[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
THE PROPOSED CONSUMER FINANCIAL PROTECTION AGENCY: IMPLICATIONS FOR
CONSUMERS AND THE FTC
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COMMERCE, TRADE,
AND CONSUMER PROTECTION
OF THE
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
JULY 8, 2009
__________
Serial No. 111-57
Printed for the use of the Committee on Energy and Commerce
energycommerce.house.gov
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COMMITTEE ON ENERGY AND COMMERCE
HENRY A. WAXMAN, California, Chairman
JOHN D. DINGELL, Michigan JOE BARTON, Texas
Chairman Emeritus Ranking Member
EDWARD J. MARKEY, Massachusetts RALPH M. HALL, Texas
RICK BOUCHER, Virginia FRED UPTON, Michigan
FRANK PALLONE, Jr., New Jersey CLIFF STEARNS, Florida
BART GORDON, Tennessee NATHAN DEAL, Georgia
BOBBY L. RUSH, Illinois ED WHITFIELD, Kentucky
ANNA G. ESHOO, California JOHN SHIMKUS, Illinois
BART STUPAK, Michigan JOHN B. SHADEGG, Arizona
ELIOT L. ENGEL, New York ROY BLUNT, Missouri
GENE GREEN, Texas STEVE BUYER, Indiana
DIANA DeGETTE, Colorado GEORGE RADANOVICH, California
Vice Chairman JOSEPH R. PITTS, Pennsylvania
LOIS CAPPS, California MARY BONO MACK, California
MICHAEL F. DOYLE, Pennsylvania GREG WALDEN, Oregon
JANE HARMAN, California LEE TERRY, Nebraska
TOM ALLEN, Maine MIKE ROGERS, Michigan
JANICE D. SCHAKOWSKY, Illinois SUE WILKINS MYRICK, North Carolina
CHARLES A. GONZALEZ, Texas JOHN SULLIVAN, Oklahoma
JAY INSLEE, Washington TIM MURPHY, Pennsylvania
TAMMY BALDWIN, Wisconsin MICHAEL C. BURGESS, Texas
MIKE ROSS, Arkansas MARSHA BLACKBURN, Tennessee
ANTHONY D. WEINER, New York PHIL GINGREY, Georgia
JIM MATHESON, Utah STEVE SCALISE, Louisiana
G.K. BUTTERFIELD, North Carolina
CHARLIE MELANCON, Louisiana
JOHN BARROW, Georgia
BARON P. HILL, Indiana
DORIS O. MATSUI, California
DONNA CHRISTENSEN, Virgin Islands
KATHY CASTOR, Florida
JOHN P. SARBANES, Maryland
CHRISTOPHER S. MURPHY, Connecticut
ZACHARY T. SPACE, Ohio
JERRY McNERNEY, California
BETTY SUTTON, Ohio
BRUCE BRALEY, Iowa
PETER WELCH, Vermont
(ii)
Subcommittee on Commerce, Trade, and Consumer Protection
BOBBY L. RUSH, Illinois
Chairman
JAN SCHAKOWSKY, Illinois CLIFF STEARNS, Florida
Vice Chair Ranking Member
JOHN SARBANES, Maryland RALPH M. HALL, Texas
BETTY SUTTON, Ohio DENNIS HASTERT, Illinois
FRANK PALLONE, New Jersey ED WHITFIELD, Kentucky
BART GORDON, Tennessee CHARLES W. ``CHIP'' PICKERING,
BART STUPAK, Michigan Mississippi
GENE GREEN, Texas GEORGE RADANOVICH, California
CHARLES A. GONZALEZ, Texas JOSEPH R. PITTS, Pennsylvania
ANTHONY D. WEINER, New York MARY BONO MACK, California
JIM MATHESON, Utah LEE TERRY, Nebraska
G.K. BUTTERFIELD, North Carolina MIKE ROGERS, Michigan
JOHN BARROW, Georgia SUE WILKINS MYRICK, North Carolina
DORIS O. MATSUI, California MICHAEL C. BURGESS, Texas
KATHY CASTOR, Florida
ZACHARY T. SPACE, Ohio
BRUCE BRALEY, Iowa
DIANA DeGETTE, Colorado
JOHN D. DINGELL, Michigan (ex
officio)
C O N T E N T S
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Page
Hon. Bobby L. Rush, a Representative in Congress from the State
of Illinois, opening statement................................. 1
Prepared statement........................................... 4
Hon. George Radanovich, a Representative in Congress from the
State of California, opening statement......................... 11
Hon. Henry A. Waxman, a Representative in Congress from the State
of California, opening statement............................... 12
Hon. Cliff Stearns, a Representative in Congress from the State
of Florida, opening statement.................................. 13
Hon. John D. Dingell, a Representative in Congress from the State
of Michigan, opening statement................................. 14
Hon. Ed Whitfield, a Representative in Congress from the
Commonwealth of Kentucky, opening statement.................... 16
Hon. Janice D. Schakowsky, a Representative in Congress from the
State of Illinois, opening statement........................... 17
Hon. Joe Barton, a Representative in Congress from the State of
Texas, opening statement....................................... 18
Hon. Gene Green, a Representative in Congress from the State of
Texas, opening statement....................................... 19
Hon. Joseph R. Pitts, a Representative in Congress from the
Commonwealth of Pennsylvania, opening statement................ 20
Hon. Doris O. Matsui, a Representative in Congress from the State
of California, opening statement............................... 21
Hon. Betty Sutton, a Representative in Congress from the State of
Ohio, opening statement........................................ 22
Hon. Kathy Castor, a Representative in Congress from the State of
Florida, opening statement..................................... 23
Hon. Steve Scalise, a Representative in Congress from the State
of Louisiana, opening statement................................ 24
Hon. G.K. Butterfield, a Representative in Congress from the
State of North Carolina, opening statement..................... 25
Witnesses
Michael Barr, Assistant Secretary for Financial Institutions,
Department of the Treasury..................................... 26
Prepared statement........................................... 30
Answers to submitted questions............................... 189
Jon Leibowitz, Chairman, Federal Trade Commission................ 47
Prepared statement........................................... 50
Answers to submitted questions............................... 202
Gail Hillebrand, Senior Attorney and Manager, Financial Services
Campaign, Consumers Union...................................... 80
Prepared statement........................................... 83
Answers to submitted questions............................... 257
Stephen Calkins, Esq., Associate Vice President for Academic
Personnel and Professor of Law, Wayne State University......... 107
Prepared statement........................................... 108
Answers to submitted questions............................... 261
Prentiss Cox, Associate Clinical Professor of Law, University of
Minnesota...................................................... 120
Prepared statement........................................... 122
Answers to submitted questions............................... 267
Rachel E. Barkow, Professor of Law, New York University School of
Law............................................................ 137
Prepared statement........................................... 139
Answers to submitted questions............................... 270
Chris Stinebert, President and CEO, American Financial Services
Association.................................................... 154
Prepared statement........................................... 156
Submitted Material
Statement of J. Thomas Rosch, Federal Trade Commission........... 177
THE PROPOSED CONSUMER FINANCIAL PROTECTION AGENCY: IMPLICATIONS FOR
CONSUMERS AND THE FTC
----------
WEDNESDAY, JULY 8, 2009
House of Representatives,
Subcommittee on Commerce, Trade,
and Consumer Protection,
Committee on Energy and Commerce,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:10 a.m., in
Room 2123 of the Rayburn House Office Building, Hon. Bobby L.
Rush [Chairman of the Subcommittee] presiding.
Members present: Representatives Rush, Schakowsky,
Sarbanes, Sutton, Green, Gonzalez, Butterfield, Barrow, Matsui,
Castor, Space, DeGette, Dingell, Waxman (ex officio),
Radanovich, Stearns, Whitfield, Pitts, Terry, Gingrey, Scalise
and Barton (ex officio).
Staff present: Anna Laitin, Professional Staff; Will Casey,
Special Assistant; Michelle Ash, Chief Counsel; Timothy
Robinson, Counsel; Marc Groman, Counsel; Stephanie Bazell,
Intern; Caren Auchman, Communications Associate; Bruce Wolp,
Senior Adviser; Phil Barnett, Staff Director; Jeff Wease,
Deputy Information Officer; Earley Green, Chief Clerk; Brian
McCullough, Senior Professional Staff; Shannon Weinberg,
Counsel; Will Carty, Professional Staff; and Sam Costello,
Legislative Assistant.
OPENING STATEMENT OF HON. BOBBY L. RUSH, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ILLINOIS
Mr. Rush. The Subcommittee on Commerce, Trade and Consumer
Protection will now come to order.
The purpose of today's hearing is to hear witnesses on the
subject of the proposed Consumer Financial Protection Agency,
implications for consumers and the FTC. I certainly want to
welcome all the witnesses, Mr. Barr and Chairman Leibowitz. The
Chair recognizes himself for 5 minutes for the purposes of an
opening statement.
I would like to thank all my colleagues and all the
witnesses who diligently worked to prepare testimony over the
Fourth of July holiday so that today's hearing would be as
meaningful as possible as we commence our examination of the
Administration's proposal to create a new Consumer Financial
Protection Agency. My view on the matter is fairly
straightforward. I believe that the FTC should remain intact as
it is currently constituted and that this committee and
subcommittee should continue to oversee and authorize the FTC.
The Commission, which was established in 1914 during our
Nation's Progressive Era, was designed to be a regulatory
agency with disinterested expertise to ensure compensation and
to promote free enterprise. That mission and those prescient
concerns are as vital today as they were almost a century ago.
The Commission operates best as a lone eagle. From high above,
the agency can survey the marketplace and swoop down on
predators that deceive unsuspecting and misinformed consumers.
The higher and farther away that the FTC is from other agencies
and the entities that it regulates, the better it is at
spotting unfair commercial and trading practices and at
isolating those practices that cast the longest shadows.
Similarly, by staying at a distance, the agency can keep would-
be credit captors at bay while staying on course to achieve its
critical mission of protecting consumers.
Looking at all reliable indicators, the commission has
performed commendably for a small and scrappy staff and
abridged powers, working alone with a five-person bipartisan
commission, possibly 1,100 dedicated employees spread out
across three bureaus: Bureau of Competition, Consumer
Protection and Economics. Although its expertise is deep and
broad, the FTC's statutory tools under the FTC Act consist of
an antiquated and cumbersome of rulemaking under the Magnuson-
Moss Act paired with anemic litigation authority. These two may
be successful at landing glancing blows but they fail to pack a
full punch of detergents that businesses will respect and
consumers deserve. Currently at the FTC's disposal are its
expertise and its agency crafted instruments of research,
policy and study development, consumer compliant and education,
competition, legal analysis and economics. While the FTC does
well, it has done without power relative to its sister
agencies, and what it hasn't done particularly well is in the
process of being fixed.
Just a few weeks ago, our subcommittee worked intently to
mark up H.R. 2309, the Credit and Debt Protection Act, which
directs the FTC to adopt rules using APA rulemaking authority
that would address rampant unfair and deceptive practices in
the area of payday lending, automobile financing, mortgage and
foreclosure rescue and debt settlement. Our subcommittee's
objective in passing H.R. 2309 was to confer more authority
upon the FTC and to equip it with sufficient resources so that
it could adopt rules faster in the areas of credit and debt
through APA rulemaking procedures and bring enforcement action
through the threat of civil penalties. Our committee had worked
devotedly in the past more than a few times with members from
the Financial Service Committee to bolster the FTC's
shortcomings, hold out the FTC's best practices for banking
agencies to emulate and protecting consumers and to improve the
ability of bank regulatory agencies to protect consumers by
ensuring unfair and deceptive rules under the FTC Act. I have
witnessed the respective chairs of the Committees on Energy and
Commerce and Financial Services jointly introduce H.R. 3525 to
tackle some of these challenges.
Further, I offered a further amendment to H.R. 3526, which
was introduced by the chair of the Financial Services Committee
in the 110th Congress to require that a GAO report
investigating federal banking and credit union regulations and
the perpetuation of unfair and deceptive acts and practices by
depository institutions. Importantly, this push and pull
between our respective committees has pressured providers of
financial services and products including banks and depository
institutions to balance the allure of profits and determination
of safety and soundness against the needs of consumers. This
collaborative working relationship between committees has
produced good and sustainable consumer protection bills to
safeguard consumers of financial services and of consumer
credit products and is a vital example of the independent
agencies that would be affected by the Administration's
proposal as it will allow each of them to maintain their
independence and respective biases and expertise when
addressing serious problems that cut across sectors and affect
market supplies and consumers.
I want to thank the witnesses for being here today, for
taking the time out from their busy schedules to participate in
this hearing. With that, I yield back the balance of my time.
[The prepared statement of Mr. Rush follows:]
Mr. Rush. The Chair now recognizes the gentleman from
California, the ranking member, Mr. Radanovich for 5 minutes
for the purposes of an opening statement.
OPENING STATEMENT OF HON. GEORGE RADANOVICH, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Radanovich. Thank you, Mr. Chairman, good morning. I
appreciate your calling today's hearing on this important
topic.
Whenever something goes wrong in this country, Washington
proposes a solution regardless of whether the situation calls
for one. However well-intentioned our actions, they rarely work
out because they are often undertaken as a knee-jerk response.
We have seen many unintended consequence of rush to legislation
in recent history, for example, the Sarbanes-Oxley Act. At
best, we have seen marginal improvements in the markets
diverting billions of dollars toward new compliance costs to
the detriment of many small- and medium-sized businesses. In
another example, last Congress we enacted a law in response to
lead paint on toys. The paint violated an existing standard but
what was a compliance problem rather than a deficient standard
problem led to numerous costly new mandates that put many
small- and medium-sized businesses out of business because the
cost was too high without any corresponding increase in safety.
This is not to say that weaknesses in our financial system
don't exist; they obviously and clearly do. The failure of so
many financial institutions and the ongoing problem of
foreclosures on mortgages some borrowers never should have
taken out are evidence of that, and if the bailout of banks and
financial firms really were necessary to save the financial
system, something clearly needs to be done to address the
systematic risk.
Additionally, fraud and deception by both lenders and
borrowers in the mortgage market ran rampant. The FBI reported
an increase in fraud by more than 400 percent since 2005. Few
people question anything was wrong in the market until home
prices started plummeting and borrowers began defaulting. If
uniformity in the enforcement of existing laws can address
these problems, I would support that. Apart from the lack of
systemic risk regulation to prevent future financial collapses
required in the taxpayer bailout, I am still trying to
understand what holes exist in the FTC's consumer protection
authority and to what extent the government contributed to the
crisis with its intervention in housing policy. I am far from
convinced that the market problems require the creation of a
new federal regulator as contemplated by the Administration's
proposal.
Fannie Mae and Freddie Mac are under government control in
part because they did exactly what Congress and the government
wanted: extend home ownership to as many people as possible
under the watch of the federal regulators. Fannie and Freddie
along with the federal housing agencies and programs were
encouraged to extend credit, and when they did, their
shareholders played the price for failing. To accomplish the
policy goal of extending home ownership to as many people as
possible, changes in lending standards had to occur. The
lowering of lending standards meant more borrowers qualified
for loans they couldn't afford. My point is that laws on the
books didn't stop people from taking out risky mortgages,
either in spite of or because of rapidly increasing home
prices, nor has it stopped regulators and law enforcement from
prosecuting those who we now know committed fraud and broke the
law.
While many experts believe that the banking regulators
performed their duties inadequately, I will leave that to the
Financial Services Committee to decide. But with regard to the
FTC, it seems to me that we are throwing out the baby with the
bathwater by stripping the authority over consumer protection
for financial products and services from the one agency that
has performed well. If we agree we need legislation, we should
take the approach of legislating with a scalpel rather than
with a bulldozer.
With that said, I have two primary concerns with this
proposal. First, it creates a new federal entity with an
enormous scope of authority. The proposal grants sweeping
authority to a new agency over financial products that would
cover every sector of the economy. As I understand it, the
draft legislation would touch everyone from a certified public
accountant to a realtor and subject them to a new tax to fund
the agency.
Second, I am concerned about transferring functions from
the FTC to a new agency without any evidence that it is
necessary or that it will be as effective as a regulator as the
FTC is. By removing the FTC's authority, we could lose the
FTC's unique expertise in balancing consumer protection and
competition.
Finally, the legislation contains several new broad
authorities for the FTC regarding rulemaking authority and
civil penalty authority. I have previously disagreed with these
and do not need to repeat them at this time. However, I do have
some questions of the witnesses regarding these provisions and
I will ask them when they are appropriate.
I want to welcome the members to the panel as well and
yield back, Mr. Chairman.
Mr. Rush. The Chair thanks the gentleman. The chairman of
the full committee is recognized for purposes of opening
statement for 5 minutes.
OPENING STATEMENT OF HON. HENRY A. WAXMAN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Waxman. Thank you very much. I want to thank you, Mr.
Chairman, for holding this important hearing.
Last year, as chairman of the House Oversight Committee, I
held several hearings examining the causes of the financial
crisis. Those hearings revealed a government regulatory
structure that was unwilling and unable to meet the
complexities of the modern economy. We found regulatory
agencies that had fully abdicated their authority over banks
and had done little or nothing to curb abusive practices like
predatory lending. The prevailing attitude was that the market
always knew best. Federal regulators became enablers rather
than enforcers.
The Obama Administration has developed an ambitious plan to
address these failures and to strengthen accountability and
oversight in the financial sector. Today's hearing will take a
close look at one piece of that plan, the proposal to create a
single agency responsible for protecting consumers of financial
products. A new approach is clearly warranted. The banking
agencies have shown themselves to be unwilling to put the
interests of consumers ahead of the profit interests of the
banks they regulate and the structure and division of
responsibilities among these agencies has led to a regulatory
race to the bottom. The Federal Trade Commission has taken
steps to protect consumers but its jurisdiction is limited and
it has been hampered by a slow and burdensome rulemaking
process.
I am pleased that this subcommittee is holding today's
hearing and examining the Administration's proposal carefully.
There are two areas of which attention and focus from this
committee are particularly needed. First, the new agency must
be structured to avoid the failures of the past. It only makes
sense to create a new agency if that new agency will become a
strong, authoritative voice for consumers. And second, we must
ensure that the Federal Trade Commission is strengthened, not
weakened, by any changes. Unlike the banking agencies, FTC has
consumer protection as its core mission.
In recent months, FTC has taken great strides to protect
consumers of financial products, bringing enforcement actions
against fraudulent debt settlement companies and writing new
rules governing mortgages. The Administration's proposal would
give most of the FTC's authority over financial practices and
some of FTC's authority over privacy to the new agency. At the
same time, the Administration proposes improving FTC's
rulemaking authority and enforcement capabilities. It is not
clear what impact these proposals would have on FTC or its
ability to perform its consumer protection mission. As we build
a new structure for protecting consumers of financial products,
it is our responsibility to ensure that we do not weaken the
agency currently responsible for consumer protections in this
and many other areas.
Once again, I thank Chairman Rush for holding this hearing.
I welcome our witnesses to the committee and look forward to
their testimony.
Mr. Rush. The Chair thanks the chairman of the full
committee, and now the Chair recognizes the gentleman from
Florida, Mr. Stearns, for 2 minutes for the purposes of opening
statement.
OPENING STATEMENT OF HON. CLIFF STEARNS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF FLORIDA
Mr. Stearns. Good morning, and thank you, Mr. Chairman.
This is a very important hearing. It is important for us as
members of this subcommittee, and Mr. Chairman, in terms of our
jurisdiction and what the implications are for jurisdiction in
the future. The Administration's newly proposed CFPA, or the
Consumer Financial Protection Agency, is relevant. It is an
idea that a lot of us have mixed reactions. It has implications
for our subcommittee. Although this is only one component of
the Administration's broad-reaching financial regulatory reform
proposal, it certainly is an important part of that overall
program and it needs detailed examination.
We must carefully consider the long-term effects that this
will have on the Federal Trade Commission, the consumers it is
charged with protecting and on industry. Currently, the Federal
Trade Commission has broad authority to protect consumers from
unfair and deceptive practices in the credit and debt areas,
and the FTC has notably been an effective and reliable agency
in terms of consumer protection. We have seen it in this
subcommittee. However, this new agency, the CFPA, proposal
strips the Federal Trade Commission of virtually all of its
consumer protection authorities pertaining to financial
practices and even some of its privacy protection authority.
So, Mr. Chairman, I think that has to be a concern.
The proposal compensates for this shifting of authority by
granting the Federal Trade Commission streamlined
Administrative Procedures Act, APA, rulemaking authority and
the ability to seek civil penalties against unfair and
deceptive practices. But this is a term of which there is no
clear definition as well as making it unlawful to ``aid and
abet'' in deceptive acts. So due to the shifting of power and
the potential economic consequences of businesses, we must
ensure that effective stakeholders have a voice at the table
but ultimately we need to be sure that the CFPA, the new
agency, will be an agency designed to do what is in the best
interests of the consumers and not what is in the best interest
of the bureaucrats who run it.
One other concern I would have, Mr. Chairman, with the APA
is it has 180 days for consideration. Is this sufficient time
under the Magnuson-Moss Act rulemaking requirements included a
public hearing and so, Mr. Chairman, perhaps as this bill moves
along we might want to include some kind of public hearing as
well as this 180 days of consideration.
With that, I yield back the balance of my time.
Mr. Rush. The Chair thanks the gentleman. The Chair now
recognizes the gentleman from Michigan, the chairman emeritus
of the full committee, my friend, Mr. John Dingell, for 5
minutes for opening statement.
OPENING STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MICHIGAN
Mr. Dingell. Mr. Chairman, I thank you, and I commend you
for this hearing. It is a very important one. It follows on a
series of events which began with a raid on this committee by
other committees and by the banking industry and by repeal of
Glass-Steagall, which removed all the penalties and
prohibitions against many of the illegal activities which
brought us to the current lowest state in which we find
ourselves financially and economically. At the Treasury
Department, there was an office still in being called the
Controller of the Currency, who pushed to totally deregulate
banks and to unlearn the lessons which we learned during the
Depression and to permit the abuses which the Pecora Commission
found to be a problem, things which brought about the 1929
crash, and lo and behold, the failure to learn those lessons or
to preserve the protections which the Congress and the
President in the 1930s put into place led to the economic
collapse which occurred in the United States in the last
calendar year and this calendar year.
So the questions that we will be concerned with are going
to be, are consumers protected, is the Federal Trade Commission
able to continue doing the work that it does to protect
consumers, and this committee is going to concern ourselves
this morning with these issues and means by which to ensure
improved consumer protections continue to exist with regard to
financial products and services and to see to it that the
Federal Trade Commission is able to carry out the
responsibilities which in a rather contemptible fashion were
disregarded by the SEC and also by the Controller of the
Currency.
Now, we need to know if our concerns here and the pause
which it gives us occurs in part because of a transfer of
existing authority from the Federal Trade Commission to a newly
minted Consumer Financial Protection Agency, an agency whose
behavior we don't know but an agency which is going to probably
be composed of many of the goodhearted people who have brought
us to this curious and unfortunate state of events. I will be
truthful: I have significant concerns about these plans and I
will be intending to engage today's witnesses in a frankly
discussion about their merits. The Administration, which has no
fault in the events of the deregulation and the collapse of the
American economy last year, envisions consolidating all
consumer protection functions related to financial products
including rulemaking, supervision, examination and enforcement
under the aegis of the new CFPA, which would receive sole
rulemaking enforcement authority over consumer financial
protection statutes such as the Truth in Lending Act. At first
glance, this strikes me as a dejure and possible unwarranted
reassignment of FTC's consumer protection authorities in the
financial services area. I will be looking to see whether this
is so and whether in fact is a good thing or can be justified
by the Administration.
While a comparatively small agency, it is to be observed
that FTC has some superb work in protecting consumers, and in
this the country would benefit not from a diminished mandate to
that agency but rather to additional statutory authority,
personnel and funding. Consequently, I have more than a modest
degree of skepticism regarding the Administration's proposal.
In brief, I wish for our witnesses to elucidate upon several
matters associated with the CFPA proposal.
First, if CFPA were mandated under law, what authorities
would be left to FTC and why would that occur. Second, what
latitude would FTC have in enforcing consumer protection
statutes as they relate to financial services, and what
consumer protection statutes would be denigrated or dissipated
under this proposal. Third, how would one characterize the
level of interagency cooperation in the drafting of the
Administration's proposal. Financially, if CFPA receives its
proposed mandate, what will become of this committee's
jurisdiction over consumer protection as designated under rule
10 of the House of Representatives? I will welcome the
witnesses' responses to these and other questions in order to
properly establish an adequate record for additional action by
the Congress if such is deemed necessary.
I would ask at this time that I have unanimous consent to
keep the record open to submit a list of questions to the
witnesses today and to have those responses and the questions
inserted into the record.
I want to commend you, Mr. Chairman, for your courtesy and
foresight in this hearing. I would conclude by a personal note
in welcoming Dr. Stephen Calkins, associate vice president for
academic personnel and professor of law at Wayne State
University in my home State of Michigan. His testimony has been
invaluable to my understanding of this matter and I look
forward to his participation in the continuing debate on
consumer financial protection, and I note, Mr. Chairman, that
my wife is a member of the Board of Governors of that great
institution, which gives me a particularly warm feeling about
it, and again, Mr. Chairman, I urge you and my colleagues to be
most diligent, most cautious, most careful and most dutifully
suspicious of the events that we inquire into today. Thank you.
Mr. Rush. The Chair thanks the chairman emeritus. The Chair
wants to put before the committee the UC request, and hearing
no objection, so ordered, the UC request by the chairman
emeritus. And the Chair also wants to take a moment of personal
privilege to celebrate the chairman emeritus's birthday and to
wish him a happy birthday, so we want you to know that we all
wish you a very happy birthday and many, many more.
Mr. Dingell. Mr. Chairman, I thank you for your kind
observations. At 83, a fellow is a little more careful about
celebrating his birthdays. The good news is, I am celebrating
my 83rd birthday. The bad news is that I am 83. I thank you,
Mr. Chairman, for your courtesy and I thank my friends for
their kindness and their courtesy.
Mr. Rush. Thank you. The Chair now recognizes the gentleman
from Kentucky, Mr. Whitfield, for 2 minutes for opening
statement. Excuse me. I didn't see Mr. Barton there. He just
walked in? OK. Mr. Barton is recognized.
Mr. Barton. Well, you can go to Mr. Whitfield. He was here
before me. I am fine with going to Ed and then come back to me
after the next----
Mr. Rush. You all worked that out then. OK. Mr. Whitfield.
OPENING STATEMENT OF HON. ED WHITFIELD, A REPRESENTATIVE IN
CONGRESS FROM THE COMMONWEALTH OF KENTUCKY
Mr. Whitfield. We are all very polite today so thank you
very much.
Mr. Chairman, I want to thank you also for holding yet
another important hearing examining the ongoing financial
crisis and ways we can help our constituents get through these
difficult times and mitigate future problems. Secretary
Geithner said that this new Consumer Financial Protection
Agency would have only one mission, and that is, to protect
consumers. It is also my understanding that this proposal would
eliminate the consumers protections at the FDIC, the Federal
Reserve Board, the Controller of the Currency, and the impact
on the FTC, perhaps we should explore expanding the authority
of the FTC.
Another problem that concerns me about the proposed
legislation is that there is no federal preemption of any State
law that is more stringent than the federal law, and anyone
that has gone through a mortgage process and when they hand you
the 45 pages of documents, you are going to find yourself
getting more documents if you have these conflicting State laws
on these consumer issues, and I think that is a real concern as
well.
But the problem that I have most of it, how much will this
cost? Every day we pick up another article in a newspaper,
growing national debt may be next economic crisis. Unless we
demonstrate a strong commitment to fiscal sustainability in the
longer term, we will have neither financial stability nor
healthy economic growth. Interest payments on the debt alone
last year were $452 billion. This year it is expected to be
$470 billion, the largest federal spending category after
Medicare, Medicaid, Social Security and defense. Another
article today, economist declares train wreck because out-of-
control federal budget deficits. The economist talks about the
real question is, how much damage will greater indebtedness do
to economic growth and government's credit worthiness. Those
things may transcend what limited additional protection
consumers get from this legislation. So I think we need to move
cautiously, find out how much costs are we talking about here
and what will the benefits be. Thank you, Mr. Chairman.
Mr. Rush. The Chair thanks the gentleman. The Chair now
recognizes the vice chair of the subcommittee, my friend from
Illinois, Congresswoman Schakowsky, for 2 minutes.
OPENING STATEMENT OF HON. JANICE D. SCHAKOWSKY, A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS
Ms. Schakowsky. Thank you very much, Mr. Chairman.
I just came from a roundtable on women's financial
literacy, clearly an important issue, but what we have found is
how daunting the environment has been for anyone who even is
pretty literate in financial issues. We have seen the
systematic production and marketing and sales of countless
financial products including mortgages that were extremely
risky, even downright dangerous for borrowers, and often it was
pretty hard to figure out what was what. For years bank and
non-bank lenders operated with too little oversight by
government regulators, and when regulation was taking place
there was little focus on whether the financial products and
services sold were safe for consumers.
The Federal Trade Commission, and I am so glad its chairman
is here today, is essentially the only agency with a mandate to
prioritize consumer safety and protect Americans from unfair or
deceptive practices, and I commend Chairman Leibowitz for his
renewed commitment to consumers' rights in the areas of credit
and debt. However, as has been mentioned, the FTC's
jurisdiction is limited to non-bank activities. The agency has
been hampered for decades by cumbersome rulemaking authority
and in recent years its actions were limited by the previous
Administration's general contempt for oversight of the private
sector.
Overall, current regulations aren't sufficient and they
aren't working. We can't maintain a system which neglects
consumer protection for the bulk of the financial service
industry. Americans deserve access to honest information that
will help them make educated decisions on mortgages, credit
cards and bank accounts. Dangerous financial products should be
kept off the markets and advertisers must be held accountable
for their claims. We have to move forward with these goals, and
I look forward to hearing today's testimony on how a consumer
financial protection agency might achieve them.
Thank you, and I yield back.
Mr. Rush. The Chair thanks the gentlelady. The Chair now
recognizes the ranking member for the full committee, the
humble and honorable Mr. Barton from Texas, for 5 minutes.
OPENING STATEMENT OF HON. JOE BARTON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF TEXAS
Mr. Barton. Well, thank you, Mr. Chairman. Before I give my
opening statement, let me amplify what you said about the
chairman emeritus, Mr. Dingell. Some people get 1 year of
experience and that is it. In his case, you could say that
would be 1 year 83 times. But in Mr. Dingell's case, each year
he adds it to the base where it compounds and amplifies by
orders of magnitude. I think you can honestly say that our
friend and chairman emeritus is the most influential Member of
Congress in our lifetime and it is such a privilege to have him
on our committee and it is really fun when he is on my side. It
is not so much when he is not on my side, but even then I learn
from him. So the heartiest congratulations from the minority to
a true gentleman of the House, the conveyor and the protector
of institutional viability for this body. We wish you many,
many more.
With regards to this hearing, Mr. Chairman, I would bring
the members' attention to today's Wall Street editorial op-ed
piece about the particular agency. It is entitled, ``Let us
treat borrowers like adults.'' It calls into question whether
there needs to be a super consumer financial products
protection agency which the legislation we are looking at today
would empower. We accept the intention as being honorable but
people like myself have extremely strong reservations about the
implementation of such an agency. What would the legislation
actually accomplish that some federal agency isn't already
attempting to do? We would like to know what is gone so wrong
with our existing protection agencies that we deem it necessary
to create another brand-new agency.
I am a bit taken back by the breadth of the proposed
coverage. This legislation, of course, relates a great deal to
banking and other financial institutions over which this
committee unfortunately has no jurisdiction, at least not now.
One never knows about the future. But it reaches beyond that.
It could reach accountants, auditors, gift cards, all other
types of institutions and entrepreneurial activities. It
doesn't fall strictly within our jurisdiction because it
applies to banks but it is still of concern. There seems to me
to be an exception that swallows the preemption rule. According
to the proposal, if I understand it correctly, State consumer
laws of general application and those State laws enacted
pursuant to federal law intended to, and I quote, ``exceed or
supplement federal law'' will now apply to any national bank.
The Harvard professor who is credited with inspiring this all-
inclusive consumer financial protection agency described the
need for it in her article, ``Unsafe at any Rate.'' Professor
Warren wrote that we need this agency in order to reverse
industry practices that make it difficult for consumers to
understand what they are getting in a financial product world,
for example, 30 pages of contract terms for a simple credit
card or 50 lines of convoluted and excessive text to explain
all required disclosures. I understand that. I just cosigned
for my stepdaughter's new condo in Austin, Texas, and it took
an hour of signing various documents, some of which were
documents I signed certifying that I just signed the previous
document. So I understand the need for simplicity and the need
for perhaps a review of some of the existing documents that we
are asked to sign but I am not sure that this agency gets
there.
This bill would assume that businesses and their customers
are eager to pay more for such protection, maybe even a lot
more, because there are no limits on the burdens to either.
There are all kinds of reports this new agency could mandate,
regular and special requests, but there are no limits to how
often the agency could require those reports, and there is no
mandate to consider the burden placed on the businesses to
produce these reports. The preemption provisions really convey
no preemption at all. In one paragraph, the proposal mandates
all State laws are preempted but only to the extent that they
conflict. In the next, the legislation permits a State law to
supersede federal law if the new agency determines the State
law is more protective. That seems to be almost in direct
opposition to the prior paragraph. What if a company is
compliant with the federal law, but while the agency hasn't yet
determined whether a state law is more protective, the attorney
general believes it is and brings action against the business
for a violation, is that company liable for its violations of
State law without any notice? This would seem to exacerbate the
decisions but rather by making certain that the products
themselves don't become the source of the trouble.
I see my time is about to expire, Mr. Chairman. I have
another page and a half of written commentary. Simply put me
down as extremely doubtful about the positive impact of this
legislation. I think we would be better served on this
committee and your subcommittee to go in and reform existing
authority, clarify the differences between existing regulatory
agencies, and if there is something that has really fallen
through the cracks, try to figure out one of the existing
agencies like the FTC and see if we couldn't give them explicit
authority in that area that needs reinforcing.
With that, Mr. Chairman, I yield back.
Mr. Rush. The gentleman from Texas, Mr. Green, for 2
minutes for opening statement.
OPENING STATEMENT OF HON. GENE GREEN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF TEXAS
Mr. Green. Mr. Chairman, thank you for holding this timely
hearing to examine the Administration's proposal to create a
new agency that would consolidate and be responsible for
consumer protection with regard to financial products and
services. After the events of last year, there should be no
doubt that Congress needs to act to further protect consumers
with regard to financial regulation.
This subcommittee has already taken steps to address this
by moving forward legislation, H.R. 2309, the Consumer Credit
and Debt Protection Act, to give the Federal Trade Commission
additional powers to better address consumer credit and debt
issues. It was widely agreed in the hearings that the
legislation with the added authority H.R. 2309 would provide
the FTC, it should take a broader and more effective role in
consumer financial protection.
With regard to the new tools this proposal would give the
FTC, the Administration has addressed many of the problems that
have hamstrung the Commission from taking steps to implement
additional financial consumer protections equally with regard
to the FTC rulemaking process. Magnuson-Moss procedures are
lengthy and cumbersome and can prevent the FTC from taking
action on widespread problems in a timely and efficient manner,
so I strongly support the provision in the Administration
proposal to grant the Commission authority to conduct
rulemaking under the Administrative Procedures Act. The
proposal also follows 2309 granting the FTC authority to seek
civil penalties for any violations of section 5 of the FTC Act
which would provide a great deterrent to would-be actors.
The portions of the proposal I am less certain about,
however, would move nearly all the FTC's consumer protection
authority for financial practices to the newly created Consumer
Financial Protection Agency. I do not disagree that additional
law enforcement is a good thing for the consumers. My main
concern is, we are adding a new enforcement regime that is
siphoning off authority from our Nation's primary consumer
protection agency when that agency is more than capable of
doing the job given the necessary tools and funding. Many of
the consumer protection functions the new agency would be
responsible for would be moved from other agencies and
departments that do not have consumer protection as their
primary function. However, this is not the case with the FTC.
I look forward to hearing from our witnesses on why the
Administration believes the FTC should not continue these
roles, and again, Mr. Chairman, I thank you for the timeliness
of the hearing. I look forward to exploring with regard to this
bill and look forward to the best paths to protect consumers.
Mr. Rush. The Chair thanks the gentleman. Mr. Pitts is
recognized for 2 minutes for the purposes of opening statement.
OPENING STATEMENT OF HON. JOSEPH R. PITTS, A REPRESENTATIVE IN
CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA
Mr. Pitts. Thank you, Mr. Chairman. Thank you for holding
this important hearing on the Administration's proposal to
create a new agency responsible for consumer protection.
I think we all agree that we need strong consumer
protection measures. The recent housing and credit crisis our
country has faced makes this abundantly clear. We must do this
prudently, though, avoiding the mistakes of the past. It seems,
however, the proposal we have before us creates yet another
divided system of regulation, making room for gaps in
oversight. We saw the effects of divided regulation at Fannie
Mae and Freddie Mac where two regulators meant less regulation,
not more.
The proposed new agency would also have the authority to
set prices rather than allowing costs to be determined by
consumers in the marketplace. Everything from ATM fees, check
overdraft fees and late payment fees for credit cards would
fall under the purview of this new agency. Instead of adding
layers of bureaucracy to financial regulation and intervening
in the marketplace, things we have tried in the past, we should
work to bring transparency and consumer choice to our markets.
Consumer financial protection is a worthy goal.
Unfortunately, increasing the layers of bureaucracy in the
financial industry has not protected consumers in the past and
I see no reason why it will this time around. Again, we all
desire effective and efficient enforcement of consumer
protection laws. It is my hope that this committee moves
forward in a wise and careful manner with increased
transparency and consumer choice as their primary goals.
I look forward to hearing from our distinguished witnesses.
Thank you, and I yield back.
Mr. Rush. The Chair now recognizes the gentleman from
Texas, Mr. Gonzalez, for 2 minutes for the purposes of opening
statement.
Mr. Gonzalez. I will waive opening.
Mr. Rush. The Chair now recognizes the gentlelady from
California, Ms. Matsui, for 2 minutes.
OPENING STATEMENT OF HON. DORIS O. MATSUI, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Mrs. Matsui. Thank you, Mr. Chairman, and thank you for
calling today's hearing. I applaud your leadership in
addressing this important issue. I would also like to thank the
witnesses for joining us today.
In today's economic recession, many families in home
district of Sacramento are struggling to make ends meet. I have
heard countless stories of people struggling to keep their
homes, their jobs and their way of life. California and in
particular my constituents in Sacramento have been greatly
impacted by the economic crisis. Many of my constituents were
and continue to be victims of predatory home loan lending,
unfair credit card practices, payday loans and other forms of
unscrupulous business practices.
Just recently, the President signed into law credit card
reform legislation to regulate unfair credit card practices.
The ink is hardly dry. The companies are already trying to find
ways to arbitrarily raise credit card interest rates and fees
on consumers. Struggling homeowners are also seeking assistance
to keep their homes but continue to be tricked into contacting
scam artists who just so happen to be the same crowd that
initially steered homeowners into subprime loans. This is also
occurring as job losses mount, foreclosures continue to rise
and Americans are increasingly turning to other forms of credit
to make ends meet. It is clear that consumers are not being
properly protected from unfair and deceptive financial
practices. When is enough enough?
The President's proposal to create a new financial consumer
protection agency could be the answer that American consumers
are seeking but it must be done in a thoughtful way to ensure
consumers are protected from fraudulent activity. We must make
sure any new agency has real authority and just as much bite as
it has bark. Consumers need to feel protected and have
confidence in our financial system. Right now it is clear that
they do not.
I thank you, Mr. Chairman, for holding this important
hearing today and I look forward to working with you and the
committee on this issue moving forward. I yield back the
balance of my time.
Mr. Rush. The Chair thanks the gentlelady. The Chair now
recognizes the gentleman from Nebraska, Mr. Terry, for 2
minutes.
Mr. Terry. Thank you, Mr. Chairman. I will try to be quick.
I think the fundamental premise of this bill is that the
FTC, the entity in charge of protecting consumers, has
evidently been an abysmal failure. I don't agree with that
premise. I think the issue should be, how do we make sure that
the FTC is properly empowered to protect consumers and that
should be what we are working for as opposed to stripping away
whatever jurisdiction they have over protecting consumers and
creating some monolithic new government agency in replace of
what already exists.
So I am very skeptical of this process or this bill and I
look forward to hearing from our witnesses so we can determine
if FTC is capable of doing what they have been doing and
whether or not this bill is even necessary. So I yield back.
Mr. Rush. The Chair recognizes the gentlelady from Ohio,
Ms. Sutton, for 2 minutes.
OPENING STATEMENT OF HON. BETTY SUTTON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF OHIO
Ms. Sutton. Thank you, Chairman Rush, and thank you for
holding today's very important hearing on the newly proposed
Consumer Financial Protection Agency.
As Elizabeth Warren aptly stated in describing the need for
an agency like this, ``It is impossible to buy a toaster that
has a one in five chance of bursting into flames and burning
down your house but it is possible to refinance an existing
home with a mortgage that has the same one in five chance of
putting the family out on the street, and the mortgage won't
even carry a disclosure of that fact to the homeowner.''
Unfortunately, many people in my district who were preyed upon
by so many unscrupulous companies, people know this all too
well.
The well-known and tragic case of one of my constituents,
Addie Polk, is a shocking example of a financial product that
not only caused someone to almost be homeless but caused
someone to attempt to take their own life. At the age of 86,
Ms. Polk was given a new 30-year mortgage on a house she
already owned and for an amount greater than the value of her
house. Let me say that again. At the age of 86, Ms. Polk was
given a new 30-year mortgage on a house she already owned and
for an amount greater than the value of her house. Less than 4
years later, Ms. Polk, probably of no surprise to the person
who sold the mortgage to her, began to have trouble making her
payments and her house fell into foreclosure. Feeling trapped
and without options, Ms. Polk shot herself rather than lose the
house she lived in for 40 years. No one ever should be in Ms.
Polk's position. Now is our chance in honor of Ms. Polk and
countless other Americans who have found themselves the
unfortunate owners of financial products with indecipherable
terms, smoke-and-mirror-like provisions and gotcha fees to
truly support strong consumer protection.
I look forward to hearing from the panel about how we make
sure we provide the needed protection, and I yield back.
Mr. Rush. The Chair thanks the gentlelady. The Chair now
recognizes the gentleman from Georgia, Dr. Gingrey, for 2
minutes.
Mr. Gingrey. Mr. Chairman, I thank you, and I thank you for
calling the hearing and welcome back Jon Leibowitz and
Honorable Barr, the assistant secretary of financial
institutions.
I associate my remarks really with what the gentleman from
Nebraska on our side just said, Mr. Terry. Here we are creating
a whole new federal government bureaucracy when we have one
already that is doing a heck of a job as it certainly seems to
me and I think most members on this panel. So the question
becomes, you know, why, to use a medical expression, throw the
baby out with the bathwater if the FTC is doing the right and
proper job and the right and proper oversight and all of a
sudden we come in and spend more federal dollars, as the
gentleman from Kentucky was talking about earlier, by creating
a whole new federal bureaucracy. So again, I am happy to hear
from the witnesses and maybe they can explain that. Hopefully
they will explain that.
But I think this is something that we need to look at very,
very carefully as we just continue to create one more or
consider creating one more government bureaucracy at a time
when we are running billions of dollars of deficit year after
year after year. And with that, Mr. Chairman, I will yield
back.
Mr. Rush. The Chair recognizes the gentlelady from Florida,
Ms. Castor, for 2 minutes.
OPENING STATEMENT OF HON. KATHY CASTOR, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF FLORIDA
Ms. Castor. Thank you, Chairman Rush, for calling this
critically important hearing on the Obama Administration's
proposal for a Consumer Financial Protection Agency.
Last Congress, in the wake of widespread concerns about
toxic lead in paint on children's toys and other toxic consumer
products, this subcommittee originated legislation to
reorganize and strength the Consumer Product Safety Commission,
and last year as the economy plunged, there were some analogous
terms being used to describe some of the mortgage and
investment products. We heard about toxic assets, poisoning
banks balance sheets and toxic mortgage products, leaving
millions of our neighbors facing foreclosure.
Predatory lenders wreaked havoc on my community and the
subsequent significant decline in property values has affected
millions of folks in my home State, and unfortunately consumers
could not count on State oversight of these mortgage brokers.
In my home State, they just turned a blind eye and I recommend
the Miami Herald expose that documented how many convicted
felons entered into the subprime mortgage loan marketing
business.
So this financial crisis has taught us that in order to
maintain a healthy economy, effective regulation must focus on
protecting consumers from abusive, deceptive and unfair lending
practices. The FTC has the enforcement authority to go after
only non-depository lending institutions that deal unfairly
with their borrowers but the abuses that led to the financial
crisis spread deep into the banking system. So in light of the
need for more-effective regulation of all lending institutions,
depository and non-depository, the Obama Administration has
rightly proposed a reorganization, and I think all of us can
agree that regulation of financial institutions must be
improved to better protect consumers. However, we must be aware
not only of the impact of granting authority to a new Consumer
Financial Protection Agency but also the consequences to
consumers of the changes that have been proposed to the FTC.
The Administration's proposal would reshape the FTC by shifting
authority over consumer credit but also by streamlining its
rulemaking process and allowing it to assess civil penalties on
bad actors.
So I look forward to your testimony on what this new FTC
might look like and how its ability to achieve its mandate of
consumer protection will be affected. I yield back.
Mr. Rush. The Chair now recognizes the gentleman from
Louisiana, Mr. Scalise, for 2 minutes.
OPENING STATEMENT OF HON. STEVE SCALISE, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF LOUISIANA
Mr. Scalise. Thank you, Mr. Chairman. I want to thank you
and the ranking member for having this hearing.
The Administration is proposing yet another new federal
agency with vague, sweeping authority. We all know there have
been bad actors in our financial system that took advantage of
consumers and contributed to the current economic crisis.
Unfortunately, many of the problems that brought on today's
financial crisis are not even being addressed in this bill. The
proposed legislation does not address the real bad actors in
our financial systems, Fannie Mae and Freddie Mac and other
institutions that engaged in subprime lending and relaxing
their standards to encourage more people to take out loans they
could not afford. Those warning signs were brought before
Congress for years and yet many of the same people in this
Administration and in the leadership in this Congress are the
same people who opposed the very reforms that would have
prevented this financial crisis from happening in the first
place.
This proposed new agency represents yet another step in the
federal government trying to run all aspects of our lives. The
government is running banks and car companies with disastrous
results. The so-called stimulus bill, which spent $787 billion
of money we don't have, is now being recognized even by this
Administration as a failure that didn't create any jobs that
were promised. There are even some in this Administration
floating the reckless idea of yet another massive spending bill
since the last one didn't work. Scores of experts predict that
this Administration's cap-and-trade energy tax will cost us
millions of jobs while increasing electricity rates on all
American families. We are debating a bill that proposes a
government takeover of health care, which has been tried and
failed in other countries to the point that sick people with
the means in those countries come here to get their health care
because government-run health care leads to rationing
everywhere it has been tried. Now we have this bill to create a
consumer czar. Enough is enough. Let us fix the problems that
exist and make reforms to federal agencies that are causing
these problems rather than adding yet another layer of
government bureaucracy that simply covers up the root causes of
the problem while punishing those who play by the rules.
I look forward to hearing the comments from today's panel
and would like to hear how the Administration's plan impacts
the FTC. In his testimony, Chairman Leibowitz speaks to the
successes the FTC has had in protecting consumers in financial
matters, which begs the question why we need a new agency with
all these sweeping new powers and spends more money that we
don't have. I yield back.
Mr. Rush. The Chair now recognizes the gentlelady from
Colorado, Ms. DeGette.
Ms. DeGette. I will waive opening.
Mr. Rush. The Chair thanks the gentlelady. The Chair
recognizes the gentleman from Ohio, Mr. Space, for 2 minutes.
Mr. Space. I will waive.
Mr. Rush. The Chair thanks the gentleman. The Chair
recognizes now the gentleman from North Carolina, Mr.
Butterfield, for 2 minutes.
OPENING STATEMENT OF HON. G.K. BUTTERFIELD, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NORTH CAROLINA
Mr. Butterfield. Thank you, Chairman Rush, for holding this
very important hearing and I especially want to thank the
witnesses for their testimony today.
Mr. Chairman, I hope this hearing will provide an
opportunity for the subcommittee to address some concerns that
we have about the proposed agency, particularly the loss of
jurisdiction on the part of the Federal Trade Commission. Now,
my colleagues are right, Mr. Chairman, there are many actors to
blame for the current state of our economy. Unscrupulous
subprime mortgage lenders and speculators and the like have all
contributed to the financial meltdown. Of deep concern and
rightfully so is the regulatory patchwork of federal agencies
charged with regulating all aspects of financial institutions.
For example, depository institutions such as banks and credit
unions are overseen by many different agencies. Conversely, all
non-depository institutions are overseen by one agency, and
that is the FTC. The FTC has done a good job, and I think we
can agree all on that, at regulating these players and I am
concerned that reducing FTC oversight as part of the creation
of the Consumer Financial Protection Agency may do more harm
than good. While I am pleased that the Administration's
proposal seeks to strengthen the FTC's rulemaking and
enforcement abilities in areas unrelated to financial products,
I believe that it is extremely important that the FTC maintain
strong non-depository institution oversight.
The Administration's proposed agency would seek to achieve
four important objectives aimed at bolstering consumer
confidence in financial institutions and transactions, and
these objectives include ensuring consumer education and
understanding of these financial products, better protecting
consumers from unfair and deceptive practices and
discrimination, ensuring consumer financial services operate
fairly, making certain that underserved communities like my
district have increased access to financial services. These are
excellent objectives and I strongly support the goals of the
proposed agencies but I want to be certain that the creation of
a new regulatory agency will not place undue and unnecessary
strains and burdens on existing federal regulatory framework
that may still be capable of meeting those same goals and
objectives.
And so, Mr. Chairman, this hearing today is vitally
important. I look forward to hearing the testimony of the
witnesses and I thank you for the time.
Mr. Rush. The Chair thanks the gentleman. The Chair sees no
other members who have opening statements.
Now it is my pleasure to introduce panel one. This is a
two-panel hearing, and panel one consists of the Hon. Michael
Barr, who is the assistant secretary for financial institutions
at the Department of Treasury. We want to welcome Mr. Barr back
to this committee once again. And also joining him at the
witness table is one who is very familiar to this subcommittee,
the Hon. Jon Leibowitz, who is the chairman of the Federal
Trade Commission, and Chairman Leibowitz, we certainly welcome
you back again to this subcommittee. It is the practice of this
subcommittee to swear in the witnesses, so I would like each of
you to stand and raise your right hand.
[Witnesses sworn.]
Mr. Rush. Let the record reflect that the witnesses have
answered in the affirmative. Now we want to recognize beginning
with Mr. Barr the witnesses for an opening statement. You have
5 minutes or thereabouts for your opening statement.
TESTIMONY OF HON. MICHAEL BARR, ASSISTANT SECRETARY FOR
FINANCIAL INSTITUTIONS, DEPARTMENT OF THE TREASURY; AND HON.
JON LEIBOWITZ, CHAIRMAN, FEDERAL TRADE COMMISSION
TESTIMONY OF MICHAEL BARR
Mr. Barr. Thank you, Mr. Chairman, and thank you, Ranking
Member Radanovich for providing me with this opportunity to
testify about President Obama's proposal to establish a new
strong financial regulatory agency charged with just one job:
looking out for consumers across the financial services
landscape.
As Secretary Geithner has said, protecting consumers is
important in its own right, and also central to safeguarding
our financial system as a whole. We must restore honesty and
integrity to our financial system. That is why President Obama
personally feels so strongly about creating this new Consumer
Financial Protection Agency.
I understand the committee's concerns that have been
expressed today with respect to boundary issues, jurisdictional
issues and the role of the FTC. I think as we work together on
those issues, it is important to keep in mind the central goal
we all share: having one agency for one marketplace with one
mission, protecting consumers. The new agency will have the
authority and the resources it needs to set consistently high
standards for banks and non-bank financial providers alike, to
put an end to regulatory arbitrage, to put an end to
unregulated corners of our financial system that inevitably
weaken standards across the board. This agency will be
accountable for its mission yet independent. It will have a
wide range of tools to promote transparency, simplicity and
fairness. It will act in a balanced manner, considering costs
as well as benefits, in a way that products consumers from
abuse while ensuring their access to innovative, responsible
financial services. It will be able to reduce regulatory burden
while helping consumers, for example, by creating one simple
mortgage disclosure form for all consumers to use. It will not
set prices for any service.
The federal government has failed to date in its most basic
regulatory responsibility, utterly failed to protect consumers.
The deep financial crisis that we are still in, let me
emphasize, that we are still in today, revealed the alarming
failure of our existing regime to protect responsible consumers
and to keep the playing field level for responsible providers.
Instead of leadership and accountability, we have had a
fragmented system of regulation designed for failure. Bank and
non-bank financial service providers compete vigorously in the
same consumer markets but are subject to two different and
uncoordinated federal regimes, one based on examination and
supervision, the other on after-the-fact investigation and
enforcement.
Less-responsible actors are willing to gamble that the FTC
and the States lack the resources to detect and investigate
them. This puts enormous pressure too on banks, thrifts and
credit unions to lower their standards to compete and on their
regulators to let them, and no financial provider should be
forced to choose between keeping market share and treating
consumers fairly. This is precisely what happened in the
mortgage market. Independent mortgage companies peddled risky
mortgages in misleading ways to borrowers who could not handle
them. To compete, banks and thrifts and their affiliates
relaxed their standards on underwriting and sales and their
regulators were slow to act. The consequences for homeowners
were devastating and our economy is still paying the price.
Fragmented regulation facilitated abusive credit cards.
Tricks and traps enabled banks to advertise selectively low
annual percentage rates to grab market share and boost income.
Other banks could not compete if they offered fair credit cards
through transparent pricing and consumers ended up with
retroactive rate hikes and unfair terms. The list goes on and
on. Credit unions and community banks with straightforward
credit products struggled to compete with less-scrupulous
providers who appeared to offer a good deal and then pulled a
switch on the consumer.
Our federal agencies do not currently have the mission,
structures and authority suited to effective consumer
protection in consumer financial markets. The FTC has no
jurisdiction over banks and it does not have supervisory and
examination authority to detect and prevent problems before
they spread throughout the market.
Mr. Chairman, I see that I will be significantly over my
time. Could I take several additional minutes?
Mr. Rush. Yes, you are so approved.
Mr. Barr. Thank you.
Mr. Rush. You are on the ``thereabouts'' part of your
testimony.
Mr. Barr. Thank you.
Bank regulators have supervisory powers over banks but
their primary mission is to ensure that banks are safe and
sound and not to protect consumer. Consumer protection
supervision is never going to share the front seat with safety
and soundness. Tinkering with the consumer protection mandates
or authorities of our existing agencies cannot solve these
structural problems. We need a structural solution. We need one
agency for one marketplace with one mission: to protect
consumers of financial products and services and the authority
to achieve that mission. That is the agency we are proposing to
create.
The CFPA will have the sole mission of protecting
consumers. It will write rules, supervise institutions, examine
them and lead enforcement efforts for the whole marketplace.
The implications for our proposal for consumer protection and
competition are enormous. The proposal will bring higher and
more consistent standards, stronger, faster responses to
problems, the end of regulatory arbitrage, a level playing
field for all providers, and more-efficient regulation. Our
proposal gives the agency the power to strengthen mortgage
regulation across all lenders and brokers. It can strengthen
disclosure, make it easier for consumers to choose simple
products, prevent lenders from paying yield spread premiums
that pay brokers more if they deliver loans with higher rates
than consumers qualify for. The agency would implement credit
card protections and update these protections as markets
change, and it would set high national standards for licensing,
bonding, monitoring of all non-bank financial service
providers.
Let me say the FTC is a good agency. The chairman and I are
good friends. Our legislation does not affect the jurisdiction
of the FTC over the vast array of non-financial markets and
actually strengthens its ability to police those markets. To
increase the FTC's ability to protect consumers, we propose
that the FTC be able to adopt rules to prohibit unfair or
deceptive acts or practices with standard notice and common
rulemaking, to obtain civil penalties when companies act in an
unfair or deceptive way and to pursue those who substantially
aid and abet providers that commit unfair or deceptive
practices.
The Administration also supports increased resources for
the FTC so that consumers can be better protected across all
markets. As for financial markets, the FTC would continue to
have authority under the FTC Act to pursue financial fraud
without delay including on foreclosure rescue and loan
modification scams. The FTC will retain authority for writing
rules under the Telemarketing Sales Act and concurrent
responsibility for enforcing them over financial products and
services, and the FTC would retain primary authority in the
area of data security for non-bank entities. In addition, the
FTC would have backstop authority to enforce the same consumer
credit statutes that it can enforce today. Under that
authority, the FTC, or frankly, a bank regulator, could if it
becomes aware of a possible law violation refer to the new
agency, and if the new agency doesn't act, take action itself.
That same referral requirement will apply to the bank
regulators, and it is designed to ensure a consistent federal
approach to interpreting and enforcing our consumer protection
statutes.
Finally, let me just say this. It is time to put consumer
protection responsibility in an agency with a focused mission
and comprehensive jurisdiction over all financial services
providers, banks and non-banks alike. It is time for a level
playing field for all financial services providers. It is time
for an agency that consumers and their elected representatives
can hold fully accountable and responsible for consumer
protection in all financial sectors, and it is also long past
time for a stronger FTC. The President's legislation fulfills
these needs.
Thank you for this opportunity to discuss the proposal, the
additional time you have graciously given me, and I will be
happy to answer any questions at the conclusion of our opening
statements.
[The prepared statement of Mr. Barr follows:]
Mr. Terry. Mr. Chairman, I would like to make a unanimous
consent request that the gentleman from the FTC have 9 minutes.
Mr. Rush. The chairman of the FTC will take whatever time
he may consume.
TESTIMONY OF JON LEIBOWITZ
Mr. Leibowitz. Thank you so much, Mr. Chairman.
Chairman Rush, Ranking Member Radanovich, Vice Chair
Schakowsky, members of the subcommittee, I appreciate the
opportunity to be here to discuss consumer protection
regulatory reform including President Obama's far-reaching
proposal to enhance consumer protection through the creation of
a new Consumer Financial Protection Agency, the CFPA.
As all of us in this room know and as many of you on the
panel articulated and as Mr. Barr also effectively articulated,
the need for reform has become as painfully clear as the
distress the consumers are now experiencing in these difficult
economic times from a failure of regulation. All of us on the
Commission support the President's goal of elevating consumer
protection, although some of us have different views as to the
best means to that end.
For my part, this initiative, which enhances the resources
and authority for the FTC and which creates the CFPA, is
clearly preferable to the status quo. In any case, the
Commission will continue to vigorously protect consumers of
financial services while this proposal is under discussion and
while the CFPA if it is enacted is ramping up. Beyond that, we
look forward to working collaboratively with the new agency.
In the last 5 years, we have brought more than 100
financial consumer protection cases and have recovered nearly
half a billion dollars in the last decade for consumers. Since
I last testified before this subcommittee in late March, we
have continued aggressively pursuing financial predators,
bringing 14 new cases in this area. In fact, today we are
announcing distribution of an additional $8 million in consumer
redress checks to Americans who were deceived by deceptive
mortgage origination fees, and on June 1st, using the new APA
rulemaking authority that you gave us in the omnibus
appropriations bill, we began a rulemaking addressing mortgage
modification and foreclosure rescue scams which have become, as
all of you know, all too common recently, and also addressing
the entire mortgage lifecycle, advertising, origination,
appraisals and servicing. Simply put, this work will help
ensure that consumers aren't ripped off by bogus mortgages or
false advertising.
Mr. Chairman, President Obama emphasized the importance of
giving the FTC tools and increased resources, the ones that we
need to stop practices that harm consumers and violate the law.
First, the proposal grows our agency, giving us the staff that
we need to do the job that you all want us to do. Currently we
have just over 1,100 FTEs. That is down from about the 1,800
FTEs we had in the late 1970s and early 1980s, despite a
considerable growth in the U.S. population, and in our own
responsibilities including enforcing canned spam, Do Not Call,
COPPA, the Children's Online Privacy Protection Act, Gramm-
Leach-Bliley and other statutes. Second, the proposal provides
the FTC with APA notice and comment rulemaking which is used by
virtually every other agency in the federal government. It
would strengthen the Commission's ability to address widespread
problems more quickly. Third, the proposal authorizes the FTC
to obtain civil penalties for violations of section 5 of the
FTC Act. This new power we believe would help deter would-be
violations and help protect consumers more effectively. I think
something like 47 State attorneys general have fining
authority. And by the way, fining authority was originally
proposed by Casper Weinberger when he was chairman of the
Federal Trade Commission under President Nixon in the early
1970s. Finally, the proposal authorizes the FTC to go after
those who aid and abet others who violate the law.
We would also urge Congress as you consider this
legislation to give both the FTC and the CFPA the ability to
bring civil penalty actions on our own, which would put both of
us on equal footing with other consumer protection agencies
like the SEC and the CFTC and not make us as we do currently
have to wait for the Justice Department to clear our going
forward.
Now, we expect that as with any bold and complex new
initiative clarifications will be worked out as the legislative
process moves forward, but from my perspective, the President's
goal of streamlining the overall system for protecting
consumers from financial abuse is more than commendable, and
eliminating the balkanization of consumer protection oversight
over non-banks and banks, as Mr. Barr has alluded to, is
laudable and very, very critical.
We do have some concerns, however, about the draft
legislation or the legislation as it was initially drafted,
although I am optimistic that we can work these out as the
legislative process moves forward. So for example, the proposal
states that the FTC would have backstop authority but the draft
legislation imposes a review period that could require us to
wait 120 days before filing certain cases. We also believe it
would be helpful to make definitions of the proposal's terms
such as credit and financial activity clearer, and let me tell
you why with an example. So suppose the FTC finds a
telemarketer making illegal robo calls to millions of consumers
on the Do Not Call Registry urging them to purchase something
like advanced fee credit cards which are, I wouldn't say per se
illegal but almost always, let us say often illegal, and
suppose that a payment processor participated in the fraud. It
is critical that we be able to bring action against all of the
malefactors expeditiously but it is unclear under this draft
whether we would have the jurisdiction over the telemarketer
offering the financial products or the payment processor, and
if so, whether the 120-day waiting period would come into play.
Now, we have made much progress with Treasury on several of
these boundary issues and we are continuing to make progress
but getting this right and allowing us to put an immediate halt
to harmful practices is crucially important.
Having said that, with this committee involving in writing
any legislation, I am confident that this very, very important
initiative will be considered, discussed, clarified and refined
with all open issues resolved in favor of American consumers.
We understand, of course, that under this proposal rulemaking
authority and primary enforcement responsibility for financial
products and services would go to the new agency but we will
continue to aggressively enforce these laws as a cop on the
beat where necessary as well as each and every other consumer
protection law within our jurisdiction. We look forward to
working with the Administration and Congress to reach a plan
that best protects American consumers, and I thank you for your
time.
[The prepared statement of Mr. Leibowitz follows:]
Mr. Rush. The
Chair thanks the gentleman, the chairman of the FTC, and the
Chair now recognizes himself for 5 minutes for the purposes of
questioning the witnesses.
With the continuation of the financial crisis, we see more
and more scam artists preying on desperate consumers seeking to
reduce their debts and to keep their homes out of foreclosure
or from selling their homes at a loss, and I am concerned about
this proposal in that this new agency would not do enough in
the short term because we all know that it takes some time for
a new agency to rev up, to get going and get running. Another
option that the Administration might have considered is
proposing that the FTC take on this essential role. By
increasing its staff and authority, it is conceivable that FTC
could be taking on these issues within weeks or months rather
than years. Mr. Barr, did the Administration consider other
options other than creating a new agency?
Mr. Barr. Yes, Mr. Rush. Let me just say, Mr. Chairman,
that with respect to the transition issues, our view is that
the FTC should act aggressively as it is doing now under the
chairman's leadership to continue to enforce the law, be a cop
on the beat, be quite aggressive in this area, and we are at
the same time that we are pushing to create the new agency
pushing on all the existing agencies working closely with them
to do everything we can under existing authority. So I don't
think there is any sense that anybody thinks we should slow
down, rather, quite the opposite.
With respect to other options, the Administration
considered a wide range of options with respect to consumer
protection, and our basic view was that the existing system was
fundamentally broken and we needed a quite large, significant
change to create one agency whose sole job was protecting
consumers across the financial services marketplace. I think
that the chairman is deeply aware of the ways in which
consumers have been abused and neglected for quite a long time
and the existing structure is just inadequate to meet the
needs. So our strong view, the President's personally strong
view was that we needed a new financial agency with that core
mission that was strong and could achieve the goals that I
think the chairman articulated so eloquently in the opening
remarks.
Mr. Rush. Chairman Leibowitz, during this interregnum
between this bill becoming law and this new creation actually
taking place, that is going to put a lot more pressure on the
FTC. Do you have the requisite resources and personnel? How
will the FTC function during this interregnum?
Mr. Leibowitz. I would say that during the sort of
interregnum period if the legislation is enacted, we are going
to work very closely with the new agency. I think the period
for transfer is somewhere between 6 and 24 months, depending on
how quickly they are ready to ramp up. We are going to continue
to bring cases, and I think that was always the notion. I do
think that going forward, you know, we could use more
resources, and we talked about this before in hearings, and I
do think that even after the agency is created, assuming it is,
that it would be useful for us to have concurrent enforcement
authority so that if we are going after--you know, the bad guys
don't always act in silos, as Mr. Barr knows, as all of you
know. You know, sometimes they are violating the Do Not Call
rule and they are violating reg Z or reg E which would go over
to the new agency, and so I think it is important going forward
that when there is ongoing consumer harm that we are able to
sort of jump over the kind of legislative, the new legislative
fence to help consumers and not have to wait potentially 120
days. I think we are working through a lot of these issues,
making a lot of progress between our staffs and ourselves.
Mr. Rush. The Chair sees that his time is up. The Chair now
recognizes the ranking member for 5 minutes.
Mr. Radanovich. Thanks, Mr. Chairman, and welcome,
gentlemen, to the panel. I am pleased to see you here today.
Mr. Leibowitz, welcome back to the committee. I know you
have been here a number of times already and probably will be
more in the future. I have to think you are doing a bit of a
dance because you stand to lose some jurisdiction in the FTC,
and it seems to me that you are getting, at least under the
proposal, getting more money and authority to do less, and I
want to know what your reaction to that statement is, given the
fact that the FTC has dual jurisdiction, and that is, two
missions to ensure competition but also consumer protection.
Mr. Leibowitz. Well, Mr. Radanovich, let me just start by
saying I hope that familiarity is not breeding contempt here.
Mr. Radanovich. Not at all.
Mr. Leibowitz. Look, you know, if you read through our
written testimony, you can sort of see it is a complex matrix
within the Commission about what we support and what we don't.
I do think from our perspective if you create this--from my
perspective, if you create this new agency and you also give us
more resources and authority, from the perspective of consumers
they will be getting a better deal because we will be able--we
will continue to have a backstop authority with respect to
financial matters and we are going to be able to concentrate
and just do more for consumers. As you know, because we have
talked about this, we spent a lot of time leveraging----
Mr. Radanovich. But if I may, you are losing jurisdiction.
Mr. Leibowitz. We would be losing jurisdiction and----
Mr. Radanovich. How does that loss of jurisdiction deal
with your two missions of ensuring competition and providing
consumer protection?
Mr. Leibowitz. Well, I would say on the competition side,
we wouldn't be losing jurisdiction. We would still retain that
jurisdiction. On the consumer protection side, we would be
losing jurisdiction to this new agency but this new agency
would be another cop on the beat protecting consumers, and
then--and we would also be losing personnel, and we have
already lost a few personnel, I would say, to the new agency...
Mr. Radanovich. But it does seem to me like you are getting
more money and authority to do less.
Mr. Leibowitz. Well, we will do more. I mean, we really
will. It is not a question from our perspective of moving to a
government--I mean, our guys work extremely hard. They have
been commended by OPM for always scoring high on sort of
effectiveness and quality of work, and we will just do more in
the areas where we have--while retaining backup authority, if
the proposal goes through, we will do more in the other areas
of consumer protection and there is plenty to do.
Mr. Radanovich. Thank you.
Mr. Barr, welcome to the subcommittee. You know, in Russia
during the height of communism, it was often talked about the
fact that there was not a lot of food on the shelves, and when
you go into stores you might be able to get a loaf of bread,
but if you wanted sourdough, you probably had to have the
standard loaf, if you wanted rolls, you got a loaf of bread, if
you wanted something else, you got a loaf of bread. Tell me
how--explain to me how you are not doing the same thing in the
credit markets in the name of consumer protection.
Mr. Barr. Thank you very much for that terrific question. I
was smiling as you were describing the example because I spent
some time in Poland had the same experience where you go to the
store and there is nothing there and you can actually literally
go hungry. This agency has nothing to do with that, literally
nothing to do with that. The new agency----
Mr. Radanovich. Tell me how you are not doing that though
in the credit markets, because that is a question I would like
answered.
Mr. Barr. The new agency is in no way pursuing that kind of
command and control model. It is in no way pursuing price
setting. It is in no way saying you can't offer certain kinds
of products. The new agency under the legislation----
Mr. Radanovich. And I understand the reason for looking at
this because we have all experienced this financial crisis but
doesn't this end up providing consumers with less choice and
driving up the cost of credit for consumers?
Mr. Barr. With respect, sir, our strong view is that it
does not. It continues to provide for financial innovation.
Consumers can get access to whatever products and services
providers want to offer. Our basic approach is to improve
disclosure, reduce regulatory burden, for example, by merging
authorities so you can have one simple mortgage form at the
time of disclosure, improve----
Mr. Radanovich. But weren't there existing authorities that
have and could and should deal with the current crisis that we
are in? Doesn't the added restrictions and regulations that you
are going to be putting on the credit industry will drive up
the cost of credit to consumers?
Mr. Barr. I think that the better judgment, sir, again,
with respect, is that the current system we have had, the
status quo on consumer protection was a dismal failure and I
think we have evidence all around us of that, and our view was,
both for banks and for non-banks, for consumers and for
households, the system failed. If you talk to, and I am sure
you do, the community bankers in your community who had to
compete against unregulated providers who were sucked into
offering products----
Mr. Radanovich. Actually competing against large banks for
TARP money, but--thank you very much, Mr. Chairman. I yield
back.
Mr. Rush. The Chair now recognizes the gentlelady from
Illinois, the vice chair, Ms. Schakowsky.
Ms. Schakowsky. Thank you. Mr. Barr, could you describe how
we potentially would have been in a different situation today
had this agency been in existence as the current problems
started to unroll?
Mr. Barr. Yes. I think we would have been in, could have
been in a fundamentally different situation if we had an agency
that could set the rules of the road for everybody to follow,
if we had an agency that could say to mortgage brokers, you
can't get paid more for offering riskier, higher-priced, more
confusing products than a basic product, if we had a rule that
said mortgage brokers, you have a duty of care, you have to do
best execution for a mortgage so you can't offer the mortgage
that is the best deal for the broker, you are supposed to offer
a mortgage that is the best deal for the consumer, if we had a
duty that said mortgage brokers have to have some skin in the
game, they need to be paid over time, securitization trusts
have to have skin in the same so that you don't have a system
where all the bad mortgages are made up front and eventually
sold to the investor at the other end with nobody in the chain
having responsibility, nobody having any of their own capital
at risk. So we could have had fundamental change. We could have
had a fundamentally different situation in which consumers were
protected at the front end and the financial system was
protected all the way through.
Ms. Schakowsky. And you are saying without any change in
legislation beyond the creation of this agency, that you would
have the authorities then under the bill, which I haven't read
thoroughly yet, you would be able to have done all those
things?
Mr. Barr. Yes. This agency would be granted the authority
to do all the things that I just described.
Ms. Schakowsky. Did you want to comment on that, Mr.
Leibowitz?
Mr. Leibowitz. Well, I would just say that one of the
things that is critical here is APA rulemaking authority, and
of course, under the new proposal, they will be able to do it
for non-bank- as well bank-related financial instruments and
mortgages. And so in the omnibus you gave us, for which we are
very grateful, APA rulemaking for non-bank mortgages and we are
going to look at that and we are going to do, I think, a very,
very good rule, and Mr. Rush, you have legislation that would
expand our jurisdiction a little bit more but it only goes--it
is only within the context of non-bank-issued financial
instruments. So 20 years ago we did a lot of matters relating
to credit cards and all the credit cards are now, virtually
every credit card is now issued by a bank. We have no
jurisdiction there. So I think that is a critical advantage
from the consumer's perspective of what this new agency might
do.
Ms. Schakowsky. And let me just say that while I absolutely
in theory think pulling it all together in one place is a good
idea, but, you know, we have seen in the startup of the
Department of Homeland Security lots of difficulties in pulling
it all together and making it all happen. The creation of a
director of national intelligence, certainly in that case many
of us on the Intelligence Committee see a large bureaucracy
itself developing, and have some problems with the coordination
that was actually supposed to happen. How can we be assured
that this will achieve its goals, achieve it in a timely way
and not just be another bureaucracy?
Mr. Barr. Thank you very much. Again, I think that our view
is, the agencies that have the authority now should
aggressively use those authorities. Those authorities are
inadequate to the task. The basic structure of the system was a
dismal failure. We need to do this. We need to take this
action. The legislation has tight timelines for transition.
Treasury has responsibility to make sure that transition
happens effectively. You can come see me, you can come see
Secretary Geithner. We are responsible for making sure. You can
hold us accountable.
Mr. Rush. The Chair recognizes Mr. Stearns from Florida.
Mr. Stearns. Thank you, Mr. Chairman. Mr. Chairman, we have
had a lot of hearings on privacy here in this committee, and
when I was chairman of the committee we had many hearings on
privacy, and I think my concern is that if we transfer some of
the Federal Trade Commission's privacy work to this new CFPA,
particularly in light of all the expertise that you have, and
you have been the leading federal agency in the area of
consumer privacy for all these years, and including financial
privacy as well as identity theft, information security. So
with that in mind, what do you feel about this transfer?
Mr. Leibowitz. Well, I guess I would make a couple points,
and this committee and you have been leaders in privacy-related
issues. You know, we will be transferring over a lot of laws.
We hope to keep sort of a backstop authority that is
concurrent, and of course, this is the beginning of the
legislative process. It is not the end and, you know, I see a
lot of agreement on many things within this committee on ways
to go forward. The way we read the legislation, it was unclear
whether issues like data security, privacy would stay with us.
I think Mr. Barr has represented today, the better reading of
the proposed statute or the reading of the way the proposed
statute will move forward is that we will keep issues like
that, and I think that is very, very important.
Mr. Stearns. So identity theft, you would still keep?
Mr. Leibowitz. I think we would keep identity theft.
Mr. Stearns. And financial privacy?
Mr. Leibowitz. Financial privacy, I think mostly moves over
to the new agency. I mean, again, I think that is to some
extent up to you. I think we would keep the safeguards rule
under Gramm-Leach-Bliley but a lot of this has to be worked
through of course during the transition period. We will keep on
doing this and again we will have backstop authority. And I
should probably turn this over to Mr. Barr, who is one of the
true architects of the plan.
Mr. Stearns. But what you are saying today is that some of
this is still up for negotiation?
Mr. Leibowitz. Yes. These boundary issues, that you have
raised the same concerns that we saw when we got the
legislation at the end of last week but it seems that it is
being resolved on many of these boundary issues in favor of
retaining jurisdiction by the existing Commission, and I assume
that, you know, as this legislation moves forward, that is what
this committee would be most interested in, but let me turn it
over to Mr. Barr.
Mr. Barr. Just to add to that, the chairman is correct that
with respect to data security issues, identity issues,
safeguard red flags, all that would stay at the FTC and the
parallel authority for that at the bank agencies but the front-
end privacy notices that have to do with disclosure would fit
in the new disclosure regime of the new Consumer Financial
Protection Agency.
Mr. Stearns. So let us say Internet privacy, consumer
privacy, would that remain with Federal Trade Commission?
Mr. Barr. Again, with respect to the disclosure aspect on
the financial side, the disclosure would be unified with the
disclosure regime at the new financial agency. All the data
security, identity theft and related issues would remain at the
FTC and the parallel authorities with respect to banks.
Mr. Leibowitz. But if you are thinking about core issues
like spam, spyware, behavioral marketing, we keep all of those.
You know, there might be some issues about whether we are going
after a malefactor or a group of malefactors and one of them is
on the other side of the core new agency's fence, you know,
right now there's 120-day waiting period, which we are a little
concerned about from the perspective of consumers, but going
back to your original point, a variety of issues including sort
of the core privacy issues we do we will be keeping and
retaining jurisdiction.
Mr. Stearns. Well, I think, Mr. Barr, what you should
realize with all that expertise in the Federal Trade Commission
we are starting a new federal agency here. You know, I would
think that as many have pointed out on this side, we are
worried about a new federal agency, particularly when you have
an agency that already has the expertise. I think the bill says
that the cost of development of this new agency is such sums as
are necessary. Is there any more definitized information you
can give on what the cost would be for this new federal agency?
Mr. Barr. I don't at this time have an overall cost
estimate for the agency or size estimate for the agency. It is
something we are working on. We will work with the appropriate
committees on it and with OMB and CBO. We anticipate that the
agency will be pulling in staff and resources from the existing
agencies and additionally having new resources required. I
would be happy to continue to work with you on that question.
Mr. Stearns. Can you talk about the resources the agencies
will need besides--I mean, have you identified any of the
resources?
Mr. Barr. We have begun the process of identifying the
number of individuals and the other resources the agency would
need but we are not at a place now where I could give you even
a reasonable estimate of what additional measures beyond the
transfer authorities would be required. It is something we are
working quite hard on.
Mr. Stearns. I will just close. Mr. Chairman, you might
think as a subcommittee chair since a lot of the expertise for
this is already in the Federal Trade Commission and this is a
new agency, you might--and particularly in your jurisdiction
here, I think we have to move carefully as Mr. Dingell out,
developing a brand-new agency. They don't know how much they
are going to spend, they don't know what resources they are
going to need, and also they are going to be taking on
expertise for areas they know nothing about that the Federal
Trade Commission has years on, so I just wonder, you as the
chairman, you might want to be very careful and cautious about
endorsing this new agency without, you know, some more hearings
on it and try to get more of the stakeholders here, perhaps
more than we have on the witness list here, to try and get into
the discussion here. So I thank you, Mr. Chairman.
Mr. Rush. The Chair thanks the gentleman. The Chair
observes that there is a vote going on on the floor. There are
three votes. It is the desire of the chairman that we should
delay the committee hearing until after the votes are concluded
and then return. I am not sure what the witnesses' time
commitments are but it would be very important if you return I
would say within 15 minutes after the last vote. Then the
subcommittee will reconvene.
[Recess.]
Mr. Rush. The subcommittee will reconvene. The Chair
recognizes the fact that there might be members of the
subcommittee who did not have an opportunity to ask questions
of our witnesses before we recessed. However, I am very
cognizant of the witnesses' time and will take this time to go
into a second round of questions, and if there are members who
come in who have not asked questions in the first round, then
the chair will prolong their questioning to 7 minutes.
So with that, the Chair recognizes himself for 2 minutes of
additional questions.
In its White Paper describing the proposed regulatory
reforms, the Department of Treasury stated clearly that, and I
quote, ``The FTC shall retain authority for dealing with fraud
in the financial marketplace.'' Despite this assurance, the
proposed language appears to weaken FTC's authority in this
area. FTC will retain the authority to enforce against unfair
and deceptive acts and practices using the FTC Act. However,
the FCC could not add any statutory claims such as the Truth in
Lending Act or the Equal Credit Opportunity Act to a complaint
without first referring the case to the new agency and waiting
120 days for that agency to decide if it wants to take the
case. Chairman Leibowitz, let me ask you, how will this change
impact the FTC's ability to consume financial problems? Could
the FTC consume one part of a case while the other is under
consideration or would you expect that it would simply not
bother with additional claims? Will the FTC's cases be weakened
if they only rely on FTC Act claims?
Mr. Leibowitz. Well, I think, Mr. Chairman, that is an
great question, and keeping in mind that we are at the
beginning of the legislative process, not near the end of the
legislative process, those are questions that this committee
will want to think through as the legislation proceeds forward.
Last week we brought a bunch of cases which we called Operation
Short Change, and it was about scams that were hitting people
in economic distress, and a lot of those were basically fraud
claims under the FTC Act, but one of them involved the
Electronic Funds Transfer Act, I think it is reg E. Now, reg E
would go to the new agency, and so this would sort of invoke
two parts of your question or two components of your question,
one of which is, would we have to wait 120 days to bring this
case while there is ongoing harm, and then the second issue is
really, what is the nature of our backup authority, and I want
to say, Mr. Barr and I have been working through this with our
staffs and very, very productively. You know, I worked on the
Hill for 13 years and I never wrote a piece for legislation for
my bosses then that didn't change as it went forward. And so
but I think these are precisely the questions that we worry
about at the FTC. We want to make sure, and I know Mr. Barr
does too, that this legislation is as effective as it can be
for the consumers that all of us represent, and so I think it
is important that you----
Mr. Rush. Well, it seems that the consumers would benefit
more if the FTC didn't have to solely rely on the so-called
backdrop authority. Do you agree with that?
Mr. Leibowitz. Well, again, I mean, from my perspective,
and I will turn the mic over to Mr. Barr in a second but from
our perspective, if the backup authority is weak, and, you
know, we have backup authority involving the SEC and the CFTC
which we use very rarely, only when we need it. But here, a
couple of points. One is, as the transition is happening, if
this legislation is created, you and certainly even after very
good lawyers are transferred and attorneys and jurisdiction,
you know, it is going to take a while for this agency, and Mr.
Barr knows better than anyone, to ramp up, and I like--I
believe that they are going to want us involved using our
backup authority, probably more earlier than later. Now, we
understand that they will have primary jurisdiction but I think
it is very important that the backup authority be robust so
that we can sort of help out and also so that when we have
these cases that involve malefactors that don't fit into the
old or new silos that we can effectively go forward and stop
ongoing harm involving consumers.
Mr. Rush. I have just one question. Earlier you stated that
you had lost some personnel. Were the individuals transferred
to Treasury?
Mr. Leibowitz. We have one or two people who have gone
over.
Mr. Rush. And what is the purpose of them going over to
Treasury? Are they on loan to Treasury or are they reassigned
to Treasury?
Mr. Leibowitz. Oh, I think they are on detail.
Mr. Rush. What is the purpose of them being on detail to
Treasury? What are they doing over there?
Mr. Leibowitz. I think they are--well, I will turn that
over to Mr. Barr. But I do know that the one person I know who
is on detail to Treasury is a fabulous attorney and really
cares about consumer protection.
Mr. Rush. All right. Well, why don't you turn it over to
Mr. Barr and let him answer the question. Thank you. Mr. Barr,
would you begin your answer with that last question and then
you can respond to the other question.
Mr. Barr. Sure, and then I would be happy to address the
broader points. We have on our staff a terrific attorney from
the FTC who has come over on detail and is going to be a
permanent employee of the Treasury Department working on
consumer issues. With respect to the broader sets of questions,
I would just say first and foremost the chairman and I have
been working closely together and are committed to working
closely together on these sets of issues. On financial fraud,
it is clear from the President's proposal that it would not in
any way diminish the FTC's ability to take on financial fraud
cases as it is stated in the white paper and in the
legislation. The FTC would retain its authority and its duty to
bring financial fraud causes without delay.
With respect to coordination, there are many issues that
the agencies will want to coordinate on. The 120-day measure is
not like the existing authorities that the FTC uses where it is
the primary entity doing enforcement. This is a proposal that
kicks in if the FTC is doing its work and finds a problem, it
can let the new agency know, the consumer agency know about it.
It doesn't have to wait as the FTC does today, it doesn't wait
until it has gone through its investigation, gone through the
whole charging process and gotten it all ready and then refer
it to the Justice Department. It is totally unlike that. This a
chance for the FTC to let the new agency know about a problem
that it sees that has come to its attention. So it is a
fundamentally different mechanism. We are committed to being
sure that that in no way delays any financial fraud cases.
And with respect to the transition issues again, the FTC
and the bank agencies will have large transition issues. We are
committed to working those through and, as I mentioned to
Representative Schakowsky, Treasury is responsible for ensuring
that transition happens smoothly and you can hold us
accountable for that.
Mr. Rush. With that, my time is concluded. Now Mr.
Radanovich is recognized.
Mr. Radanovich. Thanks, Mr. Chairman, and welcome back.
Mr. Leibowitz, uncertainty is one of the key factors behind
the perpetuation of our current economic crisis, and granting a
new and unknown regulatory agency with this broad scope of
power places a dangerous--could place a dangerous level of
uncertainty into the financial markets. Do you think that it
might be better to have an experienced regular such as the FTC
with a long and trusted history of working with business at the
helm with these new powers?
Mr. Leibowitz. Well, as you know, I am very fond of the
Federal Trade Commission as you are. I would say this. You
know, as you know, I testified here a few months ago that we
thought we could do the consumer protection mission involving
predatory financial instruments. The proposal that has been
developed, though, is one that is broader than that. It has
bank examiner components. It has compliance components. So
those are not things in our core competency. You know, again,
we are a creature of Congress. We are an independent agency,
and so we will do whatever you tell us we are going to do, and
then beyond that, I just want to come back to my initial point,
which is, based on what we have seen in this marketplace and
the restrictions that we have operated under, I do think that
if these issues are worked through, and I believe they will be,
I do think that having this new agency and the FTC both going
after unfairness, deception, fraud is considerably preferable
to the status automobile accident.
Mr. Radanovich. We agree on that. I think the issue is, how
you go about it. I will say, though, that meeting with the
bankers in my district back home, they are afraid of this, and
I think the uncertainty question is a legitimate question, and
if it does bring the specter of increased regulatory management
over the industry, not that something has to be done in order
to correct the mistakes of the last year, but, you know, what
is it going to do to the industry's willingness to get out
there and unfreeze liquidity like we are all wanting?
Mr. Barr. If I could just add to Chairman Leibowitz's
comment on that, I think that a key new factor is, this agency
would have all the supervisory and examination authority it
needs, not just with respect to banks but also with respect to
non-bank competitors of those banks, so I understand that many
banks are worried about the scope of the new Consumer Financial
Protection Agency. I appreciate those concerns. I think the
additional upside for them is that the non-bank competitors
will have the same high standard that they need to meet, the
same level playing field, the same consistent rules. So they
don't have to worry. A community bank and a credit union
doesn't have to----
Mr. Radanovich. Something tells me that you are just
broadening the uncertainty to include the entire financial
markets, you are not----
Mr. Barr. No, I think what we are able to do, sir, with
respect----
Mr. Radanovich. It seems to me the uncertainty is being
broadened, not--that doesn't answer the question about
uncertainty and the banks are afraid of this kind of
legislation.
Mr. Barr. I think what we are able to do is create a high,
consistent, clear standard. We are able to reduce regulatory
burden in many cases, for example, combining the TEAL and RESPA
forms that drive everybody crazy and don't help consumers. We
need a single, uniform, simple standard for disclosure that
applies----
Mr. Radanovich. I suggest that you need to convince the
banks because they are the ones that are expressing the real
concern. If I may, though, Mr. Barr, I do have a second
question, and that is that President Obama has stated that a
streamlined system will provide better oversight and will be
less costly for regulated institutions but the preemption
statutes in the bill create a floor rather than a ceiling for
State regulation. Doesn't that mean we are looking at 51
different versions of this thing by giving the preemption
statutes to the States and does that not conflict with
President Obama's statement that we are looking at a
streamlined system?
Mr. Barr. Well, as you know, the States have long played an
important role in consumer protection. I think one of the
upsides of living in our country is that we have independent
States that----
Mr. Radanovich. But they have not had preemptive status in
this situation before.
Mr. Barr. They have not been able to apply State laws in
some context to national banks, but they certainly have been
very active in the consumer area across lots of different
products and services in the past.
Mr. Radanovich. Do you think that could lead to 51
different versions of this----
Mr. Barr. I think we are much more likely to see a high
standard at the national level. I think it is very rare if you
set a good, high standard at the national level you are going
to find it very rare for States to go off in their own way, but
sometimes States are right. Sometimes States protect consumers
in innovative ways, and our view is, we shouldn't block the
States' ability to do what the States think in their judgment
is right.
Mr. Radanovich. All right. Thank you, Mr. Chairman.
Mr. Rush. The Chair recognizes Dr. Gingrey for 7 minutes
for the purposes of questions.
Mr. Gingrey. Mr. Chairman, thank you for your generosity of
time. I am sorry I missed the first round, and I appreciate you
letting me ask some questions. And I did want to ask Secretary
Barr, in your testimony you indicated that we need only one
agency charged with protecting consumers for financial products
and services. As one of the principal architects of the
Administration's plan and the proposed Consumer Financial
Protection Agency, you lay out very broad and sweeping changes
that will fundamentally change a number of government agencies
of course including the FTC. However, while this is still in
the early stages, there are some concerns held by members
including me that an overly broad new regulatory agency will
have the same effect of hitting a nail with a sledgehammer, and
these efforts under the guise of uniformity I feel that there
may be some different standards set for industries within this
proposed agency. For example, I have heard some suggestion that
small banks should be exempt from some or all of the rules
written by the proposed agency and the drafted legislation
contains exempted authority based on asset size. Is it the
Administration's play to apply different consumer protections
depending on whether a customer transacts with a small or a
large bank, and furthermore, if you intend to carve out smaller
institutions, what are the types of rules they would be
exempted from and what is the policy reason for carving out
these institutions?
Mr. Barr. Thank you very much for that set of questions. I
do think that our proposal does involve sweeping change, a
sweeping change that in our judgment is essential to protect
consumers. Our old system was fundamentally broken and we do
need fundamental reform.
With respect to smaller institutions, we don't expect to
see, would not expect that small banks and big banks would have
different rules of disclosure, but you may see differences in,
say, how much examination or supervision there would be. In the
bigger institutions as we do today on site there are examiners
on site year round. You wouldn't want that for a small bank. So
you may see differences like that but not differences in the
basic standards affecting consumers. Those would be uniform
across the board. So if you walk into a bank or you walk into a
credit union, you walk into a big bank or you go to your
independent mortgage broker or you go to an independent
mortgage company, you get the same simple mortgage disclosure
so consumers can understand what they are getting.
Mr. Gingrey. Chairman Leibowitz, as you outlined in your
testimony, there will be a number of changes to the FTC as a
result of the Consumer Financial Protection Agency it that
becomes law. Many responsibilities will be pulled from the
current jurisdiction of the FTC and to be given to this new
agency. With all of these proposed changes, what then will be
the role of the FTC in this new landscape and how much of that
new role will be duplicative of this proposed agency? You guys
have been doing a good job, you know, we are appreciative of
that.
Mr. Leibowitz. And we appreciate, you know, and are
heartened by what you said about our agency. I do think we do a
good job and we have terrific attorneys who really care about
enforcing the mission of the agency and good commissioners who
are also committed. You know, we will still have all of our
competition, right, our antitrust authority. We will continue
to do all the other things we do, whether it is fraud or
privacy outside of the financial context or, you know,
advertising and marketing practices, and then we will continue
to stay involved here, I think especially during the transition
period and hopefully beyond with concurrent jurisdiction. You
know, look, there are, as we know in this room, as you guys
know better than anybody else, there are a lot of bad actors
out there who are, you know, trying to rip off American
consumers and so, you know, by growing the federal ability to
go after these malefactors, you know, that can only help even
the playing field. What we do at the FTC and I think we do it
really well but it's a sort of triage, right? You know, we look
at different cases, potential cases as we are going through an
investigation and we say which one can we best leverage, which
are the ones that, you know, are the greatest harm to the
greatest number of people, which are the ones that might make
better, change bad case law, for example, and we are always
making decisions based on sort of the lack of resources that we
have. We just try to do the best job we can.
Mr. Gingrey. Well, let me reclaim my time just for a
second. I did want to ask you one other question. We don't
disagree with the need for oversight, but it seems to me that
in this current financial crisis that we are in and all of
these bad loans and toxic assets and all of that, that the
oversight got really heavy after the horse had already left the
barn and so that is kind of a concern, and there is always the
concern that the oversight becomes too much, so restrictive
after the fact that these institutions, particularly your small
banks and lending institutions, can't function, and I certainly
see this across my district in privately held banks, smaller
banks that the oversight should have been steady and consistent
and it always should be but yet, you know, when some
catastrophe occurs because somebody was not minding the store,
then all of a sudden the oversight comes down on these
institutions to the point that all of a sudden they go out of
business, it hurts the local community. But let me just ask you
in the little bit of time I have got left, you mentioned to us
what the FTC would be able to continue to do. What percentage
of what you currently do is that? Does that represent 50
percent of your current responsibilities, 25 percent? Are you
losing more than 50 percent of what you currently are charged
to----
Mr. Leibowitz. No, no, no. You know, I think it would be
more like in terms of--if I think it through in terms of
resources, I will get back to you with a response but I would
say it is more like 5 to 10 percent of what we do, and of
course, it has been an area, as you know, that we have been
concentrating on more and more because it is very important to
American consumers, many of whom are suffering from--almost of
whom are suffering from some----
Mr. Gingrey. Well, I would appreciate it if you would get
back to me.
Mr. Chairman, thank you for your patience and generosity,
and thank the witnesses.
Mr. Rush. Again, the Chair thanks the witnesses for the use
of their time. You were very generous to us with your time and
we want you to know that you have really contributed
significantly to this process and we are better off because you
testified today and helped us move along on this new proposal.
So we will be in touch with you in the future, and the Chair
wants you to know that we will give members 72 hours to ask
questions in writing, and if you will respond to them in a
reasonable amount of time, the Chair will really appreciate it,
so thank you so very much.
The Chair now calls the second panel. The Chair welcomes
the second panel to this hearing. The Chair apologizes for the
inconveniences that you might have had to endure while we were
on the floor voting, and the Chair is very respectful and
appreciative of the fact that you have come from far and wide
to be here to testify.
I want to introduce our witnesses, and I will begin my
left. Ms. Gail Hillebrand is the senior attorney and manager
for the Financial Services Campaign for the Consumers Union.
Sitting next to her is Mr. Stephen Calkins, Esquire. He is
associate vice president for academic personnel and a professor
of law at Wayne State University. Next to him is Mr. Prentiss
Cox, who is an associate clinical professor of law at the
University of Minnesota, and sitting to Mr. Cox is Ms. Rachel
E. Barkow, and Ms. Barkow is a professor of law at New York
University School of Law. And last but not least, the gentleman
with the smile next to her is Mr. Chris Stinebert. Mr.
Stinebert is the president and CEO of American Financial
Services Association. Again, we want to thank you and welcome
you to this committee hearing.
It is the practice of this committee that we swear in the
witnesses, so would you please rise and raise your right hand?
[Witnesses sworn.]
Mr. Rush. Let the record reflect that all the witnesses
responded in the affirmative.
Now it is my privilege to recognize you for 5 minutes for
an opening statement, so Ms. Hillebrand, we will start with
you.
TESTIMONY OF GAIL HILLEBRAND, SENIOR ATTORNEY AND MANAGER,
FINANCIAL SERVICES CAMPAIGN, CONSUMERS UNION; STEPHEN CALKINS,
ESQ., ASSOCIATE VICE PRESIDENT FOR ACADEMIC PERSONNEL AND
PROFESSOR OF LAW, WAYNE STATE UNIVERSITY; PRENTISS COX,
ASSOCIATE CLINICAL PROFESSOR OF LAW, UNIVERSITY OF MINNESOTA;
RACHEL E. BARKOW, PROFESSOR OF LAW, NEW YORK UNIVERSITY SCHOOL
OF LAW; AND CHRIS STINEBERT, PRESIDENT AND CEO, AMERICAN
FINANCIAL SERVICES ASSOCIATION
TESTIMONY OF GAIL HILLEBRAND
Ms. Hillebrand. Thank you, Chairman Rush, Ranking Member
Radanovich and members of the committee, you know Consumers
Union as the nonprofit publisher of Consumer Reports but our
mission is to inform, protect and empower consumers, and that
is the role in which I appear before you today. My written
testimony was joined by six national consumer organizations.
Consumer groups want and consumers in the United States
need a strong consumer financial protection agency, a robust
Federal Trade Commission and a strong role for States in
consumer protection in financial services. We believe that
those goals are entirely consistent with one another. The goal
is a better financial services marketplace and better
government in financial services oversight. We have to face it,
the current system doesn't work. It is not delivering products
or encouraging products that are understandable to consumers
who use them or that meet the reasonable expectations created
in the sales process. Instead we have gotcha banking. We have
multiple regulators by type of providers, even when those
providers are competing directly for the very same consumer. We
have long delays for regulatory action and we don't have much
of open public enforcement except by the FTC. And finally, we
have abusive features in products that are squeezing their way
through the holes in the existing law and the existing
regulatory scheme.
I believe the job of government is to serve the people. We
are not here to talk about more government, we are here to talk
about better government in financial services oversight. Today
our system isn't designed to do the job. It is spread out over
six or more agencies with a hodgepodge of rules and statutes,
and how much enforcement a provider receives depends in part on
who its regulator is. That is just not a system designed to
match the realities of today's market. We want to give the
federal government a different and new job in the financial
services marketplace, and that is to promote a fair as well as
an efficient financial services market to watch for the market
to prevent harms as they start to develop.
I come from the great State of California, where the option
ARM and some of the other products that have gone so terribly
sideways were pioneered, and you can only wonder if someone had
been watching those markets more closely whether that would
have spread around the country.
The mandate of the CFPA is the right mandate. It is to
promote transparency, simplicity, fairness with accountability
and access, and note I say ``promote.'' It is a different job
from what the federal government has had before, and with the
CFPA we have the opportunity for an agency who has an
obligation to get information, to learn about the market, to
watch that market and then to make a conscious decision about
what needs to be regulated and what doesn't and which
regulatory tools to use and then to apply those tools evenly no
matter who is providing the product. With the CFPA, we could
get one agency to watch over the market, faster-acting
responses, one agency that is responsible to you and to me when
things gone wrong, and one place for your constituents to go
instead of the alphabet soup they have now of trying to figure
out who to complain to and who to get relief from.
The CFPA model is one federal rulemaker but multiple
enforcers, and that brings me to the incredibly important
continuing role of the FTC. I would like to disclose, Mr.
Chairman, I was once a summer law intern at the Bureau of
Competition at the FTC, longer ago than could possibly be
relevant for today, but I want to disclose that. The FTC keeps
its enforcement authority. It keeps its section 5 authority
with a simple, regardless of the topic, financial services or
not, with a simple consultation that can be at the staff-to-
staff level. It keeps its authority with respect to all the
statutes it now has with that referral process, and I think it
is very important to note that is a refer and wait process but
they are not waiting for a yes or no. If the CFPA does not take
on a case the FTC thinks needs to be brought, it can still
bring that case. The CFPA cannot say no. We have made a
recommendation to you in the written testimony that the statute
should allow the CFPA to waive that notice or to shorten it by
individual case by type or category of case and by agency so
that they can work these things out where there is commonly,
for example, the telemarketer case with the EFTA claim. And we
also are recommending to you that the FTC be given the
authority to be a secondary regulator with respect to enforcing
the CFPA rules, not writing them but enforcing them.
The FTC does lose jurisdiction to write unfair and
deceptive acts and practices rules in financial services but
that has not been a role they have been able to use widely in
the last couple decades since the credit practice rule which
went into effect in the 1980s. They keep all of their
enforcement, and of course, it will be made stronger with the
aiding and abetting enforcement. We believe this is the only
way to put all the competing products under the same set of
rules. I have some examples but I will hold them for the Q&A
because I am conscious of your time, and I do want to say that
I think it is very important what the FTC does right now in the
recession. It is very important what the FTC will continue to
do after the transfer of authority in those cases where there
is overlapping enforcement and it will be extremely important
what the FTC does with its additional authority.
There are a lot of things the FTC can do right now to help
consumers who are suffering from the recession including
cleaning up the problem with credit-reporting errors, the work
it is now beginning to do under the new authority you gave it
in mortgage modification and foreclosure, debt collection and
debt settlement. All those things will remain extremely
important. I would be happy to take questions. Thank you.
[The prepared statement of Ms. Hillebrand follows:]
Mr. Rush. Thank you very much.
Mr. Calkins, you are recognized for 5 minutes.
TESTIMONY OF STEPHEN CALKINS
Mr. Calkins. Thank you. Chairman Rush, Ranking Member
Radanovich, members of the subcommittee, thank you for inviting
me here to testify about this important matter.
The proposed legislation would effect sweeping changes in
the Federal Trade Commission. The key to the bill is in the
definitions and they are written extremely broadly. Applying
those definitions and working your way through the bill, you
find that the bill would transfer out of the Federal Trade
Commission much of the work that the Federal Trade Commission
now does, giving those responsibilities to the new agency and
giving it the exclusive authority to prescribe role and issue
guidance with respect to much of what the Bureau of Consumer
Protection does.
If you take the FTC's most recent annual report for 2009
and turn to consumer protection and start reading what they
have done, subprime credit, mortgage servicing, foreclosure
rescue, fair lending, mortgage advertising, debt collection,
payday lending, Operation Clean Sweep, Operation Telephony, the
Sumtasia marketing case, payment systems, the Naovi case,
Nationwide Connections case, global marketing case and so on
and so forth, prepaid phone calls, on matter after matter after
matter of what they have been doing, I read the bill as saying
that all of that would be transferred to the new agency. In
short, we would have major change. Indeed, if you read the bill
carefully you would find that even some of the antitrust
responsibility of the Commission would be transferred. I assume
that is a mistake but that is how it is currently written.
Now, why have this sweeping change in what the Federal
Trade Commission does? It might make sense if the Federal Trade
Commission was a bad agency that was doing bad work, but as you
all have spoken so eloquently this morning, the Federal Trade
Commission is a good agency that has been doing good work. It
has a unique bipartisan structure. It combines consumer
protection and competition to bring the best from both
perspectives to bear on problems and it has been doing
important work for consumers including in the world of credit
for a very, very long time. Transferring responsibility from
the Federal Trade Commission to another agency obviously
creates some pretty significant risks, and my recommendation to
you is to proceed with great caution, to weigh those risks to
decide whether they are really worth running and certainly if
they are to work very hard to try to minimize those risks
because the bill as written would make major changes and you
need to be very careful to make sure that all of this makes
sense.
Thanks very much, and I am happy to answer questions when
the time comes.
[The prepared statement of Mr. Calkins follows:]
Mr. Rush. Thank you.
Mr. Cox, you are recognized for 5 minutes.
TESTIMONY OF PRENTISS COX
Mr. Cox. Thank you, Mr. Chairman and Ranking Member
Radanovich.
Abuses of consumer finance products were a disaster for
millions of consumers before anyone recognized them because we
had a financial crisis, a disaster. We heard previous testimony
about someone committing suicide. I have sat with people whose
families committed suicide after I worked with them who had
heart attacks from the stress. Millions of people experienced
this.
Our federal regulatory system did not respond to this. It
was dominated completely by the thinking and needs of the
lenders and sellers and not by what was happening on the
ground. It is often said that no one could have seen this. The
people who were working with the victims of subprime lending
and were talking to people who reflected the experience of
those people as well as the others who were subject to the
abuses of consumer finance products absolutely knew what was
going on and were screaming at the top of our lungs. No one was
listening. It was predictable and it was preventable.
The Consumer Financial Protection Agency as proposed offers
the first hope in generations, certainly in my adult lifetime
working on these issues, for an agency with sufficient power
and focus on consumer protection issues to seriously address
these problems. It gets it right in terms of its model. It sets
up a unified rulemaking process. It is not about whether the
FTC was good or bad. It is about the fragmentation of authority
and the lack of perspective and a unified rulemaker. It gets it
right and setting the floor and allowing innovation where
innovation should occur, which is in the state regulatory
system, and it couples that with an open enforcement system. It
allows the enforcement of those clear, unified rules to occur
in multiple places, and there are two reasons you want that.
The first is that you compare the proper enforcement agency
with the problem at hand. If you have got a problem that just
occurs in Indiana, the Indiana attorney general is the right
place to do it. It simply won't get taken care of if you allow
a federal agency. Conversely, if the Indiana attorney general
turns up a problem that appears to be nationwide, that can
highlight the need for the agency. Secondly, agencies like the
FTC and state attorneys general often will bring violations of
rules ancillary--which is what Chairman Leibowitz was saying--
ancillary to other investigations because these things don't
come up in little neat silos. So an open public enforcement
model, which is what this bill has, by allowing the Federal
Trade Commission and other federal agencies to enforce the
rules and state attorneys general to enforce the rules enhances
enforcement.
I will make two quick comments, one about the details of
the enforcement mechanisms and the other about the rulemaking
investigative authority. The open enforcement mechanisms in the
bill are excellent; however, I agree completely with Chairman
Leibowitz that the 120 days' restriction on the FTC is way too
cumbersome. It needs to be streamlined and made more efficient.
Secondly, and this is, I think, a very important point in the
bill as currently constructed--the FTC is given the authority
to enforce extant federal consumer credit laws but not the
regulations passed by the CFPA. The CFPA regulations over time
will become much more important than the extant consumer credit
regulations. It is really critical that the FTC get the
authority to enforce the regulations that are passed by the
CFPA.
There is also a consulting power in there, a requirement,
and that is correct and I hope that on an informal basis the
agency takes account of the fact that the FTC, which enforces
UDAP, unfair and deceptive acts and practices laws, gains a
particular type of experience and understanding that is vital
to setting those rules.
Secondly, state AGs have authority but mechanisms for
remedies need to be clarified because right now the section
1055 powers--it is unclear whether those are bootstrapped into
the AG enforcement.
Finally, in its rulemaking authority, the new CFPA
desperately needs detailed and express and clear investigatory
powers. Otherwise the data that is brought to bear in what the
rules are will be data held by the industry that the CFPA
simply doesn't have access to, so it is critical that the CFPA
have that investigative power so that they can get the rules
right the first time.
I really appreciate the opportunity to be at this historic
hearing and wish the Congress great luck in making this project
work.
[The prepared statement of Mr. Cox follows:]
Mr. Rush. Thank you very much.
Ms. Barkow.
TESTIMONY OF RACHEL E. BARKOW
Ms. Barkow. Thank you, Mr. Chairman, Ranking Member
Radanovich and members of the subcommittee. Thank you for
inviting me to testify before you today. I am honored to have
the opportunity to discuss this piece of legislation.
The linchpin of the Consumer Financial Protection Agency
Act is of course the agency it creates, so whether this Act
will succeed or fail in its mission to protect consumers will
depend entirely on whether the agency it creates will succeed
or fail. I therefore analyzed the structure and powers of the
proposed CFPA to determine if it has been designed in the most
effective way to achieve its stated statutory mission. I take
no position on the merits of that mission or whether there is a
need for a new agency to regulate this field. Rather, my focus
is on whether the CFPA has been designed as effectively as it
can be to achieve that mission. In that regard, I would like to
make six brief suggestions and observations about the design of
the CFPA and this legislation.
My first recommendation and the most important is to add a
provision to this Act that would limit the CFPA board's
membership to no more than three members of the same political
party. Unlike virtually all other legislation that governs
multi-member independent regulatory agencies including the FTC,
the SEC and the Consumer Products Safety Commission, the CFPA
Act as it is currently written does not require political
balance among the agency's membership. There is a wealth of
empirical studies that are demonstrating that a group comprised
solely of ideologically like-minded people tends towards
extreme decision making. Without a provision in the CFPA Act
requiring partisan balance, the CFPA is likely to change
positions from one extreme to another with each new
presidential administration. This is unhealthy for the
regulation of any market and certainly the consumer financial
products market. A political balance requirement can serve as a
stabilizing force. In addition, a political balance requirement
can lead to dissenting opinions, which is valuable for alerting
Congress and the public if the agency goes in an extreme
direction one way or the other.
Second, I suggest amending the Act's requirement that the
CFPA consult with all federal banking agencies and any other
relevant agency before passing rules to make sure those rules
will be consistent with the prudential market or systemic
objectives of the agencies being consulted. Because this
consultation requirement sweeps so broadly covering every
conceivable agency regulating-related field and anything of any
importance to those agencies, this process is likely to
dramatically delay the promulgation of CFPA rules. This is
precisely the kind of requirement that aids industry
participants in tying of agency rules for years. So unless
Congress is of the view that the delay in legal uncertainty is
outweighed by the benefits of this provision, I suggest making
clear that consultation is at the discretion of the CFPA and
not subject to judicial review.
Third, I advise modifying the statute of limitations
provision in the Act to begin running from the time the CFPA
discovers a violation, not from the time a violation has
occurred. Because violations by sophisticated business
interests are not discovered for years in many cases, this
provision is--as it is currently written--might hamper the CFPA
in its enforcement efforts.
Fourth, I recommend including a limitation on the ability
of CFPA board members to practice before the CFPA for a period
of time after their service on the board is expired. This kind
of restriction would limit the negative effects that are often
caused by having a revolving door between agencies and the
industries that they regulate.
Fifth, I just would like to highlight a protection in the
Act that I think is going to be critical to achieving the Act's
law enforcement objectives, and that is section 1042 of the Act
which allows the state attorneys general to enforce provisions.
The state AGs have demonstrated in many areas that they can be
effective law enforcement partners, and I think this is
particularly true in the area of consumer protection where
agency capture is a significant risk.
Finally, I would like to alert the subcommittee's attention
to the fact that it is unclear from this Act as it is currently
written whether the CFPA will be subject to Presidential
directives and oversight including review by the Office of
Information and Regulatory Affairs, known as OIRA. There is
language in the Act that suggests this is actually going to be
an executive agency and will be subject to this kind of
oversight. Congress may intend for the CFPA to be part of the
President's oversight process but if not, the Act would need to
be rewritten to make clear that the CFPA is an independent
regulatory agency for purposes of OIRA review. I take no
position on whether or not the agency should be subject to this
type of review but because it is a fundamental question, I note
for you that it is currently unclear in the legislation.
Thank you again for allowing me to testify and share my
thoughts on this proposed legislation, and I would be happy to
answer questions when we are all done speaking.
[The prepared statement of Ms. Barkow follows:]
Mr. Rush. Mr. Stinebert.
TESTIMONY OF CHRIS STINEBERT
Mr. Stinebert. Thank you, Mr. Chairman, and thank you for
this opportunity to speak with you today. I am very glad to
hear that this is kind of a first step and hopefully which will
be a long process because as many have expressed here today,
there are certainly some concerns about this issue and we hope
that there will continue to be somewhat of a cautious approach
as we go forward.
The American Financial Services Association has been around
for almost 100 years and we represent about 30 percent of all
consumer credit in the United States with members in the
mortgage, credit card, auto and personal installment loans.
First and foremost, AFSA supports strong financial consumer
protection regulation. Just because we have concerns going
forward about the current agency does not mean that the
industry and that the association is not committed to strong
consumer protection regulation regarding financial services. We
believe that consistent enforcement of existing consumer
protections laws by government regulators would have greatly
lessened the harmful impact that the current crisis has on
consumers and certainly our economy. Many AFSA members are
regulated primarily at the State level and subject to a
patchwork of requirements. We firmly believe that consumer
protection should be uniform in every State. Therefore, AFSA
supports strong national consumer protection standards that
allow the members to meet their consumer protection obligation
in an efficient and cost-effective manner.
In addition, strong national consumer protection standards
will provide a benefit to consumers only to the extent that
they are consistent with sound potential regulation. Consumer
protections that threaten the safety and soundness of financial
service providers offer really no protection at all. We believe
consumers will be better served by a regulatory structure where
prudential and consumer protection regulations are housed
within a single regulator. Congress tried to separate these two
intertwining functions with the GSEs. When it became apparent
that this situation was unavoidable, Congress brought the two
regulatory functions back under a single regulator and for good
reason. We urge Congress to support regulatory structure that
does not separate safety and soundness from consumer
protection.
The authority proposed to be vested in the new agency is
breathtaking in both its scope and its effect. It would cover
many entities and persons who have little or no involvement in
the activities leading to the current economic crisis. Without
any demonstrated need, many unsuspecting persons will be swept
into a web of scrutiny and reporting requirements that yield
little in the way of consumer protection but much in the way of
increased cost for consumers. Attorneys, accountants, consumer
reporting agencies, auto dealers, title companies among others
will find themselves subject to review with no evidence that
they behaved unfairly. Financial service providers will find it
increasingly difficult to plan for risk as virtually any
practice or product other than prescribed standard plain
vanilla products could be labeled as unfair or abusive.
Innovation will be discouraged.
Given the vast scope of the proposed agency's authority,
its funding needs are also staggering. The proposal seeks to
fund the CFPA by assessing fees on persons and entities it
regulates while including many that would not expect to be
covered currently. There is no doubt that any assessment on
financial service products will be passed on eventually to
consumers. That direct unavoidable result will be an increase
in the cost and availability of credit.
Most AFSA members are regulated by the FTC, which has a
proven record of enhancing consumer protection. It has
addressed the economic crisis in two ways, first by using the
enforcement authority to pursue bad actors in the financial
services industry, and second, by setting federal policy
through guidance and public comment. Numerous examples are
listed in our written testimony.
But in conclusion, AFSA believes that the FTC has done an
excellent job in enforcing consumer protection law and is best
suited to continue that role going forward. We believe the
Administration's goal can be achieved with adjustments to the
current regulatory structure and the result will be more
efficient, less costly and certainly more effective. To that
end, we have two specific suggestions. One, make current and
future consumer protection rules apply to all financial
services providers. Congress should ensure that all federal
consumer protection laws and regulations apply with equal force
to all providers of financial services with respect to similar
cases of products and services. These laws should include
strong national standards that preempt State laws and permit
all Americans to enjoy a consistent level of service and access
with respect to financial products and services. We have heard
again and again today as you have 50 different States that can
meet or exceed the current laws that this is not
simplification. We are just going to wind up with 51, as you
stated, Mr. Chairman, different rules that these people are
going to have to follow.
And number two, pursue a regulatory structure that does not
separate financial products and services from the viability of
the companies that offer them. All prudential agencies should
work together to coordinate consumer protection regulation for
financial products and services with the goal that regulations
be preemptive, consistent and uniform. If we don't have that,
we are not going to make any headway. Thank you for your time.
[The prepared statement of Mr. Stinebert follows:]
Mr. Rush. The Chair thanks the witnesses and the Chair now
recognizes himself for 5 minutes for questioning.
According to the Administration's proposal, the States will
be able to enforce the statutes and rules being transferred to
the new agency right away. In contrast, the FTC will be
required to provide the CFPA with notice of a proposed action
and has been stated earlier wait 120 days for the CFPA to
determine if it would take the case before it takes any action.
This applies to the very rules and laws currently enforced by
the FTC.
Mr. Calkins, in your testimony you suggest that this 4-
month delay will prevent the FTC from ever investigating or
taking action in these areas. Can you explain and expound upon
that, please?
Mr. Calkins. When I read the bill, I sat and tried to think
about what life would be like under the new legislation and the
120-day rule, what would the FTC do, and as I thought about it
and I read the bill, I read where the bill says ``all consumer
financial protection functions of the Federal Trade Commission
are transferred to the other agency.'' So who at the FTC is
going to be doing the work to find that there is a violation
that they wish to use the 120-day rule to develop. Maybe the
FTC will go out and develop new resources to do this. Does that
make sense? And I don't think that makes sense because the
whole point of the bill, it appears, is to transfer a large
part of what the FTC does to this new agency. Let us talk about
the 120-day rules. Well, we have experience with the FTC and
the Department of Justice where the FTC can ask the Justice
Department to bring a civil penalty action for it, 45 days
there. The reality is that the FTC, although I am not sure they
would admit it, goes out of its way to avoid using that
authority. It is a lot more effective and efficient for the
Commission to go directly to court, bring an action, take
action against a wrongdoer, stop a fraud, stop some harm, get
relief and so they use the authority they can use by
themselves, and time and again they don't go to the Department
of Justice. I think that 120-day authority will be very rarely
used in the new world. It is really there in case we have a new
agency that is so opposed to enforcing these rules than an FTC
might come along and try to develop some sort of alternative
world as a backstop, but I think that the world that I see
would have the FTC using this authority very, very rarely and I
just do not think that is the vision contemplated by the bill
as written.
Mr. Rush. Does any other witness want to chime in here? I
am hearing skepticism on the part of the other witnesses. Ms.
Barkow, are you skeptical of this backdrop rule?
Ms. Barkow. It does seem like 120 days would be the
equivalent of a lifetime in this kind of an industry where you
are talking about the----
Mr. Rush. Well, if it was 60 days, would that make a real
difference?
Ms. Barkow. Well, that I leave to the FTC to decide but the
fact that they are worried about the 120 days I think speaks
volumes about the fact that it is probably going to be a
significant issue.
Mr. Rush. Does anyone else want to chime in here on this?
Mr. Stinebert. Well, I think if you look at some of the
discussion that occurred earlier and they were talking about
the number of days, but perhaps more importantly look at the
actual structure. If they have taken so many of the personnel,
the team has been taken from the FTC and is now part of the new
agency and yet they are supposed to maintain the backstop or
the backup in these areas, but the team is gone, and as Mr.
Calkins suggested, all they can do is go out and rehire new
experts that are supposed to be the backup. It doesn't sound
like a very good system to me.
Mr. Rush. Ms. Hillebrand?
Ms. Hillebrand. Yes. Thank you, Mr. Chairman. Under the one
rule writing many enforcers model, we want it to be as easy as
possible for the FTC to bring the cases in its existing
jurisdiction as well as to enforce the CFPA rules. If the
Commission recommends a shorter time period, we would want you
to look at that very seriously. We think a waiver process also
could help here. The Commission and the CFPA could agree that
for this kind of case we don't need to know in advance and for
these other cases we need a shorter period.
Mr. Rush. The Chair's time is concluded. The Chair
recognizes the ranking member, Mr. Radanovich.
Mr. Radanovich. Thank you, Mr. Chairman.
Mr. Calkins, the proposed legislation defines a covered
entity to include those who provide tax planning, financial and
other related advisory services or provide educational courses
and instruction materials to consumers. PBS often runs such
programming on TV for their audiences as do financial cable
stations and radio stations. Would these entities be covered
persons under the proposed legislation, in your opinion?
Mr. Calkins. Certainly there is a risk that they would be
covered persons. Certainly the Commission would have to think
about whether it was required to transfer responsibility for
all those and then, very important, even if they are not
covered entities today, the new agency has authority to define
for itself additional activities that it would have
jurisdiction over, and so even if the FTC didn't have to
transfer authority today, they might have to transfer authority
a year from now when the definitions got changed.
Mr. Radanovich. Thank you, Mr. Calkins. I want you to
comment on a prior statement about the FTC's bipartisanship in
the way it conducts its activities and how that is good. Can
you elaborate on that and how the lack of bipartisanship might
hinder the CFPA's ability to effectively carry out what is now
the FTC's mission?
Mr. Calkins. Well, the FTC I think has over the years
developed credibility with Congress, with the States, with
international observers because it operates in a bipartisan
way. The commissioners try to work by consensus. They try to
take the actions that make the most sense. When somebody wants
to go out on a limb and be really wild and crazy to the left or
the right, there is someone from the other side to pull them
back in. As noted before, Ms. Barkow, when you have people
going too far, dissents can be filed, and it succeeds in
developing a shared understanding of the sensible way to
proceed and then as presidents come and go there exists some
continuity and that continuity I think adds credibility to the
agency's operations and really has made it into a more
effective agency.
Mr. Radanovich. All right. Thank you.
Ms. Barkow, would you care to respond to that question as
well?
Ms. Barkow. I agree completely, and I think that the whole
idea of an independent regulatory agency which I think is part
of the goal in this legislation is to have that kind of
consensus generating form of norms that transcend any
particular presidential administration so that you don't have
the instability that comes with every new presidential
administration means sweeping changes one way or the other. You
have a stabilizing force in an agency that has membership from
both parties. I think it has proven to be effective in other
context and it is hard to understand why you would have a
multi-member agency here that doesn't have that mix of
political views on it. I mean, why not just then have a single-
member board.
Mr. Radanovich. Thank you very much.
Mr. Stinebert, I want to ask you about uncertainty in the
financial markets, this massive shift of responsibility and the
creation of a new agency on consumer protection, your bird's
eye view on the industry, how it would react to something like
this and the level of uncertainty that it might bring into the
markets where uncertainty is--we are trying to do everything to
avoid uncertainty. Would you comment on that, please?
Mr. Stinebert. Well, some might argue that this is the
perfect time to do something like this. I think it is
absolutely the worst time. We are finally starting to see some
stability in the financial markets. We are starting to see some
recovery. We are starting to see investors come back into the
marketplace, which eventually investors have to buy these loans
out there. In Europe and the United States, we are starting to
see movement back in there. This does introduce a whole level
of uncertainty back into the whole arena because people are now
going to stand back and wait and see what goes on, whether
there is additional liability requirements and regulations on
these entities. So yes, I do agree that is going to bring a new
level of uncertainty into the marketplace at the worst possible
time for that.
Mr. Radanovich. Can you describe a scenario where the
duplicative regulatory authorities allowed by this Act's weak
preemption provision might actually prevent consumers from
access to valuable financial services? This is the State
preemption issue where you would have 51 different----
Mr. Stinebert. Right now it is set up as basically a floor
or a standard that States will have the ability to exceed.
Someone will make a judgment whether what the State is trying
to do is meeting or exceeding. I am assuming that would be the
new agency. But if a determination is made by them that it
exceeds it, of course anything that they would do to exceed
would be permitted. So I think you have seen it in many other
instances. I will give you the most recent, the new SAFE Act.
That was the licensing for residential mortgage originators.
You basically have out there in the implementation of that law
50 different standards that everyone is trying to meet and each
of them, many of them exceeding the federal guidelines. So
people that are regulated at the State level will have to
register in multiple States as originators are going to have to
follow very, very many different laws.
Mr. Radanovich. Thank you very much. Thank you, Mr.
Chairman.
Mr. Rush. The Chair now recognizes the gentleman from
Massachusetts, Mr. Sarbanes--Maryland. I am sorry.
Mr. Sarbanes. We are trying to get to Massachusetts. We
have one Republican left. Thank you, Mr. Chairman. I appreciate
the hearing.
Mr. Stinebert, you said this is absolutely the wrong time.
What would be a good time?
Mr. Stinebert. Well, I think when you go back, and there is
plenty of history to point fingers at what was the cause of the
subprime mortgage crisis and currently economic crisis but I
don't think you would get anybody that would predict that
whatever is done here today or by Congress that you can control
every bubble that is going to occur in the future. Most
economists would agree that yes, this bubble is a housing
bubble, before it was a tech bubble, before that it was a
savings and loan bubble. You cannot have government totally
controlling financial markets unless they can totally control
potential bubbles, unless you totally stymie innovation and all
you have is a plain vanilla standard product out there, and I
don't think that is good for the very consumers that we are
trying to protect here.
Mr. Sarbanes. Yes, I agree with that. I mean, I don't think
you can have government totally controlling every single
financial dimension in the market. I don't think you can do
that. I don't think this tries to do that. I think what this
tries to do is provide some oversight and direction and rules
of the road so that people stop driving off the road, not only
because in the view of Alan Greenspan that causes the drivers
to crash and hurt themselves but because they run over hundreds
of thousands of innocent bystanders in the process.
Let me switch back to a discussion from a few minutes ago
because I think it is very relevant. As attractive as the new
agency may be to some, and I am partial to it as it is being
described, we still have to get from here to there, and I worry
a lot because even if we had in place now the regulatory
structure that we thought was necessary, it would have to be in
overdrive, I would argue, to be on the lookout against
predatory action that is lurking out there. But certainly in a
transitional phase, predators have a lot of opportunities to
make mischief, and I think the discussion about the 120 days
kind of points to some of this anxiety, but I would like anyone
who would care to, I would like to hear you respond to the idea
of some kind of a special initiative or taskforce or
consciousness that during this transition we need to be paying
attention to, maybe it is a limited set of activities or
potential mischief but there has got to be a special focus on
that so that we don't make the transition, say now we have got
a good regulatory structure in place, but in the meantime while
that happened, a lot more people got hurt, and I say this
because there is a lot of money that is flowing right now,
taxpayer money, into the financial infrastructure of the
country and many of the same players that took advantage of
people over the last few years are thinking creatively of ways
to take advantage of them again by accessing some of these
dollars. So speak to that issue of how we can not be caught
napping during the transition. We can start with you, Ms.
Hillebrand.
Ms. Hillebrand. Thank you. I believe you are asking exactly
the right question. There will be a danger period during the
transition. There are a couple of things, and I don't have the
whole answer. One is the work that the FTC does right now and
continues to do up to that date of the transfer of rulemaking
so it will be incredibly important. It could be up to 2 years
after enactment. If these two titles are enacted together, the
FTC will get its rulemaking improvements right away and can get
some of these rules that have been kind of backlogged because
of the limitations on its power moving into place. That will
help certainly to put that policing into place. We do need to
be paying attention to the new problems that will be
developing. One that worries me in particular is a new form of
zombie debt. You know, that is a debt where no one has got the
paperwork, someone just has a list saying you owe this money,
that might come out of some of these mortgage unsuccessful
modifications or post kind of mortgage dispositions. So there
are new issues, a lot of old issues. The more we can get the
FTC to do now before the transfer, I think the better shape it
will be in, but we will have to watch for that, yes.
And the other thing is, there is not going to be enough
enforcement resources. Moving people from where they are over
from all the different agencies is not going to give us enough
enforcement staff to do the whole job for the country. The FTC
worked very hard. They said they had 100 cases over 5 years. If
you talk to any State AG in the country, they will tell you,
100 cases, we could bring that in my State tomorrow. There is
more need than the number of people that are currently in place
to do consumer protection enforcement financial services at the
federal level.
Mr. Sarbanes. Yes, sir.
Mr. Cox. I think you need to break your question, which is
a great question, in two parts. One part is more scam-like
activities, and I think this Congress effectively delegated the
FTC, charged to go over foreclosure rescue scams where a lot of
mortgage brokers were moving in and loan modification scams and
that kind of thing. That kind of activity the existing
authority clearly is sufficient to regulate and the additional
authorities recently give them help. You break that from more
traditional and large-scale sale of products such as mortgages,
et cetera, and I think in that area the credit markets are so
beaten down that I think that this agency would be up and
running effectively to get ahead of the new products that would
be----
Mr. Sarbanes. OK. That is helpful. Thank you very much.
Mr. Rush. The Chair will extend to the members additional
time for one additional question, and the Chair would recognize
himself for one additional question.
I want to get back to this area of concurrent enforcement,
and, you know, are there any risks or downsides to consumers or
industry with this whole idea of concurrent enforcement between
two agencies? Can you predict or look into a crystal ball and
tell us what you see in terms of downsides or harm to the
industry or to consumers regarding this whole area of
concurrent enforcement? Anybody want to jump in? Mr. Stinebert?
Mr. Stinebert. Well, I will give it a try and go first. One
of the whole things that I think the agency being proposed is
supposed to do is have single-source responsibility. Then you
take enforcement and you break that among current enforcement
agencies and then you have a new agency that is supposed to
share some type of dual enforcement. It doesn't sound practical
to me. We think that enforcement should continue to stay with
the existing agencies. Now, to your question, Congressman,
about the timing and you mentioned the speed limit and the
people watching the people going down the road, I think that--I
don't think anybody would deny that the regulations or the
speed limits were in place but up until several years ago that
perhaps the regulations were in place but the enforcement and
the oversight was not. But I think if you look today in all of
these agencies whether it be the FTC or the other agencies in
Washington, I think everybody has their radar guns out and are
certainly looking at consumer protection issues as well as
credit and lending issues in general. I don't think there has
ever been a focus in this area like there is today, and so to
that respect, I think that going back to your question, Mr.
Chairman, I think that it is very important, I think most
important, that there be continued responsibility between
safety and soundness and the viability of those companies and
consumer protection, and I think it is unwise to separate those
two entirely. We have gone through a good example with the GSEs
of trying to do that and finding out why that doesn't work, and
it would be very simple if that agency that is just concerned
about consumer protection can make everything so safe that is
not really good for the companies offering those products or
for the consumers themselves. There is always going to be risk
in this industry. That defines what it is. And I don't think
you an eliminate that entirely.
Mr. Rush. Ms. Barkow.
Ms. Barkow. I think it is a really good question and I
would say that I think it is not so much of a risk as long as
the rules of the game as clear, so as long as you have the one
agency that is setting the rules and what it is that companies
have to do, the fact that there would be multiple enforcers of
those rules is less disconcerting because you have clear
standards and everyone would know what they are and you would
have essentially this kind of more cops on the beat analogy and
so that is why you could have state AGs helping out, you could
have the FTC helping out. You would just be getting more
manpower. But the rules would be clear. So really the success
of it would depend upon what kind of rules end of being
produced from this process, and I guess I would just state,
that is why it works to have, for example, all the States can
police Medicare fraud, for example, and it is not a risk
because everybody knows what they are looking for and so it
would just be really important for the agency that is created
to have clear rules, and if they see an enforcement action that
looks like it is not really in the spirit of those rules, the
act as it is written, for example, if the state AG brings it,
the CFPA could intervene and they could step into that action
and make clear that that is a bad interpretation of their rule
or it is a bad enforcement action. So I think it is oK to have
multiple law enforcers and in fact probably necessary because
there just aren't enough resources for all the fraud that is
out there.
Mr. Rush. Ms. Hillebrand.
Ms. Hillebrand. Thank you, Mr. Chairman. I had to think for
a moment about your question to remember that there already are
six concurrent enforcing authorities. It is just that the
banking agencies haven't used that open public enforcement
model to bring cases with the vigor and approach that the FTC
has used. So we already do have concurrent enforcement and the
downside has been that many of the agencies other than the FTC
that have enforcement authorities also have other obligations
that tie them very close to the industry that they regulate. At
least with the concurrent enforcement authority with the CFPA
and the FTC, we won't have that problem and I think that is a
good step forward.
Mr. Rush. Mr. Calkins.
Mr. Calkins. Mr. Chairman, I think that concurrent
enforcement authority could work if done carefully but I worry
that there is too much attention to the FTC as an enforcer. I
prepared for this over the weekend when the Web site was down
so I was reduced to the documents that I happened already to
own. I owned a 2004 annual report that happened to be in my
files. I opened it up to consumer protection where the FTC has
a good list of the range of activities in which the agency
engages and that is part of what makes it a success. Consumer
protection policy, one, research and reports; two, hearings and
workshops; three, advocacy; four, amicus briefs; five, consumer
and business education and outreach. The FTC is not just a cop
on the beat. It is an agency that has economists, that does
competition, that does consumer protection and uses a whole
range of tools to develop expertise, to identify problems and
to craft solutions, and if a huge part of what the FTC does as
a matter of subject matter is transferred out and if the new
agency has the exclusive authority to give guidance in this
way, then we have lost a very great deal of what the FTC does
and I think that the consumers would be the worse for it.
Mr. Rush. Mr. Cox.
Mr. Cox. Chairman Rush, I think ultimately the industry
will make two arguments about he concurrent authority and the
problems with it. The first is, it is too much enforcement, but
as Ms. Hillebrand said, and as someone who spent years making
priority lists, your list is way longer than you will ever get
to and the problem with this bubble bursting was not too much
enforcement. The second problem which is more subtle or real is
an inconsistency in enforcement policy, and Ms. Barkow
appropriately says that this rulemaking authority, if it is
clear, if the rules are clear enough, certainly will solve the
problem, and I would further say that the CFPA is given the
sufficient authority to make sure the is happening in a uniform
way.
But there is a second response to the inconsistency, which
is unlike rulemaking where I agree you want a unified
rulemaker, when it comes to enforcement, this is where
regulatory competition actually works because you are competing
to be a better enforcer as opposed to competing for a race to
the bottom so that people will charter with you, which was a
serious problem in creating this situation. And when you
compete to do better, you are aware that if you don't do it and
somebody else enforces your rule in a situation that you might
get embarrassed, Madoff, SEC, you know, that when you have
competitive enforcement you have a market that essentially
forces public entities to be aware of that. That actually
works, and when it comes to UDAP authority, I just want to say,
it is so important. The state attorneys general, and I am
patting myself on the back here because I was part of a small
group who did this. We were the only ones out there screaming
about and bringing these cases. The FTC was saying it is great
because they were going after different actors but did one case
where we got half a billion dollars back to people with
subprime mortgages followed by another case where there was
$300 million and I thought that was too little and I had left
by then. I mean, this was a problem that if you were on the
ground you saw it. I mean, it was visceral. These people were
utterly out of control. The State AGs were able to enforce it
because they had a different enforcement agenda. They were
sitting at a different place. Regulatory competition works in
terms of an open enforcement model.
Mr. Rush. The Chair now recognizes Mr. Radanovich for one
question.
Mr. Radanovich. Thanks, Mr. Chairman. I appreciate
everybody's testimony but Mr. Cox, what I thought I heard was
that we need multiple agencies having to do the same job to
make sure that the people are doing their job, and that to me a
recipe for wasted spending. But I do want to ask you a question
about, I believe it was Ms. Sutton who was here earlier talked
about a situation where an 84-year-old woman who owned her
place free and clear was duped into a 30-year mortgage. I would
like to know whether or not there was family involved putting
her up to that and that happened for reasons that wouldn't have
anything to do this with this current financial crisis. I
happen to represent Stanislaus County in California. It is the
epicenter of mortgages, the number one county in the Nation
where mortgage defaults and foreclosures have happened. So I
have a great appreciation for what is happening here. And you
would hear tales about, one in particular, non-English-speaking
people that were talked into a home that all they needed to do
was come in and sign the papers. Once they got there, they were
jammed with points and fees that they knew absolutely nothing
about and were put into an uncomfortable situation, signed the
mortgage papers, later lost the house. So I am curious to know
after we have spent in reaction to this financial crisis
anywhere between $800 billion to $1.5 trillion dollars to
stimulate the economy. We get a rise in the unemployment rate
that was supposed to drop with all that spending. I am a little
leery of broad, sweeping reactions to the problems that we are
in. So how does something like--and I would offer that to you,
Mr. Cox, Mr. Stinebert or anybody else that wants to respond to
this thing. How would that help the person--I am not sure about
the Sutton case, and I want to know whether the family put her
up to that, that poor, unfortunate, elderly person up to that
situation. But my situation in Modesto, California, where the
non-English-speaking person was jammed into that loan and a
shyster put points on there and then they quickly sold the
mortgage to somebody else and this guy was washing his hands
and he was out of there. How does this broad, sweeping change
that you are talking about prevent something like that from
happening and at what cost any more so than what is currently
on the books to prevent?
Mr. Cox. Thank you, Ranking Member Radanovich. I will
respond to that by also responding to Mr. Stinebert's earlier
comment, that we all agree that the regulation that was there
was an enforcement problem. We don't all agree on that, and
here is--the problem had two parts to it if you want to break
it into its grossest problem. The first part was the type of
products that were being sold. They were simply way too high
risk, way too complex and way too aggressively sold for average
consumers to work through all the problems and understand all
the costs and consequences and the context of these mortgages.
For instance, held up at the time as the great financial
innovation, the payment option ARM, it was sold so aggressively
on its benefits but its risks were not clear to the average
consumer, to my aunt. You know, it was the kind of thing I
could have sold her on if I was an evil person without
informing her of the risks. So there is a product regulation
problem that existed here. The Fed, if you read the Fed's
papers during this time and you put them right next to the
industry's papers, you could change the titles and you couldn't
tell the difference. There was one type of thinking. That needs
to change.
The second problem was a fraud problem. The fraud problem
got so far out of control, I have never seen anything like it.
You know, if you were talking to the people and you saw this
going on, if you talked to the ex-workers in these agencies, et
cetera, in these companies that were selling these things,
fraud was so rampant in this industry that, you know, that was
almost a separate problem from the product regulation problem,
and so we also had a lack of enforcement, particularly at the
federal level, you know, on fraud but we fundamentally had a
product regulation problem. I hope that responds.
Mr. Radanovich. Mr. Stinebert.
Mr. Stinebert. Commenting back to Mr. Cox's earlier
discussion about whether we should have multiple regulators is
a good thing, I ask you, if you are a business and you have
multiple regulators, two and three regulators, is competition
really good if you are the regulated entity and the costs that
are involved in that. I mean, so the FTC is in your office one
week and having your staff gather everything else and the next
week, you know, another regulator is in there. I can see where
there might be some contention where that is good but you won't
have businesses, anyone that operates a business, small profit
or a large business having multiple regulators and enforcers
coming into your offices is necessarily a good thing because--
and all of those costs are eventually passed on to consumers.
These do not happen in vacuums. So, yes, there are protections
I think that need to be in place and you are absolutely right
about that, but I do think you can overdo a process to. We want
to have a process that protects consumers but is efficient for
everyone involved, that it is efficient for the safety and
soundness and the viability of the companies that are being
regulated as well as good for the consumers that are buying
their products, and I think that that is an important thing.
Mr. Radanovich. Thank you, Mr. Chairman.
Mr. Rush. The Chair recognizes the chairman emeritus, Mr.
Dingell.
Mr. Dingell. Chairman, I thank you for your courtesy.
This question is to Gail Hillebrand and to Professor
Calkins. What authority will remain in the FTC to protect the
consumers after the Administration's plan has been adopted if
it is adopted in its current form?
Ms. Hillebrand. Thank you, Chairman Emeritus. The FTC
retains all of its authority to bring section 5 enforcement
subject only to a staff level of consultation, coordination and
discussion----
Mr. Dingell. But we would lose that authority?
Ms. Hillebrand. The FTC retains that authority. I am going
to give you a list of things it retains. It retains its section
5 authority. It retains its authority to bring cases under the
statutes and rules for the enumerated consumer statutes. That
is our alphabet soup: ECOA, EFTA, reg Z and so on. It retains--
well, those are the big things that it retains. It also retains
its pure fraud authority. I mean, there are financial services
and then there are people who tell lies who say sign up with me
and give me your Social Security number and your checking
account number and you will never see me again. It retains that
authority. Those folks are not selling financial services, they
are selling lies, and it retains that authority, and we have
recommended that it also be given the same kind of backstop
authority that it now has currently and would have under this
proposal for the existing consumer statutes with respect to
enforcement of the CFPA rules. That is not yet in the proposal.
Mr. Dingell. Now, what would it lose? What would FTC lose?
What consumer protection jurisdiction would it lose?
Ms. Hillebrand. Yes. The FTC would lose the jurisdiction
that has been important but difficult for it to use which is
its authority to develop unfair and deceptive acts and
practices rules in the financial services area. I am sure you
are aware the last time that authority was used was in the
credit practices rule, which came into effect in the mid-1980s.
Mr. Dingell. OK. Now, why should that be taken away from
FTC?
Ms. Hillebrand. If we were looking at just the FTC, there
would be no reason to take it away, but the problem is, we
need----
Mr. Dingell. There is no reason to take it away?
Ms. Hillebrand. No, I am not quite finished.
Mr. Dingell. Let us just go a wee bit further and explain
to me why we should give it some of those goodhearted folks who
led the fight for the repeat of Glass-Steagall who deregulated
banking and financial services and who left us this glorious
mess which we now have in the form of probably the biggest
depression that this country has had since 1929. Now, why
should we do that?
Ms. Hillebrand. We need to give the authority to an agency
that can make one set of rules that applies to the bank
provider and the non-bank provider. If the FTC----
Mr. Dingell. I have no objection to taking care of the bank
regulatory agencies. Let them create them and let them do their
thing. But why wouldn't we want the honest men and women at FTC
looking over their shoulder and why wouldn't we want them
looking over the shoulder of those goodhearted banks and
financial folks and MBAs up in New York that created this mess?
Now, help me. Why wouldn't we want that?
Ms. Hillebrand. We definitely want oversight. We want
someone who can look over no matter what kind of----
Mr. Dingell. Do you like the idea of having the FTC sort of
keep an eye on those people?
Ms. Hillebrand. We like the idea of having an agency that
can look at everybody, not just the non-bank providers, keep an
eye, and we think the best way to----
Mr. Dingell. And what about all the goodhearted banks that
are going to be engaging in all kinds of things? They are going
to be engaging in real estate, they are going to be engaging in
issuing of bonds and securities. They are going to be engaged
in all kinds of wonderful activities on derivatives which are
really gambling devices. So why shouldn't the FTC retain its
continuing and ancient jurisdiction over keeping honest men
honest and maybe occasionally catching a rascal? Now, why
should we take that away from FTC?
Ms. Hillebrand. Mr. Chairman Emeritus, I respectfully
suggest----
Mr. Dingell. You represent consumers. Why shouldn't we just
leave FTC as it is and let these other folk go about their
nefarious business under the kind of weak-minded regulation
that the Treasury has traditionally given to these
institutions?
Ms. Hillebrand. We are absolutely in favor of----
Mr. Dingell. I will give you a good reason for that. You
are speaking here for the consumers, and I am trying to figure
out do you really understand the consumers' needs or are you
engaged in perhaps disregarding the consumers because these
other folks have done a better job of telling you what a
wonderful job they are going to do after they have brought
about not one but two depressions?
Ms. Hillebrand. I am looking at it from the point of view
of the ordinary person who is trying to get a mortgage, and
they want to know--I mean, the consumer doesn't think it is----
Mr. Dingell. No, no, you are giving me a wonderful answer
but it is to the wrong question. Answer my question, please.
Ms. Hillebrand. The answer is, we think----
Mr. Dingell. Why should we not keep FTC in its traditional
jurisdiction of protecting consumers? When I was a boy,
Roosevelt tried to give FTC jurisdiction over the stock market,
and you can't imagine the outrage that this generated in New
York because they were scared to death of the Federal Trade
Commission, which is under the jurisdiction of the committee.
We keep them honest. And we find that as soon as the FTC got
away from this committee, they all of a sudden became a wholly
owned subsidiary of the securities industry and the banking
industry. Now, why should we sanctify that by stripping the
consumers of the one remaining protection which they have, the
FTC, in favor of giving it to a congregation of folks well
known to be influenced by some of the worst scoundrels in our
society?
Ms. Hillebrand. Are you ready for my answer? We believe
that we need to put it in one place so that the non-banks
aren't saying oh, don't regulate us the banks can still do
that. The banks are saying oh, don't regulate us because the
other guy can still do it.
Mr. Dingell. We don't mind having this agency that would be
created by the Administration's proposal do that. What we want
is to have the FTC there so as to sort of watch over these
people and let them know that there are honest men and women
watching them so that the rascality is diminished and the
consumers are protected. What is wrong with that?
Ms. Hillebrand. I think we have the same goal and perhaps a
different with respect about how to get there.
Mr. Dingell. So then are you telling me that you like the
idea of having the FTC continue its jurisdiction while these
other goodhearted folk go about their nefarious business?
Ms. Hillebrand. We have endorsed full retention of FTC
enforcement authority but we think----
Mr. Dingell. We have talked about what FTC is going to lose
and you are apparently advocating the losing of it. I am not of
a view that maybe we want FTC to lose that jurisdiction and
maybe we want FTC to be around to sort of provide a minor
dampening of the rascality which is going to continue to occur
in the financial services industry. Now, what is your objection
to that?
Ms. Hillebrand. We believe that you need----
Mr. Dingell. Dear friend, in just a few words, what is your
objection?
Ms. Hillebrand. Put the rulemaking in one place so that it
is very clear whose job it is, and then you can hold them
accountable.
Mr. Dingell. They arranged that one-stop shopping when they
moved this whole thing across the hall, and since then the
whole financial services industry of the United States has had
to be bailed out to the amount of $700 billion, which was
congregated by Mr. Paulson, who came from that industry, and
which has done nothing but enriched the same rascals that had
caused trouble, and it has not only enriched those rascals but
it has given us something new to think about, and that is, it
has seen to it that they have had the funds to pay the same
scoundrels who made the mess enormous bonuses amounting to as
much as $165 million in one instance. Obviously, this is the
product of one-stop shopping which I suspect you were telling
me you support or maybe you want to tell me now you don't
support.
Ms. Hillebrand. We are trying to end the ability to shop
for your regulator by having one entity write the rules no
matter what kind of charter and what kind of provider. That is
our position.
Mr. Dingell. Well, I have to say, I think somebody else
wrote your statement but I thank you for your presence, and Mr.
Chairman, I thank you for your courage and ability to bring
this event about. Thank you.
Mr. Rush. The Chair thanks the chairman emeritus. The Chair
thanks the witnesses. This hearing now stands adjourned. But
before we adjourn, I wanted to let you know how grateful we are
for you to extend your time with us and spend your time with
us.
By unanimous consent, I request that members submit all
questions to be sent to the witnesses for the record within
seven calendar days and that witnesses will respond promptly to
the questions that are submitted to them. Thank you so very
much, and safe travel.
[Whereupon, at 2:15 p.m., the subcommittee was adjourned.]
[Material submitted for inclusion in the record follows:]