with a 
slimmer, more effective set of regulations that apply across-
the-board wherever the product is issued, regardless of who 
issues it.
    Mr. Miller of California. How does a lender deal with the 
reality of their having to draft some form of a contractual 
loan document agreement that covers them as a lender and covers 
the consumer who is getting a loan? And I am looking at all the 
mandates and all the laws and all the requirements that we 
place on them where they have to safeguard themselves and 
safeguard the consumer.
    Ms. Warren. That is the point, Congressman. We are really 
trying to change the legal mandates. We are trying to say that 
more legal mandates of ineffective disclosure is not helping 
the consumer, is driving up costs for the financial 
institutions, and is a bad idea.
    So what we want is a new agency that has the power to say, 
we are going to slim these down. We are going to make the 
disclosures work for consumers and frankly be far cheaper for 
the financial institutions. Where that difference will be felt 
of course will be for the financial institutions who cannot 
afford to hire a team of lawyers in order to figure out the 
current regulatory compliance.
    Mr. Miller of California. And you are establishing a floor, 
am correct?
    Ms. Warren. I'm sorry?
    Mr. Miller of California. You establish a floor for Federal 
regulations.
    Ms. Warren. That is right, that is what is proposed.
    Mr. Miller of California. How do you deal with the ceiling 
when you have to deal with the States? I know California, and 
we regulate the heck out of anything that walks, talks, breaths 
or ever moved. So what are you going to do with the States 
when, all of a sudden, these State legislators who think they 
are more brilliant than you and a committee that you might 
form, how do you deal with them? I am not being sarcastic.
    Ms. Warren. Congressman, I know you are not. This creates a 
floor, and it creates a floor--we really have to be clear here. 
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--
    Mr. Miller of California. So we have an override over State 
regulation for the first time in this type of a form. So RESPA 
and the way Realtors have to form closing statements and those 
type of things that the States actually mandate, we are going 
to supersede that.
    Ms. Warren. So this is going to bring all of the Federal 
rulemaking, all of the Federal disclosure responsibilities into 
one place.
    And I want to make one important point about preemption. It 
is my own view. If we get this right, if we get the plain 
vanilla forms right and they work for the community banks and 
they work for the customers, if we get that right, the need for 
the States to write additional regulations, in my view, becomes 
much less.
    Mr. Miller of California. But it won't happen in reality.
    One last question. This is very, very important, and this 
raises a huge red flag. You said good products will be 
rewarded, and bad products will be driven out. Who is to 
determine what the good product is and--I mean, it is a matter 
of apples and oranges. I like apples; he likes oranges.
    Ms. Warren. No. It is the customer who will make that 
decision. That is the whole point behind this. When I can take 
a 2-page credit card agreement and I can look at four of them 
and tell instantly what the costs are, what the risks are, and 
how I get my free gifts, then I can make the decision as a 
customer. This is about making markets work. That is the point 
behind it.
    Mr. Miller of California. I guess I am going to have to buy 
you lunch to discuss this because I am out of time.
    This such a complex industry driven by government 
regulations and mandates and requirements; I don't know how you 
just forego everything we have done in the past, and we mandate 
on lenders, and just make it simple without firing all the 
attorneys.
    Thank you. I yield back.
    Mr. Gutierrez. [presiding] I am not in that big of a hurry. 
You could continue going.
    Let me just make a statement about what is kind of going 
on, what my perspective on what is going on here.
    So I was here, I think it was in 1994, when we passed 
legislation to deal with mortgages to make it clearer to 
people, and then it took the Federal Reserve until this year to 
pass the rules and the regulations. So, you know, there have 
been people saying no regulations, no regulations, no 
regulations, and guess what happened, a lot of people got 
caught up. And now they passed some nice rules, obviously.
    Mr. Miller of California. Would the gentleman yield for one 
second?
    Mr. Gutierrez. Sure.
    Mr. Miller of California. I want to make myself clear so 
you don't misunderstand me.
    I think that the problem we faced in recent years was we 
failed to define predatory versus subprime. And lenders went 
out and acted, and some individuals acted as if there were no 
underwriting standards necessary that should apply to a loan.
    Mr. Gutierrez. I understand that perfectly.
    My only point is, look, we need to re-look at how we do 
things because obviously they are not working real well. So we 
do have a consumer protection agency, and it was kind of the 
Federal Reserve, and they didn't do it. And we finally got 
rules and regulations. We were happy to adopt them. We were 
applauding them when they came here, and then we expanded them 
when we did the credit card bill of rights. We actually 
expanded on some of them. Some people said, why are you doing 
it; they have already issued rules. So we do those things.
    And I think that we really need to--the public is really 
hungry for someone to be on their side, and they rightfully 
don't feel. I just want for public disclosure--I mean, I got 
home. I went to the--I am usually not here when we are not in 
session, but I stuck around because, in all the years I have 
been here in 17 years, I have never been to a bill signing. At 
least maybe it was the first time I was relevant to a bill 
signing because I am a subcommittee Chair.
    So I show up, I go down to the White House, get my pen, and 
it is the credit card bill of rights. I get my pen, and I get 
home. Do you know what I found out when I got home, no kidding, 
three changes from three different credit card companies, two 
of which I had forgotten about. So I promptly called them and 
said, you changed the rules; I don't want your card. I figured 
that was a better reason than just saying I had forgotten I had 
a card. But the card that I did use--and then I buy a ticket on 
a foreign airline, and all of a sudden, there is this new 
charge that I had never seen before.
    So, look, that is why we need rules, because even when we 
pass rules, they kind of rush to change the rules. So I think 
it is a very good time for all of us. We are going to take some 
time in July. We are going to go through this stuff. We are 
going to have some hearings. We are all going to work together.
    But I think they are good men and women on both sides of 
the aisle here that we can get together and do what I believe 
the public is really yearning for us to do. They know we are 
good at approving hundreds of billions of dollars to bail out--
we are the socialists. The socialists bail out the capitalists. 
I love this. We bailed out Wall Street, the socialists, 
Democrats. Do you remember? It was kind of ironic, but that is 
what we did. That is all I am going to say. We are going to 
move on to the next panel.
    Mr. Sherman. Mr. Chairman, I would like to ask questions of 
this panel.
    Mr. Gutierrez. The gentleman is recognized for 5 minutes.
    Mr. Sherman. Thank you. Just when you thought that America 
does not torture, the chairman decides that you have to stay 
here for 5 more minutes.
    To me, one of the key issues here is whether--
    Mr. Gutierrez. I was going to say I actually like everybody 
on this panel, so I didn't keep you here for that reason.
    Mr. Sherman. One of the key issues for me is whether we are 
creating a law enforcement agency or a law-making agency. A 
study of U.S. history over the last 60 years reflects an effort 
by the Executive Branch, sometimes abetted by the Legislative 
Branch, to turn Congress into an advisor body rather than a 
legislative body. I have seen this in all areas. It is perhaps 
most pronounced in foreign affairs.
    And at the extreme, what we could do is: have the Fed take 
over control of making sure the economy is protected; have this 
new agency make sure the consumer is protected; and then we 
could save a lot of time and money by not having a Financial 
Services Committee.
    And I guess I will address this to Professor Warren: Is the 
goal here to create a law enforcement Executive Branch agency 
or to create a law-making agency that would decide all the 
issues that I have spent 13 years on this committee arguing 
about? For example, should we have interest rate caps on this 
product or that product, would be a good specific. God knows I 
have spent 13 years arguing that on a dozen different products. 
What do you have in mind here?
    Ms. Warren. Well, Congressman, there is no doubt the 
authority resides with Congress, and it appropriately does. 
Congress will set the standards for this agency, and then ask 
the agency to go and use its rulemaking authority to put that 
into specific terms on any given form of disclosure or other 
activities they engage in. But that certainly doesn't preempt 
Congress, and it should not preempt Congress, not only from its 
continued oversight of the agency itself, but its continued 
involvement in this area. It is only Congress that should make 
the big changes. But this is about an agency that makes the 
financial product market work better for consumers.
    Mr. Sherman. We certainly all want to make things work 
better for consumers. And certainly nothing that would be 
constitutional would completely deprive Congress of the right 
to pass future statutes. The closest we could get would be to 
create a new agency and basically say, you guys do whatever you 
think is in the consumer's interest, and from time to time, we 
will have oversight hearings.
    Are you talking about going that far at the other--the more 
traditional administrative law approach is Congress writes the 
big rules, and then the little--you know, whether it has to be 
on yellow paper or blue paper, we let the administrative agency 
decide. And I address this specifically as to rate caps just as 
a good example. Would this new agency have the right to say, 
for this kind of product or for that kind of product, the 
maximum interest rate is ``X?''
    Ms. Warren. I have to say I am not someone who heads in the 
direction with this agency for rate caps. It seems to me if we 
were talking about rate caps, that would be an appropriate 
place for Congress to set the larger policy question.
    Mr. Sherman. Absolutely. And we have had a lot of hearings 
in this room about rate caps, and sometimes they seem like a 
good idea, and sometimes they don't. But do you envision an 
agency that would have within its power the ability to say, 
well, Congress hasn't decided on rate caps for credit cards. We 
just passed a big credit card bill; we left that out. 
Therefore, our agency will impose rate caps.
    Ms. Warren. I have to say, Congressman, I am afraid in this 
sense you are asking the wrong person. Ultimately--
    Mr. Sherman. I see one of the other witnesses--
    Mr. Pollock. We have the same point, Congressman.
    Ms. Warren. I am sure there are those who would like to say 
you are going to give it too much power and therefore we 
shouldn't do this at all. I think it is ultimately Congress's 
decision how much power you think it needs to get the job done. 
What I am focused on is the job it needs to get done and the 
structure it needs to do that.
    Mr. Sherman. The only thing perhaps more important than 
protecting consumers is protecting the Constitution.
    I yield back.
    Mr. Gutierrez. The gentleman is recognized for 5 minutes.
    Mr. Manzullo. Thank you.
    The basic facts about your mortgage loan, a 1-page 
document, it is simple. It is easy, perhaps too simple and too 
easy for Congress to pass, editorialized by the Washington Post 
as being the best statement that the consumer understands. When 
I practiced law, I went through probably at least a couple 
thousand real estate closings before RESPA, which screwed up 
America. It has done more harm. We used to close in 20 minutes, 
and now that you have documents like this, you close in 2 
hours. No one reads the dang thing because if you don't sign 
everything there, you don't get the keys to your house.
    Mr. Pollock, why hasn't your 1-page form been adopted, and 
what is wrong with the city that insists upon screwing 
everything up? How do you like that question?
    Mr. Pollock. Thank you, Congressman.
    Mr. Manzullo. And if you have some time, let Mr. Yingling 
try to, or Mr. Mierzwinski has an answer to that, too. Go 
ahead.
    Mr. Pollock. Thank you. I have asked myself that question a 
lot of times because it seems like such an obviously good idea. 
We did get bills introduced in this committee and in the 
Senate, where Senator Schumer introduced a 1-page mortgage form 
bill. They didn't get passed, but we had a little debate about 
whether the consumer should have to sign the form.
    That was my view, of course--and the counter-argument was, 
well, if the consumer signs, it means they are taking 
responsibility. My point was, yes, that is the idea. But we 
didn't get them passed.
    I am happy to say that Bank of America has introduced 
voluntarily a 1-page mortgage form. And we know that the 
Department of Housing, in looking at their new couple of page 
forms, studied the one-page idea. I think we need to keep 
working on it. It should certainly be doable.
    Mr. Manzullo. Anybody else want to try--Mr.--how do you 
pronounce your last name?
    Mr. Mierzwinski. ``Mierzwinski,'' sir. I would just say 
briefly the consumer groups think that the new agency would cut 
through the red tape. There are 20 or so consumer laws; 
currently there are 7 or 9, depending on how you count them, 
agencies that have authority over various parts of the law. 
RESPA and TILA are in these interagency negotiations.
    Mr. Manzullo. Why don't we just eliminate all that crap?
    Mr. Mierzwinski. But if we had one agency that could cut 
through all of that, that would be a solution.
    Mr. Manzullo. But that is another layer.
    Mr. Mierzwinski. No. It is going to take away from the 
other agencies.
    Mr. Manzullo. No, it won't. It will just add to it.
    The Federal Reserve had the authority to do two things that 
could have stopped this collapse in America. Number one, they 
could have required to have written proof of a person's income 
before that person could have bought a home. And number two, 
they could have eliminated the outrageous 3/27 and the 2/28 
mortgages with the teaser rates upfront. One agency had the 
authority to do it. They didn't do anything, and the Nation 
collapsed economically because of that.
    So why should we create another agency to come in, create 
brand new products, oversee what these other people already are 
not doing. How do we know the new agency would do its job?
    Mr. Mierzwinski. Very briefly, because I know Ms. Seidman 
and Professor Warren want to speak. But I think that if you 
have safe consumer products, you have less risk in the system.
    Mr. Manzullo. That is the job of the Fed.
    Mr. Mierzwinski. The Fed has two jobs. Monetary policy 
conflicts with consumer protection and prompts this.
    Mr. Manzullo. No, it doesn't. Not if it is done correctly.
    Mr. Mierzwinski. It is the way that it has been done is the 
problem with that.
    Mr. Manzullo. Who else wants to get in this argument?
    Professor Warren, did you raise your hand?
    Ms. Seidman?
    Ms. Warren. I am glad to yield, but that is the problem. 
The people who go to the Fed want to do monetary policy. They 
have demonstrated in as many ways as one can humanly 
demonstrate that they are not interested in--
    Mr. Manzullo. So you need another agency to do their job, 
right?
    Ms. Warren. Excuse me, Congressman. They are not interested 
in consumer protection.
    Mr. Manzullo. Yes, they are. Mr. Bernanke is interested in 
consumer protection.
    Ms. Warren. Then why hasn't he done anything?
    Mr. Manzullo. Well, you might want to ask him that 
question.
    Mr. Pollock?
    Mr. Pollock. Congressman, I just would like to underline 
the point you made that a lot of extremely complex and 
confusing disclosure that we have, as you pointed out, is the 
result of regulation.
    Mr. Manzullo. That is right.
    Last word, Ms. Seidman.
    Ms. Seidman. Yes, the Administration's proposal, actually 
in contrast to some of the pending legislation, would move the 
authority from the Fed, from HUD, to the new agency.
    Mr. Manzullo. So another bureaucracy.
    Ms. Seidman. It would not put it on top of it.
    Mr. Manzullo. How do you know they will do their job with 
another layer of bureaucracy on top?
    Ms. Seidman. First of all, it is not another layer. It is a 
different agency.
    Mr. Manzullo. But these are layers of agencies.
    Ms. Seidman. No. The old layer is being taken away.
    Mr. Manzullo. So who is the old layer being taken away?
    Ms. Seidman. The Fed would no longer have--
    Mr. Manzullo. But then the Fed would have no responsibility 
for taking a look at instruments and determining whether or not 
those are safe instruments.
    Ms. Seidman. It would be moved over to the new entity.
    Mr. Manzullo. More Federal jobs, Mr. Chairman.
    Mr. Gutierrez. The time of the gentleman is expired. We did 
invite these people to come and address us and answer 
questions, and we might want to treat them as such.
    Mr. Manzullo. Well, we did.
    Mr. Gutierrez. Please, please. We might want to treat them 
as such. They are our guests here in the People's House. We 
might want to treat them at least with some modicum of respect 
for their answers.
    Now, Mr. Ellison you have one question, right?
    Mr. Ellison. Just one. And I really mean that.
    Thank you all for being here. My one question is, could 
you, perhaps Professor Warren, describe the limits of 
disclosure? In your testimony, you did a phenomenal job at 
talking about effective disclosure. But I am curious to know if 
in your view there are limits to that and if the consumer 
products board could help address some of those limitations?
    A quick illustration of what I mean. When I was a trial 
lawyer, I went and cross-examined witnesses every single day. I 
don't care if you were a police officer or a professor, you 
weren't there in that courtroom more than me, and I was going 
to make you look like you were lying even if you were telling 
the truth.
    People who do financial regulation, they do this every 
single day, even if you have a 1-pager. I mean, are there 
limits to disclosure, and could the board help address some of 
those limits in terms of just basic fairness? That is my only 
question.
    Ms. Warren. Thank you, Congressman.
    I want to say two things because I think you are exactly 
right. We have been talking about layers of complexity and how 
this would take out some of the complexity, but there is 
another point. If we make the real point about disclosure, can 
the consumer accurately understand what you have just done? 
Then the whole game shifts. So this is not about how many 
things can I write that make you look over here while I am 
really socking it to you over there. This is about someone who 
says, now, did you get it straight across the middle what it is 
that you are trying to accomplish?
    And you put your finger on a key point that no one has 
talked about, and that is expertise. You know, the largest 
financial institutions in this country hire literally thousands 
of people to play with the design of their products. I sat next 
to someone from Bank of America who described the number of 
people and the number of experts they hire. They ran 500 
experiments internally on their own customers in order to 
determine what maximizes profits for the bank.
    There is no expert on the side of the consumers. And so 
this agency is about is leveling the playing field just a 
little by saying there is someone who is going to be an expert, 
who is going to get smart, who is going to learn to read this 
and be able to say, when you make a disclosure, it has to be a 
disclosure that is effective so that the consumer can make a 
real choice at the end of the day.
    Mr. Ellison. Thank you.
    Mr. Gutierrez. For my own protection, the chairman is going 
to be back pretty soon and he is going to see the same panel he 
left that he thought he had discharged. So Mr. Ellison had his 
question, and I thank Professor Warren.
    Mr. Paulsen, you are recognized for 5 minutes.
    Mr. Paulsen. Thank you, Mr. Chairman.
    And we have had some discussion about the different layers 
of regulatory environment and the bureaucracy. But for those 
who are not watching and those who aren't aware, there is a 
plethora of regulation right now that goes on with banks and 
other institutions. And this new agency would seek to regulate 
some additional regulations obviously.
    And so if you are a national bank, right now, your 
regulator is the Office of the Comptroller of the Currency. If 
you are a thrift, your regulator is the Office of Thrift 
Supervision. All banks are overseen by FDIC, of course, because 
of deposit insurance. Bank holding companies are supervised by 
the Fed. State-chartered banks are regulated by their State 
banking supervisor. And if you are not a member of the Fed, 
then the FDIC has additional oversight of that bank.
    Bank subsidiaries have functional regulators, such as the 
FCC when they regulate securities. State commissions regulate 
insurance, subs, etc. Banks are also subject to the IRS, to 
OSHA, pension oversight, and every other Federal regulator that 
regulates any aspect of a business.
    SBA regulates the function of SBA lending that a bank does, 
and HUD gets into RESPA and other housing related issues, and 
it goes on and on and on.
    So my question, and I am a big proponent of having a focus 
on a regulation for safety and soundness, and it is really 
important that we have transparency, especially on the customer 
side. But my concern, and I want to ask Mr. Yingling because 
everyone else kind of went around the circle there, but Mr. 
Yingling in particular, do you see this new regulatory, this 
new proposal on the consumer side, as offering any additional 
value to your customers, or is it just adding to the mix of the 
alphabet soup?
    Mr. Yingling. Well, I think there are two issues.
    One is just the structure. And as I testified earlier, as 
banks look at this, they just see another layer. Now, I 
recognize the argument that you are taking it out of other 
agencies and putting it over here. But look at it from the 
point of view of a bank, what it means is, you are going to 
have an examiner from another institution come in. And that 
examiner is going to look at the same thing in many cases that 
your prudential regulator looks at and come to different 
conclusions. Even if they have the same philosophy, they are 
going to come to different conclusions.
    So the account operating process, I will use this as an 
example, at banks is heavily regulated, and it is regulated on 
a bunch of sides. You have to have the right disclosures. You 
have to have the right signatures. You have to do things that 
relate to antifraud protection to make sure you know your 
customers. We have a product at the ABA where the bank takes 
whatever name they get and the information, and it runs it 
through a computer, and it tells them, is that really Ed 
Yingling? Is Ed Yingling really 5-foot 9 and 35-years-old with 
blue eyes? No, I am not. And it regulates also for the Bank 
Secrecy Act, very important to stop money laundering and 
terrorist financing.
    Now we are going have two regulators come in and give us 
different views of that account-opening process. We train our 
employees, our front-line employees, extensively with all of 
these rules, but they are reporting to one regulator. Now all 
that will be reporting to two regulators. We have to take the 
exams that they take, the front-line compliance exams that they 
take, and show them to the regulator, and the regulator has to 
say yes, those exams are okay. Now we are going to have two 
different regulators. So from the bank's perspective, it is an 
additional layer.
    Mr. Paulsen. And just to follow up. One of the concerns I 
have, and I just spoke yesterday to a community banker in my 
district, and he said he is going through an audit process 
right now. And the folks who are in his building are looking 
at--just a small community bank. I thought maybe he would have 
3 or 4 regulators who are going through the books and the 
audit; 17 people are in there going through the books from top 
to bottom. And that is a huge drain on resources. Obviously 
regulation is important, but 17 people. And to think that we 
potentially are going to add another layer on top of that is of 
a concern to me.
    And I guess it is important to focus again on safety and 
soundness, but at a time I think in the market right now we 
need innovative products, we need to allow the financial 
community to provide for innovation, I am really concerned that 
this may hamstring that ability.
    Ms. Seidman. Can I raise an issue? I don't think anybody 
would create our bank regulatory system if they were starting 
from scratch for many of the reasons you just described.
    But Mr. Yingling listed all of the different rules that you 
have to go through with respect to account opening. Those rules 
are generated by a whole bunch of different agencies. One of 
the points of this proposal is to have them generated by one 
agency.
    Mr. Yingling. No, they aren't. They are three different--
    Ms. Seidman. The rules will be consistent--
    Mr. Yingling. How can they be generated by one agency? One 
is the Bank Secrecy Act. One has to do with account opening and 
truth in lending, and one has to do with antifraud. They are 
different rules.
    Ms. Seidman. They could be harmonized much better if one 
agency is harmonizing them instead of many of them.
    Mr. Yingling. But the consumer agency will not have 
jurisdiction over all those rules.
    Mr. Gutierrez. Hold it. One at a time.
    Mr. Paulsen. I will point out, the devil is going to be in 
the details, Mr. Chairman.
    I yield back.
    Mr. Gutierrez. The time of the gentleman has expired on 
that question.
    So I just wanted to say to Professor Warren, Ms. Seidman, 
and the others, I would like to put a floor on payday lending, 
a national one, so that at least we have some minimum standard. 
I would like for the remitters to have somebody nationally, you 
know a Federal regulator, I would like to see people maybe not 
buy an $800 TV and 3 years later pay $2,400 for it, or people 
to kind of, I don't know, escape to installment loans at 500 
and 600 percent. Some people might be surprised that happens. 
It happens.
    So not to take any time here, if you have any ideas about 
how that fits into what we are doing now in terms of setting 
floors and doing something now versus dealing with all of those 
things, you know, while we have the public's attention and the 
Congress' attention, I would love to hear from you later.
    And now to close, the sponsor, Mr. Miller, is recognized 
for 5 minutes.
    Mr. Miller of North Carolina Thank you, Mr. Chairman.
    Several witnesses and members have referred to the need for 
personal responsibility. I agree with that, but I have noticed 
that no one seems to use the term personal responsibility or 
call for personal responsibility when they are actually taking 
personal responsibility. It always seems to be when they are 
pointing out that someone else is responsible and that other 
person is not taking personal responsibility.
    Mr. Yingling used or said that a variety of products was 
valuable and the products would compete, and that is the way I 
would like to see the market work, too. I am perfectly happy 
where there is some rough equality of bargaining power, some 
rough equality of information, or information symmetry, as 
economists would say, that we leave the parties to a 
transaction to their own devices.
    The way economic theory says that should work is that when 
one competitor introduces a new product or does something 
different and it proves profitable, others will mimic what they 
are doing, and they will compete with each other, and they will 
be forced to contain their costs, and the prices will come 
down, and it will benefit the consumer. And the result is that 
all the competitors make an honest living, and the consumers 
actually get the benefits of their innovation.
    What we have seen in the financial sector, though, is 
beginning around 1980, after bouncing for decades between 5 and 
15 percent of all corporate profits, the profitability of the 
financial sector went up steadily, dramatically, consistently, 
up until a couple of years ago, to more than 40 percent of all 
corporate profits. And compensation of the industry, about 
which we have heard a great deal, went from about what other 
Americans made beginning in 1982, about 1.8 times what most 
Americans made.
    Mr. Yingling, if the market were working properly, if there 
were competitive forces that were containing costs and limiting 
profits, how do you account for that level of profitability and 
that compensation level by the financial sector?
    Mr. Yingling. Well, you are asking me a question that is 
broader than your local community banks in North Carolina. You 
are asking a question about Wall Street. A fair question. I 
just want to point that out, that I don't represent all those 
people in hedge funds and that type of thing.
    I think your analysis of the way it is supposed to work is 
correct. I think it is quite clear there were problems. I 
think, for example, and we have testified to this, that the 
compensation systems were not properly calibrated. And I don't 
mean to use that as a technical term. Compensation did not 
include enough consideration of the risk that, say, traders 
were putting on the system. I think it also shows that there 
was way too much leverage in the system. It also raises 
questions about monetary policy, quite frankly.
    So I would certainly say that there were severe problems, 
including gaps in regulation, that led us to this problem. The 
great majority of it outside the traditional banking industry.
    Mr. Miller of North Carolina. Well, and I recognize the 
financial sector includes more than just the banking industry 
and more than just consumer credit. But consumer credit is 
actually the bulk of all transactions one way or the other. You 
don't think that consumer credit and the failures of the market 
to limit profitability and prices in a consumer credit 
transaction was part of the problem?
    Mr. Yingling. I don't know about the word profitability, 
particularly with respect to banks. I think that there were 
severe, terrible problems in the subprime lending market. In 
the President's proposal, it points out that 94 percent of that 
took place outside the traditional regulated banking market. 
There were terrible problems with mortgage brokers who were 
giving loans to people that never should have been made. There 
were problems with the fact that those loans went over the 
banking system to Wall Street where they were given AAA.
    Mr. Miller of North Carolina. My time is about to expire, 
and I haven't really gotten much on that.
    But the second question, there have been several mentions 
of protecting consumer choice. And I am very perplexed at what 
consumers appeared to have chosen in financial products in the 
last few years. Can you get me the names of some consumers that 
I can talk to who would explain why they chose a double cycle 
billing for credit card transactions, or consumers who 
qualified for a prime mortgage but instead asked for a mortgage 
that had an initial rate that started at about prime; after 2 
or 3 years, the rate adjusted, their monthly payment went up 30 
to 50 percent, and they had a prepayment penalty? Could you 
give me the names of consumers who went into one of your member 
institutions and asked for those products, so I could somehow 
fathom how they made those choices?
    Mr. Yingling. I think that is a rhetorical question, and I 
won't try to answer it.
    Mr. Gutierrez. Thank you very much.
    It is wonderful to have you all here.
    Mr. Pollock, good to see you again, although you did come 
as a witness for the minority side, but we will still be 
friendly with one another.
    And it is good to have you all here. We are going to try to 
get it right this time. I thank this wonderful panel, all of 
you, for being here. And I look forward to talking to you all 
once again. Thank you so much.
    I ask unanimous consent that written statements by the 
American Financial Services Association and the Insurance 
Marketplace Standard Association be entered into the record.
    Without objection, it is so ordered.
    Thank you so much.
    Well, I am going to work really hard on this, because I 
want to get everybody's name right. We now have our third 
panel.
    We welcome you all: Mr. Travis Plunkett, legislative 
director, Consumer Federation of America; Ms. Kathleen E. 
Keest, senior policy counsel, Center for Responsible Lending; 
the Honorable Ralph Tyler, commissioner, Maryland Insurance 
Administration, on behalf of the National Association of 
Insurance Commissioners, welcome; Mr. Gary E. Hughes, executive 
vice president and general counsel of the American Council of 
Life Insurers, we are happy to have you here; Ms. Catherine J. 
Weatherford, president and chief executive officer, NAVA, the 
Association of Insured Retirement Solutions; and Mr. Cliff F. 
Wilson, Southeast Arizona Insurance Supervisors, on behalf of 
the National Association of Insurance and Financial Advisors.
    We welcome you all, and we will start with Mr. Travis 
Plunkett for 5 minutes please.

 STATEMENT OF TRAVIS PLUNKETT, LEGISLATIVE DIRECTOR, CONSUMER 
                  FEDERATION OF AMERICA (CFA)

    Mr. Plunkett. Good afternoon, Mr. Chairman, and members of 
the committee, and Ranking Member Bachus.
    My name is Travis Plunkett, and I am the legislative 
director at the Consumer Federation of America. I really 
appreciate the opportunity to speak with you again.
    CFA strongly supports creating a Federal consumer 
protection agency focused on credit and payment products 
because it targets the most significant underlying causes of 
the massive regulatory failures that have harmed millions of 
Americans. In particular, combining safety and soundness 
supervision with its focus on bank profitability in the same 
regulatory institution as consumer protection authority 
magnified an ideological predisposition or antiregulatory bias 
by Federal officials and contributed to an unwillingness to 
rein in abusive lending before it triggered the housing and 
economic crises.
    Structural flaws in the Federal regulatory system 
compromise the independence of banking regulators and encourage 
them to overlook, ignore, or minimize their mission to protect 
consumers. A consumer financial protection agency would correct 
many of the most significant structural flaws that exist, 
realigning the regulatory architecture to, first, put consumer 
protection at the center of financial services regulation; 
second, end regulatory arbitrage; and third, create a truly 
independent regulatory process.
    Towards that end, I want to talk about funding quickly. It 
should be a priority to provide the agency with a stable 
funding base that is sufficient to support robust enforcement 
and is not subject to political manipulation by regulated 
entities. Funding from a variety of sources, as well as a mix 
of these sources, should be considered, including congressional 
appropriations, user fees or industry assessments, filing fees, 
priced services, such as for compliance exams and transaction-
based fees.
    Another authority that this agency should have that has 
been the subject of much discussion is the process for 
overseeing products, features, and services that are offered. 
Where credit products represent a significant risk to 
borrowers, we think this agency could require providers to file 
additional data and information to allow the agency to assess 
the fairness, sustainability, and transparency of products, 
features, and practices.
    As we have heard a lot of discussion about plain vanilla 
products that are determined to be fair, transparent, and 
sustainable should be presumptively in compliance and face less 
regulatory scrutiny and fewer restrictions. Those that are 
riskier need to have stronger oversight. That could include a 
variety of remedies related to increased regulatory 
requirements, including prohibition.
    And for those who think this is an unusual idea, let me 
just point out that Congress does this frequently and has 
recently done so regarding certain abusive credit card 
practices that consumers simply can't understand and that 
Congress has determined to be just outright abusive.
    We have been asked by the committee to consider whether 
this agency should have some jurisdiction over insurance as 
well. This is certainly an excellent question. With a few 
notable exceptions, State insurance consumer protections and 
market conduct examinations are generally very weak.
    CFA testified last month before Chairman Kanjorksi's 
subcommittee in support of bringing safety and soundness 
regulation under Federal control in part because effective 
systemic regulation of insurance, which we support, is not 
really possible unless the regulator has a thorough knowledge 
of and control over safety and soundness.
    However, consumer protection regulatory weaknesses that 
exist at the State level should be strengthened without 
undermining the excellent regulatory practices in a few States, 
such as the remarkably successful rate regulation regime in 
California. Any Federal efforts to assist insurance consumers 
must be as a supplement to, not a replacement for, consumer 
protection efforts by State insurance regulators.
    There are several things in our testimony that we throw out 
as possibilities for this agency regarding insurance 
regulation. Most significantly, given the core mission of the 
agency, which is to protect consumers in the credit markets, it 
makes a lot of sense to consider granting the agency minimum 
standards jurisdiction over insurance products that are central 
or ancillary to a credit transaction such as credit, title, 
mortgage and forced place insurance.
    Mr. Gutierrez. [presiding] The time of the gentleman has 
expired.
    Mr. Plunkett. Okay. Thank you.
    [The joint prepared statement of Mr. Plunkett and Mr. 
Mierzwinski can be found on page 118 of the appendix.]
    Mr. Gutierrez. You are very welcome.
    Ms. Keest, you are recognized for 5 minutes.

 STATEMENT OF KATHLEEN E. KEEST, SENIOR POLICY COUNSEL, CENTER 
                    FOR RESPONSIBLE LENDING

    Ms. Keest. Thank you to the chairman and to Ranking Member 
Bachus, although, I guess he is not here anymore. Thank you 
very much for inviting us to testify.
    The Center for Responsible Lending brings a unique 
perspective to the question of how to structure a regulatory 
system that best serves the public, the institutions, and the 
financial needs of American households. Ours is a research-
based policy organization, but it is affiliated with a 
financial institution that is directly affected by regulations 
and the regulatory system.
    I, myself, am a former credit code administrator and 
assistant attorney general in Iowa, so we bring three 
perspectives to this proposal. From all of these perspectives, 
we wholeheartedly welcome the proposal of a separate, 
independent regulator that is focused on the bottom lines of 
both the providers and of the households who are their 
customers.
    Today's crisis has many origins, but a big one is a fatally 
flawed regulatory system that has led to where we are today. 
There were flawed regulators in not seeing what they were 
doing, but the structure, itself, has made it unlikely that any 
of the current lessons that today's regulators may have learned 
will have any staying power.
    The OTS is a good example of that. They were created after 
the savings and loan industry self-destructed 20 years ago. 
Yet, today, when OTS' full-time, on-site safety and soundness 
examiners were at WaMu, they failed to notice that half of the 
real estate loans that WaMu was making from 2004 to 2006 were 
inherently risky, badly underwritten loans.
    It is a little bit difficult to understand why we are 
talking about vesting these agencies with the consumer 
protection fair lending compliance, calling them ``prudential 
regulators'' when they have been no more prudent than the 
customers of those agencies, which is what they call their 
supervised institutions.
    Financial autopsies by inspectors general have pointed to 
regulatory failures in both the OCC and the OTS for not doing 
their jobs, and the attitude of those regulators who consider 
their supervisees their customers is at the heart of the 
problem. For the market to work as intended, we need to have a 
level playing field. We need rules of the game and we need 
referees. We need referees, not cheerleaders, but the charter 
competition and the legal systems for sales structure that we 
have now inevitably led to the so-called ``prudential 
regulators'' being cheerleaders.
    That is why we believe that this needs to be an independent 
regulator. That regulator needs to have all three tools that a 
regulator's toolbox should have. It needs to have the authority 
to set standards, the ability to monitor them in real-time, and 
the ability to enforce those standards. As a former regulator, 
I can tell you that, if you are not able to be onsite and 
monitoring things in real-time and are left to dealing with 
them when they become big enough to become a law enforcement 
problem, then the damage has already been done, and at the 
velocity that today's market moves, that does not take very 
long.
    The second question that I would like to address is that 
about insurance. One of the things that we think is key is that 
insurance products that are inextricably linked with the 
financial products have to be there. We have proposed a ``but 
for'' test, which is to say, if this insurance product would 
not exist except for the underlying transaction and if it is 
intrinsically intertwined with it, then it should be there. We 
think that it is important to remember that credit insurance 
was one of the key tools used by predatory mortgage lenders 10, 
15 years ago, and it was used to strip billions of dollars of 
equity out of people's homes when they still had some equity to 
steal.
    Fifteen years ago, Congress had a chance to nip it in the 
bud then by making it a HOEPA trigger fee, but you did not. You 
did give the Fed the authority to do so later, but it was about 
5 years later after billions of dollars of equity had been lost 
and after State legislatures, law enforcement and the FRB all 
clamped down on it.
    So we would simply like to remind you that we think it is 
important to have learned both from the lessons of the S&L 
crisis 20 years ago and from the predatory lending problem 15 
years ago and to say, let's learn from those mistakes and not 
do the same thing over again.
    Thank you for the opportunity to testify, and I will look 
forward to your questions.
    [The prepared statement of Ms. Keest can be found on page 
94 of the appendix.]
    Mr. Gutierrez. Thank you.
    Commissioner Tyler, please, you are recognized for 5 
minutes.

   STATEMENT OF THE HONORABLE RALPH S. TYLER, COMMISSIONER, 
 MARYLAND INSURANCE ADMINISTRATION, ON BEHALF OF THE NATIONAL 
             ASSOCIATION OF INSURANCE COMMISSIONERS

    Mr. Tyler. Thank you, sir. Good afternoon.
    Mr. Chairman, my name is Ralph Tyler. I am the Maryland 
Insurance Commissioner, and I appear today on behalf of the 
National Association of Insurance Commissioners. My comments 
will be directed to the question posed by the committee 
regarding the applicability of this proposed new agency to 
insurance.
    While separating consumer protection from financial 
oversight may be an appropriate structure for other sectors, 
not so with insurance. Insurance is a promise to pay in the 
future if a covered loss occurs. Thus, solvency is the bedrock 
consumer protection. With an insurance contract, consumer 
protections are embedded in the product design, and product 
design directly affects solvency. As a result, we do not think 
the supervision of these areas should be separated or shared 
with a competing regulator.
    There is currently a continuum of interaction between the 
insurance regulator and the insurance industry. It extends from 
licensing a company or a producer through product design and 
financial assessment to market conduct and claims payment. 
Breaking apart the links in that process will create gaps and 
inconsistencies, and it will do nothing to address the problems 
we collectively seek to resolve.
    In the area of insurance regulation, the States have 
developed a wide range of consumer protection tools, which are 
detailed in my written testimony, all of which are designed 
around complex products and unique interactions between 
insurers and policyholders. The basic purpose of market 
regulation is to protect consumers by identifying and 
correcting practices that are in conflict with contract 
provisions and State law requirements.
    For example, all States have unfair trade practices laws 
and unfair claims settlement protections based on models 
developed through the National Association of Insurance 
Commissioners. These laws provide a framework of consumer 
protection that gives States broad authority to intervene on 
behalf of policyholders.
    The first link in the insurance regulatory chain is 
licensing an insurer to do business in the State. This process 
begins by examining the insurer's financial solvency, 
management capacity, expertise, and other factors. We also 
assess insurance producers through examinations, background 
checks, and continuing education requirements to ensure that 
consumers are protected at the point of sale.
    Regulators then ensure the adequacy and appropriateness of 
the products offered to consumers. Insurance policies are 
complicated contracts, so insurance departments review policy 
forms to ensure that consumers are getting the coverage for 
which they have paid and that the policy provisions comply with 
the law. Likewise, because insurance is a product whose 
ultimate value is not known at the time of purchase and is 
dependent on risk assumptions that are difficult for a consumer 
to verify, States have some form of rate review to assure that 
rates are adequate but not excessive or discriminatory.
    Additionally, 36 States, including Maryland, from where I 
come, are now part of the Interstate Insurance Product 
Regulation Commission, which allows an insurer offering life 
insurance, annuities, long-term care, and disability products 
to get product approval directly through the Commission, using 
one set of uniform standards while leaving market conduct 
enforcement and consumer protection to the States.
    In total, the States have approximately 1,600 consumer 
service personnel monitoring the marketplace, handling in the 
aggregate 2.3 million consumer inquiries and 370,000 formal 
consumer complaints each year. To deal with criminal activity 
related to insurance, there are over 1,200 State personnel 
devoted to these activities.
    The States have developed a sophisticated system of 
consumer protection, and we would respectfully urge the 
committee not to change that system in the name of consumer 
protection. Simply put, federalizing insurance regulation in 
the name of consumer protection would weaken consumer 
protection.
    Thank you very much.
    [The prepared statement of Mr. Tyler can be found on page 
189 of the appendix.]
    Mr. Gutierrez. You are very welcome.
    Mr. Hughes, you are recognized for 5 minutes.

STATEMENT OF GARY E. HUGHES, EXECUTIVE VICE PRESIDENT & GENERAL 
       COUNSEL, AMERICAN COUNCIL OF LIFE INSURERS (ACLI)

    Mr. Hughes. Thank you, Mr. Chairman, and members of the 
committee.
    I think there is some risk of having an industry witness 
come before you, talking about consumer issues and saying we 
strongly support enhancing consumer protections, and then we 
say, ``however,'' and offer you a lot of reasons of why we do 
not support the protections that are being discussed.
    In point of fact, life insurance companies do, indeed, 
support strong consumer protections. It is good business: Led 
by a group of CEOs, we have been working for over 2 years with 
State and Federal regulators to provide annuity consumers with 
more relevant and more clearly understandable disclosure. And 
we are continuing to work with State regulators to have all 
jurisdictions adopt uniform annuity standards on suitability, 
sales to seniors, and producer credentialing; but we do believe 
there are right ways and wrong ways to strengthen consumer 
protections in the context of insurance, and I think much of 
what I am going to say is going to echo what Commissioner Tyler 
has just said.
    So why don't we support placing insurance products under 
the jurisdiction of an agency like the CFPA?
    If you consider the stated purpose of the Agency as 
articulated by the Administration, we see references to 
products that are unregulated, lightly regulated or regulated 
by agencies with conflicting agendas and that were a cause of 
or contributed in some way to the financial crises. Life 
insurance products are not any of those things.
    Our products are more heavily regulated than most. States 
typically have a prior approval process for new products, so if 
a company does business on a national basis, it will make 51 
separate product filings. It will have 51 separate reviews, and 
it will wait for 51 separate approvals. Frankly, we do not see 
the wisdom or justification in making that number 52. Just to 
be clear, heavy product regulation is not the same thing as 
efficient product regulation or regulation in the best 
interests of consumers. In fact, one of the principal reasons 
we have been pressing for a Federal charter is due to the 
redundant, costly, and very time-consuming State product 
approval process.
    Placing life insurance products under the CFPA would be a 
step backwards in terms of achieving more efficient and 
effective insurance regulation. Frankly, the last thing that 
our industry needs is more fragmented regulation. In that same 
vein, we note that the Administration proposes to exempt SEC 
and CFTC regulated products from the purview of the CFPA. The 
rationale, presumably, is that these agencies adequately 
regulate products under their jurisdictions. We believe that 
the even heavier regulatory oversight of life insurance 
products suggests that they should be afforded a similar 
exclusion.
    A lack of necessity is not the most compelling factor 
arguing against placing life insurance products under the CFPA. 
As the Commissioner said, life insurance product regulation is 
an integral part of life insurance solvency regulation, and 
there is no more important consumer protection in our world 
than solvency. Our products involve promises to pay, extending 
outwards of 40 years or more, and the solvency standards 
governing the design of these products assure that these 
promises will be kept.
    Life insurance product regulation involves, among other 
things, how premiums received from the sale of the products 
must be invested, the nature, level and duration of guarantees 
that are made, what risk classification criteria are used, what 
assumptions on product lapses are made, the appropriate level 
of surrender charges, the adequacy of reserves, what 
nonforfeiture limitations are applicable, what mortality rates 
are assumed, and what pricing assumptions are involved.
    Failure to regulate any of these product attributes 
correctly puts consumers at risk over the long haul, and it 
jeopardizes the solvency of the issuing life insurance company. 
So divorcing product regulation from the balance of life 
insurance solvency regulation--and by that, we mean assigning 
these responsibilities to more than one regulator--weakens 
rather than strengthens consumer protections, and increases 
rather than decreases systemic risk in the insurance market.
    This brings me to the last point I would like to make. It 
should be clear that anyone presuming to regulate life 
insurance products must be intimately familiar with the 
technical underpinnings of these products as well as with how 
product design relates to overall solvency. Put differently, 
life insurance company product regulation requires in-depth 
insurance regulatory expertise.
    As this committee well knows, that sort of expertise is 
absent at the Federal level, although that is a gap in the 
overall regulatory framework that we would like to see remedied 
through the creation of a Federal functional insurance 
regulator. But it is unrealistic to expect that the CFPA would 
ever have the degree of expertise necessary to handle insurance 
product regulation effectively.
    The centerpiece of the Administration's proposal with 
respect to insurance is the creation of an Office of National 
Insurance, and if it becomes a reality, the ONI would be the 
appropriate Federal agency to coordinate with State functional 
regulators concerning insurance product issues. Unless and 
until Congress establishes a Federal functional regulator with 
full solvency authority, we believe that the role of any 
Federal body with respect to insurance regulation should be 
advisory only.
    In conclusion, we urge this committee to consider carefully 
the points we have raised because we do firmly believe that the 
best interests of consumers would not be well served by giving 
the CFPA jurisdiction over insurance products.
    Thank you.
    [The prepared statement of Mr. Hughes can be found on page 
87 of the appendix.]
    Mr. Gutierrez. Ms. Weatherford, you are recognized for 5 
minutes, please.

  STATEMENT OF CATHERINE J. WEATHERFORD, PRESIDENT AND CHIEF 
EXECUTIVE OFFICER, NAVA, THE ASSOCIATION FOR INSURED RETIREMENT 
                           SOLUTIONS

    Ms. Weatherford. Thank you.
    Mr. Chairman, Ranking Member Bachus, and members of the 
committee, thank you very much for this opportunity, and I 
commend you for holding this important hearing to examine gaps 
in and overlapping of financial regulation and their products.
    I have over 30 years of regulatory experience, much of that 
time as an elected insurance commissioner and as CEO of the 
National Association of Insurance Commissioners. Since I have 
built my career protecting consumers, I fully understand the 
necessity for sound and effective regulation. NAVA's members 
are insurers, broker-dealers, banks, and asset management 
firms, and they are represented by hundreds of thousands of 
registered Financial Advisors across the country who help 
millions of Americans build sound retirement plans.
    Congress' long-time focus on incentivizing retirement 
savings has shown to be wise foresight, especially in these 
turbulent economic times. Consistent with our new mission, 
which will be fully reflected in our new name, which will be 
announced later next month, I would like to make a few key 
points today.
    Retirement savings is even more critical now as boomers' 
nest eggs are shrinking due to the economic crisis. At the same 
time, they are living longer due to rapid advances in medicine. 
Americans no longer fully rely on traditional retirement 
programs. So guaranteeing a lifelong income through an annuity 
is an option more and more Americans are choosing. In 2007, 
life insurers held $2.6 trillion in annuity reserves with 23 
million variable contracts in force, representing over $2 
trillion in assets under management. This truly demonstrates 
the value of variable annuities, especially in these down 
markets. When compared to other financial products, VA's have 
delivered guaranteed benefits to consumers in this down market 
better than others.
    NAVA supports important consumer protection principles--
transparency, suitable sales and education and training. 
Therefore, we urge uniform passage of the NAIC suitability, 
disclosure, and senior designation models. We also support the 
adoption of a summary prospectus by the SEC for annuity 
purchasers, which has already been adopted for mutual funds. We 
are also partnering with FINRA to deliver education both for 
consumers and for FINRA members.
    Our consumers are protected by a comprehensive regulatory 
structure consisting of the SEC, FINRA, and 50 State 
regulators. These regulators perform comprehensive examinations 
of numerous consumer protection laws as often as every year, 
and at the State level, it is common for most large insurance 
companies to undergo 5 to 10 examinations, if not more, by 
different State insurance departments simultaneously in any 
given year.
    Variable products, because they are securities, must be 
also approved by the SEC. Then, on the State level, the 
products must contain legally required contractual provisions, 
and must be approved by every State insurance regulator in the 
Nation where the product will be sold--a very arduous process 
that can take well over a year to obtain approvals of these 
types of products in all States.
    Given the current regulatory protections, adding yet 
another layer of regulation to the insurance industry is 
unnecessary. It has already been stated that separating 
financial regulation and consumer protection regulation is not 
prudent and would present significant risks to consumers. It 
could also prevent the best products from reaching consumers in 
a timely fashion. To this end, we do support the President's 
Office of National Insurance proposal as well as Subcommittee 
Chairman Kanjorski's H.R. 2609.
    In summary, while we do not believe an additional consumer 
protection regulator is necessary or even advisable for the 
annuity industry, we ask the Congress to continue to focus on 
how regulatory structures and necessary consumer protections 
can be operated and administered in the most effective manner. 
This is why we do support Treasury's proposals to modernize and 
improve our system of insurance regulation as well as its six 
principles for the regulation of insurance.
    Thank you for the opportunity, and I welcome any questions 
you may have.
    [The prepared statement of Ms. Weatherford can be found on 
page 206 of the appendix.]
    Mr. Miller of North Carolina. [presiding] Thank you, Ms. 
Weatherford.
    Mr. Wilson, for 5 minutes.

   STATEMENT OF CLIFF F. WILSON, SOUTHEAST ARIZONA INSURANCE 
 SERVICES, ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE 
                 AND FINANCIAL ADVISORS (NAIFA)

    Mr. Wilson. Good afternoon, members of the committee. Thank 
you. My name is Cliff Wilson, and I operate an insurance agency 
in Chandler, Arizona. I serve as president of the National 
Association of Insurance and Financial Advisers, NAIFA. Thank 
you for the opportunity to appear before you today to share our 
views regarding financial regulatory reform and the critically 
important area of consumer protection.
    NAIFA comprises more than 700 State and local associations 
representing the interests of approximately 200,000 agents and 
their employees nationwide. Like me, NAIFA members focus their 
practices on one or more of the following: life insurance and 
annuities; health insurance and employee benefits; multiline; 
and financial advising and investments. NAIFA members share the 
views of the Administration and of this committee that robust 
consumer protection is necessary to ensure public trust in 
financial products and services and in the financial system as 
a whole. Stepped-up Federal oversight through a consumer 
financial protection agency may make sense for some products. 
Insurance, however, is different for three reasons:
    First, insurance products are subject to comprehensive 
State regulatory oversight. Federal intervention is unnecessary 
and could lead to regulatory confusion. Insurers and insurance 
agents are required to comply with the laws and rules of every 
State in which we do business and are required to hold a 
license in every State. Agents who sell more than one line of 
coverage may be required to hold more than one license in each 
State. As an agency, I am required to have an agency license as 
well. As part of the license process, producers undertake pre-
licensing and continuing education courses; they pass 
examinations; submit to an application process; and perhaps 
most importantly, they comply with State consumer protection 
laws.
    Moreover, agents cannot sell a product in a State unless it 
has been approved by the State's insurance regulator. Until 
fairly recently, product approval was a State-by-State endeavor 
that could take years to complete. With the creation of the 
Interstate Insurance Product Regulation Commission by the NAIC, 
the product approval process for life insurance, annuities, 
long-term care, and disability income products has been 
streamlined dramatically in the 35 States that currently 
participate.
    More than 40 States also have imposed suitability 
requirements in connection with the sale of annuity products. 
These State requirements are based on the NAIC's Suitability in 
Annuity Transactions Model Regulation, which imposes a 
suitability requirement on any recommendation to purchase or to 
exchange an annuity. The NAIC model rule also imposes duties on 
insurance companies regarding supervision and monitoring where 
none had previously existed.
    Separate and apart from the requirements of the NAIC model, 
more than 80 percent of NAIFA members are securities licensed 
and are, therefore, subjected to FINRA rule 2821 in connection 
with the sale of variable products. For producers selling 
variable annuities in States that have not enacted the NAIC 
model, the requirements of the FINRA rules still apply.
    To the extent that one of the missions of the CFPA would be 
to simplify consumer disclosures, we are unsure how that can be 
accomplished under a regime that would establish a regulatory 
floor under which State disclosure requirements would still be 
fully applicable. It appears that these twin objectives--
disclosure simplification and the continued applicability of 
current State requirements--are at odds with one another, and 
all that the new Federal requirements would accomplish in the 
highly regulated insurance arena would be to add an additional 
set of requirements to an already very robust consumer 
protection scheme.
    Second, the separation of insurance product regulation from 
insurance solvency regulation is dangerous. States regulate 
solvency to ensure that the ultimate consumer protection is 
available when needed--the promise to pay a claim when it comes 
due. A regulator focused on only one part of the puzzle may 
have oversight and may take actions not in the best interests 
of the product.
    Third, Federal financial product oversight should be 
addressed only as part of a comprehensive review of insurance 
regulation. This should not be a piecemeal effort. The dangers 
and regulatory burdens on producers, companies and clients are 
too great. If the Federal Government is going to assume 
insurance regulatory authority, there must be a Federal 
insurance regulator with expertise and authority to fully 
understand the implications of regulatory actions for the 
industry, the marketplace, and the consumers. NAIFA members 
have debated long and hard regarding the proper Federal role in 
insurance regulation. We are long-time supporters of State 
regulation and continue to be so, but we understand there could 
be areas for Federal regulation.
    We appreciate the opportunity to speak.
    [The prepared statement of Mr. Wilson can be found on page 
224 of the appendix.]
    Mr. Miller of North Carolina. Thank you, Mr. Wilson. We 
will now have rounds of questions by members.
    Mr. Kanjorski is recognized for 5 minutes.
    Mr. Kanjorski. Thank you very much, Mr. Chairman.
    Let me address this to the full panel:
    Do you all think that this concept of a consumer agency of 
this nature is the best way to go about regulating the 
insurance industry? If you do, show your hands ``yes'' so I can 
separate the panel, or if the whole panel is for it, let me 
know. I am totally lost when it comes to it.
    Who is for it? Who thinks this is the greatest thing since 
sliced bread? Just one of the panel. Two of the panel. Okay, 
four of the panel think it is the worst thing since sour milk. 
Is that it?
    Ms. Keest. Could I say that I think that, with respect to 
some kinds of insurance, it is a necessity to be part of this, 
and those are the ones that are related to the credit 
transactions.
    Mr. Kanjorski. All right. Could you help me out a little 
bit and explain to me what tremendous contribution consumers 
have made to the most recent recession and financial crisis?
    Ms. Keest. Are you asking me?
    Mr. Kanjorski. Anyone. I am trying to figure out why 
anybody thinks this is something we should not be moving on 
from in the Congress compared to all of the other disasters and 
compared to all of the other problems we have to meet.
    What has happened in the last couple of years in protecting 
consumers that has caused such a disaster that we should divert 
all of our attention now to this one plank? It is not all of 
our attention, but it is a major part of our attention when we 
are doing reform regulation.
    Mr. Hughes. Without disagreeing with your premise, I think 
your question is an interesting one.
    Again, if you go back to at least what we understood the 
Administration had in mind here, which was a focus on products, 
it was to say, if there are products that have harmed consumers 
as part of the crisis, if there are products that contributed 
to the crisis--worsened it, deepened it--then perhaps there is 
a way to get at that; but I think the people on this panel 
would be saying generally the products that we deal with do not 
fit that model. That is why, I think, as we look at the 
proposal on this agency that we do not think it is the right 
way to address insurance products.
    Mr. Kanjorski. I have been struggling with the regulation 
of insurance on a Federal level or on a State level and how it 
could or should be done and whether it warrants getting done 
for a number of years right now. I have never seen anything in 
the world more devious or backdoor to come in to Federal 
regulation than doing it this way, and with the least amount of 
real direct effect. I can see us spending years in court, 
trying to figure out the jurisdiction of this agency to do what 
it wants to do because it was or was not the intention of 
Congress to do that, and then as to how we are going to 
structure this.
    Do you all see that is not a problem here?
    Mr. Plunkett. Mr. Chairman, we responded to a request to 
consider if the notion to set up a consumer protection agency 
focused on a provision of credit and payment systems, to 
consider insurance in that light, and there are some positive 
aspects to that idea. In particular, what we threw out just 
before you arrived was the idea of a holistic jurisdiction from 
the consumer protection point of view over the entire credit 
transaction to include insurance products that are directly 
related to that credit transaction. Title, mortgage, credit, 
and forced placed insurance are some examples.
    To answer your previous question, credit insurance has been 
a major part of single premium credit insurance, in particular, 
abusive mortgage lending practices. It has been tied very 
closely.
    Mr. Kanjorski. I can see that as an after the fact that 
some problem occurs with a particular element and that we are 
trying to find out whether there is some agency of the Federal 
Government that has jurisdiction to do something about it. The 
reality is: Shouldn't we get our hands around whether or not 
this is needed and whether it is essential? Are there other 
areas that we can strengthen or create that would do it more 
efficiently, more effectively, and more directly?
    I hate to say this, but anything that gets the title 
``consumer'' seems to have an express ticket on the train to 
getting there. Unfortunately, it may be very expensive; it may 
be very circuitous in the route we want to take, and it could 
probably impede what we are trying to do to create a Federal 
charter, if that is what we decide we need. After this, I do 
not think we need a Federal charter because it is going to take 
us 5 or 10 years to figure out what this agency is supposed to 
do.
    Mr. Plunkett. Mr. Chairman, as you know, the consumer 
community is very concerned about a Federal charter, and we are 
talking about regulatory arbitrage today.
    Mr. Kanjorski. Right. Right.
    Mr. Plunkett. It will allow regulated entities to play 
these State regulators off of Federal regulators.
    Mr. Kanjorski. You know, I heard testimony in this 
committee just 2 months ago from the consumer organizations, 
saying that they did not want a Federal optional charter or the 
Federal regulation of insurance companies because the States 
were doing such a magnificent activity, and they should keep it 
at the State level. Now, suddenly, the consumer groups are 
coming in and are telling us to create a whole consumer agency 
to handle something that the States are doing perfectly well. 
Give me one or the other, but do not try and get both. What do 
you mean?
    Is there such a failure of consumer protection in the 
United States on the State level that they are not doing their 
jobs, and we have to create a Federal agency or regulator to do 
that or is that not true?
    Mr. Miller of North Carolina. If we proceed with 5 minutes, 
I think all of us can get in our questions, but I do appreciate 
the chairman of the Capital Markets Subcommittee, on which I 
serve, for his questions.
    Mr. Bachus for 5 minutes.
    Mr. Bachus. Thank you, Mr. Miller.
    I guess I will ask--is it Ms. Keest?
    Of course, Mr. Miller and others worked on the subprime 
bill that has now passed.
    Does that address most of the problems in subprime 
lending--that in combination with other things that have been 
done?
    Ms. Keest. No.
    Mr. Bachus. Okay.
    Ms. Keest. There is a lot left to be done. Part of the 
issue about it is that it was sort of the same thing that 
happened 15 years ago. It only deals with the mortgage market. 
It mostly deals with part of the mortgage market. It leaves the 
rest of the financial services, the basic package of consumer 
financial banking needs, unaddressed.
    Mr. Bachus. I am talking about the subprime mortgages, 
where it is just restricted to that. I sort of associate you 
all with subprime lending, but you are actually on all sorts of 
credit--with the Center for Responsible Lending.
    Ms. Keest. I am sorry.
    Mr. Bachus. I said I associate you all with subprime 
lending just because of the last few years, but you are 
actually concerned with all sorts of lending practices.
    Ms. Keest. Certainly. We work on credit cards. We work on 
payday loans, and we are affiliated with the financial 
institution that does mortgage lending, small business lending 
and that has retail credit union operations.
    Mr. Bachus. On the subprime, where do we stand on that 
after this legislation?
    Ms. Keest. Well, first off, number one, we have to make 
sure that it gets through the Senate and does something.
    Mr. Bachus. Okay. I keep forgetting that they have not 
passed it. It is the second time, I guess.
    Ms. Keest. There is a long distance to go.
    The second thing is that, I think, it really does a lot of 
improvement to the existing problems, but it leaves a lot of 
questions unanswered, one of which is that it would require 
joint rulemaking by the Federal financial institutions, which 
sort of gets back to the flip side of the reason that we would 
like a single integrated unit because the examples of joint 
rulemaking by the financial regulators has been gridlock and a 
great race to the bottom, so the devil will be in the details. 
This law could be very good if those regulations turn out well, 
but one of the provisions in it is a joint rulemaking process 
that could basically mean it is a paper tiger.
    Mr. Bachus. Okay. Thank you.
    Mr. Miller of North Carolina. I like calling time on 
members who are much more senior than I am on this committee. 
We do need to try to get done before this series of votes. It 
is a real series of votes, not a temper tantrum of votes.
    For Ms. Keest and Mr. Plunkett, one series of questions, or 
one point repeatedly made today, is that consumer protection is 
a vague concept for which Congress should enact very bright 
line rules, which is somewhat contrary to the wisdom of 
previous generations.
    There was a famous 18th Century British case widely quoted 
in the United States that said that there should be no single, 
all-encompassing definition of ``fraud'' less the craft of men 
should find a way of committing fraud which might escape such a 
rule or definition. One of the principal functions of financial 
innovation in recent years appears to be to evade existing 
regulations.
    In your experience, Ms. Keest and Mr. Plunkett, how easy 
has it been to get legislation through Congress to protect 
consumers from financial practices?
    Mr. Plunkett. Well, Congressman, until this year, it has 
been virtually impossible.
    Ms. Keest. I would like to say that I was here 15 years ago 
when HOEPA was enacted. HOEPA did a good job of dealing with 
1993's and 1994's markets. It is 15 years later, and we have 
had several more generations of things that nobody would have 
even thought of then, and there has still been no action coming 
out of the whole Congress.
    Mr. Miller of North Carolina. So the craft of men has found 
ways of escaping the rules of 15 years ago.
    Mr. Tyler and Mr. Hughes, quickly, I think both of you or 
several witnesses have used the word ``robust,'' which is a 
word you hear a lot more in Washington than you do in the rest 
of America to refer to insurance regulation. About an equal 
number of States have file and use policy form approvals and 
require prior approval for policies. It is striking how 
different that regulatory scheme is from credit products.
    Can you offer any explanation for why a similar regulatory 
regime should not be in effect for approving or for at least 
requiring information about new credit products?
    Mr. Tyler, you are on.
    Mr. Tyler. Well, thank you, Congressman. You are right. 
States have made different choices about these things, but it 
would be a mistake, I would suggest, to look only at what the 
file and approval laws or procedures are in States. You would 
also need to take into account that all States have an Unfair 
Claims Practices Act and other consumer protections, which are 
the fabric of consumer protection. So whatever process a 
particular State has chosen for the initial approval of 
products, that is not the sum total of the regulatory regime.
    Mr. Miller of North Carolina. But my question is:
    Why should other financial institutions credit 
institutions--banks, thrifts, credit unions, whoever? Why 
should they not be required to file what credit products they 
are selling to consumers? Here are the documents just as you 
have to get filings of policy forms. It seems not to require 
anything they do not already do.
    Mr. Tyler. With all due respect, I am not really qualified 
to speak about what banks should do. My point, really, is that 
insurance should not be part of this.
    Mr. Miller of North Carolina. Mr. Hughes, can you think of 
any reason that banks and thrifts should not be subjected to 
the same kinds of approvals that you are for what they sell to 
consumers?
    Mr. Hughes. Again, like Commissioner Tyler, that is not our 
association's area of expertise, but off the top of my head, I 
would have to say no.
    Mr. Miller of North Carolina. All right. I will now yield 
back the balance of my time.
    Mr. Manzullo?
    Mr. Manzullo. Thank you.
    I do not believe we should start a whole new consumer 
agency to protect the consumer on financial products. However, 
the analysis done by Mr. Plunkett and Ed, I would commend that 
everybody on the panel read the reasons why they want to set up 
a new organization because of the complete failure of the 
existing organizations to stop the subprime massacre that took 
place in the country. So I can understand where they are coming 
from, but it is irrelevant to you guys on the insurance side.
    I would like to ask this question of Mr. Plunkett. On page 
3, the last paragraph, you state that the failure of Federal 
banking agencies to stem subprime mortgage lending abuses is 
fairly well-known. They did not use a regulatory authority 
granted to them to stop unfair and deceptive lending practices 
until it was too late.
    You are advocating the setting up of another agency. I can 
understand the reason for that because what is there did not 
step into the breach. I mean the Fed had the authority, and Mr. 
Greenspan could have stopped it. Most of this occurred before 
Mr. Bernanke came on board, because there were no rules that 
said that you had to have proof of payment or proof of your 
income before you could buy a house or could do away with these 
predatory practices of 3/27 and 2/28 mortgages.
    My concern is, even though the appointees to this new body 
would be ``consumer-oriented,'' I would think that, ultimately, 
the bottom line is everything should be consumer-oriented 
because it is the consumer who has the greatest stake in the 
banks and in the other financial institutions being sound and 
safe. It protects them. So there is actually an identity of 
interest that is involved.
    Mr. Plunkett, what would make this new agency political 
proof or able to do the job or to recognize what the other 
agencies did not?
    Mr. Plunkett. Well, that is a very good question.
    There was at its root a failure of will by Federal 
regulators, but that was, as I mentioned before, exacerbated 
and magnified by really serious structural problems in the ways 
that agencies are structured--two points here, the conflict 
that regulators sometimes see between safety and soundness 
regulation and consumer protection regulation and the ability 
of regulated parties to shop around for a regulator who would, 
you know, essentially, lower standards, you know, to a reduced 
level.
    Mr. Manzullo. But the President wants to combine OTS along 
with OCC. So that would do away with that problem.
    Mr. Plunkett. To some extent, it would, but we still need 
an agency with purview over all credit products, looking at 
them all together, and that has a mission to be a proactive 
regulator, not a reactive regulator.
    Mr. Manzullo. Let me flip the question.
    If you believe, as I do, that you do not need another 
agency, what would you do with the present structure to make 
sure this economic collapse did not occur again?
    Mr. Plunkett. Well, that is another really thoughtful 
question, and I know a lot of folks who testified on the 
previous panel and on this panel have thought a lot about it.
    I, frankly, think that the existing structure is broken and 
that we cannot really build on a regulatory structure in which 
the regulators have so many sometimes conflicting measures--
    Mr. Manzullo. You think it cannot be fixed in its present 
form. Is that your answer?
    Mr. Plunkett. Yes. Yes. I think we need a consumer focus 
here, and the best way to do that is with a single agency.
    Mr. Manzullo. How could you add a consumer focus to the 
broken agencies?
    Mr. Plunkett. Well, I have thought a lot about that.
    Mr. Manzullo. If your answer were that you cannot, I would 
accept that, but go ahead and take a stab at it.
    Mr. Plunkett. I think a lot of people have thought about 
that. The truth is that, in the safety and soundness mission 
and in the case of the Fed with the monetary policy mission, 
you know, you will get good leaders who at times will focus a 
little more on consumer protection. Chairman Bernanke has done 
a little more of that, and that is a good thing.
    Overall, I think the way that agencies like that will 
typically function is to put consumer protection in the 
backseat. I think that is the normal, sort of everyday way that 
they will function, and we cannot legislate based on 
exceptions, and Ellen Seidman is an exception.
    Mr. Manzullo. My time has expired. Thank you, Mr. Chairman.
    Mr. Miller of North Carolina. Thank you.
    Ms. Speier, a conscientious member of this committee, who 
missed the first round of questions. Ms. Speier for 5 minutes.
    Ms. Speier. Thank you, Mr. Chairman.
    Let me be very brief because I know we want to get to the 
vote, and I know there are others who want to ask questions.
    First, let me just say that I disagree with my 
distinguished chairman, Mr. Kanjorski, who does not believe as 
I do that State regulation is really where insurance regulation 
should take place. I am a firm believer that it should. I think 
the actions of the last few years make it very clear, 
particularly with AIG. Mr. Liddy has said over and over again 
that we should have stuck to our knitting, meaning they should 
have stayed in the insurance business and not meandered out 
into credit default swaps and into other exotica, but let me 
ask this:
    Mr. Hughes, Ms. Weatherford and Mr. Wilson, if insurance 
were exempted in this new agency, would you support the bill?
    Mr. Hughes. Well, I think, if insurance were exempted and 
we were not part of it and if there were other aspects of the 
bill, for example, and if the Office of National Insurance were 
part of it, then perhaps, yes, we would.
    On the new agency specifically, if we are not part of it, 
we will not have any interest in it, but if there are other 
aspects of the Administration's proposal that we do favor and 
if we were not part of the agency, then, in fact, we would be 
inclined to be supportive, yes.
    Ms. Speier. Ms. Weatherford?
    Ms. Weatherford. Our association represents financial 
security products, which are very different from the debt 
instruments that have been discussed by most of the panelists 
today, and we are already under the oversight of State 
insurance regulators--the SEC and FINRA--and fully believe that 
we should be exempted.
    Ms. Speier. I understand that, but would you support the 
bill if you were exempted?
    Ms. Weatherford. If the Office of National Insurance were 
included, if Representative Kanjorski's language for his bill 
possibly had some of that in there where we could enjoy having 
some Federal knowledge of insurance and insurance regulation, I 
think it would be most helpful to us.
    Ms. Speier. Wait. Are you saying that, if there were a 
national charter for insurers, then you would want to be 
exempted from this insurance being part of it?
    Ms. Weatherford. No. We could support it if there were the 
inclusion of the Office of National Insurance or of the Office 
of National Insurance Information where more knowledge was held 
at the Federal level about insurance regulation.
    Ms. Speier. So, if it were just the Office of Insurance 
Regulation and not the preemption of States relative to 
international treaties and agreements, you would support this 
bill?
    Ms. Weatherford. I suppose, yes, we would, other than the 
fact that many of the aspects of the bill are about debt 
instruments and apply to other entities that have nothing to do 
with insurance.
    Ms. Speier. All right. Finally.
    Mr. Wilson. We would support the same position as Mr. 
Hughes. If there is not insurance as a part of it, we would 
have no position.
    Ms. Speier. You all are supporters of an OFC; is that 
correct? I am speaking of just--not Mr. Commissioner.
    Mr. Tyler. Surprisingly, I am not.
    Mr. Hughes. Yes, we are.
    Ms. Weatherford. My association has taken no position on 
the Federal chartering legislation. We are already enjoying 
dual regulation, Federal and State, today, but we have not 
taken a position on Federal chartering for the insurance 
industry.
    Mr. Wilson. We have a position that we could support the 
concept with conditions, ``conditions'' being choice for the 
agent, consumer protection and to retain State-based as well, 
and so we have a dual position, a dual system of a position. So 
based on those conditions--
    Ms. Speier. Meaning that you could forum shop then?
    Mr. Wilson. Well, some of the parts of our industry have 
different needs and different circumstances, and with basic 
conditions of enhanced consumer protections and to retain 
State-based, we could support the concept.
    Ms. Speier. All right. Thank you.
    I yield back.
    Mr. Miller of North Carolina. Thank you, Ms. Speier.
    Mr. Sherman for 5 minutes.
    Mr. Sherman. I will try not to take all 5 minutes. I am 
going to ask you folks to respond for the record because I do 
have this dream of making the votes.
    When I was dealing with the first panel, I focused on the 
fact that what we have seen in this country over the last 50-
plus years is a transfer of power from the Legislative Branch 
to the Executive Branch, including Executive agencies. The 
question is:
    Are we here to create a law enforcement agency, which is 
the appropriate role of the executive branch, or a law-making 
agency, which is a way for us to simply, again, transfer the 
powers vested in us by article I to the article II agencies? I 
am speaking of the U.S. Constitution.
    Now, one way is--and this will be the question I would like 
you to respond to, and I will just use this as a specific. We 
passed a credit card bill through Congress. Normally, that is 
thought to be Congress' role. Of course, the Fed kind of had 
some regulations along the same lines.
    If we create this new agency, will it have the power to add 
to the Credit Cardholders Bill of Rights a provision limiting 
total interest rate--an interest rate cap? In other words, we 
thought of an interest rate cap. We did not put it in the law, 
but could this agency do it?
    Likewise, second, we specifically prevented double-cycle 
billing. Could this agency decide that it is in the interest of 
consumers to allow double-cycle billing? Let's not assume that 
every commissioner who is ever going to be appointed to this 
board is going to be certified by the Consumer Federation. I 
have seen the pendulum swing back and forth.
    Finally, do you envision that we pass legislation that is 
simply so incredibly vague that the commission does not know 
whether it has the authority to either allow double-cycle 
billing or to cap interest rates? Should we here not only punt 
our authority to an administrative agency but punt on the issue 
of whether we are even doing that or not by making it so 
unclear that the agency's powers are in question?
    The second question relates to the move here to separate 
consumer protection on the one hand with prudential or safety 
and soundness regulation on the other. With Fannie and Freddie, 
I see we used to have those two separated, and with OFHEO, we 
seem to have put them together. Now, with this bill, we are 
taking them--the prudential regulation and the compliance and 
consumer protection regulation--and separating it.
    So the first question is: Is this a departure from recent 
precedent?
    The second question is: If we separate compliance and 
oversight from prudential oversight, it can be expected that 
there might be conflicting mandates from the two separate 
regulators that a particular financial institution has to 
answer to. What does the regulated institution do in such a 
situation? How will these conflicts be addressed?
    So one question is about the role of Congress. Another 
question is about whether it is best to sever compliance and 
prudential oversight. If we are going to separate them, how do 
we work out the conflicting demands of two regulatory agencies, 
both with power over the same financial institution?
    Rather than miss the vote, I am going to ask you to respond 
in writing, not only to protect my voting record, but that of 
the chairman's.
    I yield back.
    Mr. Miller of North Carolina. Thank you, Mr. Sherman.
    That ends the questioning of this panel. On behalf of Mr. 
Frank and all of the members of the committee, I want to thank 
all of the witnesses for your testimony today.
    The Chair notes that some members may have additional 
questions for this panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to this 
panel and to place their responses in the record.
    This hearing is adjourned.
    [Whereupon, at 2:09 p.m., the hearing was adjourned.]


                            A P P E N D I X


                             June 24, 2009

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