[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
U.S. GOVERNMENT PRINTING OFFICE
52-406 PDF WASHINGTON : 2009
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]