[Senate Hearing 111-274]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 111-274


   CREATING A CONSUMER FINANCIAL PROTECTION AGENCY: A CORNERSTONE OF 
                   AMERICA'S NEW ECONOMIC FOUNDATION

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   ON

   THE CREATION OF A CONSUMER FINANCIAL PROTECTION AGENCY TO BE THE 
            CORNERSTONE OF AMERICA'S NEW ECONOMIC FOUNDATION

                               __________

                             JULY 14, 2009

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate/
                            senate05sh.html






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20402-0001



            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii              BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  JIM DeMINT, South Carolina
JON TESTER, Montana                  DAVID VITTER, Louisiana
HERB KOHL, Wisconsin                 MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                    Edward Silverman, Staff Director

              William D. Duhnke, Republican Staff Director

                      Amy S. Friend, Chief Counsel

             Jonathan N. Miller, Professional Staff Member

                   Kara Stein, Legislative Assistant

                     Randall Fasnacht, GAO Detailee

                Mark Oesterle, Republican Chief Counsel

                Andrew J. Olmem, Jr., Republican Counsel

                       Dawn Ratliff, Chief Clerk

                      Devin Hartley, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, JULY 14, 2009

                                                                   Page

Opening statement of Chairman Dodd...............................     1
    Prepared statement...........................................    57

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     4
    Senator Johnson
        Prepared statement.......................................    58

                               WITNESSES

Michael S. Barr, Assistant Secretary for Financial Institutions, 
  Department of the Treasury.....................................     6
    Prepared statement...........................................    59
    Responses to written questions of:
        Chairman Dodd............................................   141
        Senator Johnson..........................................   148
        Senator Vitter...........................................   149
Richard Blumenthal, Attorney General, State of Connecticut.......    34
    Prepared statement...........................................    66
Edward L. Yingling, President and Chief Executive Officer, 
  American
  Bankers Association............................................    36
    Prepared statement...........................................    69
    Responses to written questions of:
        Chairman Dodd............................................   153
Travis B. Plunkett, Legislative Director, Consumer Federation of 
  America........................................................    38
    Prepared statement...........................................    79
    Responses to written questions of:
        Chairman Dodd............................................   154
Peter Wallison, Arthur F. Burns Fellow, American Enterprise 
  Institute......................................................    39
    Prepared statement...........................................   132
Sendhil Mullainathan, Professor of Economics, Harvard University.    41
    Prepared statement...........................................   136

                                 (iii)

 
   CREATING A CONSUMER FINANCIAL PROTECTION AGENCY: A CORNERSTONE OF 
                   AMERICA'S NEW ECONOMIC FOUNDATION

                              ----------                              


                         TUESDAY, JULY 14, 2009

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 9:05 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Christopher J. Dodd (Chairman 
of the Committee) presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The Committee will come to order.
    I would like to welcome all here this morning for this 
morning's hearing on ``Creating a Consumer Financial Protection 
Agency: A Cornerstone of America's New Economic Foundation.'' 
We want to thank you, Mr. Barr, for joining us, and our other 
witnesses we will hear from after your testimony, and the 
Members of the Committee who are here this morning. And, 
obviously, my good friend and colleague Richard Shelby, former 
Chairman of the Committee, will be making some opening comments 
as well. So let me take a few minutes and share with you my 
thoughts on this question and then turn to Richard for any 
comments he has. And since only a few of us are here this 
morning, Bob, if you have got any opening comments you would 
like to make as well, I will turn to you, and then we will go 
to you, Mr. Barr, for your testimony.
    This morning we are taking an important step in our efforts 
to modernize our financial regulatory system. The failure of 
that system in recent years has left our economy in peril, as 
we all know, and caused real pain for many hard-working 
Americans who did nothing wrong themselves. And so I would like 
to start by reminding everyone that the work we do here matters 
to real people, men and women in my home State of Connecticut 
and all across our Nation who work hard every day, play by the 
rules, and want nothing more than to make a better life for 
themselves and their families.
    These families are the foundation, as all of us know, of 
our economy and the reason that we are here in Washington 
working on this historic and critically important legislation. 
That is why the first piece of the Administration's 
comprehensive plan to rebuild our regulatory regime and our 
economy is something that I have championed as well, and that 
is, an independent agency whose job it will be to ensure that 
American consumers are treated fairly and honestly.
    Think about the moments when Americans engaged with 
financial service providers. Now, I am not talking about big-
time investors or financial experts. We know those people have 
a level of sophistication. I am talking about just ordinary 
citizens, working people trying to secure a stable future for 
themselves and their families. They are opening checking 
accounts. They are taking out loans. They are building their 
credit. They are trying to build a foundation upon which their 
families' economic security can rest for years to come. These 
can be among the most important and stressful moments a family 
can face.
    Think of younger people who have carefully saved up for 
that down payment on a home. It might be a modest house, but it 
will be their first home, a starter home. Before they can move 
into their new home, however, they must sign on the dotted line 
for that first mortgage, with its pages and pages of complex 
and confusing disclosures. Who is looking out for them in that 
process?
    Think of a factory worker who drives 30 miles to and from 
work every day and that old car that is about to give out. He 
or she needs another one to make it through the winter, but 
wages are stagnant and the family budget is stretched to the 
max. He has got no choice but to go to navigate the complicated 
world of an auto loan. Who is looking out for that person at 
that moment?
    Think of a single mother--and there are many in our 
country--whose 17-year-old son or daughter has just gotten into 
his or her first choice of going to college. She is overjoyed 
for him or her, but worried about how she is going to pay for 
that tuition, which grows every year astronomically. Financial 
aid might not be enough, and she knows that as her son or 
daughter begins the next chapter in their lives filled with 
promise, they may be saddled with overwhelming debt. Who is 
looking out for that family under those circumstances?
    These moments are the reason that we have invested so much 
of our time and money to rebuild our financial sector, even 
though some of the very institutions that the taxpayers have 
propped up are responsible for their own predicaments. These 
moments are the reason why we serve on this Committee and why I 
believe we have all come to the Senate to try and make a 
difference in the lives of the people we represent. And these 
moments are the reason that I and many of my colleagues were 
enraged by the spectacular failure of consumer protection that 
destroyed economic security for so many of our American 
families.
    In my home State of Connecticut and around the country, 
working men and women who did nothing wrong have watched this 
economy fall through the floor, taking with it their jobs, 
their homes, their life savings, and the cherished promise of 
the American middle class. These people are hurting. They are 
angry and they are worried, and they are wondering whether 
anyone is looking out for them.
    Since the very first hearings before this Committee on 
modernizing our financial regulatory structure, I have said 
that consumer protection should be a top priority in our 
deliberations. Stronger consumer protection could have stopped 
the crisis before it started, in my view. And where were the 
regulators in all of this?
    We know now that for 14 years, despite a clear directive 
from the U.S. Congress, the Federal Reserve Board took no 
action to ban abusive home mortgages. Gaping holes in the 
regulatory fabric allowed mortgage brokers and bankers to make 
and sell predatory loans to Wall Street that turned into toxic 
securities and brought our economy to its knees.
    That is why many of us call for the creation of an 
independent consumer protection agency whose sole focus is the 
financial well-being of consumers, an agency whose goal it is 
to put an end to lending practices that have ripped off far too 
many American families, and the Administration has sent us a 
very bold and I believe thoughtful plan for that agency.
    You would think financial services companies would support 
protections that ensure the financial well-being of their 
consumers. An independent consumer protection agency can and 
should be very good for business, not just for consumers. It 
can and should protect the financial well-being of American 
consumers so that businesses can rely on a healthy customer 
base as they seek to build long-term profitability. It can and 
should eliminate the regulatory overlap and bureaucracy that 
comes from the current Balkanized system of consumer protection 
regulation. It can and should level the playing field by 
applying a meaningful set of standards, not only to the highly 
regulated banks but also to their nonbank competitors that have 
slipped under the regulatory radar screen.
    Financial services companies that want to make an honest 
living should welcome this effort to create a level playing 
field. Indeed, the good lenders--and there are many--are the 
most disadvantaged when fly-by-night brokers and fly-by-night 
finance companies set up shop down the street. Then we see bad 
lending pushing out the good.
    No Senator on this Committee, Democrat or Republican, wants 
to stifle product innovation, limit consumer choice, or create 
regulation that is unnecessary or unduly burdensome. And I 
welcome the constructive input from those in the financial 
services sector--who share our commitment, by the way, to 
making sure that American families get a fair shake. We all 
want financial services companies to thrive and succeed, but 
they are going to have to make their money, in my view, the 
old-fashioned way: by developing innovative products, pricing 
competitively, providing excellent consumer service, and 
engaging in fair competition on the open market.
    The days of profiting from misleading or predatory 
practices need to be over with completely. The path to recovery 
of our financial services companies and our economy is based on 
the financial health of American consumers. I believe that very 
deeply. We need a system that rewards products and firms that 
create wealth for American families, not one that rewards 
financial engineering that generates profits for financial 
firms by passing on hidden risks to investors and borrowers.
    The fact that the consumer protection agency is the first 
legislative item the Administration has sent to Congress since 
it released its white paper on regulatory reform last month 
tells me that our President's priorities are in the right 
place. Nevertheless, with the backing of the Administration, 
with the support of many in the financial community who 
understand the importance of this reform, and, most of all, 
with a mandate from the American families I have discussed who 
count on a fair and secure financial system, I believe that we 
will push forward and succeed.
    I thank all of you for being with us here today as we move 
forward on this issue. Let me say, as I have said many times 
already in discussions both informally and formally, Richard 
Shelby, my partner in all of this, he and I are determined to 
work together on this to get this right. This is not one where 
we bring a lot of ideology to this debate but, rather, what 
works, what makes sense, what will restore the confidence and 
optimism of people all across this country--and, for that 
matter, around the world, who look to the United States as a 
safe and secure place and an innovative place to come and park 
their hard-earned dollars and hard-earned money.
    And so, with that, I thank again everyone for being here, 
and let me turn to Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman.
    The Committee today, as the Chairman has already said, will 
examine the Administration's proposal to establish a stand-
alone consumer protection agency. Well-regulated and 
transparent financial markets have been and must continue to be 
one of the central goals of our financial regulatory system. 
The purpose of our markets is to benefit consumers by giving 
them ways to save, invest, and conduct transactions.
    Consumers are not likely to participate in our markets, 
however, unless they know they are protected against fraud and 
unfair dealings. In addition, consumers are more likely to use 
financial products if they have the information they need to 
make good financial decisions.
    By creating confidence in our markets, consumer protection 
promotes consumer participation, which in turn provides 
additional benefits by increasing the size, vitality, and 
resilience of our financial system. Good consumer protection, 
therefore, makes good economic sense.
    Since the start of the ongoing financial crisis, I have 
stated that we should approach regulatory reform in a thorough 
and deliberate manner. I believe this Committee should examine 
what caused this financial crisis, develop solutions to the 
problems identified by that examination, and then consider the 
practical consequences of any reform measures.
    This morning, we begin our examination of the 
Administration's proposal. This is our first chance to review 
the Administration's findings regarding the problems they have 
identified and the solutions that they seek. As part of our 
consideration, I believe it would be very useful, if not 
necessary, for the Administration to submit for the record the 
data and the evidence they used to craft a regulatory 
restructuring proposal. It might be very helpful to us here.
    In addition, the fact that the Administration has produced 
a legislative draft gives us a chance to consider some of the 
practical questions associated with the proposal. For example, 
how will this new agency interact with the other banking 
regulators? Who will have the final discretion over things like 
capital treatment for alternative mortgage products or other 
consumer credit products? What authority would the 
Administration leave to State banking regulators?
    What if there is a disagreement between a prudential 
supervisor and the new consumer protection agency? What if a 
prudential supervisor fails to operate in a manner consistent 
with the consumer protection agency's guidelines? Will a 
prudential supervisor be allowed to overrule the consumer 
protection agency?
    Will certain types of financial products be banned? What 
standards would be used to make the decision to remove products 
from the marketplace?
    Beyond the practical issues regarding the program, I want 
to highlight some conceptual issues that I believe we must 
recognize as we consider financial consumer protection reform.
    First, I believe that we must clearly acknowledge and 
accept that risk cannot be eliminated from our financial 
markets? It is risk taking that generates return. It would be 
both false and irresponsible to lead the American people to 
believe that an enhanced regulator can provide them with risk-
free opportunities.
    Second, I believe that we must also acknowledge that the 
risk associated with financial products are largely depending 
on the circumstances surrounding a particular transaction and 
the consumer. Some have tried to make oversimplistic analogies 
comparing defective consumer products to certain financial 
products. This is inaccurate, and I believe it is highly 
inappropriate.
    For example, a defective electrical device is dangerous 
under every circumstance where it is used. We know that. But 
that is not the case for financial products. A plain-vanilla 
30-year fixed mortgage is not inherently safer, some argue, 
than a shorter adjustable rate product? In fact, a 30-year 
fixed mortgage could involve high costs and provide less value 
to the consumer. We have to look at the circumstances.
    Consumers need the relevant information and the means to 
understand it so they can purchase products and engage in the 
transactions that best fit their needs and circumstances. This 
point bears on what I believe is finally the most important 
issue associated with consumer protection reform. Who is best 
able to decide about the value and the necessity of any 
particular financial product or service?
    Some, including those in the Administration, have decided 
that consumers will not act in their own best interests and, 
therefore, it is necessary that we remove or greatly restrict 
products that in some situations might cause financial harm. 
Implied in this belief is the notion that some people, such as 
the Government bureaucrats, can make informed decisions about 
the value of products and services while others, such as the 
American consumer, cannot. In other words, ``Yes, we can,'' has 
become ``No, you can't.''
    While I can accept the view that in some cases consumers do 
not have the necessary information or understanding to make 
sound financial decisions, I do not accept the premise that the 
remedy is to deny consumers decision-making power altogether. I 
think this would be a very significant and paternalistic 
departure from the notions of liberty and personal 
responsibility that have previously guided all our regulatory 
efforts. Quite frankly, I find it a bit disturbing and somewhat 
offensive that the concept of the ``intellectually deficient 
consumer'' has now found a voice in our legislative process.
    To the extent that there is any merit to this theory, I 
believe it would be better to provide those with deficiencies 
the means to address them rather than seizing from them their 
right to make free and informed choices. And while I look 
forward to hearing from our witnesses, I am greatly concerned 
over many aspects of the President's plan, not to mention its 
underlying premise.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    And with that, we will turn to you, Mr. Barr, for your 
opening statement and any supporting material or data you think 
would be valuable for the Committee to have at this point. Why 
don't you go ahead? Try and keep your remarks down, if you can, 
to 5 or 10 minutes or so.

STATEMENT OF MICHAEL S. BARR, ASSISTANT SECRETARY FOR FINANCIAL 
            INSTITUTIONS, DEPARTMENT OF THE TREASURY

    Mr. Barr. Certainly. Thank you very much, Chairman Dodd, 
thank you very much, Ranking Member Shelby. It is a pleasure to 
be back here to talk with you about the Administration's 
proposal for a Consumer Financial Protection Agency, a strong 
financial regulatory agency charged with just one job: looking 
out for consumers across the financial services landscape.
    The need could not be clearer. Today's consumer protection 
system is fundamentally broken. It has just experienced a 
massive failure. This failure cost millions of responsible 
consumers their homes, their savings, and their dignity. And it 
contributed to the near collapse of our financial system.
    There are voices today saying that the status quo is fine 
or good enough, that we should just keep the bank regulators in 
charge of protecting consumers, that we just need some patches 
to our broken system. They even claim consumers are better off 
with the current approach. It is not surprising that we are 
hearing these voices.
    As Secretary Geithner observed last week, the President's 
proposals would reduce the ability of financial institutions to 
choose their own regulator and to continue financial practices 
that were lucrative for a time, but that ultimately proved so 
damaging to households and our economy. Entrenched interests 
resist change always. Major reform always brings out fear 
mongering. But responsible financial institutions and providers 
have nothing to fear.
    We all aspire to the same objectives for consumer 
protection regulation: independence, accountability, 
effectiveness, and balance. The question is how to achieve 
them. A successful regulatory structure for consumer protection 
requires a focused mission, marketwide coverage, and 
consolidated authority.
    Today's system has none of these qualities. It fragments 
jurisdiction for consumer protection over many regulators, most 
of which have higher priorities than protecting consumers. 
Nonbanks avoid Federal supervision; no Federal consumer 
compliance examiner lands at their doorsteps. Banks can choose 
the least restrictive supervisor among several different 
banking agencies with respect to consumer protection. 
Fragmentation of rule writing, supervision, and enforcement 
leads to finger-pointing in place of action and makes the 
action that is taken less effective.
    The President's proposal for one agency, for one 
marketplace with one mission--to protect consumers--will change 
that. The Consumer Financial Protection Agency will create a 
level playing field for all providers, regardless of their 
charter or corporate form. It will ensure high and uniform 
standards across the financial services marketplace. It will 
end profits based on misleading sales pitches and hidden fee 
traps, along the lines of those that Senator Shelby and 
Chairman Dodd worked together to end in the credit card market. 
But there will be plenty of profits made on a level playing 
field where banks and nonbanks can compete fairly on the basis 
of price and quality.
    If we create one Federal regulator with consolidated 
authority, we will be able to leave behind regulatory arbitrage 
and interagency finger-pointing. And we will be assured of 
accountability.
    Our proposal ensures, not limits, consumer choice; it 
preserves, not stifles, innovation; it strengthens, not 
weakens, depository institutions; it will reduce, not increase, 
regulatory costs; and it will increase, not reduce, national 
regulatory uniformity.
    Successful consumer protection regulation requires mission 
focus, marketwide coverage, and it requires expertise and 
effectiveness through a consolidated supervisory entity.
    Consumer protection requires a mission focus for 
accountability, expertise, and effectiveness.
    A new supervisor must have marketwide jurisdiction to 
ensure consistent and high standards for everyone.
    And an effective regulator requires authority for 
regulation, supervision, and enforcement to be consolidated. A 
regulator without the full kit of tools is frequently forced to 
choose between acting with minimal effect and not acting at 
all. We need to end the finger-pointing. The rule writer that 
does not supervise providers lacks information it needs to 
determine when to write or revise rules and how best to do so. 
The supervisor that does not write rules lacks a marketwide 
perspective or adequate incentives to act. Splitting 
authorities is a recipe for inertia, inefficiency, and lack of 
accountability.
    The present system of consumer protection is not designed 
to be independent or accountable, effective, or balanced. It is 
designed to fail. It is simply incapable of earning and keeping 
the trust of the American people.
    Today's system does not meet a single one of the 
requirements I just laid out. The system fragments jurisdiction 
and authority for consumer protection over many agencies, most 
of which have higher priorities than protecting consumers. 
Nonbanks avoid Federal supervision; banks can choose the least 
restrictive supervisor; and fragmentation of rule writing, 
supervision, and enforcement leads to finger-pointing in place 
of action.
    This structure is a welcome mat for bad actors and 
irresponsible practices. Responsible banks and credit unions 
are forced to choose between keeping market share and treating 
consumers fairly. The least common denominator sets the 
standard, standards inevitably erode, and consumers pay the 
price.
    Mr. Chairman, if you look at the range of problems that 
have been occurring in the marketplace through this fragmented 
jurisdiction, I think that it is clear that the American public 
cannot afford more of the same. The problems that we had in the 
mortgage market--exploding ARMs, rising loan balances, credit 
card tricks such as double-cycle billing and late fee traps, 
the extent of failures in the past--are just unacceptable for 
us in the future, and the system we have had that led to this 
is structurally flawed. It is not capable of being fixed 
through tinkering around the edges. The problem is the 
structure itself.
    That problem has only one effective solution: the creation 
of one agency for one marketplace with one mission--to protect 
consumers of financial products and services, and the authority 
to achieve that mission.
    It is time for a level playing field for financial services 
competition based on strong rules, not based on exploiting 
consumer confusion. It is time for an agency that consumers--
and their elected representatives--can hold fully accountable. 
The Administration's legislation fulfills these needs.
    Thank you for this opportunity to discuss our proposal, and 
I would be happy to answer any questions.
    Chairman Dodd. Well, thank you very much, and I did not 
give you a proper introduction to begin with, and I apologize. 
Mr. Barr is the Assistant Secretary for Financial Institutions 
at the Department of Treasury, and I should have made the 
formal introduction, so forgive me for not doing so.
    Mr. Barr. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much for your testimony. As I 
said at the outset, if you have any additional data that you 
think would be helpful for the Committee in its consideration, 
we would appreciate your submitting that to us as well. And I 
will ask the clerk to put us on a 5-minute clock, if you would 
here, and we will try and stay to that time.
    Let me, if I can, be sort of the devil's advocate with you 
because I anticipate these sorts of questions will be raised by 
my colleagues as well. I know you have spent a lot of time in 
your testimony on this point, but I think it is worth 
reiterating. Why do you think a separate consumer protection 
agency is necessary? And why wouldn't we just simply beef up 
the existing regulatory bodies? Let us even assume we end up 
consolidating a number of these regulatory bodies so they are 
far more efficient, we stop the regulatory arbitrage that is 
going on too often, the shopping, the charter shopping that we 
talked about. Why not just beef them up, give them additional 
personnel, and tell them they ought to be doing a better job? 
In effect, aren't they supposed to be consumer protection 
agencies in their own right? And so why in the world would you 
go around and create a whole new one? And wouldn't you, in 
fact, be then minimizing the importance of these other bodies 
if they end up deferring that consumer protection function to 
one agency and they are not doing the job they were supposed to 
be doing in addition to their regulatory functions?
    Mr. Barr. Thank you, Mr. Chairman. I think we have had a 
long experiment with having the prudential supervisors over 
banks responsible for consumer protection supervision, having 
another agency--the Federal Reserve--responsible for rule 
writing, having yet another agency--the Federal Trade 
Commission--responsible for after-the-fact enforcement in the 
nonbanking sector. And I think what we have seen and what the 
American public has just experienced is a massive failure of 
that system. And it was a massive failure of that system 
because of the very structure of the system.
    There were good people at the Federal Reserve, for example, 
who wanted to effectuate strong consumer protections. You might 
even say there were heroic people at the Federal Reserve who 
wanted to effectuate consumer protection. Ned Gramlich, who was 
a dear friend of mine, the Vice Chair of the Federal Reserve, 
wanted to get consumer protection done, and the very structure 
of the Federal Reserve, its very focus on what it viewed as 
prudential supervision, its inability to move quickly on 
consumer protection blocked reform in the mortgage market that 
could have helped avert this crisis.
    So I think we have had a long and disastrous experience 
with having bank agencies with a mixed mission, with no one 
focused on protecting consumers, with no one able to set rules 
and supervise across the financial services marketplace, with 
no one able to say there is going to be a level playing field 
with high standards for everybody. And what we saw is the 
market tipped to bad practices. We saw it tip to bad practices 
in credit cards, practices which you and Mr. Shelby so 
effectively blocked in the credit card bill this spring. We saw 
it shift, tilt to bad practices in the mortgage market in ways 
that were disastrous for the American people. And I just don't 
think we can afford that experiment any longer. We have to have 
a fresh start with a new agency whose sole mission is standing 
up for the American people.
    Chairman Dodd. Let me continue my role as the devil's 
advocate. One of the arguments we are going to hear is this 
will restrict the availability of credit to consumers, restrict 
their choices; that a way that the financial institutions will 
respond to this is just start saying no to a lot of people who 
otherwise might have a chance to get that car loan, get that 
started house; and so if you want us to make sure we are not 
going to make any mistakes at all, not take any risks at all, 
then we just won't provide that kind of extension of credit to 
an awful lot of people out there.
    How do we respond to the question that consumer credit and 
consumer choices are going to be severely limited if, in fact, 
you get so heavy-handed with a consumer protection agency that 
the very people you are designing it to help here are actually 
going to be hurt by this idea?
    Mr. Barr. Mr. Chairman, I think that is exactly the thing 
to be focused on, and in our legislative draft, we suggest that 
the agency be required to assess not just the benefits of its 
rules, but the costs of its rules; that it be required not just 
to look at questions of consumer protection but also questions 
of access; that it be required to evaluate its major rule 
writing every 5 years to ensure that it is keeping up with 
changes in the marketplace at a minimum; that it be required to 
be held accountable through notice and comment rulemaking, even 
when it is not going to do a rule, to let the public and 
financial institutions comment on how it is doing its job.
    I think it has got to weigh the costs and the benefits. It 
has got to be a balanced entity. But what we want to see is a 
level playing field, access for everyone based on high 
standards. We want consumers to be able to choose whatever 
product they want, whatever credit card they want, whatever 
mortgage loan they want, whatever payday loan they want. We 
want them to be able to choose loans, to choose products, to 
choose services. We want the consumer to be empowered to do 
that. We want it to be done on a level playing field with high 
standards. So what they are choosing is based on transparency 
and honesty and integrity in the process.
    Chairman Dodd. Two final questions for you. I made the 
point in my opening statement that I thought if this were done 
well and right--as I plan to do so--that it is not only going 
to be beneficial to consumers, but the one argument we do not 
hear is that it is very beneficial to business, very beneficial 
to the financial institutions themselves to have a consumer 
protection agency, number one.
    And, number two, a witness who will appear in the second 
panel, Mr. Wallison from the American Enterprise Institute, 
says in his statement here, ``If we are looking for a primary 
cause of today's financial crisis, it is here,'' referring to 
the Community Reinvestment Act.
    Why don't you respond to the issue of whether or not you 
believe the Community Reinvestment Act was the primary cause of 
the financial crisis as well?
    Mr. Barr. Thank you, Mr. Chairman. Let me first say I agree 
with you that the Consumer Financial Protection Agency is good 
for banks as well as for consumers. If banks are competing on 
the basis of price and quality, that is good for them. If banks 
and credit unions and their communities can compete on a level 
playing field so we do not have a situation where a community 
bank wants to do the right thing but an independent mortgage 
company is stealing all market share with a policy that 
consumers cannot understand, we don't want that in the future. 
We want a level playing field based on fair competition, based 
on transparency to consumers.
    With respect to the Community Reinvestment Act, I think the 
empirical evidence here, Mr. Chairman, is quite strong. I 
looked at this when I was researching at the University of 
Michigan. The Federal Reserve economists have looked at this 
question. The Federal Reserve found that about 6 percent of 
subprime mortgage loans were made by CRA-regulated institutions 
with respect to low-income communities or low-income borrowers. 
Six percent is unlikely to have driven, highly unlikely to have 
driven the subprime mortgage crisis.
    If you look at the timing of our subprime mortgage crisis 
in the mid-2000's, it is hard to imagine that that was caused 
by changes in CRA regulations a decade earlier in 1995. If you 
look at the performance of CRA lending with respect to 
equivalent subprime loans, comparable performance levels. So I 
think the empirical evidence just does not support that claim.
    Chairman Dodd. They have very strong underwriting standards 
with CRA. The Community Reinvestment Act required very strong 
underwriting standards to be met by the borrowers. Is that 
true?
    Mr. Barr. That is correct.
    Chairman Dodd. Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    Secretary Barr, the proposed Consumer Financial Protection 
Agency embodies the notions of behaviorally informed regulation 
that you wrote about in an article published in October of last 
year. The premise of that article, as I understood it, was 
that--and I will quote--``Individuals consistently make choices 
that they themselves agree diminish their own well-being in 
significant ways.'' That was in the article.
    This dim view of the capabilities of the average American 
contrast with the author's belief, as we understood it, that 
bureaucrats are capable of discerning what financial products 
and services would maximize the well-being of individuals that 
they don't even know.
    Why do you believe that bureaucrats working for a Consumer 
Financial Protection Agency would be able to make better 
decisions than American consumers themselves?
    Mr. Barr. Thank you, Mr. Chairman. I appreciate the 
opportunity to make clear that that is not my view. In the 
first case----
    Senator Shelby. Was that in this article?
    Mr. Barr. The quote is in the article, but the material 
that followed that you articulated was not in the article. So 
the material that followed is the point that I would say is not 
my view. I would say it in two particular respects.
    One is I think the common human failing that we identified 
in the article are not about us versus them. They are common 
human failings that all of us have. All of us make mistakes in 
our daily lives. I get overdraft----
    Senator Shelby. We learn from those mistakes, don't we?
    Mr. Barr. We do learn from those mistakes, and sometimes 
those mistakes are quite costly. But we all make them, is the 
only point I--I wasn't trying to say--I am not speaking for 
you, sir, but I know I make those mistakes all the time.
    Senator Shelby. I probably make more. Go ahead.
    Mr. Barr. So just to be clear on that.
    So these are mistakes that I make, at least, and that other 
people make and that are common mistakes, and our idea in the 
legislation is not to prevent people from making mistakes. It 
is to make it easier for them to avoid mistakes. Just easier 
for them to avoid mistakes.
    So if you have a product that people cannot understand, 
then we need to figure out a way of making it easier for them 
to understand.
    Senator Shelby. I agree with that.
    Mr. Barr. And, Mr. Shelby, I know you worked very hard on 
the credit card legislation to make sure that credit card 
products and services are offered in a transparent way, and to 
let people know the consequences of their financial decisions 
for the cost of making those choices, and that is exactly the 
kind of approach that is embodied in this legislation.
    Senator Shelby. Is your premise basically trying to take 
risk out of a marketplace? And if there is no risk, there is no 
marketplace, is there?
    Mr. Barr. Sir, I think that risk and innovation are central 
to our financial system.
    Senator Shelby. We benefit from it, don't we?
    Mr. Barr. We at times benefit from it and at times have 
costs from it, and on balance, financial innovation and risk 
taking are central to our system. What we are talking about 
here is not eliminating risk, certainly not eliminating 
financial innovation. Quite the contrary. I think those are 
central concepts. But we have to see that happen on a level 
playing field with high standards so that people are competing 
based on price and quality and not consumer confusion.
    Senator Shelby. The board of the consumer--the composition 
of the board, the proposal of the Consumer Financial Protection 
Agency would include the Director of the National Bank 
Supervisors and four members of the President's choosing. There 
is no limit on the number of members who are from the same 
political party. This contrasts, as you well know, with the 
limits on the composition of both the Securities and Exchange 
Commission and the Consumer Product Safety Commission.
    Why did you choose such a politically biased construct at 
this point knowing that would raise red flags for some?
    Mr. Barr. Senator Shelby, I would not describe it as 
politically biased in any way. In fact, it is designed to be 
not political, so there is not an identification of parties 
with respect to those matters. And the board----
    Senator Shelby. You do not say that, but that is what the 
result would be.
    Mr. Barr. And if you look, for example, Mr. Shelby, at the 
Federal Reserve Board, we see a balanced range of individuals 
on the Federal Reserve Board without a particular requirement 
of party identification.
    Senator Shelby. I would like to just restate a request I 
made in my opening statement. I am sure the Administration used 
a great deal of detailed data--you know, you had to--and 
analysis that led to this proposal, because we would do this, 
too. Would you please provide that data and your analysis of 
that data to the Committee--not just to me, but the Chairman 
and all of us, staff on both sides--so that we can use it in 
our effort to evaluate your proposal? In other words, look at 
your data, evaluate it, weigh it, because we might agree with 
it. We might not. Would you do that?
    Mr. Barr. We would be happy to work with the Committee to 
provide whatever information would be available and useful to 
you.
    Senator Shelby. You state, Mr. Secretary, repeatedly that 
the status quo is not acceptable because things are changing 
every day in the marketplace, as we know, and the need for a 
new independent consumer protection regime could not be 
clearer. In addition, you state that, ``Banks can choose the 
least restrictive supervisor among several banking 
supervisors.'' Yet the Administration leaves in place in their 
overall proposal exactly that fragmented system for prudential 
supervision, four or five regulators.
    Why is it that we must and why would you propose only one 
agency responsible for consumer protection, but four Federal 
banking agencies is entirely appropriate for safety and 
soundness regulation of our system? Why would you do that if 
you are going to have the other? If we had one prudential 
banking regulator, you could draw the analogy, but I don't know 
how you do it here.
    Mr. Barr. Thank you, Mr. Chairman. Our view was that in the 
context of prudential supervision and the arbitrage that we had 
seen on the prudential side, that we could effectively deal 
with that problem by merging the OCC and the OTS into a new 
national bank supervisor, and eliminating the thrift charter, 
eliminating the remaining distinctions between State member 
banks, State nonmember banks, and national banks, and requiring 
a series of protections against charter conversion in the event 
that there were pending enforcement matters, pending problems 
at any of the institutions.
    It is not, I would agree, a perfect answer to that 
question, and in the context of the Consumer Financial 
Protection Agency, the problems that we saw were so pervasive, 
the basic structural problems so severe, the extent of mission 
conflict and mission confusion so strong, that we felt the only 
real answer there was a Consumer Financial Protection Agency.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Secretary, in a panel that will follow you, Mr. 
Yingling, who is the representative of the American Bankers 
Association, has a series of critiques, and I would like to go 
through some of them with you and see what your responses are.
    First of all, he talks about how community banks are likely 
to have greatly increased fees to fund a system that falls 
disproportionately and unfairly on them, as they were not part 
of the present crisis.
    Second, he talks about this agency having the power to 
compel the use of certain products that the agency would 
define.
    Third, he talks about two lessons that he believes are 
fundamental building blocks of any reform of consumer 
protection oversight: One is that the uniform regulation and 
supervision of consumer protection performance should be 
applied to nonbanks as rigorously as it has been applied to the 
banking industry; and two, that regulatory policymakers for 
consumer protection should not be divorced from the 
responsibility for financial institution safety and soundness. 
And he talks about how the failure of nonbank regulation was 
the most severe under the current system.
    So looking at those as some of the main points of critique 
of the legislation, how do you respond to those?
    Mr. Barr. Thank you, Senator Menendez. I would be happy to 
address those four concerns.
    First, with respect to community banks, community banks 
have endured a system under which they are forced to compete 
with independent mortgage companies and other unregulated 
lenders in the system. They have been forced essentially by 
market pressure to offer products and services that, if you are 
in their community and you talk to community bankers, they 
would rather not have offered. They would rather not have 
gotten engaged in pay option ARMs. But because or the unlevel 
playing field in supervision and regulation, the market tilted 
to bad practices, and market pressure drove the market to a 
place that was bad for community banks and it was bad for 
consumers.
    What we are saying here is there is going to be a level 
playing field for community banks, for big banks, for 
independent mortgage brokers, for anybody else in the 
marketplace. One regulator is going to set the standards, 
everybody can compete equally, on an equal footing.
    Senator Menendez. Are you saying that the proposed 
legislation that the Administration advocates is going to reach 
to those previously unregulated entities?
    Mr. Barr. Absolutely, sir. One of the key features of this 
legislation is that nonbank providers for the first time are 
going to get subject to supervision and examination and 
enforcement with the same tools available to bank regulators. 
So the legislation would say the new Consumer Financial 
Protection Agency would apply these strong consumer standards 
across the board so that no one competes on the basis of an 
unlevel playing field or hiding the ball.
    Second, with respect to the point about compelling the use 
of products, the agency here is offering a lighter touch form 
of regulation than banning or restricting products or services. 
What the legislation provides is if the agency sees a problem 
in the marketplace where some products and services are more 
confusing based on more difficult terms for consumers, instead 
of saying you can't offer that product at all--right?--which in 
some instances an agency would want to say, Oh, we want to ban 
that kind of product or service, in this instance the agency 
has a different tool, a more flexible and more nuanced tool. 
They can say, Look, if you want to offer a pay option ARM, you 
have to show a consumer first what a 30-year fixed-rate 
mortgage would look like or what a regular adjustable rate 
mortgage looks like, what a 5-1 ARM without hidden features or 
terms looks like, so they can compare and make their own 
judgment, make their own choice, but make it based on something 
that they can understand and that is comparable across the 
marketplace.
    Third, with respect to nonbanks, let me just reiterate 
nonbanks will be subject to the same high standards, the same 
rules, the same supervision, the same examination, the same 
enforcement as banks for the first time ever.
    And, last, with respect to the link to safety and 
soundness, again, I think we have had a system. We just 
experienced what it is like to have massive failure in a system 
in which bank supervisors do safety and soundness and also do 
consumer protection. And what happened is they did not do 
safety and soundness in a good way, and they did not do 
consumer protection in a good way. We had a massive failure in 
our system. And we need to reform it. We need to give them a 
single--the bank regulators need to have a single mission 
focused on safety and soundness, and we need a new consumer 
protection agency whose sole mission is consumer protection. 
Agencies can then have one job. They can be held accountable 
for doing that job. And you all can go out and talk to them and 
say, ``This is your job. Why aren't you doing it?''
    Senator Menendez. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Senator Corker.
    Senator Corker. Mr. Chairman, thank you, and thanks for 
having this hearing. Mr. Secretary, thank you for your service.
    I am going to digress just for 1 second. I think you may be 
the overall architect, if you will, of much of what has been 
put forth as it relates to regulatory changes, and I have been 
somewhat curious that the GSEs were not addressed, and if we 
could just spend about 30 seconds on that. Obviously, the 
largest liabilities that we as a country have, other than 
Medicare and Social Security, are within those GSEs, and yet at 
a time when you in essence own them, we are not in any way 
looking at changing their status or moving them along into a 
different direction. I am just wondering why you all chose not 
to address that.
    Mr. Barr. Thank you, Senator Corker. In the Treasury 
Department's report, we highlighted the fundamental need that 
you articulated just now to reform those institutions, and we 
promised to come back to the Congress at the time of the 
President's budget submission in February with a reform 
proposal, and really our judgment was just about sequencing of 
what we could get done with you.
    We think it is a high priority to get done. We will be 
proposing legislation to you with respect to reform of the 
Government-sponsored enterprises, looking at our mortgage 
finance system as a whole. And between now and then, we will be 
holding a series of public meetings as well as engaging in our 
own internal deliberations to focus exactly on that question. 
You are right. We need to address it.
    Senator Corker. When is ``then''? When is ``then,'' when 
you are going to be proposing this----
    Mr. Barr. Oh, I am sorry. At the time of the President's 
budget submission, which is in February of the coming year.
    Senator Corker. So would you urge us to wait on regulatory 
reform until after that point so that we can address it all?
    Mr. Barr. Our judgment, again, Senator Corker, I do not 
have--you all are obviously keepers of your own calendar, and I 
would not want to suggest anything with respect to that. Our 
own judgment in terms of the sequencing is that we could move 
forward expeditiously on the financial reforms measure we have 
put in place, that we have suggested that you put in place, and 
next turn to the Government-sponsored enterprises in February.
    I do not think we can afford to wait for 6 or 7 months to 
do that. I think we need to act now and put in place these 
essential measures for the financial system.
    Senator Corker. So sort of a developing theme, I think, 
within the Administration, not necessarily with yourself, is 
that we have a lot of smart people who work with us that know 
better than the average citizen what ought to happen in so many 
areas, and it is just a theme that continues to evolve. So as I 
look at this agency--and I no doubt believe that consumer 
protection ought to take place. For the first time--and a lot 
of people have sort of compared this to consumer product 
safety, but, in essence, you all are advocating that you design 
products for the financial industry. That is a major departure 
from anything that has happened in any other category of the 
economy that I am aware of. But you guys would be designing 
products that all institutions had to conform to, which is very 
different than product safety. They usually test products that 
are designed by others afterwards to see that they are safe.
    I am just wondering, what is it that drives you all to that 
extreme?
    Mr. Barr. Senator Corker, thank you for the opportunity to 
clarify again that that is not at all what we have in mind. So 
under this Consumer Financial Protection Agency, financial 
institutions can continue to offer any product or service that 
they want. The point of having a simple product offering is to 
say if you are going to offer a complex product like a pay 
option ARM, you also have to offer a straightforward product 
that exists in the marketplace--a 30-year fixed-rate mortgage 
with straightforward pricing and terms; a 5-1 or 7-1 ARM with 
straightforward pricing and terms.
    So I think that if you look at the language that we have 
proposed, the factors that the agency is supposed to take into 
account, this is not designed to dictate all the products and 
services. It is not designed to----
    Senator Corker. But it does dictate some, right? Because 
you are dictating by virtue of what you just said.
    Mr. Barr. It says certain products or services that are 
standard products and services, if you are going to offer 
exotic products and services, you also have to show the 
consumer what it would cost to take out a straightforward 
product that exists in the marketplace.
    Senator Corker. So if Senator Warner, who has been a 
tremendous entrepreneur, wanted to create a niche product to 
serve the public, he would not be able to offer that niche 
product unless he offered all of these other standard products, 
which if he were a new boutique kind of company that was trying 
to meet the need of a small part of our population that needed 
that service, he would be unable to do that under your 
legislation unless he offered all of these other types. Is that 
correct?
    Mr. Barr. Senator, if you look at the areas in which this 
might apply, we are talking about, let's say, again, in the 
mortgage context, if an entrepreneur wanted to offer a pay 
option ARM, they would need to show the consumer what a 30-year 
fixed-rate or regular ARM would look like in terms of cost so 
the consumer can compare and make their own choices. They would 
still be able to offer these other products and services in 
whatever way they would like, but they would need to have a 
point of comparison that shows what the costs and risks are in 
relation to that standard.
    Senator Corker. I have a number of questions, and I guess 
we may have another round. I do not know if that is true or 
not. So what you are saying is this new entity under your 
proposal is not going to lay out basic requirements for certain 
types of products. You are not going to do that. Yes or no?
    Mr. Barr. Senator, with respect to what a standard product 
is, you would be able to say a 30-year fixed-rate or a regular 
ARM is a standard product, and if you wanted to offer other 
products, that is fine; but you have got to compare it to this 
product, too. You would not be saying----
    Senator Corker. And you have to offer that product----
    Mr. Barr. You have to offer the standard product if you are 
going to offer the exotic product.
    Senator Corker. OK. Well, I think my time is up, but I 
think what you have just said, again, is that smaller 
innovative companies that want to enter a market, which is what 
our country is about as it relates to innovation--that is why 
we are the leader that we are in the world. You are basically 
saying that these entities, unless they offer other standard 
products, would not be able to be in business. That is a large 
departure from where we have been as a country, and I want to 
revisit that with you. And I thank you for your service and 
your testimony.
    Chairman Dodd. Thank you, Senator, very much.
    Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair, and thank 
you for your testimony and for your presentation of this 
agency. It certainly has been a long time since we have had an 
agency that was dedicated to consumers in the financial world, 
and we have certainly seen many practices that have damaged the 
financial foundations of our working families. And so I 
certainly applaud the Administration for bringing this forward.
    In your testimony and in follow-up questions, you talked 
about a level playing field. I wanted to ask about one aspect 
of that. If a State, for example, decided that it wanted to ban 
yield spread premiums or incentives to brokers to basically 
sell a more complicated product, a more expensive product, 
wanted to ban those or make them perhaps transparent, at least 
to be displayed to the consumer so the consumer understands 
where the broker is receiving their compensation, would they be 
able to do that under this legislation? And would it apply to 
all folks who offer or only for State-chartered institutions?
    Mr. Barr. Thank you very much, Senator Merkley. So under 
our proposal, if a State wanted to have higher standards than 
exist under Federal law, they would be able to apply those 
standards. Under our proposal, the broad preemption provisions 
that had previously applied to national banks and their 
subsidiaries would not apply in that circumstance, so the 
higher standard would be available for institutions operating 
in that marketplace.
    Senator Merkley. So this would eliminate the unfairness 
that has arisen in part in the past where State-chartered 
institutions might have been subject to higher standards 
imposed by the State, but had federally chartered competitors 
who were not subject to those standards?
    Mr. Barr. That is correct.
    Senator Merkley. Second, I wanted to ask you about a 
phrase, there is a set of tests in the law for what can be 
done, and to quote, ``The agency must have a reasonable basis 
to conclude that the act or practices cause or are likely to 
cause substantial injury to consumers which is not reasonably 
avoidable by consumers, and such substantial injury is not 
outweighed by countervailing benefits.'' So we have a 
``substantial'' test, a ``not reasonably avoidable'' test, and 
a ``not outweighed by countervailing benefits.''
    Can you expand a little bit on those, and particularly this 
``not reasonably avoidable''? And let me give you an example. I 
have a constituent, an elderly constituent, who cashed in a 
check that came in the mail that was from an established 
financial institution that he did business with. He thought it 
was related to simply a refund of an excess escrow fees or 
something of that nature. And, in fact, what it was in the fine 
print on the back was a high-interest loan--a very high-
interest loan. And then the bank turned around and asked him to 
consolidate that loan with his other debt, and he ended up 
converting basically a very sound financial situation in short 
order into a situation that destroyed his equity in short 
order.
    But one could argue that he could reasonably have avoided 
that by simply not depositing the check, that he could have 
read all of the fine print on the back of the check and made 
sure he understood it.
    How does this test work in kind of the real world?
    Mr. Barr. Thank you very much, Senator. The intent of the 
provision is to ensure that when the agency is thinking about 
the options available to it in regulating a particular product 
or service or sector, that it first try methods such as 
disclosure. So if we have a strong disclosure regime in place, 
could a consumer in that circumstance reasonably avoid the 
practice?
    In the context, say, of credit cards, thinking back again 
to the work that the Senate did in getting that bill passed, 
the judgment was that double-cycle billing was not a practice 
that a consumer could reasonably--with disclosure could 
reasonably understand, and so the Senate decided that that 
practice was a practice that should be banned.
    So the basic idea of this legislation is to say, let us try 
disclosure first. Let us see if there are ways to make 
disclosure work. Let us try and have robust disclosure. If 
disclosure can't work because the consumer can't reasonably 
shape his or her conduct to be responsible based on that 
disclosure because the information, the terms are so confusing 
that consumers can't get enough information to actually 
understand them, then it ought to think about other regulatory 
tools, and in doing that, it needs to consider the costs as 
well as the benefits.
    Senator Merkley. So certainly a very clear set of 
reasonable tests to be met, moving from disclosure forward.
    Mr. Barr. That is correct.
    Chairman Dodd. Thank you very much, Senator.
    Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman and Secretary Barr.
    I want to return to the issue that Senator Corker had 
raised with you just so that I understand it more clearly. As I 
understand the proposal, the new agency would, in fact, have 
authority and direction to create what are called plain-vanilla 
or basic products and services. Do I understand that to mean 
that in a number of different categories, the agency would 
decide what the basic vanilla product is, like the basic 30-
year loan or the basic ARM and so forth?
    Mr. Barr. The agency could decide to say a basket of loans 
is a standard basket of loans, so a 30-year fixed-rate loan and 
an ARM with straightforward pricing might be the standard loan 
or set of loans. And then consumers would have the opportunity 
to see what the costs of that loan were and compare it to the 
costs of, say, a pay option ARM.
    Senator Crapo. But conceivably, as we get more distinct and 
varied types of products, we could see more distinct and varied 
types of what we are calling plain-vanilla versions of those 
products and we could have a pretty long list or vast array of 
agency-established products, is that correct?
    Mr. Barr. Senator, the intent and purpose of the provision 
is not, precisely not to have a proliferation of product-level 
decisions at a micro level but a basic set of standards that 
people can use as a point of comparison in making their 
decisions in choosing which product or service that they want. 
They will have a standard, a comparative point to look across 
the sector, as we did essentially with respect to the mortgage 
market until quite recently.
    Senator Crapo. I guess my point is, where does it end? 
Theoretically, the agency could just create one vanilla 
product, a 30-year loan, or a 15-year loan, or what have you, 
but it seems to me that what I am understanding you to be 
saying is that that is not what is contemplated and that there 
is, in fact, going to be an agency-established product for more 
than just a 30-year loan, but for other types of products and 
services that are going to be marketed. Am I correct there?
    Mr. Barr. Senator, you can have the agency engage in this 
process in the mortgage sector. You might see it, say, in 
credit cards. I would think you would want to look at areas in 
which there is broad market participation, lots of consumers 
are involved, and there is a way of anchoring decision making 
in a comparable product. But I don't imagine it would be the 
primary tool of the new agency. It is an additional tool that 
it has, along with the other tools of disclosure and banning 
unfair and deceptive acts and practices.
    Senator Crapo. And am I correct that the proposal also 
contemplates that the consumer would be required to acknowledge 
in yet another notice or acknowledgment that they were offered 
these basic products as well as any other products that were 
offered?
    Mr. Barr. Again, the agency has flexibility there, Senator. 
So it could, instead of--it could have a requirement that the 
consumer opt into an alternative product. It need not do it 
that way. There is flexibility built into the agency's 
structure so that it can choose that approach if it feels it is 
warranted under the circumstances.
    Senator Crapo. All right. Thank you. I would like to--
because of time, I want to shift gears very quickly here to the 
issue of whether it is wise to separate safety and soundness 
regulation from consumer protection. I am sure you are aware 
that a number of authorities have indicated that there's a 
great danger in doing so.
    I see a couple of problems. One, proliferation of 
regulatory agencies. I think we should be trying to consolidate 
and streamline our regulatory system rather than adding yet 
another regulatory layer. But also the fact that you could have 
inconsistent regulations between the safety and soundness 
regulators and the consumer protection regulators. And finally, 
the fact that the safety and soundness regulators or the 
prudential regulators will have access to information that 
could be very relevant to consumer protection and vice-versa. 
Why should we separate these two functions?
    Mr. Barr. Thank you very much, Senator Crapo. I think that 
the key here is that in the past, we have had a system in which 
we had a joining of the safety and soundness function and the 
consumer protection function in the banking sector and then no 
supervision or examination at all in the nonbanking sector and 
I think we have seen the results of that. We have had a system 
that hasn't protected consumers and hasn't been good for the 
safety and soundness of banks. It is very hard, I think, to say 
that our current structure with respect to consumer protection 
is good for consumers. It is very hard to say that it is good 
for banks.
    I don't think we will see inconsistent approaches because 
the consumer regulator will have clear authority for the items 
that the consumer regulator has to do. The prudential 
supervisor has clear authority for what it has to do. And they 
each have to do their jobs.
    And third, with respect to information, there is a 
requirement of information sharing between the prudential 
supervisor and the consumer agency. The examiners are going to 
share examination reports. The prudential supervisor sits on 
the board of the consumer agency. The consumer agency and the 
prudential supervisor both sit on the Financial Services 
Oversight Council. So I do believe there will be quite good 
coordination.
    Senator Crapo. Well, thank you. I have heard that 
explanation before, the fact that it didn't happen before, 
therefore, we should change. I am not sure that that really is 
a good reason to separate those two functions, but thank you 
very much anyway.
    Chairman Dodd. Thank you, Senator Crapo, very much.
    Senator Tester.
    Senator Tester. Yes, thank you, Mr. Chairman. Thank you, 
Secretary Barr, for being here.
    The proposal provides authority for the agency to collect 
annual fees or assessments. How do you see this impacting 
smaller financial institutions?
    Mr. Barr. Thank you, Senator Tester. I believe that the new 
agency will be able to use existing fees that are collected for 
this purpose by the banking agencies----
    Senator Tester. OK.
    Mr. Barr. ----and it will not increase the overall level of 
fees that are being collected in the system.
    Senator Tester. So they are going to be pulling some of the 
fees they are already paying to pay for the regulation that 
already exists?
    Mr. Barr. That is correct.
    Senator Tester. So no increase in fees?
    Mr. Barr. Well, under the legislation, there is broad 
authority for the agency. We don't anticipate that it would 
result in any increase in fees. It would likely result in a 
reduction in fees because the agency is consolidating functions 
across all the existing entities. There will be efficiencies of 
scale and scope in doing that.
    Senator Tester. All right. How do you see the States 
fitting into the Consumer Financial Protection Agency?
    Mr. Barr. The States would have a quite important role. 
States have been at the forefront in many ways of consumer 
protection. States would be able to enforce Federal law. States 
would have a strong role with respect to their own examination 
and supervision processes.
    Senator Tester. Would they be able to go beyond the 
Federal?
    Mr. Barr. And States would be able to set higher rules if 
they believe that the Federal standards weren't sufficient.
    Senator Tester. All right. There can be debate on why we 
have regulation. I can tell you, safety and soundness and 
consumer protection, I mean, if you don't have--it is all 
consumer protection in the end, as far as I am concerned. I 
think that is fundamentally, from my perspective, why 
regulation is set up. You may disagree. But in your statement, 
and it is in the written statement and you verbalized it again, 
you talked about how screwed up the current system is, and I 
agree and I think everybody in this Committee understands that 
it is severely flawed right now. And I appreciate the 
Administration coming forward with their proposal.
    But the question is, does the proposal, this part of the 
proposal, other parts of the proposal, does it really fix the 
problem, because we do have a fragmented system and you can 
shop for regulators and all that stuff. Does it fix it?
    Mr. Barr. In our judgment, sir, it does. I think it would 
prevent the kind of regulatory arbitrage that we saw in the 
past.
    Senator Tester. OK----
    Mr. Barr. It sets high standards across the playing field 
that apply to everybody.
    Senator Tester. Correct me if I am wrong, but as far as 
consolidation of agencies so things don't fall through the 
cracks, the proposal is for the OCC and the OTS to be combined. 
Any others?
    Mr. Barr. Yes, sir. I think if you look across the range of 
the proposals that we put in place, we would merge the OCC and 
the OTS into a new national bank supervisor.
    Senator Tester. Right.
    Mr. Barr. We would prevent kind of shopping for regulators 
by firms that are in enforcement trouble. We would eliminate 
all the exceptions to the Bank Holding Company Act, the 
loopholes in the past that have permitted firms to escape 
consolidated supervised regulation at the Federal level. We 
would remove the Fed Light restrictions from the Gramm-Leach-
Bliley Act so that the Federal Reserve can act as a 
consolidated supervisor. And each of those measures is designed 
to ensure that the kind of regulatory arbitrage we saw on the 
prudential side does not occur in the future.
    Senator Tester. OK. One of the things that has concerned me 
and I have expressed in this Committee many times is that 
community banks, credit unions, for the most part, have been 
pretty good actors in this whole thing. They haven't created 
the problem. And yet when it gets down to the nuts and bolts of 
regulation, they are being clamped as much as the Wall Street 
bankers that I think in a lot of cases should be doing time for 
what they have done.
    So in this proposal, what can you tell me--Consumer 
Financial Protection Agency aside, what can you tell me that 
will make it so that this doesn't happen again or has a lot 
less possibility of happening again?
    Mr. Barr. Senator Tester, we have a very strong proposal in 
our report and will soon be sending up legislation with respect 
to consolidated supervision of very large financial firms, what 
are called under our proposal Tier 1 financial holding 
companies. They will be subject to stringent supervision on a 
consolidated basis. They will have higher capital standards. 
They will have higher requirements with respect to liquidity. 
And the basic goal of that system is to create large cushions 
in the system so that when failures happen, if failures happen, 
there is a lot more give----
    Senator Tester. Are we doing the same thing to the 
community banks that you just talked about to the Wall Street 
banks?
    Mr. Barr. The communities are not getting extra 
requirements----
    Senator Tester. Are we requiring higher capital standards? 
Are we doing some of the other stuff you talked about? What I 
am hearing that is happening on the ground because of what the 
bad actors did above them, if you want to call them above them, 
is they are getting pinched on capital standards across the 
board.
    Mr. Barr. Sir, I think I want to separate, Senator Tester, 
what may be happening in the field with respect to examination 
today and what the proposals are for the future, and under our 
legislative proposal, we are focusing on raising capital in the 
system and raising it even more so and higher with respect to 
Tier 1 financial holding companies so that any incentive to be 
large is taken away.
    Senator Tester. All right. OK. Thank you very much. Thank 
you.
    Chairman Dodd. Thank you, Senator Tester.
    Let me just comment here. I think Senator Tester has raised 
a good point. I think all of us would tell you up here, and I 
am sure you are aware of this, as well, that from our community 
bankers and, for the most part, the credit unions in our State 
acted very responsibly through all of this and what they worry 
about is being saddled with a lot of the cost that comes down. 
That will not be warmly received, I can tell you right now, 
just looking at it.
    We need to make that case over and over again. There is a 
distinction in performance. We have a tendency to talk about 
banks in a generic context and don't draw the distinctions 
between those who acted responsibly and those who didn't. And 
so as we look at these proposals and ideas, we ought to keep 
that very much in mind. I can just guarantee you, there will be 
no willingness up here to levy kind of additional fees and 
costs on the community banking system of the country that is 
feeling a lot of pressure already.
    Mr. Barr. Absolutely, Mr. Chairman.
    Chairman Dodd. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for your testimony. Let me start 
by simply saying I concur that there have been failures in the 
systems and that we need to figure out how to do a better job 
on consumer protection. I do have some questions about the 
approach the Administration is taking. I want to go back to 
some of the comments that Senator Corker and Senator Merkley 
made.
    I am still struggling with kind of what the underlying 
theory here is. Is the underlying theory that the goal is 
enhanced disclosure in comparison, or as you raised, that there 
are times when disclosure in comparison may not be enough as 
was evidenced by the Fed's action on double-cycle billing? Take 
me through again what the basis is here. Are we going to look 
for some bright-line prohibitions or do we feel like a 
disclosure regime alone is enough?
    Mr. Barr. Thank you, Senator Warner. I think that in the 
first instance, we need an independent, single-focused mission 
Consumer Financial Protection Agency. So the first principle 
would be clear mission, clear accountability, clear 
responsibility by one agency. That agency will have different 
tools that it needs to use in different market contexts. Some 
of those tools--the bulk of those tools will be disclosure. 
Disclosure can often solve many of the problems in our 
financial services marketplace, because if you clearly disclose 
a product or services, then consumers can choose the product or 
service they want. That is the best answer in many 
circumstances.
    In some circumstances, you want that agency to do more. You 
want it, for example, to say to a consumer, not just here is 
the information about the transaction, but here is the 
consequence of this decision or that decision. So one of the 
things that this Committee and the Congress did in the credit 
card bill was say to credit card companies, you need to let 
consumers know how much it would cost them if they only paid 
the minimum on their credit card balance. That is an additional 
item beyond the traditional disclosure that in some contexts 
can make a big difference to consumers.
    In other contexts, you need a standard point of comparison 
to make that disclosure meaningful, so not just the pay-option 
ARM costs X, but that is what it costs in relation to, say, a 
standard 30-year mortgage or in the kinds of pay-option ARM, a 
5-1 ARM with straightforward terms. So points of comparison can 
matter a lot, too.
    And then in the last instance, you have the ability to ban 
terms in products or services where they are unfair and 
deceptive and these other tools don't work.
    Senator Warner. But you would see this agency having that 
ability to ban certain products?
    Mr. Barr. Again, as----
    Senator Warner. In a preclearance way or after the product 
has already been out in the marketplace?
    Mr. Barr. There is no preclearance requirement under this 
legislation. It is not like other legislation the Committee may 
have considered in the past. There is no preclearance procedure 
with respect to all products and services. There is a 
requirement of disclosure.
    Senator Warner. But let us assume you have a product. It 
has been disclosed. You have got a comparison basis. In effect, 
the Federal agency has fostered that that is appropriate. But 
we are still allowing, then, the 50 independent Attorneys 
General to go out and raise the bar higher, correct?
    Mr. Barr. Yes. So under the legislation, the traditional 
preemption by national banks would not be available and States 
could set higher rules for products and services. But with 
respect to the unfair acts and practices, the agency could step 
in and say, if you are offering a credit card with double-cycle 
billing, that is unfair. We can't disclose our way around it. 
So that particular term----
    Senator Warner. I guess what I just want to make sure I 
understand, you are saying that a product, that if the Federal 
agency had determined disclosure alone was enough, it then 
comes out into the marketplace and an Attorney General decides, 
no, disclosure is not enough. We want to actually ban this 
product in State X. They can go ahead and initiate that action, 
and if it is successful at a State level, what does the 
financial institution--there is no kind of pass, that once you 
have passed the disclosure requirement at the Federal level, 
that you have got an ability then to go into the marketplace 
and offer this because you can still have the State Attorney 
General raise a separate action, is that correct?
    Mr. Barr. No, sir. So the State Attorney General can only 
enforce State law that exists or Federal law that exists. If a 
State legislature decided to set a higher standard in a 
particular area, it would be free to do that as States are free 
in many areas of consumer life to set higher standards to 
that----
    Senator Warner. I know my time is up. Just one quick other 
comment. I am not sure I fully got your answer there, but I am 
interested in this area on the nonbank supervision, the 
question of going after financial products. Do you envision at 
some point the Administration coming forward on these 
noncurrently covered financial institutions? Are you going to 
look at their product mix underneath this legislation? Will you 
also envision at some point laying out some kind of safety and 
soundness oversight, prudential oversight, as well, for a 
series of nonbank financial institutions?
    Mr. Barr. Senator Warner, this only applies to consumer 
financial protections. So in our proposal, consumer financial 
protection issues would be at this one agency and the consumer 
issues would be able to be examined across the financial 
services sector. But there is no proposal to have broad Federal 
prudential----
    Senator Warner. No prudential regulation on the whole 
nonbank sector of the----
    Mr. Barr. Not with respect to, say, an independent mortgage 
company. Certainly with respect to, if you are a--within a bank 
holding company, the Federal Reserve would have consolidated 
supervision of all the entities within a bank holding company 
and it would be required to ensure that all the elements of the 
holding company are not undermining safety and soundness. So in 
that respect, yes, but not a broad new authority with respect 
to prudential supervision outside the bank holding company 
context.
    Senator Warner. Thank you, Mr. Chairman. I hope we get 
another round.
    Chairman Dodd. Thank you, Senator Warner.
    Senator Johnson.
    Senator Johnson. Mr. Barr, one of the objectives of the 
CFPA is to fill regulatory gaps, a goal I share. If a State 
does not examine a mortgage broker, would this agency? If a 
State does not examine a check casher, would this agency?
    Mr. Barr. The agency, Senator Johnson, would have the 
authority to set uniform rules to examine and supervise 
mortgage brokers. It could also do that with respect to other 
financial services providers, including check cashers, with a 
goal again of having high standards across the financial 
services marketplace and a level playing field for competition, 
so banks and community banks and credit unions are not at a 
competitive disadvantage.
    Senator Johnson. According to the draft bill submitted by 
the Administration, the CFPA would have the authority to 
oversee financial advisors who provide financial and other 
related advisory services. Since the bill appears to exclude 
from the CFPA's jurisdiction all products and services 
regulated by the SEC, the CFTC, and State insurance 
departments, will you please clarify who this language is 
intended to impact.
    Mr. Barr. Thank you, Senator. The basic language there is 
designed to deal with scams that have come up around the 
corners of the marketplace, where institutions that are not 
generally subject to any regulation offer what they call 
financial advice to consumers. It is primarily not aimed at 
State-regulated financial advisors, where there already is a 
system in place at the State level for regulating those 
institutions.
    Senator Johnson. Could an unintended consequence of 
products be the consolidation of markets?
    Mr. Barr. I think, Senator Johnson, that we will see lots 
of financial innovation in the future, lots of choice in the 
future in financial products. This agency will enable choice 
cross the financial services sector, enable financial 
innovation across the financial services sector based on a 
level playing field with high standards.
    Senator Johnson. I can probably say that most mortgages are 
originated within the terms of 30-year fixed-rate mortgages. 
These products work for most of my constituents. That said, 
sometimes there are other products that are not plain vanilla 
that work for a consumer. Your proposal seems to create many 
hurdles for both banks that offer these types of products and 
consumers that use them. Do you think your proposal creates a 
disincentive for institutions to offer different products? Do 
you think that fewer products will reduce consumer choice? 
Could this indirectly increase the cost of credit?
    Mr. Barr. Thank you, Senator. Our judgment is that the new 
agency will have the ability to set high standard across the 
financial services marketplace, including for mortgages, that 
we will continue to see innovation in the mortgage sector, but 
that if firms want to offer products that are difficult for 
consumers to understand, there will be a higher burden on them 
to explain those products and services. And I think that we 
have seen the consequences of a system in which there is 
inadequate supervision of those kinds of practices.
    So I do think we are going to see a rebalancing, if you 
will, where it is a much lighter regulatory burden even than we 
have today with respect to straightforward products. So you can 
do things like combine the Truth in Lending Form and the Real 
Estate Settlement Practices Form into one simple Mortgage 
Disclosure Form everybody can use. That is easy under the new 
approach, very hard under the current approach. It is a way of 
reducing regulatory burden for banks, improving disclosure for 
consumers. We can see a lot of that happening in this space 
with the new agency.
    Senator Johnson. My time is up.
    Chairman Dodd. Thank you very much, Senator.
    Senator Bayh.
    Senator Bayh. Thank you, Mr. Chairman.
    Thank you, Mr. Barr, for your service. I know you guys have 
a lot on your plate over at Treasury, so I am grateful for your 
time this morning and your focus on this important issue.
    Can you outline for the Committee, what were some of the 
abuses that have been brought to light by the current crisis 
that this proposal intends to prevent?
    Mr. Barr. Thank you, Senator Bayh. I think one key area 
where we saw abuse was in mortgage broker conduct. We saw 
brokers who were offered incentives to get consumers to take 
out loans that were more costly than the ones they qualified 
for----
    Senator Bayh. And you forgive me for interrupting you. I 
agree with that wholeheartedly. That has been fairly well 
documented. How about in areas beyond mortgage lending?
    Mr. Barr. I think, again, in the credit card context, this 
Committee has discussed problems with unfair practices in 
credit cards, problems we have seen with respect to bank 
overdraft fees, which are not disclosed as credit problems, 
problems in the payday lending sector, where there have been 
significant failings, problems in the auto loan sector, where 
disclosures have been inadequate and abuses have occurred. I 
think if you look really across the consumer financial services 
marketplace, at credit products, at payment products, and the 
like, bank products, there have been a series of failures of 
our existing regime to take account of the needs of consumers. 
And I am sure you hear the complaints from your constituents on 
these matters.
    Senator Bayh. Certainly in the credit card area we did, and 
that is one of the reasons the Committee and the Congress acted 
in that area. So it is your judgment, Mr. Barr--and I agree 
with your assessment of many of the practices you have outlined 
there--it is your judgment that the problem can't be addressed 
by simply proscribing some of those things or tightening 
existing enforcement and regulation to prevent a recurrence or 
to require greater disclosure in the future?
    Mr. Barr. That is our judgment, sir. I think if you look 
across the history of this matter, we don't want to fix one 
problem only to ignore and miss the next problem. We need an 
agency that is looking out for consumers all the time.
    Senator Bayh. Let me ask you about the responsibility that 
consumers have, because an enlightened, vigilant consumer is 
really their best protection. It is hard to regulate against 
all these sorts of things. So what responsibilities do 
consumers bear under this regime?
    Mr. Barr. I think consumers bear the responsibility to act 
responsibly based on the best information they have, and it is 
the job of the financial services industry to compete based on 
price and quality and not based on confusing consumers. But in 
our current system, the incentives to have hidden features are 
very large. We have seen that across the financial services 
marketplace. And so if you have an agency that can set rules of 
the road, everybody can compete based on transparent pricing 
and services. Consumers win. Financial services firms win. It 
is good for the economy. It is good for the country. So that is 
the kind of system we want to see going forward.
    Senator Bayh. Several of my colleagues have touched upon 
the importance of disclosure, and you have touched upon the 
importance of prohibiting abusive practices. I think we all 
agree on that. But disclosure only works if consumers do their 
part, too, and that is why I asked the question. We need to 
build in incentives for them to actually take advantage of the 
information that is being offered, process it, and then bear 
some responsibility for their own outcome, because if there is 
not some responsibility on the individual, the system is not 
going to work too well.
    Mr. Barr. I think that is absolutely right. Consumers need 
to behave responsibly and we need to make the path available to 
them to do so.
    Senator Bayh. Thank you, Mr. Barr.
    Mr. Barr. Thank you.
    Chairman Dodd. Thank you very much, Senator.
    Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman, and we appreciate 
your being here, Under Secretary Barr. Sorry I couldn't be here 
the whole time. We have the Judiciary hearings. That is why I 
am in the back here.
    But I am very much for a Consumer Financial Protection 
Agency. In fact, Senator Durbin, Senator Kennedy, and I 
introduced legislation quite along the lines of this a while 
back and I am glad that the Chairman has made this an important 
hearing, an important part of our bill, and I am glad that the 
White House has supported it.
    The bottom line is that the present regulatory structure 
has been an abject failure. I worked with the Fed on, for 
instance, credit card interest rates for 15 years. The progress 
was slow, it was muted, and way behind what the credit card 
issuers would come out with. And so to have an agency whose 
sole focus is on protecting consumers when the Fed has so many 
other responsibilities, and we are considering giving them even 
more responsibility, makes sense. Having the FTC do it, again, 
they are all across the board.
    And look, let us face it, the kinds of deceptive practices 
that, for instance, occurred in the mortgage industry brought 
down the whole economy, and it is amazing to me that people say 
we don't need stronger regulation given that that has happened. 
It is just amazing.
    And as for this idea, and I want to ask you about this, 
stifling innovation--some of the critics have said this--yes, 
it will. It will stifle innovation, clever ways to dupe the 
consumer, to sell people mortgages that they shouldn't have, to 
issue people more credit card debt than they can pay for. You 
bet, it is going to stifle that kind of innovation. But will it 
stifle a new product, as long as it is fully disclosed, that 
the consumer or mortgagor needs? No.
    So please, we have had such a sorry history in the 
regulation of consumer financial products--sorry history, 
despite the efforts of you, Mr. Chairman, and others on this 
Committee on both sides of the aisle--that I would argue that 
if we don't include this in our financial regulation bill, 
there will be a gaping hole.
    But I want to ask you the question about innovation, Mr. 
Barr. What about the argument that this new agency will stifle 
innovation of new products and things?
    Mr. Barr. Senator Schumer, I think that the agency will 
enable financial innovation to occur based on a level playing 
field with high standards. It will prevent the kind of 
competition that we have seen in the past based on--competition 
based on who can provide the most confusing terms and the most 
hidden fees.
    Senator Schumer. Right.
    Mr. Barr. But competition based on financial innovation for 
price and quality, transparency to consumers, that kind of 
financial innovation we will see more of, not less.
    Senator Schumer. Right. Let me ask you this. What about the 
FTC? Some have said, well, the FTC can do these kinds of 
things. Has the FTC done at all a decent job in regulating 
financial products in the last decade?
    Mr. Barr. Senator, I think that the FTC is a good agency 
with many good people in it. I think that it has not had the 
tools to do this kind of action. It is structurally not set up 
to supervise or examine the nonbank sector. It can only act 
long after the fact with enforcement when it is too late----
    Senator Schumer. Right.
    Mr. Barr. and that is just not enough. It can't act at all 
with respect to banks, and so we have a fractured system where 
everybody can point fingers and nobody gets the job done.
    Senator Schumer. Right. And let me just ask one more 
question of you, and that is this. Right now, one of the things 
that hamstrung us was the fact that there were unregulated 
areas. In other words, if a bank issued a mortgage, there was 
some degree of regulation--I would say not enough, but some. 
But if a mortgage broker got from a nonbank financial 
institution financing, there was virtually no regulation at the 
Federal level, and when you talked to the Fed about it, which I 
did, they would say, well, we don't have jurisdiction. Isn't 
another reason to have this financial product regulator, which 
regulates the product and not the specific institution that 
issues the product, a way when the next new innovation comes up 
that there won't be a hole in the regulatory structure, because 
right now, we regulate by the type of institution, not the type 
of product issued?
    Mr. Barr. Senator Schumer, that is exactly right. This 
institution, this new agency will have the authority to examine 
and supervise any financial institution. It won't be limited to 
banks. It won't be limited to nonbanks. It can supervise and 
examine and set rules across the financial services industry. 
So if you are a community bank and a credit union, you are not 
going to be put in a place of competing with an unregulated 
mortgage company ever again.
    Senator Schumer. It will, as you say, create a level 
playing field across the board based on the product.
    I thank you, Mr. Chairman.
    Chairman Dodd. Senator Schumer, thank you very much.
    Senator Shelby has a comment he wants to make. I know Bob 
had a quick question. I am trying to get to the second panel if 
we can, as well, so I don't want to limit my colleagues here 
who want to raise another question or two here, but I do want 
to get to the second panel.
    Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman. I will try to be 
fast. I do have a number of questions for the Secretary that I 
would like to be made part of the record.
    Chairman Dodd. And I have, as well, and I will submit those 
for the record.
    Senator Shelby. Mr. Secretary, you were one of the authors, 
and we have talked about this this morning, of the article that 
appeared, published by the New American Foundation, 
``Behaviorally Informed Financial Service Regulation,'' right?
    Mr. Barr. Yes, sir.
    Senator Shelby. OK. Among other things in that article, I 
just want to quote from this, and this will be as quickly as I 
can say. It says, ``We explore a different approach based on 
insights from behavioral economics on the one hand and an 
understanding of individual organization on the other. At the 
core of our analysis is the interaction between individual 
psychology and market competition. This is in contrast to the 
classic model, which relies on the interaction between rational 
choice and market competition. In the classic model, absent 
market failures, because rational agents choose well, firms 
compete to provide products and improve welfare. Because 
rational agents process information well, firms compete to 
provide information that improves decision quality.
    ``By contrast, in our model,'' and some of this is in this 
proposal, as I understand it, ``individuals depart from 
neoclassical assumptions in important ways. The introduction of 
richer psychology complicates the impact of competition. Now 
firms compete based on how actual individuals will respond to 
products in the marketplace and actual competitive outcomes may 
not always and in all contexts closely align with the improved 
decisional choice and increase consumer welfare.''
    This is a real departure from, as you said in your paper, 
from the model that we have relied on for a long time. I am not 
saying that model is pure and perfect, because it is not, but 
this is a heck of a departure, is it not?
    Mr. Barr. And, Senator Shelby, in that article, we are 
highlighting different models of thinking about human decision 
making----
    Senator Shelby. Sure.
    Mr. Barr. and in most circumstances, competitive outcomes 
are going to lead to welfare enhancement. But in some 
circumstances where individuals are consistently prone to 
failure, it won't, and then the question is should the 
Government do something about that. Many times, the answer is 
no. It is sort of a trivial difference in outcomes. It would 
cost more to get engaged than it would to not get engaged and 
so you want the Government to do nothing.
    In some contexts, though, the failures are so deep that you 
think some kind of step needs to happen, whether that is 
through disclosure or through providing information about the 
consequences of financial decision making, or in some 
particular circumstances saying a particular term should be 
banned, as this Committee did with respect to double-cycle 
billing.
    Senator Shelby. I understand, I think, where you are going, 
or trying to go. I hope you don't go too far here, or we don't. 
But on the other hand, an informed consumer--an informed 
consumer--that has relevant information will generally make a 
rational decision in the marketplace.
    Mr. Barr. I think that is absolutely right. So I think that 
in most circumstances, most of the time, disclosure is going to 
get you most of the way there. And then the question is, in 
what context is that not enough? And again, as the Committee 
did with respect to credit cards, some practices you can't 
disclosure your way around. They are too complicated. Consumers 
can't--a responsible consumer trying to do the right thing 
couldn't actually figure out how to behave responsibly in that 
context.
    Senator Shelby. Wait a minute. But you are really saying 
that you don't trust the consumer to make decisions for 
themselves, in a sense.
    Mr. Barr. No, I think consumers are--I trust consumers 
tremendously. What I don't trust is that if we set up the 
marketplace so that the incentives are to confuse consumers, 
that is the kind of competition we will get. We will get 
competition around confusing consumers. If we set up the 
marketplace so the rules are you compete to get consumers to 
your product because you have a better product, that is the 
marketplace we will get.
    Senator Shelby. But according to Senator Corker's question, 
as I understood it earlier, you are going to ration the 
products that you can offer.
    Mr. Barr. No, sir. There would be no product rationing 
under this----
    Senator Shelby. You are not going to ration----
    Mr. Barr. No product rationing under this approach at all. 
Consumer choice, individual freedom are at the heart of this. 
The key provisions of this Act would enhance the ability of 
consumers to make decisions that make sense for their own 
lives.
    Senator Shelby. Well, I hope we are going to have a lot of 
hearings on this, Mr. Chairman.
    Chairman Dodd. Yes. Jack, you have a question you would 
like to raise?
    Senator Reed. Thank you very much, Mr. Chairman, and thank 
you, Secretary Barr.
    Can you walk through how the proposal establishes primary 
and secondary enforcement, rulemaking, and examination 
responsibilities?
    Mr. Barr. Yes, Senator Reed. A core principle of our 
proposal is that supervision, examination, and rule writing 
should be joined together with respect to banks and nonbank 
institutions so there can be uniform rules of the road, real 
supervision and enforcement across the financial services 
sector.
    We leave backstop authority at the bank agencies and at the 
FTC in case something falls through the cracks, in case 
something gets picked up in an exam and they need to refer it 
over to the new agency. But the idea is not to have any 
duplication, to have real core focus on consumer issues in one 
place with real responsibility and accountability to the 
Congress and the American people.
    Senator Reed. Can you comment about the alternative 
approach which some have suggested, which is essentially the 
bank regulators take the lead and then the CFPA would be sort 
of the backup?
    Mr. Barr. Senator Reed, I think we have seen a system in 
the past where rule writing was at the Federal Reserve and 
supervision was spread around in the bank agencies and the 
system was fundamentally broken. The rule writer had a 
conflicting mission. The supervisory entities had conflicting 
missions. None of them thought consumer protection was at the 
top of what they would do. They would regulate banks based on 
reputation risk and litigation risk with respect to consumer 
issues, looking out for the interest of the bank and not 
consumers. I think we can't have that approach going forward.
    Senator Reed. Let me raise another issue and that is the 
funding. Your proposal, how would the CFPA be funded?
    Mr. Barr. We look forward to working with the Congress on 
determining the right approach to funding issues. I know that 
is an area of great concern to the Congress. We need to ensure 
that the funding is stable and strong. Under our approach, 
there would be a mix of appropriated funds as well as the 
transfer of fees from the bank regulatory agencies with respect 
to consumer protection functions and fees in the area where 
such fees have not been collected in the past in the nonbanking 
sector. So we have a mix of appropriations and fees funding the 
agency. We would be happy to work with the Congress on that 
approach.
    Senator Reed. Mr. Secretary, a final question. There is at 
present the tension in the banking regulators between safety 
and soundness and consumer protection. Some would argue that 
consumer protection was always subservient to that, and that 
led--was one of the factors that led. How in this new approach 
do we balance the safety and soundness issue with the 
regulators who are responsible for it and the consumer 
protection issues?
    Mr. Barr. Each agency would have responsibility for the 
mission assigned to it. The consumer protection agency would 
need to be sure that, say, disclosures are clear about a 
product or service, and the bank supervisory agency would have 
authority with respect to prudential supervision, underwriting 
standards, capital requirements, sort of core prudential 
supervisory matters. So a clear assignment of authority, clear 
assignment of responsibility and accountability to the Congress 
and to the American people for achieving those aims.
    Senator Reed. Thank you very much. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator, very much.
    Bob, did you have a quick question on this?
    Senator Corker. Out of respect for everybody's time and 
knowing you want to move on, instead of asking questions, I 
will just make one statement. You have not alluded to student 
loans, auto loans. I know we have talked about mortgages. All 
of those are areas under your proposed legislation that you all 
would set up basic products. And while I said not necessarily 
on the front end, I just want to say, in listening to your 
testimony and answers, this is an example of all examples of 
this Administration being Big Brother, and I think the American 
people are recoiling from this. I think this is a tremendous 
overreach and very disturbing to listen to.
    I hope that as you move along, we will be able to work 
together to do something that is not an overreach, where the 
Federal Government is telling citizens the types of products 
they should and shouldn't buy, and telling companies what they 
should and shouldn't offer. This is way out of bounds and I 
look forward to working with you to get it in bounds.
    Chairman Dodd. Senator Warner, do you have a quick 
question?
    Senator Warner. I just want to make sure we try to get it 
right and I have still got a series of questions, but I will 
reserve those until another time.
    Chairman Dodd. I thank my colleagues. Let me just say, that 
is our intention, obviously, to get this right. I think your 
testimony has been very valuable this morning. Maybe Senator 
Schumer hit the note in a way. We don't want to forget what has 
happened over the last several years. It is unprecedented. You 
have got to go back to the generation of our grandparents to 
talk about a time similar to the ones we have been through. We 
have got 15 million homes underwater today--15 million--and 
every likelihood of those foreclosures continuing at a rate 
that is unprecedented, certainly in modern times, and the 
obvious implications of that are spread far beyond just home 
mortgages to other aspects of our economy.
    And so the notion--when we lost sight of the--three great 
things done by the Depression Era Congress and Administrations 
were the establishment of the Securities and Exchange 
Commission, the establishment of the Federal Deposit Insurance 
Corporation, and Glass-Steagall, in my view. Those three things 
gave us virtually 60 years almost of unprecedented stability. 
When we began to wander away from having oversight of our 
financial institutions, we began to mix commerce and banking to 
the point where we thought we were going to have firewalls to 
protect people but did not do so, as well as not having 
adequate insurance under the Federal Deposit Insurance 
Corporation. We began to see the problems, and I can point to 
other aspects to all of this.
    And so getting back to the notion that when that consumer--
and the consumer, in my view, is the shareholder, it is the 
policy holder on an insurance policy, it is the borrower 
whether it is a mortgage or a car loan or a student loan--when 
we lose sight of that individual, if we don't take into view 
that individual's concerns and begin to look just top-down and 
not bottom-up, then you begin to lose sight of what this is all 
about to people. These are highly complicated areas.
    Now, I think the issues raised about mandating or dictating 
or somehow driving certain product lines is something that we 
have got to be careful how we engage in that. Bob Corker has 
raised an interesting point and one that we ought to examine 
thoroughly. But the idea that we are going to have sort of 
disregard for what is going on, too often, in too many cases is 
where consumer issues have been lost in this process here.
    The idea that when people walk in and they are being 
marketed--60 percent--according to the Wall Street Journal, 60 
percent of the subprime mortgages went to people who otherwise 
qualified for a conventional mortgage, a lot cheaper product 
than that subprime mortgage. That is an outrage. That is people 
marketing products that they knew very well that that borrower 
could not afford, never at the fully indexed rate, and were 
going to be in trouble. And having a process which protects 
people against that kind of behavior, I think is critical.
    Now, how we do this and shake this up obviously is a 
challenge to the Committee, working with the Administration and 
others. But my view is we have got to take this issue on and 
find a mechanism here that certainly fills that gap that has 
existed for far too long and created for the first time in 60 
years the kind of break that occurred that we are all 
struggling with today.
    So I appreciate your testimony. We will have additional 
questions for you to submit, but I want to get to the second 
panel here if we can, very quickly.
    Senator Shelby. Mr. Chairman, can I have one word?
    Chairman Dodd. One word.
    Senator Shelby. If I could, maybe one or two. We appreciate 
you coming here today, but even you admit in your studies, and 
this is an outgrowth of some of those studies, that this is a 
radical departure from the way we have regulated things before. 
We have tried to let the market work, let the consumer, an 
informed consumer, make decisions, not a bureaucrat make the 
decisions. And there are a lot of flaws in these proposals and 
that is why we are holding hearings, political and otherwise. 
But to move away fast and furious from a classical model of 
regulation, we had better be really careful. What we ultimately 
will do probably is really ration credit to people who need it 
the most.
    Chairman Dodd. Let me just say, and then we will give you a 
chance to quickly respond, we have been faced with a radical 
situation in our country. This is unprecedented. I respect that 
the classical model has fallen apart and the people who have 
paid the price for it are consumers. That home owner or that 
potential home owner, that person out there today who is losing 
their home, they are losing their jobs, they are losing their 
retirement, they are losing their health care, to them, this is 
pretty radical. This is not an abstract problem for them, it is 
a real one. And when you get 10,000 people a day losing their 
homes and 20,000 people a day losing their jobs, that is 
radical, believe me.
    And so I am not looking for radical solutions here that 
don't meet the problem. But if we don't understand the depth of 
this problem, the anger of the people of this country of what 
they are going through and the demand that we start paying 
attention to what happens to them every single day they walk 
into an institution to borrow money, to buy a policy, to invest 
in a corporation because they want to increase their stability, 
then we are losing something here. So we need to get this 
right.
    Do you have any comments you want to make quickly as we end 
up?
    Mr. Barr. Thank you, Mr. Chairman. The Administration's 
proposal would represent a fundamental break from the past. I 
think it is clear that our system of financial regulation 
failed the American people and we need to have a new 
foundation, a firm foundation that protects consumers, and that 
is what this proposal does.
    Thank you very much to you, Mr. Chairman, to Mr. Shelby, 
and to the Committee as a whole for hearing from me.
    Chairman Dodd. We will stay in touch. As Bob Corker said 
and others said, we want to work with you. We have got a lot of 
work to do, but we appreciate you being here.
    Senator Shelby. A lot of work.
    Chairman Dodd. Very good.
    Mr. Barr. Thank you.
    Chairman Dodd. Let me go to our second panel, and we 
appreciate their patience, but I hope it has been worthwhile to 
be here with us. The introductions are going to be brief, so I 
don't have long introductions.
    Let me first of all introduce my Attorney General. Dick 
Blumenthal is here with us. Richard has been our Attorney 
General for a long time and done a fabulous job, served in the 
Connecticut House of Representatives, the State Senate, a 
Sergeant in the U.S. Marine Corps Reserves, distinguished 
record, and I think the greatest Attorney General in the United 
States of America. I say that every time I get to introduce 
him. He does a great job.
    Ed Yingling is an old friend and a person we respect 
immensely. Ed is the President and CEO of the American Bankers 
Association. All of us here have worked with Ed Yingling for 
many, many years and have a high regard for him and his 
abilities.
    Travis Plunkett is the Legislative Director for the 
Consumer Federation of America and has appeared before this 
Committee on numerous occasions involving any number of issues, 
most recently on the credit card efforts, and I want to thank 
publicly Travis and the Consumer Federation of America for the 
tremendous job they did in promoting and advocating the 
legislative success we had with the credit card bill.
    Peter Wallison, I have already drawn into the debate, 
having quoted from his testimony, but we thank you very much, 
Peter. I hope you didn't mind me mentioning your quote on CRA. 
Peter is the Arthur F. Burns Fellow in Financial Policy Studies 
at the American Enterprise Institute. I often quote Arthur 
Burns about the race to the bottom, he used to talk about, in 
regulatory processes.
    And Mr. Sendhil Mullainathan is a Professor of Economics at 
Harvard University, and we thank you very much, Professor, for 
being with us.
    Let me begin with the Attorney General and thank him for 
his testimony in advance and for your incredible career of 
public service to our State and the country.

  STATEMENT OF RICHARD BLUMENTHAL, ATTORNEY GENERAL, STATE OF 
                          CONNECTICUT

    Mr. Blumenthal. Thank you, Senator. I am very, very honored 
by those kind words, especially from someone who has led 
consumer protection efforts in the country, most recently in 
the credit reform bill, and I want to thank you very sincerely 
for all that you have done in other areas of consumer 
protection and the leadership that you will no doubt provide 
the Committee in this area, which as you have said marks what 
seems to be a radical departure from past practices in a time 
that demands radical solutions.
    It is a fundamental break with the past that is very well 
justified by recent history. This proposal would create a new 
agency, a very strong financial products watchdog and guardian, 
similar to the one that now exists at the Federal level in the 
Federal Trade Commission for other kinds of products, the 
Consumer Product Safety Commission for certain kinds of other 
goods and services, and essentially would restore the historic 
State-Federal alliance that existed for so many years so 
productively in combating financial fraud and abuse.
    This financial State partnership was riven and destroyed by 
excessive resort to Federal preemption, which displaced State 
enforcement and replaced that collegiality between Federal and 
State officials with conflict and tension that need not have 
existed. In fact, that conflict was one of the reasons why we 
saw the kinds of abuses that led to the financial meltdown.
    That meltdown was foreseeable. Indeed, it was foreseen. I 
used the word ``regulatory black hole'' to characterize hedge 
funds and many of the other inventive and innovative financial 
instruments that very few people understood even as they used 
them, and the excessive risk taking, often with other people's 
money, that was enabled by that regulatory black hole.
    And so I think that the genius of this proposal, or its 
great advantage, is to restore the alliance between consumer 
protectors at the Federal and State level.
    The doctrine of Federal preemption has essentially led to 
the Federal Government abandoning the battlefield and then 
foreclosing the States from fighting on that battlefield. It 
has in so many areas prevented States, in fact, in many of 
those same areas that Secretary Barr answered to Senator 
Warner's question--payday loans, tax preparer anticipation 
refund loans, credit card issues, mortgage abuses--and I 
describe in my testimony--I am not going to read the testimony 
but just briefly say that in many of those areas where these 
abuses developed, our opponent was most frequently the Office 
of the Comptroller of the Currency.
    I litigated more against the OCC than I did against any 
other single institution. And the most recent Supreme Court 
decision, Cuomo v. Clearinghouse Association, which restores 
some of our authority under the National Bank Act, was really 
against the OCC.
    And so it isn't only that Federal authority has been 
fragmented, that the culture has been wanting, that the FTC has 
lacked the tools and resources, it is the hostility, the overt 
antagonism and adversarial posture of the Federal Government as 
against the States in consumer protection. And if it does 
nothing else--and it does a lot else--this proposal will help 
restore that alliance between State Attorneys General and the 
Federal Government.
    I believe very strongly that this proposal is a good idea. 
There are details, as many Senators have already remarked, that 
need to be refined and perhaps changed. But in concept, the 
idea of having one central point accountable, fully accountable 
to those consumers out there who don't know where to call--and 
right now call my office--is a very, very important concept. 
The accountability to this body of the Consumer Financial 
Products Commission or Agency will be a tremendous advantage.
    And let me just close by saying I couldn't agree more, 
based on 18 years as Attorney General, that consumers 
ultimately have to be their own protectors. But anybody who 
right now reads most of these documents, and I am trained to 
read them, will find them extraordinarily perplexing and 
confusing, not just in the fine print but in their concepts. 
And so this agency, as job number one, ought to not only fill 
that regulatory black hole, but provide for clear, truthful, 
accurate disclosure, and that is one of the essential missions 
that has been completely absent.
    I agree completely that the prudential responsibilities of 
the Fed and other existing agencies probably conflict, or at 
least create divided loyalties so far as consumer protection is 
concerned, another reason why we can't use either the FTC or 
the Federal Reserve to carry these important responsibilities, 
because consumer protection, especially in disclosure, is a 
mission that really requires, in financial products, a separate 
and distinct agency that has that accountability and will 
replace the current culture, the current mindset of conflict 
with the States and resistance to aggressive and vigorous 
consumer protection.
    Thank you very much.
    Chairman Dodd. Thank you very much, General. Thank you 
very, very much.
    Let me just also note that the Attorney General's son is 
with us today. We are delighted to have him in the room, by the 
way. We thank him for being with us.
    Mr. Blumenthal. Thank you.
    Chairman Dodd. Thank you.
    Ed Yingling. Ed, thank you very much. You have been before 
this Committee on countless occasions over the years. We have a 
high regard and respect for you.

STATEMENT OF EDWARD L. YINGLING, PRESIDENT AND CHIEF EXECUTIVE 
             OFFICER, AMERICAN BANKERS ASSOCIATION

    Mr. Yingling. Thank you, Mr. Chairman. I appreciate your 
introduction. It may be my high-water mark this morning, but I 
really appreciate it. Thank you, Senator Shelby and Members of 
the Committee.
    It would be expected that your Committee would look at this 
proposal from the point of view of consumers, who should be 
paramount in your consideration. However, the ABA believes that 
this proposal is not, unfortunately, the best approach for 
consumers and will actually undermine consumer choice, 
competition, and the availability of credit.
    But I would also ask you to look at this issue from an 
additional point of view. While banks of all sizes would be 
negatively impacted, think of your local community banks and 
credit unions, for that matter. These banks never made one 
subprime loan, yet these community banks have found the 
Administration proposing a potentially massive new regulatory 
burden. While the shadow banking industry, which includes those 
most responsible for the crisis, is covered by the new agency, 
their regulatory and enforcement burden is, based on history, 
likely to be much less.
    The proposed new agency will rely first on State 
enforcement, and yet we all know that the budgets for such 
State enforcement are completely inadequate to do the job. 
Therefore, innocent community banks will have greatly increased 
fees to fund a system that falls disproportionately and 
unfairly on them.
    The agency would have vast and unprecedented authority to 
regulate in detail all bank consumer products. The agency is 
even instructed to create its own products and mandate that 
banks offer them. And Senator Corker, this is the part that was 
missing from your discussion with the Secretary. The agency is 
urged to give the products it designs regulatory preference 
over the bank's own products. The agency is even encouraged to 
require a statement by the consumer acknowledging that the 
consumer was offered and turned down the Government's product 
first, and every nongovernment product would be subject to more 
regulation than the Government product. Community banks, 
whether it fits their business model or not, would be required 
to offer Government-designed products, which would be given 
preference over their own products.
    On disclosure, the proposal goes beyond simplification, 
which is needed, to require that all bank communication with 
consumers be, quote, ``reasonable.'' This is a term that is so 
vague that no banker and no lawyer would know what to do with 
it. But not to worry. The proposal offers to allow thousands of 
banks and thousands of nonbanks to preclear communications with 
the agency. So before a community bank runs an ad in the local 
newspaper or sends a customer a letter, it would need to 
preclear it with the new agency.
    All this cost, regulation, conflicting requirements, and 
uncertainty would be placed on community banks that in no way 
contributed to the crisis.
    The fundamental flaw in the proposal is that consumer 
regulation and safety and soundness regulation are two sides of 
the same coin. You cannot separate a business from its 
products. The simple example is check-hold periods. Customers 
would like the shortest possible hold, but this desire needs to 
be balanced with complex operational issues in check clearing 
and with the threat of fraud, which costs banks and ultimately 
consumers billions of dollars.
    The breadth of this proposal is, in many respects, 
shocking. Every financial consumer law Congress has ever 
enacted and every existing regulation is rendered to a large 
degree moot, mere floors. No one will know for years what the 
new rules are and what they mean. When developing products and 
making loans, providers must rely on legal rules of the road, 
but now everything will be changed, subject to vast and vague 
powers of this new agency and anything States may want to add.
    This problem is exacerbated by the use of new, untested 
terminology, again such as the requirement that disclosures be 
reasonable, whatever that means, which will take years to be 
defined in regulation and court decisions. If industry has no 
idea what the rules will be, what the terms will mean, and how 
broad legal liability will be, there is no doubt what will 
happen. Innovative products will be put on the shelf and credit 
will be less available.
    We agree that improvements need to be made. The great 
majority of the problems occurred outside the highly regulated 
traditional banks, but there are legitimate issues relating to 
banks, as well. We want to work with Congress to address these 
concerns and implement improvements, and in that regard, my 
written testimony outlines concepts that should be considered.
    I do want to put one fact back on the table that Secretary 
Barr referred to, and that is as we look at this and as we look 
at preemption, as we look at where the problems were, 94--this 
is the Administration's own numbers--94 percent of the high-
cost mortgages occurred outside the traditional banking 
industry in areas that are either unregulated, lightly 
regulated, or in theory supposed to be regulated at the State 
level.
    Thank you, Mr. Chairman.
    Senator Reed [presiding]. Thank you, Mr. Yingling.
    Mr. Plunkett, please.

STATEMENT OF TRAVIS B. PLUNKETT, LEGISLATIVE DIRECTOR, CONSUMER 
                     FEDERATION OF AMERICA

    Mr. Plunkett. Mr. Chairman, Ranking Member Shelby, Members 
of the Committee, it is good to be back with you. I am 
testifying today on behalf of the Consumer Federation of 
America and 23 consumer, community, civil rights, and labor 
organizations. We strongly support the Administration's 
proposal to create a Federal Consumer Protection Agency focused 
on credit, banking, and payment products because it targets the 
most significant underlying causes of the massive regulatory 
failures that have led to harm for millions of Americans.
    First, agencies did not make protecting consumers from 
lending abuses a priority. In fact, they appeared to compete 
against each other to keep standards low and reduce oversight 
of financial institutions, ignoring many festering problems 
that grew worse over time. If they did act, and they often 
didn't, the process was cumbersome and time consuming. As a 
result, they did not stop abusive lending practices in many 
cases until it was too late. Finally, regulators were not truly 
independent of the influence of the financial institutions they 
regulated.
    The extent and impact of these regulatory failures is 
breathtaking. I offer 10 pages of detail on 12 separate 
regulatory collapses in my testimony over the last decade that 
have harmed consumers and increased their financial 
vulnerability in the middle of a deep recession. This involves 
not just the well-known blunders that we have heard about on 
mortgage lending and credit card lending. I also offer lesser-
known but quite damaging cases of regulatory inaction, such as 
the failure of regulators to stop banks from offering extremely 
high-cost overdraft loans without consumer consent, the 
permission that Internet payday lenders have gotten from 
regulators to exploit gaps in Federal law, and the fact that 
regulators have not stopped banks that impose unlawful freezes 
on accounts containing Social Security and other protected 
funds.
    Meanwhile, the situation for consumers keeps getting worse 
as a result of these regulatory failures and the economic 
problems in our country. One in two consumers who get payday 
loans default within the first year. Mortgage defaults and 
credit card charge-offs are at record levels. Personal 
bankruptcies have increased sharply, up by one-third in the 
last year.
    Combining safety and soundness supervision with its focus 
on bank profitability in the same institutions, regulatory 
institutions, as consumer protection magnified an ideological 
predisposition or antiregulatory bias by Federal officials that 
led to unwillingness to rein in abusive lending before it 
triggered the housing and economic crisis. But we now know that 
effective consumer protection leads to effective safety and 
soundness. Structural flaws in the Federal regulatory system 
compromised the independence of banking regulators and 
encouraged them to overlook, ignore, and minimize their mission 
to protect consumers.
    The Administration's proposal would correct these 
structural flaws. Key facets of this proposal include 
streamlining the Federal bureaucracy by consolidating consumer 
protection rulemaking for seven different agencies in almost 20 
statutes; providing the agency with authority to address 
unfair, abusive, and deceptive practices; ensuring that agency 
rules would be a floor and not a ceiling and that States could 
exceed and enforce these standards.
    In response to this far-sighted proposal, the financial 
services industry has launched an elaborate defense of the 
status quo by minimizing the harm that the current disclosure-
only regime has caused Americans, making the usual threats that 
improving consumer protection will increase costs and impede 
access to credit, and offering recommendations for reform that 
barely tinker with the existing failed regulatory regime. These 
critics are hoping that this Committee will overlook the fact 
that the deregulatory regime that they championed and largely 
controlled has allowed deceptive, unsustainable, and abusive 
loan products to flourish, which has helped cause an economic 
crisis and a credit crunch. In other words, the regulatory 
system that creditors helped create has not only led to direct 
financial harm for millions of vulnerable Americans, but it has 
reduced their access to and increased their costs on the credit 
they are offered.
    Only a substantial restructuring of the regulatory 
apparatus through the creation of this kind of agency offers 
the possibility of meaningful improvement for consumers in the 
credit markets. The agency will be charged with spurring fair 
practices, transparency, and positive innovation in the credit 
markets, which should lead to a vibrant, competitive credit 
marketplace for many years to come. We strongly urge the 
Committee to support this proposal. Thank you.
    Senator Reed. Thank you, Mr. Plunkett.
    Mr. Wallison, please.

 STATEMENT OF PETER WALLISON, ARTHUR F. BURNS FELLOW, AMERICAN 
                      ENTERPRISE INSTITUTE

    Mr. Wallison. Thank you, Mr. Chairman and Ranking Member 
Shelby, Members of the Committee. I must say candidly that I 
was shocked when I realized how this legislation will actually 
work.
    For me, it raised the following questions. Are consumers 
protected when they cannot buy products and services that are 
available to others? Is that what consumers want? Does it 
matter what they want? These questions occur because the 
Administration's proposal for a Consumer Financial Protection 
Agency, the CFPA, results in the Government, I believe, 
essentially deciding which Americans will have access to 
certain financial products and which will not.
    Traditionally, consumer protection in the United States has 
focused on disclosure. It has always been assumed that with 
adequate disclosure, all consumers at whatever level of 
education or sophistication could make rational purchase 
decisions. Consumer protection under these circumstances 
focused on fraud and deception and could take account of 
differences in consumer sophistication.
    But the Administration's plan is based on an entirely 
different idea. That idea is that many consumers should not be 
allowed to have particular products or services because they 
are not sophisticated, educated, and perhaps intelligent enough 
to understand what they have been offered.
    It is clear that in the Administration's plan, disclosure, 
no matter how complete, is not enough. The white paper that the 
Administration circulated before submitting its legislation 
contains the following language: ``Even if disclosures are 
fully tested and all communications are properly balanced, 
product complexity itself can lead consumers to make costly 
errors.''
    As a result, under the proposed legislation, every provider 
of a financial service, and that term, incidentally, includes 
everything from banks to check cashing services, and from 
furniture rental companies to Western Union, every one of these 
institutions--not including, incidentally, securities firms or 
insurance companies, which are also involved in financial 
activity--is required to offer a plain-vanilla product or 
service to be defined and approved by the CFPA that will be 
simpler and entail, ``lower risks'' for consumers.
    This raises, to me, the obvious question. Once the CFPA has 
prescribed a simpler and lower-risk mortgage, who will be 
eligible to buy the more complex product that is tailored to a 
consumer's particular needs? In effect, this question places on 
the provider the burden of deciding which of his customers is 
qualified for the more complex or riskier product.
    Going beyond the plain-vanilla product will entail risks 
for the provider, who could face an enforcement proceeding and 
a fine from the CFPA, action by a State Attorney General or a 
State Consumer Protection Agency also to enforce the CFPA's 
regulations, and a class action by disgruntled consumers who 
claim they did not understand the risks associated with the 
nonplain-vanilla product.
    As the white paper states, the CFPA should be authorized to 
use a variety of measures to help ensure that nonplain-vanilla 
mortgages were obtained only by consumers who understood the 
risks and could manage them. How would a provider determine 
whether a product with more features than the plain-vanilla 
product is suitable for a particular consumer? The white paper 
suggests that the CFPA could, ``require providers to have 
applicants fill out financial experience questionnaires.'' This 
will be a humiliating experience for anyone, especially a 
consumer whose credit record up to that point has been 
completely unblemished. It is not a question of what he can 
afford, but what he can understand, a much more difficult 
question.
    These elements are troubling enough, but this regime will 
be bad for all consumers. Product innovation will be stymied. 
Product variety will be diminished. Costs of credit will rise, 
and many small credit providers, small stores, finance 
companies, and others will have to leave the market. This will 
reduce competition and in some cases eliminate the only sources 
of credit for some consumers.
    So those who will be able to get these more complex plain-
vanilla products--more products than are plain vanilla--who are 
these people? Not ordinary Americans, in my view, whose lack of 
demonstrable financial sophistication will make the risks of 
selling to them very difficult for most providers. The more 
complex products, the ones with useful features, will be 
offered only to the more sophisticated and the better educated, 
in other words, to the Nation's elites.
    In this way and for the first time in our history, it will 
be Government policy to deny products and services to a large 
proportion of the population, not because the products and 
services are inherently dangerous, like drugs or explosives, 
but because this Administration apparently believes that no 
amount of disclosure can make some Americans capable of 
understanding what they are buying. Thank you.
    Senator Reed. Thank you, Mr. Wallison.
    Professor.

  STATEMENT OF SENDHIL MULLAINATHAN, PROFESSOR OF ECONOMICS, 
                       HARVARD UNIVERSITY

    Mr. Mullainathan. Mr. Chairman, Ranking Member Shelby, and 
Members of the Committee, thank you for providing me with an 
opportunity to testify.
    As an academic, my comments will lay out some of the ideas 
and research behind consumer protection. By way of background, 
my area of expertise is behavioral economics. It combines 
economists' healthy respect for markets with psychologists' 
recognition that people are not financial engines churning out 
optimal decisions.
    I will focus on making three points. First, the quality of 
choice is a result of the context in which we choose. Some 
contexts--many contexts allow people to choose well, but others 
do not.
    Second, when people choose well, markets work very well. 
They provide healthy competition. But when people choose badly, 
they can race to the bottom.
    Third, one tool in the proposed legislation, ring fencing 
so-called ``standard products,'' provides a way to promote 
competition and prevent this race to the bottom.
    So let me start with the psychology of choice. I am going 
to try and use two examples that are pretty familiar to all of 
you to illustrate decades of psychological research on how 
people actually choose. I want you to think back to the last 
time you painted a room in your house. You have thousands of 
colors to choose from. Benjamin Moore alone offers 140 shades 
of white. Yet, you sifted through this explosion of options and 
were probably happy with your final choice.
    Contrast this with the last time you bought an electronic 
device, such as a digital camera. How do you choose between a 
smaller, cheaper 8-megapixel camera and a bigger, more 
expensive 12-megapixel camera? What is a megapixel? How many do 
you need? Are 12 megapixels 50 percent more than 8 megapixels? 
At the end of this process, you probably weren't really sure 
whether you bought the right camera.
    The distinction here is that choosing between things you 
don't understand--megapixels is very different from choosing 
between things you do understand--color.
    Part of choosing a mortgage is like picking a color. What 
monthly payment fits within your budget? Part of choosing a 
mortgage, however, is like choosing a megapixel. How do you 
choose between a fixed-rate mortgage at $1,000 a month and one 
that begins at $900 a month but after 2 years changes to three 
points above the 1-year LIBOR? What does LIBOR mean? How much 
does it vary? Is three points above it reasonable? The provider 
says, ``Hey, you can refinance this mortgage in 2 years.'' 
Should you worry about being able to get another loan in 2 
years?
    Note, this has nothing to do with elites or intellectuals. 
This is true for all people. These features of the difficulty 
of choice are the challenges of being human in choice context 
that are really not your area of expertise. The problem is not 
disclosure alone, it is about understanding. Sometimes 
disclosure produces understanding, but sometimes it does not.
    Financial technicalities simply do not resonate with the 
concepts you use in everyday life. As a result, errors abound. 
For example, a recent study shows that 40 percent of borrowers 
with income less than $50,000 do not know the per period caps 
on their ARMs. It wouldn't surprise me if, like megapixels, 
they barely understood what a pro period cap is. Why should 
they?
    Now let me turn to competition. As I pointed out, when 
people choose well, low road firms with short time horizons 
cannot do much harm. The best they can do is offer a product 
the consumer likes. In this case, markets work well and 
innovation helps consumers. However, when people are choosing 
badly, low road firms can confound both the consumer and high 
road firms.
    Next to the $1,000 fixed-rate mortgage, the $900 balloon 
ARM has a superficial appeal. It is cheaper today. Nine-hundred 
is smaller than $1,000. Its risks down the road are harder to 
understand. The worse product can look like the better product. 
The high road firm can be pulled down by the low road option.
    Now to my final point. I feel one powerful tool in the 
proposed legislation can be particularly useful in preventing 
the race to the bottom. Ring fence the standard, well-
understood products and the more exotic ones. Regulate the 
standard ones minimally, ensure disclosure, prevent fraud, but 
regulate the more exotic ones stringently. The goal of this 
regulation should be to ensure that customers understand not 
just that the risks of these products be mechanically 
disclosed. Marketing can be endlessly inventive in sidestepping 
disclosure. The Consumer Financial Protection Agency needs 
stronger tools for products beyond the fence.
    Ring fencing, though, is far more market friendly than a 
banner or mandate. It retains customers' ability to access 
exotic products. The CFPA would simply ensure that there is a 
door on the fence that requires conscious choice to go through. 
No one should unknowingly end up on the other side of the 
fence.
    There are several precedents for this approach. I do not 
think this is the first time in American history this has 
happened. In fact, the SEC uses it as a way to regulate the 
trading of options and derivatives. If any of you would like to 
see this, try and buy an option. The Federal Reserve in July of 
2008 placed some mortgages under far greater scrutiny. It is 
also analogous to how we regulate drugs. If you want to buy 
ibuprofen, you simply go and buy it. If you like a strong 
antibiotic, there are more barriers in place.
    Ring fencing, however, requires a variety of things to 
work. First, there must be sufficient choice within the fence. 
This cannot be a one-size-fits-all solution. The goal of this 
is to maximize choice. It is not to create standard products 
designed by the Government. That would be a failure.
    Second, there must be a clear, transparent process for how 
products enter the fence. This is necessary to encourage 
innovation. Lenders who create a good product must have the 
comfort that they can reap rewards from it. For this reason, it 
is important that the legislation should instruct the CFPA to 
develop and codify a transparent process by which products will 
be declared within the fence.
    To summarize, real people choose badly when faced with 
technical features as financial choices sometimes require. To 
prevent a race to the bottom, financial regulation must prevent 
unfair competition from products with hard-to-understand risks. 
Ring financial provides one way to accomplish this goal. When 
effective, it provides a market-friendly alternative to bans 
and mandates. Thank you.
    Senator Reed. Thank you very much. Thank you, gentlemen, 
for your testimony.
    Let me take 5 minutes and then recognize Senator Shelby.
    General, thank you not only for your testimony, but for 
your service.
    Mr. Blumenthal. Thank you, Senator.
    Senator Reed. As a neighbor in Rhode Island, I am well 
aware of what you have done for your State and for the Nation.
    Mr. Yingling suggested that we should put our attention on 
the nonbanking system, and yet your testimony suggests that 
there are real problems within the banking system because 
Federal regulators have essentially interfered with your 
ability to regulate what might be Connecticut chartered 
companies. Is that fair, and can you elaborate?
    Mr. Blumenthal. What has happened, Senator, and that 
question is a very good one, is that many nonbanking 
institutions have, in effect, invoked the shield by aligning 
themselves with national banks. In the gift card area, for 
example, we have been prevented from stopping expiration dates 
and dormancy fees on gift cards, from enforcing our State law, 
because they have used national banks. On payday loans or tax 
anticipation loans, again, the litigation is cited in my 
testimony. These institutions have, in effect, allied 
themselves with national banks to shield themselves from State 
authority. Again and again, what we have seen is that there has 
been a very knowing and purposeful resort to the national bank 
shield to protect these State and even local institutions 
because they have succeeded in invoking that Federal doctrine.
    And so the proposal here to put a floor rather than ceiling 
on the impact of Federal regulation, I think is a very 
important one. It is hardly novel or new. It is essentially 
what is done in antitrust and other forms of consumer 
protection enforcement with the FTC and I think it would 
eliminate the incentive for these local institutions to, in 
effect, become part of or integrate their activities with the 
national banks.
    Senator Reed. Thank you, General.
    Mr. Yingling, you have just laid out, I think, in your very 
good testimony, as always, the notion, and one that I think we 
all ascribe to, that safety and soundness and consumer 
protection are sort of two sides of one coin. And yet we have 
seen examples over the last several months where that doesn't 
seem to be the case. Maybe safety and soundness is not the 
word, but profitability seems to have come before consumer 
protection in credit card cases and many other instances, which 
leads, I think, to the thrust of what the Administration is 
proposing, that you have an agency that is, in fact, devoted 
not to this balance between safety and soundness and consumer 
protection, but has a focus on consumer protection. Your 
response?
    Mr. Yingling. Well, first, they are two sides of the same 
coin and I would just use the famous example now of the 
mortgage crisis, where that was in many ways a consumer issue, 
a terrible failure of regulation at both the Federal and State 
level with respect to regulating these toxic mortgages. At the 
same time, it is a tremendous safety and soundness question 
because it has blown up our economy to a large degree in a 
number of markets. Local banks that maybe never made a subprime 
loan in their life are being dragged down because the local 
economy is dragged down.
    I think the main question we would have with respect to 
separation is just to use example after example where we feel 
that we are going to be caught in the middle. So take the 
account opening process. That is a combination. So we are going 
to have one examiner come in and say, in your account opening 
process, you need to change this disclosure. It needs to be 
clearer. You need to change this process. You need to change 
the way you are training your tellers. We spend billions of 
dollars training tellers on all kinds of compliance issues. The 
safety and soundness examiner comes in and says, I completely 
disagree with that. If you do it that way, you are going to 
encourage fraud, and by the way, you are not complying with the 
Bank Secrecy Act. What are we to do? All the legislation talks 
about is consulting, but ultimately, both sides have the power 
to say, you will do it our way. And there is just example after 
example. Check hold periods are another example where we would 
be caught in the middle.
    Senator Reed. Right now, could a Federal regulator make 
those same calls?
    Mr. Yingling. One Federal regulator could make the same 
calls.
    Senator Reed. And that Federal regulator, it seems, based 
on the record of the last several years, to make the call in 
favor of not consumer protection, but to the ability of the 
bank to continue to operate, reputational and other----
    Mr. Yingling. I would not argue with you, Senator, that 
there have not been failures and that things need to be done. 
But it is not always profitability. If you look at the check 
hold period, they have to balance what the consumers would 
like, which is the money right away, with the fact that we have 
a multibillion-dollar processing system that is evolving for 
checks with the fact that we are subject to billions of dollars 
in check fraud which is ultimately paid for by the consumers.
    Senator Reed. Mr. Plunkett, if you could comment on this 
discussion, I think it has been a good one.
    Mr. Plunkett. The concern I have is that there are, until 
the last year, virtually no examples of the current safety and 
soundness structure putting consumer protection concerns first. 
The reason we need to go this route is because safety and 
soundness regulators, and we have to say this based on 
experience over the last 30 years, the norm for them is to 
consider the bottom line for the institutions that are 
regulated, and there is just example after example.
    I mentioned in my statement overdraft loans, where the 
regulators appear to have dithered because primarily what is a 
deceptive practice, that is offering a loan without telling the 
consumer, charging the consumer fees without giving them a real 
right to choose to accept those fees, it is a very profitable 
line of business. So again and again, the norm for safety and 
soundness regulators has been to ignore consumer protection. It 
is all well and good to say, well, that should change, but I 
don't think that that is how safety and soundness regulators 
typically think.
    Senator Reed. Thank you very much.
    Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    Mr. Wallison, in your written testimony, you quote Justice 
Brandeis, who wrote, and I will quote, ``The greater dangers to 
liberty lurk in insidious encroachment by men of zeal, well 
meaning but without understanding.'' Elaborate on that, if you 
would, because as I raised earlier the question to Secretary 
Barr, this is a radical approach, different from our classical 
approach to regulation, is it not?
    Mr. Wallison. Yes, I think this is a very paternalistic 
approach and quite different from anything we have had in the 
past. In the past, we have always used disclosure, and 
disclosure can be improved. There is no question----
    Senator Shelby. Absolutely, it can.
    Mr. Wallison. Actually, my AEI colleague, Alex Pollock, has 
come up with a one-page disclosure form for a mortgage which 
you would have to look at before you signed up for the 
mortgage--not at the closing, but when you sign up for the 
mortgage--and that would list all of the various risks and so 
forth and the costs of the kind of mortgage that you are 
taking. That is an improvement----
    Senator Shelby. In plain English, right?
    Mr. Wallison. In plain English, that is exactly right. 
People can understand that. Instead, what we are proposing to 
do here is really to say to providers, you are going to take 
the risk of offering something more than this plain-vanilla 
product. If you take this risk and it turns out that the 
consumer is not pleased with it or we, the regulatory agency, 
are not pleased with it, you are going to have to pay some very 
substantial costs in the form of enforcement. This is a 
completely different way of looking at consumer protection and 
radical in my view, too.
    Senator Shelby. Could this in a big way ration credit to 
some people who need it the most?
    Mr. Wallison. Well, exactly. The effect of this, of course, 
is when a provider is confronted with the choice of whether to 
offer only the plain-vanilla product or the more complex 
product, he has to decide whether this particular consumer is 
going to be able to understand the product. And as I quoted in 
my testimony, the white paper says here that disclosure itself 
may not be enough. For some people, complexity itself is going 
to make it difficult for them to sign up for something that 
they may not understand.
    So the provider has to make this decision, and what the 
provider is mostly going to do is say, I am sticking with the 
plain-vanilla product because if I go any further with that, 
with this particular consumer, I could get in trouble, and that 
will reduce the products that are available to consumers, I am 
afraid.
    Senator Shelby. Financial institutions, as I understand the 
proposal, will no longer be primarily concerned with discerning 
and meeting the needs of their customers. Instead, they would 
be concerned with gaining regulatory approval and avoiding 
taking any steps that would lead to enforcement actions or, 
obviously, costly litigation down the road. Do you agree with 
that?
    Mr. Wallison. Yes, of course. That is the thing that I 
think the people in the Administration missed--that there is a 
very important problem for providers, a very difficult problem 
in fending off litigation and enforcement activities. They want 
to comply with the law, and so they have to know exactly what 
it is that they can do. If they are left in a position where 
they have to make a decision about the ability of someone 
sitting in front of them across the desk to understand 
something, well, there is only one decision they can make and 
that is to limit what they offer.
    Senator Shelby. Mr. Yingling, the proposal states that the 
agency would have to, quote, ``consider the potential benefits 
and cost to consumers and covered persons.'' Consider and 
potential are not very definite words, I would think. Shouldn't 
the language require that the real benefits must outweigh real 
costs to consumers and covered persons instead of that? The 
agency could not meet its mandate, as I understand it, to 
promote efficient markets if in the end the transaction is not 
beneficial for both parties in the transaction. That is the way 
the market works, does it not?
    Mr. Yingling. Senator, that is basically the only general 
standard in it. The authority of this agency is broader than 
any agency, I would say, that has ever been proposed. If I 
could, let me just read you the one section. This is Section 
1037(1)(a). In general, the agency shall prescribe rules 
imposing duties on a covered person. Now, a covered person is 
anyone that offers consumer financial services. So the agency 
shall prescribe rules imposing duties on a covered person as 
the agency deems appropriate or necessary to ensure fair 
dealing with consumers. That is it.
    Every single law you have ever passed, every regulation on 
the books is trumped by this. They are just floors. And the 
standard you cited, I could go in the hall with a couple of 
lawyers and in an hour come back with a paragraph, a 
boilerplate paragraph with a couple of blanks in it that this 
agency could put in every rule they write to meet that 
standard.
    This agency is empowered to do anything it wants, and I 
don't know what that means your function is, because that 
credit card bill you just worked so hard on is now nothing but 
a floor, trumped by this section.
    Senator Shelby. Thank you. Thank you, Mr. Chairman.
    Senator Reed. Thank you, Senator Shelby.
    Senator Warner, please.
    Senator Warner. Thank you, Mr. Chairman.
    I share some concerns about some of the Administration's 
proposals, but I want to go back with Mr. Wallison. I am not 
sure that I would concur that the sense that the Government is 
going in certain cases to prohibit certain products as being 
too dangerous, that that has not been due course of doing 
business. I mean, we have done it recently. The Fed has done it 
recently with double-cycle billing in the credit card area. We 
have had longtime prohibitions against loan sharking. I used to 
be in a pretty good business in the venture capital business, 
but we had, as we have discussed, Peter, prescriptions that 
said not everybody can invest in venture capital fund. You have 
to be a qualified investor.
    And I understand the notional difference between investing 
and access to credit, although I would argue that some of the 
products that we have created have been all about marginally 
lowering the cost of risk, and there is some judgment of 
marginally lowering the cost of risk versus the overall 
societal downside risk we are taking. There has got to be some 
balancing here.
    So I know where you are going to come back at me on this, 
but I do want you to come back at me in terms of saying, would 
you say market all the time, no prohibitions at all on any 
product mix, disclosure alone always trumps?
    Mr. Wallison. No. Thank you for the question, Senator, but 
that would not be my view. I think there are things that one 
could--the Senate could, the Congress could--forbid, and 
should, because some things can actually be abusive. But in 
general, what we are doing with this legislation is putting 
providers in a position where they have to make a judgment 
about the ability of the person sitting across the desk from 
them to understand all of the factors that go into a particular 
product that is being offered.
    And so what we are saying in this legislation essentially 
is, here is the plain-vanilla product. If you offer this 
product, you are not going to take many risks because it has 
been approved by the CFPA and here are the disclosures that the 
CFPA wants you to make about it. And the provider puts that 
product in front of the customer and says, ``I think you should 
take this product'' because the provider has made a judgment 
that this customer probably can't understand or might not be 
willing to understand the complexities of the other products 
that the provider could offer to customers who are more 
sophisticated and experienced.
    So the result of that, I think, is going to be only one 
thing, that many, many people who could understand, with 
adequate disclosure, products that are going to be better for 
them and their families will never have those products offered 
to them.
    Senator Warner. But in this example, I mean, in the normal 
marketplace, if we put out a symbol that says ``buyer beware,'' 
buyer makes the wrong choice and the market absorbs the 
consequences. But in this circumstance, at least we have seen 
in recent action there perhaps was not a ``buyer beware'' on 
some of these exotic financial mortgage products. I have got 
members of my family that I argued diligently against, don't 
take that product. You are going to get it. But they saw the 
up-front sticker price and they bought it anyway. Not everybody 
has got a wealthy brother to bail them out, although I guess we 
do have a wealthy Uncle Sam that is now indirectly bailing out.
    But if at the end of the day the ramifications of buyers 
making bad choices around the credit markets is that we, the 
taxpayers, are ultimately going to bail them out, don't we have 
some responsibility to perhaps put some either ring fencing or 
some parameters around this? I mean, are we in a different mix 
of products when we are at the end of the day maybe having the 
taxpayer be on the hook for bad choices made by consumers? Is 
there----
    Mr. Plunkett. Senator, buyer beware doesn't always work. As 
you pointed out, it is not just the new credit card law. In 
2005, Congress said payday loans and other high-cost loans are 
not good for our service members and prohibited them. There is 
actually a long line of recent Congressional and regulatory 
measures that have acknowledged that the disclosure-only 
approach doesn't work. Telling somebody that you are going to 
deceive them and then deceiving them is not a good thing. So we 
need to recognize the limits of this disclosure-only approach.
    Mr. Wallison. This makes my case, I think, and that is 
there is no way that a provider can offer a product that he is 
not certain the person sitting across from him understands.
    Mr. Yingling. I think----
    Mr. Plunkett. But that occurs all the time in the 
securities world. Suitability is embedded in the new 
legislation that the House has passed on mortgage lending. It 
is absolutely possible to make those determinations and it is 
done in law.
    Mr. Yingling. Some products should be banned. Some products 
should have a ``buyer beware'' sign on them, and that is what 
the Fed has done, in effect, with their new mortgage 
regulations. If you cross a certain line, it has a ``buyer 
beware'' sign on it.
    What this proposal says is if you deviate in any fashion 
from the plain-vanilla product, so I will use a different 
example. I will use basic banking accounts, because that will 
be part of this. So they design a basic banking account and if 
the community bank in Nashville says, I have a great idea that 
the students at Vanderbilt will love. I will add an Internet 
feature. If Navy Federal Credit Union says, I have a great 
feature I can add that will be good for sailors at sea, they 
are no longer part of the plain-vanilla product.
    Let me read you what this says. This is the thing that was 
handed out at the White House, the report that went with this 
legislation. For example, the CFPA could impose a strong 
warning label on all alternative products, require providers to 
have applicants fill out a financial experience questionnaire, 
or require providers to obtain the applicants' written opt-in 
to such products. Originators, talking about loans, of 
alternative products should be subject to significantly higher 
penalties for violations.
    Why would that bank in Nashville, why would Navy Federal 
Credit Union offer these changes to the basic vanilla product? 
It is one thing to have warning labels. It is one thing to 
outlaw products. It is another thing to say, if you don't offer 
our product, you are subject to all kinds of new regulatory 
restrictions. I am quoting them. This is their proposal.
    Mr. Blumenthal. If I may try to bring together these two 
points of view from the standpoint of----
    Senator Warner. Let the record show, Mr. Chairman, that I 
am not extending my time. The panel is.
    [Laughter.]
    Senator Reed. This is the General and it is the General's 
preference, so go ahead.
    Mr. Blumenthal. The highest I made it in the Marine Corps 
Reserve was Sergeant, so----
    Senator Reed. I am actually in a higher rank.
    [Laughter.]
    Mr. Blumenthal. If I can bring together these somewhat 
differing abstract points of view from the standpoint of the 
cop on the beat, and we are talking here about an enforcement 
authority as much as a regulator, we may disagree on what 
should be banned. I think there is some agreement that certain 
products should be banned. We can disagree on where the floor 
in enforcement should be.
    But the question really for this Committee and for the 
Congress is, should we have a point person, an authority that 
is accountable for protecting consumers, whether they have a 
wealthy relative or not, and assuring disclosure, uniform 
disclosure nationwide in an age where--and this is one of our 
great frustrations--the mortgage rescue scams, the tax 
anticipation loans that charge 300 percent interest can 
disappear into the Internet ether and we need Federal 
enforcement. Otherwise, even with the best and most vigorous 
State law enforcers, including Attorneys General, that system 
will be ineffective.
    And so I think it is more than which products should be 
banned, and certainly some of these standards need to be 
tightened. I accept very wholeheartedly Mr. Yingling's critique 
of this first draft of the legislation. There need to be 
stronger standards, perhaps. But do we need an authority that 
will ally with the States in providing stronger enforcement? My 
answer is yes.
    Senator Warner. You wouldn't end up being where you have 
got just the floor set at the Federal level. Could a financial 
institution ever have felt like they have finally passed muster 
and they aren't going to be then still subject to 50 additional 
Attorneys General trying to come after their product, even if 
they have passed muster at the Federal level?
    Mr. Blumenthal. And I think one of the challenges, Senator, 
and I will be very brief in my response, but I think you have 
identified, as you did earlier in your questions, one of the 
key questions, which is how to harmonize Federal and State 
enforcement. But that is a tension inherent in our Federal 
system. We go through it in the criminal system with many other 
areas except where there is total Federal preemption, as in the 
food and drug area. But if we are going to have State 
enforcement, there needs to be harmonization. I think the SAFE 
Act recognizes the potentials for harmonization. So do the 
recent credit card reforms. I think we are moving in the 
direction that keeps alive the Federal system, and I think they 
can be harmonized.
    Mr. Plunkett. Senator, I would just add that if the minimum 
is high enough, then you will achieve uniformity because most 
States won't see the need to exceed that minimum.
    Senator Reed. Thank you.
    Senator Corker.
    Senator Corker. Mr. Chairman, thank you, and I thank each 
of you as witnesses. It is always highly beneficial to us to 
have people like you here and I thank you for that.
    Mr. Wallison, I do want to thank you for your comments. I 
agree with almost everything you have said, and we have met 
many times. I appreciate certainly your testimony today.
    Professor, I listened to the pixels and the ring fences and 
very much appreciated what you had to say, also. I still was 
unclear, though, as to whether you viewed disclosure--you were 
talking about the psychology of people purchasing things in an 
economy--whether you believe that disclosure is enough or 
whether you believe, like this Administration, that they are 
wise men that govern ignorant souls that need to be directed as 
to what to buy and not buy. I still was unclear and I would 
love some edification there.
    Mr. Mullainathan. Thank you very much. I think it is useful 
to set two extremes. I think by focusing on contrasts with 
disclosure, we are failing to recognize that sometimes in this 
sector we also engage in bans. We have done that with the 
credit card bill and it will happen again.
    So to me, the challenge is not about disclosure and moving 
to do more than disclosure. The challenge is when we are 
setting up an agency, are we going to handicap it by giving it 
only two extreme options, disclose or ban. To me, that is 
unfortunate. That is exactly a bad market solution because 
there are products which have benefits for some consumers but 
which are complicated for other consumers. As a result, 
disclosure might not work. It may be hard to get some consumers 
to understand fully the most exotic products, but we don't want 
to ban them because they have genuine benefits for a variety of 
other consumers.
    I think that raises a--there is a set of products that fall 
in that middle, and to me, ring fencing and the proposals in 
the legislation--and I have to admit, maybe I am reading a 
different draft. I don't see Government design or Government 
standards in this draft. To me, what this does is it gives the 
opportunity, and I think more clarity is needed in the bill and 
I think moving forward that is where we would need clarity, but 
it gives an opportunity to say, let us recognize the financial 
services require some middle ground. Sometimes, we will want to 
keep exotic products in the mix. Therefore, we won't want to 
ban them. But we will need something more than disclosure, 
because a lot of consumers, as with double-cycle billing, there 
is no single form that is going to simply explain to consumers 
the most exotic products.
    And even if there were a single form, the reality of the 
way you buy something is such that someone can give you that 
single form and eight other pieces of paper on top of that 
single form. I have rented cars many times, and I realized the 
other day, they say, put an X here, an X here, an X here, put 
your initials there, and sign here. I don't know what I am 
signing for when I sign those things. I have never read the 
disclosure on that form. Maybe some of you have.
    But the point I am trying to make is that marketing is very 
powerful. Disclosure for many customers for exotic products 
won't necessarily work, but at the same time, I wouldn't want 
to resort to a ban every time we encounter that situation. And 
I think it is that middle ground that is trying to be attained 
by this bill. Though, I understand the risks if that middle 
ground is not done well, and I would think the challenge of 
working and crafting this bill is to give the agency another 
tool beyond either of these extremes.
    Mr. Yingling. I will just say Section 1036 of the bill, 
Standard Consumer Financial Products or Services, clearly 
authorizes them to mandate products and to put restrictions on 
products that are not mandated.
    Senator Corker. Which brings me----
    Mr. Plunkett. The idea is not to have a bureaucrat 
designing a product, Ed. The idea is to, as we heard from the 
Administration, make sure that as a class there are 
alternatives.
    Mr. Yingling. I can only deal with what the statute says 
and what their proposal----
    Senator Corker. I would like to interject here, if I could.
    Mr. Yingling. Sorry, Senator.
    Senator Corker. Thank you both for your vigorous help in 
this.
    So, Mr. Yingling, you have been before us before, and 
obviously because of the group that you represent, people are 
going to say that when you say that we can do this within the 
confines that we now have, you are basically arguing for the 
status quo. I know that is not what you are arguing for. But if 
you would, tell us how within the present regulatory system 
that we have we can ensure that there is consumer protection. 
And, second, what kind of products do you think would go away 
under this type of regime? Good products, by the way.
    Mr. Yingling. Well, first we are not arguing for status 
quo. The status quo has been a failure, and so we are arguing 
for change.
    One thing I would point out is there has been a significant 
change in terms of the power of the agencies using UDAP. And if 
you look at the credit card regulation--which you all trumped 
with a stronger bill, but a lot of it was in that regulation--
this is a new era. The use of UDAP by the regulatory agencies 
is much stronger, and we would recommend that a bill that was 
passed by the House last year which grants that authority in a 
coordinated fashion to all the regulatory agencies should be 
adopted.
    You are going to deal with a systemic oversight regulatory 
that is controversial, but that systemic oversight regulator 
should have the authority to look at these consumer issues in a 
coordinated fashion.
    One of the great obvious failures is why our Government did 
not see--did see, to a large extent, but was not really charged 
with saying look at the graphs in the growth of these kinds of 
loans, let us investigate it, let us stop it. The systemic 
regulator should be given that charge.
    There should be a coordinated place in the Federal 
Government where consumers can call in. You raised that point. 
It is a very legitimate point. They do not know where to call. 
There should be a coordinated place where they can call, and 
then the statistics are kept, and that is referred for action 
to the correct regulator.
    There should be greater coordination at the Federal level 
with the States. I think we have gotten into the habit of 
having these court fights, and in reality we should be sitting 
down at the table between the States and the Federal regulators 
and figuring out how to do it. There are a number of things 
that could be done.
    In terms of products that would be innovative, every single 
day in this country in some bank they are thinking of how to 
adjust a mortgage product, adjust an automobile loan, adjust a 
basic banking account. They are sitting around a table saying, 
``Oh, if we could add this Internet feature, if we could add a 
feature for senior citizens.'' They are constantly adjusting. 
And some of those fail; some of those helped in their market; 
some of them become great products that others start to offer. 
And I can only deal with the language that they have offered. 
All those are not plain-vanilla products. Any time you 
deviated, you would not be a plain-vanilla product. And so if 
that is not going to chill innovation, I do not know what is, 
because you are subject to all kinds of extra rules if you 
cannot make those deviations.
    Senator Corker. Mr. Chairman, thank you, and, gentlemen, I 
want to say that the comments you have made indicate to me that 
while you want to see strong consumer protection, because that 
is what you do, and you see abuses, that you, too, even see 
this bill in its present form as an overreach and that we have 
a lot of work to do to get it right.
    Mr. Blumenthal. I would agree with everything you have just 
said except perhaps with the term ``overreach.'' And I do not 
mean to quibble or criticize. I agree with you wholeheartedly 
that this bill is a first draft; it needs refinement, it needs 
work. And I think with your help, with Senator Shelby's, and 
with all the Senators who are here, particularly Senator Dodd, 
we are going to reach the goal line. But I do think that a 
point of accountability somewhere that your constituents can 
call when they have a question or a problem and they need an 
enforcer to protect them against a usurious interest rate or 
any of the abuses we have been talking about here I think is 
tremendously important.
    Thank you.
    Senator Reed. Thank you.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Thank you all 
for your testimony.
    Mr. Yingling, I appreciate many of the comments you made. I 
know you spent a lot of time in your testimony talking about 
community banks, and I am concerned about the pressures we are 
putting on them. But it was not just community banks. If it was 
just community banks, we would not be in trouble. You know, we 
have Bank of America, we have given it a lot of money; Citi, we 
have given it a lot of money. So while I understand your focus 
on community banks, the reality is that we have a range of 
banks here, some which clearly acted in ways that were not, I 
guess, in their interest and certainly not in our collective 
interest because they created systemic risk, and that is why we 
are giving them enormous amounts of money.
    And while I think you have some legitimate concerns in your 
testimony, I am concerned, as I have said in the past to the 
association on other matters, is that, you know, I read the 
elements of what you have listed here as improvements that can 
be made. And, you know, my concern is that if the industry does 
not get out there and be for significant changes, then it will 
face a legislative action that it probably will not like at the 
end of the day.
    And so I hope that when you say that we are not for the 
status quo and we are for change--but I read the changes and, 
you know, centralized call centers and, you know, basically 
saying that we should enable basic products, you know, when 
even in your testimony you recognize some of those problems 
become overly complex and difficult, as well as that they often 
have consumers buying products or enhancements that are not 
right for them, for which they pay too much, you know, is not 
in my mind the type of reform we are going to need. I 
appreciate what you talked about on OTS. That is, I think, a 
good offer, but after that it seems very little to me.
    So I would urge, you know, the association to be more 
aggressive in what they are offering here in terms of a 
legislative response. And I am concerned, you know, that--I 
look at where we are at, and it seems to me that a lot of, 
prior to the crisis, financial institutions changed their 
charters to shop for lenient regulators. And it seems to me 
that by imposing uniform regulations on consumers financial 
products across all types of financial institutions, one of 
your concerns, but listening to the Secretary pretty much sound 
to me like we are talking about all types of financial 
institutions no matter who regulates them, wouldn't the 
Consumer Financial Protection Agency reduce the incentives to 
shop for more lenient regulators, at least with respect to 
consumer product legislation?
    So I think that while we can tailor this a little better, 
the reality is that we need this. So, you know, I am--I hope 
the industry will be a little bit more forthcoming in terms of 
real change so that we can strike the right balance at the end 
of the day between having the financial products we all want to 
see open to consumers but having the protections that are 
critical at the end of the day. And it is in that spirit that, 
you know, I certainly come to this with, and I hope others do 
as well.
    I just get, you know, a sense--you know, Mr. Plunkett, when 
most Americans go apply for one of the hundreds of different 
kinds of mortgages, they do not typically bring a financial 
adviser along with them, do they?
    Mr. Plunkett. No.
    Senator Menendez. And when a mortgage broker or lender 
talks to somebody about a 5-1 interest-only ARM or a negative 
amortization loan, how many people do you think really 
understand that?
    Mr. Plunkett. I wouldn't--Senator, you make some very good 
points here. What we have heard so far from the financial 
services industry in terms of their ``reforms,'' I heard a 
systemic regulator maybe, but I heard no discussion of 
eliminating regulatory arbitrage. I heard no discussion of 
consolidating the consumer protection approach in any fashion 
to make it more effective. I heard no discussion of any 
systemic approach to improving consumer protection regulation. 
I heard the regulators are getting a little better, so we might 
as well leave things as they are.
    That is not going to work given the current situation. We 
need something broader, and we need an agency that is focused 
just on consumers.
    Senator Menendez. So it just seems to me that when we go 
down the list of questions of what the average consumer might 
find themselves in, we see the incentives, for example, in the 
mortgage crisis for lenders to move people into products that, 
at the end of the day, may be very beneficial to them but not 
very beneficial to the consumer. And when millions of people 
enter into those transactions and then have consequences when 
those first 5 years end and cannot meet their obligations, then 
we have systemic challenges to our economy.
    So it just seems to me why should we have the borrowers 
simply fend for themselves? I believe all in personal 
responsibility. I would love us to have greater financial 
literacy commitments as a country from education, to 
engagement, even our financial institutions to do so. But at 
the end of the day, if we allow millions of people based upon 
incentives that move individuals to try--entities to try to 
move individuals to products that are good for the lender and/
or the broker but bad for the consumer and millions ultimately 
make a mistake and then create the consequences that we have 
today in the housing market, it affects all of us.
    Mr. Plunkett. Well, Senator, I hope that when we heard 
discussion today about choices, we were not hearing about 
choices like the large number of minority consumers who were 
steered into high-cost mortgage loans when they could have 
afforded and would have qualified for a lower-cost loan. I hope 
we are not talking about choices like what Congress has just 
eliminated in the credit card bill, not just double-cycle 
billing but interest rate increases on existing balances for no 
apparent reason. I mean, that is called ``negative financial 
engineering.'' That is not legitimate innovation. And that is 
the kind of, unfortunately, choice in many credit areas that 
has driven out positive credit, credit offered by some of the 
small banks you mentioned or credit unions.
    Senator Menendez. Well, Mr. Chairman, I hope that we will--
you know, I do have concerns about how we structure this in a 
way that affects community banks that clearly have not been at 
the forefront of our economic challenges. We need to look at 
that.
    I do get concerned about how we harmonize the State 
regulator process with these efforts.
    And, third, I do want to see--I think Mr. Yingling does 
make a very valid comment that we have to apply--if we are 
going to have this consumer protection agency, which I 
generally support, it has to be applied across the spectrum of 
financial service entities; otherwise, we would do a disservice 
to the consumer, to the Nation, and certainly to the industry 
as well. So I look forward to working toward those goals.
    Senator Reed. Thank you, Senator Menendez.
    Senator Shelby, you have a comment?
    Senator Shelby. I have got a couple of scenarios here that 
I think we ought to consider. In case one, a borrower obtains a 
subprime loan, the only loan he could qualify for, and uses it 
to buy property and then realizes a 75-percent gain on the 
property 3 years later. This goes on.
    In case two, a borrower obtains a subprime loan in another 
market. This borrower has all the same credit and income 
characteristics at the time he received the loan as the 
borrower in the first scenario, but later loses his job, sees 
the real estate market collapse, and then defaults.
    I believe we need a system where we can accommodate both. 
How do we do that? In other words, the first guy--and this goes 
on--took a subprime loan and he made money out of it. Good for 
him, good probably for the market. The second one, he had the 
same qualifications, but things turned sour on him. He lost his 
job, and then he could not make the payments and so forth.
    How do we do this? Mr. Wallison, do you have any--how do we 
balance this, I guess?
    Mr. Wallison. I think, Senator Shelby, you are focusing on 
exactly the problem here, which is trying to determine in 
advance what a person understands. The first person you are 
talking about--that consumer--may or may not have understood 
all of the elements of this loan, but it worked for him. It 
might not even have been the best loan he could have gotten, 
but it still worked for him. In the second case, it did not 
work for him.
    I am looking at it, again--and I must do this because we 
have to consider the way this works in practice--from the 
standpoint of the provider. The provider is going to be very 
much at risk if he offers a loan to the first or the second 
person--the same loan----
    Senator Shelby. That is right.
    Mr. Wallison. Which goes beyond the plain-vanilla 
structure. If he does, the second guy--who did not make any 
money--is going to come back to him and complain about that or 
complain to the CFPA about him. And providers have to worry 
about this because they can be driven out of business very 
easily.
    Senator Shelby. By litigation.
    Mr. Wallison. By an enforcement action or a litigation or 
by a State Attorney General. So I think when the Committee is 
looking at this, you have to look at it from the standpoint of 
both the consumer and the provider, because the provider's 
decisions on whether to make these loans will affect very much 
what the consumer can get.
    Senator Shelby. Thank you.
    Mr. Mullainathan. If I may, I would like to add two 
comments to that, if I----
    Senator Reed. Quickly.
    Mr. Mullainathan. Quickly. One comment is providers are in 
the business already of detecting whether consumers understand 
or not. It would be unfortunate if a consumer took out a loan 
they could not repay. So one of the things providers do is 
actually assess whether the person--a good provider, whether 
the person understands the payments owed to them. So I do not 
think this is novel business practice.
    Second, I think we have to ask the question who should bear 
the risk of a consumer not understanding. I think part of the 
risk should be borne by the consumer, but some of the risk 
should be borne by the firm. So I think the question is, do we 
leave the tilt of the balance all on the consumer or do we say 
the firm bears some of the risk as well of a consumer not 
understanding.
    Thank you.
    Senator Reed. Thank you very much.
    Senator Merkley has joined us, but he has been very 
gracious, and I just want to make two comments. I think the 
testimony has been excellent. We have several challenges. The 
two primary ones are ensuring there is a comprehensive form of 
consumer protection, which has been proposed in one agency. And 
then a second issue is the authority of that agency to conduct 
the operations. Those I think are the two basic issues.
    I think also, too, I would just point out for the record 
that there is no private right of action included in this 
proposal. So there might be complaints to regulators, but the 
suggestion that this is going to set off a wave of private 
claims it not included in the legislation.
    Also, I think the presumption at least that I start out 
with is that this agency will be subsuming the existing 
legislation authority of the Fed, of the different regulators, 
not have sort of an open-ended sort of role in crafting any 
sort of ideas they want. Truth in Lending Act, HOEPA, all those 
things now would shift--that legislation, that authority would 
shift to the agency.
    So I again want to thank you all, and I particularly want 
to thank Senator Merkley, because I think we are ready to go. 
Thank you, gentlemen.
    The hearing is adjourned.
    [Whereupon, at 12:10 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
           PREPARED STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
    Good morning. Thank you all for being here today.
    This morning, we are taking an important step in our efforts to 
modernize our financial regulatory system. The failure of that system 
in recent years has left our economy in peril and caused real pain for 
hard-working Americans who did nothing wrong.
    The important work we do on this Committee is often complex and 
painstaking in its detail.
    And so, I'd like to start by reminding everyone that the work we do 
here, the details, matter to real people, the men and women in my home 
State of Connecticut and across America who work hard, play by the 
rules, and want nothing more than to make a better life for their 
families.
    These families are the foundation of our economy and the reason 
we're here in Washington working on this historic and critically 
important legislation.
    That's why the first piece of the Administration's comprehensive 
plan to rebuild our regulatory regime and our economy is something I 
have championed: an independent agency whose job it will be to ensure 
that American consumers are treated fairly and honestly.
    Think about the moments when Americans engage with financial 
service providers. I'm not talking about big-time investors or 
financial experts, just ordinary working people trying to secure their 
futures. They're opening checking accounts, taking out loans, building 
their credit, trying to build a foundation upon which their family's 
economic security can rest.
    These can be among the most important and stressful moments a 
family can face.
    Think of a young couple. They've carefully saved up for a down 
payment. It might be a modest house--but it'll be their home. Before 
they can move into their new home, however, they must sign on the 
dotted line for that first mortgage with its pages and pages of complex 
and confusing disclosures.
    Who's looking out for them?
    Think of a factory worker who drives 30 miles to and from work 
every day in an old car that's about to give out. He needs another one 
to make it through the winter, but his wages are stagnant and the 
family budget is stretched to the max. He's got no choice but to 
navigate the complicated world of auto loans.
    Who's looking out for him?
    Think of a single mother whose 17-year-old son just got into his 
top choice of colleges. She's overjoyed for him, but worried about how 
she'll pay the tuition. Financial aid might not be enough, and she 
knows that even as her son begins the next chapter in a life filled 
with promise, he might be saddled with debt.
    Who's looking out for them?
    These moments are the reason we have invested so much time and 
money to rebuild our financial sector even though some of the very same 
institutions the taxpayers have propped up are responsible for their 
own predicaments. These moments are the reason we serve on this 
Committee.
    And these moments are the reason I and many of my colleagues were 
enraged at the spectacular failure of consumer protection that 
destroyed the economic security of so many American families.
    In my home State of Connecticut and around the country, working men 
and women who did nothing wrong have watched this economy fall through 
the floor--taking with it jobs, homes, life savings, and the cherished 
promise of the American middle class.
    These folks are hurting, they are angry, they are worried. And they 
are wondering: Is anyone looking out for me?
    Since the very first hearing before this Committee on modernizing 
our financial regulatory structure, I have said that consumer 
protection must be a top priority.
    Stronger consumer protection could have stopped this crisis before 
it started.
    And where were the regulators? For 14 years, despite a clear 
directive from Congress, the Federal Reserve Board took no action to 
ban abusive home mortgages. Gaping holes in the regulatory fabric 
allowed mortgage brokers and bankers to make and sell predatory loans 
to Wall Street that turned into toxic securities and brought our 
economy to its knees.
    That is why I called for the creation of an independent consumer 
protection agency whose sole focus is the financial well-being of 
consumers; an agency whose goal is to put an end to unscrupulous 
lenders and practices that have ripped off far too many American 
families.
    And I'm pleased that the Administration has sent us a bold and 
thoughtful plan for that agency.
    You would think financial services companies would support 
protections that ensure the financial well-being of their customers--if 
not out of concern for their own bottom-lines, then out of simple 
common decency.
    But now I read that various industry groups are planning a major PR 
offensive in an effort to kill this consumer protection agency.
    To those who helped create this mess and now plan to flood the 
airwaves with misleading propaganda, I have just two words for you: Get 
real.
    The forces of the status quo can run as many ``Harry and Louise'' 
ads as they want. But Harry and Louise are exactly why we're moving 
forward on this proposal.
    We can't have a functioning economy if Harry and Louise can't 
safely invest and borrow without fear of being cheated by greedy banks 
and Wall Street firms. And we will not have a financial regulatory 
modernization bill that doesn't provide the protections American 
families need and deserve.
    An independent consumer protection agency can, and should, be good 
for business.
    It can, and should, protect the financial well-being of American 
consumers so that businesses can rely on a healthy customer base as 
they seek to build long-term profitability.
    It can, and should, eliminate the regulatory overlap and 
bureaucracy that comes from the current balkanized system of consumer 
protection regulation.
    It can, and should, level the playing field by applying a 
meaningful set of standards, not only to the highly regulated banks, 
but also to their nonbank competitors that have slipped under the 
regulatory radar screen.
    Financial services companies that want to make an honest living 
should welcome this effort to create a level playing field.
    Indeed, the good lenders are the most disadvantaged when fly-by-
night brokers and finance companies set up shop down the street. Then 
we see bad lending pushing out the good.
    No Senator on this Committee wants to stifle product innovation, 
limit consumer choice, or create regulation that is unnecessary or 
unduly burdensome.
    And I welcome constructive input from those in the financial 
services sector who share our commitment to making sure that American 
families get a fair shake.
    But I do not view as constructive the opposition to the creation of 
this agency by some industry groups in order to, as Bloomberg News 
reported, ``protect their fees.''
    We all want financial services companies to thrive and succeed, but 
they will have to make their money the old fashioned way--by developing 
innovative products, pricing competitively, providing excellent 
customer service, and engaging in fair competition on the open market.
    The days of profiting from misleading or predatory practices are 
over.
    The path to recovery of our financial services companies and our 
economy is based on the financial health of American consumers.
    We need a system that rewards products and firms that create wealth 
for American families, not one that rewards financial engineering that 
generates profits for financial firms by passing on hidden risks to 
investors and borrowers.
    The fact that the consumer protection agency is the first 
legislative item the Administration has sent to Congress since it 
released its white paper on regulatory reform last month tells me that 
our President's priorities are in the right order.
    I wish I could say the same for everyone in the industry.
    Nevertheless, with the backing of the Administration, with the 
support of many in the financial community who understand the 
importance of this reform, and, most of all, with a mandate from the 
American families who count on a fair and secure financial system, we 
will push forward.
    I thank you all for being here today. Now let's get to work.
                                 ______
                                 
               PREPARED STATEMENT OF SENATOR TIM JOHNSON
    Thank you Mr. Chairman for holding today's hearing. This hearing 
could be one of the most important held this month as the Committee 
takes up legislation to modernize our financial regulatory system.
    The current economic crisis has exposed regulatory gaps that 
allowed institutions to offer products with minimal regulation and 
oversight. Many of these products were not just ill-suited for 
consumers, but were disastrous for American homeowners. There is a 
clear need to address the failures of our current system when it comes 
to protecting consumers. We need to find the correct balance between 
consumer protection, innovation, and sustainable economic growth.
    There is no doubt that the status quo is not acceptable. However, 
as Congress considers proposals to improve the protection of consumers 
from unfair, deceptive, and predatory practices, we must ask many 
important questions. We need to know if it is the right thing to do to 
separate consumer protection from functional regulation. We need to 
know if a separate, independent consumer protection agency is better 
than a consumer protection division within an existing regulatory 
agency. We need to know who should be writing rules for consumer 
products and who should be enforcing those rules. We need to know if 
national standards or 51 set of rules made by each State are better for 
consumers. Last, while the goal of any consumer protection agency is 
clearly better protection of consumers, we need to know if it will also 
preserve appropriate access to credit for the consumers it is designed 
to protect.
    The creation of a new agency is a daunting task under any 
circumstances; even more so in this case, considering the role a 
consumer protection agency would play in our Nation's economic 
recovery. It is important we get this right. I look forward to hearing 
from today's witnesses.
                                 ______
                                 

                 PREPARED STATEMENT OF MICHAEL S. BARR
            Assistant Secretary for Financial Institutions,
                       Department of the Treasury
                             July 14, 2009
    Thank you, Chairman Dodd and Ranking Member Shelby, for providing 
me with this opportunity to testify about the Administration's proposal 
to establish a new, strong financial regulatory agency charged with 
just one job: looking out for consumers across the financial services 
landscape.
    The need could not be clearer. Today's consumer protection regime 
just experienced massive failure. It could not stem a plague of abusive 
and unaffordable mortgages and exploitative credit cards despite clear 
warning signs. It cost millions of responsible consumers their homes, 
their savings, and their dignity. And it contributed to the near 
collapse of our financial system. We did not have just a financial 
crisis; we had a consumer crisis. Americans are still paying the price, 
and those forced into foreclosure or bankruptcy or put through other 
wrenching dislocations will pay for years.
    There are voices saying that the status quo is fine or good enough. 
That we should keep the bank regulators in charge of protecting 
consumers. That we just need some patches. They even claim consumers 
are better off with the current approach.
    It is not surprising we are hearing these voices. As Secretary 
Geithner observed last week, the President's proposals would reduce the 
ability of financial institutions to choose their regulator, to shape 
the content of future regulation, and to continue financial practices 
that were lucrative for a time, but that ultimately proved so damaging. 
Entrenched interests always resist change. Major reform always brings 
out fear mongering. But responsible financial institutions and 
providers have nothing to fear.
    We all aspire to the same objectives for consumer protection 
regulation: independence, accountability, effectiveness, and balance. 
The question is how to achieve them. A successful regulatory structure 
for consumer protection requires mission focus, marketwide coverage, 
and consolidated authority.
    Today's system has none of these qualities. It fragments 
jurisdiction and authority for consumer protection over many Federal 
regulators, most of which have higher priorities than protecting 
consumers. Nonbanks avoid Federal supervision; no Federal consumer 
compliance examiner lands at their doorsteps. Banks can choose the 
least restrictive supervisor among several different banking agencies. 
Fragmentation of rule writing, supervision, and enforcement leads to 
finger-pointing in place of action and makes actions taken less 
effective.
    The President's proposal for one agency for one marketplace with 
one mission--protecting consumers--will resolve these problems. The 
Consumer Financial Protection Agency will create a level playing field 
for all providers, regardless of their charter or corporate form. It 
will ensure high and uniform standards across the market. It will end 
profits based on misleading sales pitches and hidden traps, but there 
will be profits made on a level playing field where banks and nonbanks 
can compete on the basis of price and quality.
    If we create one Federal regulator with consolidated authority, we 
will be able to leave behind regulatory arbitrage and interagency 
finger-pointing. And we will be assured of accountability.
    Our proposal ensures, not limits, consumer choice; preserves, not 
stifles, innovation; strengthens, not weakens, depository institutions; 
reduces, not increases, regulatory costs; and increases, not reduces, 
national regulatory uniformity.
Successful consumer protection regulation requires mission focus, 
        marketwide coverage, and consolidated authority
    Consumer protection regulation should be effective and balanced, 
independent and accountable. It can be none of these without three 
essential qualities: mission focus, marketwide coverage, and 
consolidated authority.
    First, consumer protection regulation requires mission focus. A 
clear mission is the handmaiden of accountability. It is also the basis 
for the expertise and effectiveness that are essential to maintaining 
independence.
    Second, the regulator must have marketwide jurisdiction. This 
ensures consistent and high standards for everyone. And it prevents 
providers from choosing a less restrictive regulator. Carving up 
markets in artificial, noneconomic ways is a recipe for weak and 
inconsistent consumer protection standards and captured regulators.
    Third, authorities for regulation, supervision, and enforcement 
must be consolidated. A regulator without the full kit of tools is 
frequently forced to choose between acting without the right tool and 
not acting at all. Moreover, if different regulators have different 
authorities, each can point the finger at the other instead of acting, 
and the sum of their actions will be less than the parts. The rule 
writer that does not supervise providers lacks information it needs to 
determine when to write or revise rules, and how best to do so. The 
supervisor that does not write rules lacks a marketwide perspective or 
adequate incentives to act. Splitting authorities is a recipe for 
inertia, inefficiency, and unaccountability.
The present system of consumer protection regulation is designed for 
        failure
    The present system of consumer protection regulation is not 
designed to be independent or accountable, effective or balanced. It is 
designed to fail. It is simply incapable of earning and keeping the 
trust of responsible consumers and providers.
    Today's system does not meet a single one of the requirements I 
just laid out: mission focus, marketwide coverage, or consolidated 
authority. It does not even come close. The system fragments 
jurisdiction and authority for consumer protection over many Federal 
regulators, most of which have higher priorities than protecting 
consumers. Nonbanks avoid Federal supervision and banks can choose the 
least restrictive supervisor among several different banking agencies. 
Fragmentation of rule writing, supervision, and enforcement among 
several agencies lead to finger-pointing in place of action and make 
actions taken less effective.
    This structure is a welcome mat for bad actors and irresponsible 
practices. Responsible providers are forced to choose between keeping 
market share and treating consumers fairly. The least common 
denominator sets the standard, standards inevitably erode, and 
consumers pay the price. Let me spell out these failures in more 
detail.
    Lack of mission focus: Protecting consumers is not the banking 
agencies' priority. The primary mission of Federal banking agencies, in 
law and in practice, is to ensure that banks act prudently so they 
remain safe and sound. Ensuring that banks act transparently and fairly 
with consumers is not their highest priority. Consumer protection 
regulation and supervision was added to the agencies' responsibilities 
relatively late in their histories, and it has never fit snugly in 
their missions, structures, or agency cultures.
    In fact, consumer protection supervision is generally conducted 
through the prism of bank safety and soundness. The goal of such 
supervision has too often been to protect banks or thrifts from 
excessive litigation or reputation risk, rather than to protect 
consumers. It was thought that supervising the banks for their 
effective management of ``reputation risk'' and ``litigation risk''--
aspects of a safe and sound institution--would ensure the banks treated 
their customers fairly. It didn't. It did not prevent our major banks 
and thrifts from retroactively raising rates on credit cards as a 
matter of policy, or from selling exploding mortgages to unwitting 
consumers as a business expansion plan.
    It should not have come as a surprise that the agencies' ``check-
the-box'' approach to consumer compliance supervision missed the forest 
for the trees. Examiners are well trained to ascertain whether the 
annual percentage rate on a loan is calculated as prescribed and 
displayed with a large enough type size. Equally or more important 
questions--Could this consumer reasonably have understood this 
complicated loan? Is this risky loan remotely suitable for this 
consumer?--are not a priority for an agency whose main job is to limit 
risks to banks, not consumers.
    Managing risks to the bank does not and cannot protect consumers 
effectively. This approach judges a bank's conduct toward consumers by 
its effect on the bank, not its effect on consumers. Consumer 
protection regulation must be based first and foremost on a keen 
awareness of the perspectives and interests of consumers, and a strong 
motivation to understand how products and practices affect them--for 
good and for bad. Agencies charged primarily with safeguarding banks 
will lack this awareness or motivation.
    Fragmented jurisdiction: There are two regulatory regimes for one 
market, and nonbanks escape Federal supervision. There is one market 
for residential mortgages, one market for consumer credit, and one 
market for payment services--but two different and uncoordinated 
regimes for these and other consumer financial products and services. 
Banks are subject to an extensive supervisory regime, with lengthy and 
intensive consumer compliance examinations on-site and off-site as well 
as a legal obligation to respond to requests for internal information.
    This regime, when it works, identifies and resolves weaknesses in 
banks' consumer protection systems before they harm consumers. The 
major failures of this regime were not for lack of examination hours or 
paperwork burdens. Failures occurred for lack of asking the right 
questions and taking the right perspective. These failures were rooted 
in the absence of mission focus. A Federal regime of consumer 
compliance supervision can be very effective in the right hands.
    Nonbank providers, however, are not subject to any Federal 
supervision. No Federal regulator sends consumer compliance examiners 
to nonbank providers to review their files or interview their 
salespeople. Nor does any Federal regulator regularly collects 
information from them, except limited mortgage data.
    Nonbank providers are subject only to after-the-fact, targeted 
investigations and enforcement actions by the Federal Trade Commission 
or State attorneys general. Supervision by the States of these 
providers is limited, uneven, and not necessarily coordinated. In 
general the same Federal consumer protection laws apply to this sector 
as apply to banks, but lack of Federal supervision and inherent 
limitations of the after-the-fact approach of investigations and 
enforcement resources leave the sector much less closely regulated.
    Lack of Federal supervision of nonbanks brings down standards 
across the board. Capital and financing flow to the unsupervised sector 
in part because it enjoys the advantages of weak consumer oversight. 
Less responsible actors face good odds that the FTC and State agencies 
lack the resources to detect and investigate them. This puts enormous 
pressure on banks, thrifts, and credit unions to lower their standards 
to compete--and on their regulators to let them.
    This is precisely what happened in the mortgage market. Independent 
mortgage companies and brokers grew apace with little oversight; 
capital and financing flowed their way. The independents peddled 
subprime and exotic mortgages--such as ``option ARMs'' with exploding 
payments and rising loan balances--in misleading ways, to consumers 
demonstrably unable to understand or handle their complex terms and 
hidden, costly features. The FTC and the States took enforcement 
actions, but their resources were no match for rapid market growth. And 
they could not set rules of the road for the whole industry, or examine 
institutions to uncover bad practices and prevent their spread.
    To compete over time, banks and thrifts and their affiliates came 
to offer the same risky products as their less regulated competitors 
and relaxed their standards for underwriting and sales. About one half 
of the subprime originations in 2005 and 2006--the shoddy originations 
that set off the wave of foreclosures--were by banks and thrifts and 
their affiliates. Lenders of all types paid their mortgage brokers and 
loan officers more to bring in riskier and higher-priced loans, with 
predictable results. Bank regulators were slow to recognize these 
problems, and even slower to act. The consequences for homeowners were 
devastating, and our economy is still paying the price.
    Mortgages are the most dramatic example of the harm that regulatory 
fragmentation causes consumers, but not the only one. Take the case of 
short-term, small-dollar credit. Payday lenders have grown rapidly 
outside the banking sector. They are not typically subject to State 
examinations or information collections. On the other side of the bank-
nonbank divide, banks compete in the short-term, small-dollar credit 
market with cash advances on credit cards and ``overdraft protection'' 
programs.
    Each one of these three competing products is disclosed to the 
consumer differently, and each has been associated with abusive or 
unfair practices. There is a clear need for a consistent approach to 
regulating short-term, small-dollar credit that protects consumers 
while ensuring their access to responsible credit--but our fragmented 
system cannot deliver.
    The list goes on. A wide range of credit products are offered--from 
payday loans to pawn shops, to auto loans and car title loans, many 
from large national chains--with little supervision or enforcement. 
Credit unions and community banks with straightforward credit products 
struggle to compete with less scrupulous providers who appear to offer 
a good deal and then pull a switch on the consumer.
    Banks and thrifts can--and do--choose the most permissive 
supervisor, further depressing standards. Just as capital flows from 
the bank sector to the nonbank sector in search of less regulation, 
banks and thrifts can freely choose their Federal supervisor on the 
basis of which one has less restrictive oversight of consumer 
compliance. We saw this choice in action during the mortgage boom.
    But institutions do not actually have to switch supervisors to 
bring down standards. The mere fact that institutions have a choice 
exerts a subtle but pernicious drag on standards. It has little to do 
with who runs the agency. It is simply that Government agencies, like 
all other organizations, respond to incentives. The banking agencies, 
naturally, seek to retain or even compete to gain ``market share.''
    Incomplete and fragmented supervision delays and impedes responses 
to emerging problems. When a consumer protection problem emerges, a new 
regulation is not necessarily the first and best response. It takes 
many months, even years, to adopt a new rule. And rules are often 
fairly rigid, detailed, and technical, especially if the underlying 
statute allows private suits. Supervisory guidance can be a much faster 
and more flexible, principles-based method to prevent problems.
    But guidance is a much weaker tool than it should be because of 
incomplete and fragmented Federal supervisory authority. There is no 
Federal supervision over nonbanks, and supervision of banks is divided 
among several agencies. This means that any effort to use supervisory 
guidance requires a massive and prolonged effort to bring many 
different Federal bank regulators, and State regulators of bank and 
nonbank institutions, to agreement on the precise wording of the 
document.
    It took the Federal banking agencies until June 2007 to reach final 
consensus on supervisory guidance imposing even general standards on 
the sale and underwriting of subprime mortgages--two years after 
evidence of declining underwriting standards emerged publicly in a 
regulator's survey of loan officers. By that time the subprime 
explosion was nearly over. It took additional time for States to adopt 
parallel guidance for independent mortgage companies. And it took a 
third year for the Federal agencies to settle on a model disclosure of 
subprime mortgages, by which point the subprime market had long ago 
imploded.
    Fragmented authorities: Rule writing is divided across agencies and 
largely divorced from enforcement and supervision. Fragmented rule-
writing authority produces delays and inefficiencies. Separation of 
rule writing from supervision and enforcement invites finger-pointing 
in place of action and reduces the effectiveness of actions taken.
    Rule-writing authority is fragmented, producing delays and 
inefficiencies. While authority to write most Federal consumer 
protection regulations is exclusively in the Federal Reserve, other 
agencies have joint or concurrent authority to implement several 
statutes. It is a recipe for delay and inefficiency.
    For example, HUD and the Federal Reserve each implement a different 
statute governing mortgage disclosure, the Real Estate Settlement 
Procedure Act and Truth in Lending Act, respectively. The result is two 
forms emphasizing different aspects of the same transaction and using 
different language to describe some of the same aspects. It has been 11 
years since the agencies recommended an integrated form. Even if they 
succeed in adopting an integrated form, their ability to act jointly to 
keep it up-to-date as the market changes will be limited at best.
    As another example, Congress mandated joint or coordinated 
rulemaking by six Federal agencies under the Fair and Accurate Credit 
Transactions Act of 2003 to improve the accuracy of information 
reported to credit bureaus and, to establish procedures for consumers 
to file disputes with information furnishers. Those agencies published 
final rules less than two weeks ago, on July 1, 2009. Clearly consumers 
deserve faster action on issues as important in their financial lives 
as accuracy of credit reports.
    Rule writing is divorced from enforcement and supervision, causing 
inertia and undermining effectiveness. The authority to write 
regulations implementing the Federal consumer protection statutes is 
largely divorced from the authority for supervision and enforcement. 
This deprives the rule writer of critical information about the 
marketplace that is essential to effective and balanced regulation.
    That is one reason we did not have Federal regulations for the 
subprime market. The Federal Reserve has authority to write regulations 
under the Truth in Lending Act and Homeownership and Equity Protection 
Act to ensure proper disclosure and prevent abusive lending. But it 
cannot examine, obtain information from, or investigate independent 
mortgage companies or mortgage brokers. So it is not surprising that 
the agency was slow to recognize the need for new subprime regulations. 
By the time it proposed rules, the subprime market had evaporated.
    The separation of rule writing from supervision and enforcement 
also leads to finger-pointing and inertia. Take the case of credit 
cards. Some banks found they could boost fee and interest income with 
complex and opaque terms and features that most consumers would not 
notice or understand. These tricks enabled banks to advertise 
seductively low annual percentage rates and grab market share. Other 
banks found they could not compete if they offered fair credit cards 
with more transparent pricing. So consumers got retroactive rate hikes, 
rate hikes without notice, and low-rate balance transfer offers that 
trapped them in high-rate purchase balances.
    A major culprit, once again, was fragmented regulation: One agency 
held the pen on regulations, another supervised most of the major card 
issuers. Each looked to the other to act, and neither acted until 
public outrage reached a crescendo. By then it was too late for 
millions of debt-entrapped consumers.
There is only one solution to these deep structural flaws: One 
        regulator for one market with one mission--protecting 
        consumers--and the authority and resources to achieve it
    These deep structural flaws cannot be solved by tinkering with the 
consumer protection mandates or authorities of our existing agencies. 
The structure itself is the problem. There are too many agencies with 
consumer protection responsibilities, their authorities are too 
divided, and their primary missions are too distant from consumer 
protection.
    These problems have only one effective solution: a single Federal 
financial consumer protection agency. 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.
    A new agency with a focused mission, comprehensive jurisdiction, 
and broad authorities is the only way to ensure consumers and providers 
high and consistent standards and a level playing field across the 
whole marketplace without regard to the form of a product--or the type 
of its provider. It is the only way to ensure independence, 
accountability, effectiveness, and balance in consumer protection 
regulation.
    The CFPA will have one mission: To protect consumers. Mission focus 
will not be a problem for this agency. It will have no other mission 
that competes for attention or resources. And it will have the 
resources it needs to fulfill this mission and maintain its 
independence. The agency will have a stable funding stream in the form 
of appropriations and fee assessments akin to those regulators impose 
today.
    A mission of protecting consumers requires weighing competing 
considerations. Our proposal explicitly recognizes this complexity. It 
charges the CFPA with requiring effective disclosures and preventing 
abusive or unfair practices; and it also charges the CFPA with ensuring 
markets are efficient and innovative and preserving consumers' access 
to financial services. A statutory mandate to weigh these potentially 
competing considerations will help ensure the CFPA's regulations are 
balanced.
    The banking agencies will be able to concentrate their attention on 
bank safety and soundness. The Federal Reserve will be able to focus on 
monetary policy, financial stability, and holding company supervision 
without the major distractions it has experienced because it holds the 
pen on most major consumer protection regulations.
    The CFPA will have jurisdiction over the entire market. Our 
proposal for comprehensive jurisdiction will ensure accountability. The 
CFPA will not have the luxury of pointing the finger at someone else. 
If a problem arises in the nonbank sector, the agency will be as 
accountable as it will be for problems in the banking sector.
    Comprehensive jurisdiction will also make regulatory arbitrage a 
thing of the past. Providers will not have a choice of regulators. So, 
by definition, they will not be able to choose a less restrictive 
regulator. The CFPA will not have to fear losing ``market share'' 
because our legislation gives it authority over the whole market. 
Ending arbitrage will prevent the vicious cycles that weaken standards 
across the market.
    Comprehensive jurisdiction will protect consumers no matter with 
whom they do business, and level the playing field for all institutions 
and providers. For the first time, a Federal agency would apply to 
nonbank providers the tools of supervision that regulators now apply to 
banks--including setting compliance standards, conducting compliance 
examinations, reviewing files, obtaining data, issuing supervisory 
guidance and entering into consent decrees or formal orders. With these 
tools, the Agency would be able to identify problems before they 
spread, stop them before they cause serious injury, and relieve 
pressures on responsible providers to lower their standards.
    The CFPA's marketwide perspective and authority will help it work 
with the States to target Federal and State examination resources to 
nonbank providers based on risks to consumers. The CFPA can set and 
enforce national standards and supplement State efforts with its own 
examiners and analytics. The agency will be able to use efficient 
supervisory techniques in the nonbank sector such as risk-based 
examinations. The CFPA will provide leadership to the States, improve 
information sharing, and leverage State resources. The FTC will 
continue to have full authority to investigate and stop financial 
frauds.
    The CFPA will have the full range of authorities: Rule writing, 
supervision, and enforcement. CFPA's regulations will be based on a 
deep understanding of markets, providers, and products gained from the 
power to examine and collect information from the full range of bank 
and nonbank financial service providers. Combining rule-writing 
authorities with supervision and enforcement authorities in one agency 
will ensure faster and more effective rules.
    Where speed and flexibility are at a high premium, the CFPA will be 
able to exploit the full potential of supervisory guidance to address 
emerging concerns. Years-long delays to issue guidance because of 
interagency wrangling will be a thing of the past.
    For example, the CFPA will both implement the new Credit CARD Act 
of 2009--to ban retroactive rate hikes and rate hikes without notice--
and supervise the credit card banks for compliance. So the agency will 
have a feedback loop from the examiners of the banks to the staff who 
write the regulations, allowing staff to determine quickly how well the 
regulations are working in practice and whether they need to be 
tightened or adjusted. It will also be able to improve credit card 
practices with supervisory guidance.
    The CFPA's rule-writing authority will be comprehensive and robust. 
The CFPA will be able to write rules for all consumer financial 
services and products and anyone who provides these products. (Its 
authority will not extend to entities registered with the Securities 
and Exchange Commission when these entities are acting within their 
registered capacities.) The CFPA will assume existing statutory 
authorities--such as the Truth in Lending Act and Equal Credit 
Opportunity Act. New authorities we propose--to require transparent 
disclosure, make it easier for consumers to choose simple products, and 
ensure fair terms and conditions and fair dealing--will enable the 
agency to fill gaps as markets change and to provide strong and 
consistent regulation across all types of consumer financial service 
providers.
    For example, our proposal gives the CFPA the power to strengthen 
mortgage regulation by requiring lenders and brokers to clearly 
disclose major product risks, and offer simple, transparent products if 
they decide to offer exotic, complex products. The CFPA will also be 
able to impose duties on salespeople and mortgage brokers to offer 
appropriate loans, take care with the financial advice they offer, and 
meet a duty of best execution. And it will be able to prevent lenders 
from paying higher commissions to brokers or salespeople (``yield 
spread premiums'') for delivering loans with higher rates than 
consumers qualify for. Lenders and consumers would finally have an 
integrated mortgage disclosure.
    Comprehensive standard-setting authority would improve other 
markets, too. For example, the CFPA could adopt consistent regulations 
for short-term loans--establishing disclosure requirements--whether 
these loans come in the form of bank overdraft protection plans or 
payday loans or car title loans from nonbank providers. The agency also 
could adopt standards for licensing and monitoring check cashers and 
pawn brokers.
    The new CFPA will bring higher and more consistent standards; 
stronger, faster responses to problems; the end of regulatory 
arbitrage; a more level playing field for all providers; and more 
efficient regulation. A dedicated consumer protection agency will help 
restore the trust and confidence on which our financial system so 
critically depends.
The CFPA will ensure, not limit, consumer choice; preserve, not stifle, 
        innovation; strengthen, not weaken, depository institutions; 
        and reduce, not increase, regulatory burden; and increase, not 
        reduce, uniformity
    The CFPA will ensure, not limit, consumer choice. The agency will 
have a mandate to promote simplicity. It will also be charged with 
preserving efficient and innovative markets and consumer access to 
financial services and products. The point is to make it easier for 
consumers to choose simpler products while preserving their ability to 
choose more complex products if they better suit consumers' needs.
    For example, the CFPA will have the authority to require providers 
that offer exotic, complex, and riskier products to offer at least one 
standard, simple, less risky product. In the mortgage market, a lender 
or broker that peddles mortgages with potentially exploding monthly 
payments, hidden fees and prepayment penalties, and growing loan 
balances--such as the ``pay option ARMs'' of recent years--might also 
be required to offer consumers 30-year, fixed-rate mortgages or 
conventional ARMs with straightforward terms.
    The idea is not new. A division between ``traditional'' and 
``nontraditional'' products is deeply embedded in our mortgage markets. 
A similar consensus about standard and alternative products may emerge 
in other product markets. The CFPA's rigorous study of consumer 
understanding and product performance may help produce a consensus in a 
given market about the appropriate dividing line.
    This approach, to be sure, may not work in all contexts. Our draft 
legislation requires the agency to consider its effect on consumer 
access to financial services or products. In some cases the costs may 
outweigh the benefits--that will be for the agency to determine. In 
other cases, using this approach will obviate the need for costlier 
restrictions on terms and practices that would limit consumer choices.
    The CFPA will preserve, not stifle, innovation. The present 
regulatory system clearly failed to strike the right balance between 
financial innovation and efficiency, on the one hand, and stability and 
protection, on the other. This imbalance was a major cause of the 
financial crisis. Ensuring that consumers who want simple products can 
get them, and that consumers who take complex products understand their 
risks, will re-right the scales.
    The benefits of innovation will continue to flow. By helping ensure 
that significant risks are assumed only by knowing and willing 
consumers, the CFPA will improve confidence in innovation and make it 
sustainable rather than tied to quarterly results.
    The CFPA will strengthen, not weaken, depository institutions. 
Protecting consumer is not unsafe or unsound for banks. Protecting 
consumers is good for banks. If we had protected consumers from banks 
that sold risky mortgages like option ARMs in misleading ways, then we 
would have made the banks more sound, not less.
    We reject the notion that profits based on unfair practices are 
sound. The opposite appears true. Massive credit card revenue, for 
example, was not sustainable. It depended on unfair practices that bore 
the seeds of their own demise. These practices led this Congress to 
pass, and President Obama to sign, tough new restrictions on credit 
cards.
    Examiners in the field will resolve the rare conflict that arises 
just as they do today. For larger banks, CFPA examiners could reside in 
the bank just as consumer compliance examiners often do today, right 
next door to safety and soundness examiners. They would regularly share 
information--our draft legislation mandates the exchange of examination 
reports--and coordinate approaches. Moreover, the CFPA could work with 
the banking agencies to ensure bank consumer compliance examiners are 
trained to understand safety and soundness, as they are today.
    For the even rarer conflict that arises and cannot be resolved on 
the ground, our proposal provides mechanisms for its resolution. A 
safety and soundness regulator will have one of five board seats, 
ensuring a strong voice within the agency for prudential concerns. In 
addition, the agency must consult with safety and soundness regulators 
before adopting rules. The Financial Services Oversight Council will 
bring these agencies together on a regular basis.
    The CFPA will reduce, not increase, regulatory costs. The CFPA is 
not a new layer of regulation; it will consolidate existing regulators 
and authorities. I have already discussed the tremendous benefits this 
will bring to responsible providers by ensuring consistent standards 
and a level playing field. And consolidating authority does not just 
increase accountability for protecting consumers, it also increases 
accountability for removing unnecessary regulatory burdens.
    Consolidation will also bring direct efficiencies. The agency would 
help to simplify and reduce regulatory burdens in areas where current 
authorities overlap or conflict. For instance, the agency would ensure 
we have a single Federal mortgage disclosure--eliminating confusing and 
unnecessary paperwork.
    Other efficiencies will flow from the CFPA's ability to choose the 
best tool for the problem. The agency's authority to restrict terms and 
conditions of contracts by regulation--as the Congress did in the 
Credit CARD Act of 2009--will be just one of many authorities. With 
comprehensive supervisory authority over the whole market, the agency 
will also be able to use more flexible, potentially less costly tools 
such as supervisory guidance.
    The breadth and diversity of the authorities we propose will ensure 
the agency can tailor its solution to the underlying problem with the 
least cost to consumers and institutions. The agency will have ample 
authority to harness the benefits of market discipline by improving the 
quality of, and access to, information in the marketplace. The CFPA 
will have authority to ensure that consumers receive relevant and 
concrete information in a timely manner. These measures, and measures 
that make it easier for consumers to choose simpler products, should 
reduce the need for more burdensome regulations.
    Imposing Federal supervisory authority on nonbank institutions for 
the first time will increase compliance requirements on that sector. 
But this is well worth the benefit of higher and more consistent 
standards.
    The CFPA will increase, not reduce, national regulatory uniformity. 
The CFPA's rules and regulations will set a floor for the States, not a 
ceiling. The contention that this will somehow increase variations in 
State laws is a red herring. Our proposal does not alter the law of the 
status quo: major Federal consumer protection statutes such as the 
Truth in Lending Act and Homeownership and Equity Protection Act 
explicitly make Federal regulations a floor, not a ceiling.
    In fact, a strong Federal consumer protection regulator should be 
able to increase regulatory uniformity. States sometimes adopt new 
financial services laws because they perceive a lack of Federal will 
and leadership. That is exactly what happened in the mortgage context, 
where States filled a vacuum of predatory mortgage law with State 
statutes and regulations. If the States believe an expert, independent 
Federal agency is on the job and working with the States to protect 
their consumers, the States will feel less need to adopt new laws.
Conclusion
    We need consumer protection regulation that is independent and 
accountable, effective and balanced. These goals are achievable, but 
only if we address fundamental flaws in the structure of consumer 
protection. The only real solution to these flaws is creating an agency 
with a focused consumer protection mission; comprehensive jurisdiction 
over all financial services providers, both banks and nonbanks; and the 
full range of regulatory, enforcement, and supervisory authorities.
    It is time for a level playing field for financial services 
competition based on strong rules, not based on exploiting consumer 
confusion. And it is time for an agency that consumers--and their 
elected representatives--can hold fully accountable. The 
Administration's legislation fulfills these needs. Thank you for this 
opportunity to discuss our proposal, and I will be happy to answer any 
questions.
                                 ______
                                 

                PREPARED STATEMENT OF RICHARD BLUMENTHAL
                           Attorney General,
                          State of Connecticut
                             July 14, 2009
    I appreciate the opportunity to strongly support the 
Administration's proposal to create a Federal agency dedicated solely 
to protecting consumer interests in financial products and markets, and 
preserve and expand State consumer protection authority.
    The new agency--a consumer financial guardian--promises to be a 
powerful watchdog and protector, and a partner of State attorneys 
general in fighting for our citizens. The proposal marks a giant step 
toward restoring an historic Federal-State alliance in combating 
financial fraud and abuse. This Federal-State partnership was riven by 
excessive resort to Federal preemption--displacing State enforcement 
and replacing Federal-State collegiality and cooperation with 
relentless conflict.
    The new agency is a necessary and appropriate response to exploding 
complexity, scope, and scale of new financial instruments and markets--
and exponentially increasing impact on ordinary citizens. It fills a 
deeply felt consumer need. Ever more slick and sophisticated 
marketing--often misleading and deceptive--cannot be battled 
successfully by States alone, or the existing Federal agencies. 
Creating a new agency to fight consumer cons and abuse in alliance with 
the States, the Federal Government can muster more potent and proactive 
policing and prosecution.
    A new consumer guardian--we need it, and now. New firepower, focus 
and drive, all are vital. The new agency will be more an enforcer, than 
a regulator. At the Federal level, the new agency would investigate law 
breaking and enable and assist Department of Justice prosecutions, both 
civil and criminal.
    Unfortunately, some opponents of this agency have misrepresented 
its purpose. The Financial Consumer Protection Agency will not 
``regulate credit.'' It will not make choices for consumers or deny 
them access to products and services. Instead, one of its main missions 
will be to assure that consumers are informed in clear, layman's 
language of the terms and conditions of credit cards, mortgages, and 
loans. The point is to assure that consumers fully understand the 
financial realities and consequences of financial obligations, credit 
cards, or loans they are considering before they make commitments.
    As even experienced lawyers and consumer protection advocates can 
attest, anyone attempting to understand their credit card agreements 
all too frequently faces incomprehensible, consuming small print with 
huge consequences. This agency's purpose is to assure people have good 
information so they can make good financial decisions. Once they use 
that information and make decisions, they will have to live with the 
consequences.
Federal Preemption Doctrine Disaster
    For far too long, States have been forced to the sidelines, 
standing helplessly, while credit card, mortgage, and financial rescue 
companies used Federal preemption as a shield to stop State consumer 
protection agencies from enforcing State laws against unfair and 
unscrupulous practices. Connecticut consumers have been scammed by 
fraudulent and unfair marketing schemes and products by companies who 
create or affiliate with national banks solely to avoid State consumer 
protection laws.
    Worse, Federal agencies have been complicit--aiding and abetting 
lawbreakers by supporting preemption claims when States sued to stop 
these unfair practices and recover consumer losses. Federal agencies 
went AWOL--not only disavowing their firepower but disarming State 
enforcers. They forced States from the battlefield and then abandoned 
it--in countless areas of consumer protection. They enabled and 
encouraged use of preemption as an impregnable shield to protect 
mortgage fraud, credit card abuses, securities scams, banking failure, 
and many deceptive and misleading snake oil pitches.
    The financial meltdown was foreseeable--and foreseen--by 
enforcement authorities who warned of irresponsible and reprehensible 
retreat and surrender in Federal law enforcement. There were warnings--
including mine--about a regulatory black hole concerning hedge funds, 
derivatives, credit default swaps, excess leverage devices and other 
practices. I used this term--regulatory black hole--to characterize 
lack of oversight and scrutiny that enabled self dealing, excessive 
risk-taking, and other abuses that sabotaged the system.
    The national financial meltdown was directly due to massive Federal 
law enforcement failure--lax or dysfunctional Federal oversight and 
scrutiny of increasingly arcane, complex, opaque, risky practices and 
products. Federal law placed all enforcement and regulatory authority 
in an array of Federal agencies that were inept, underfunded, 
complacent or complicit. The result was a void or vacuum unprecedented 
since the Great Depression.
    Robust State investigatory and enforcement authority no doubt would 
have revealed unfair and illegal activities sooner and helped fill the 
gap left by Federal inaction and inertia. Putting State cops on the 
consumer protection beat would have sent a message--educating the 
public, deterring wrongdoing, punishing lawbreakers.
    Connecticut has been at the forefront of State efforts to protect 
consumers from unfair and fraudulent financial transactions. And two 
areas illustrate the obstacles that we and other States have faced 
under the current system.
    Tax preparers use the lure of instant cash to entice taxpayers--
mostly low income--to borrow money at extremely high interest rates, 
using their tax refund to pay these loans. Recognizing that Connecticut 
could not regulate such usurious lending by national banks, our State 
sought to cap at 60 percent the interest charged on loans made through 
a tax preparer' or other facilitator of the loan. The statute was 
challenged by lenders who charge more than 300 percent annual interest 
rate. As a former United States Attorney, I can tell you that organized 
crime would offer a better deal. The Federal Second Circuit Court of 
Appeals held that Connecticut law could not be applied to national 
banks or their agents. Pacific Capital v. Connecticut, 542 F.3d 341 (2d 
Cir. 2008). As a result, consumers continue to pay astronomical 
interest rates for such refund anticipation loans.
    Second, even as gift cards have become increasingly popular in 
Connecticut and the country, consumers often see their cash value erode 
over time because of hidden inactivity fees or short expiration dates. 
In response, Connecticut prohibited both inactivity fees and expiration 
dates. Mall operators and retail chain stores avoided such consumer 
protection laws by merely contracting with national banks to issue gift 
cards. The Second Circuit Court of Appeals held that State consumer 
protection laws are preempted because the State measures affect a 
national bank rule. It ruled that Visa gift cards had expiration dates 
so the State could not prohibit them. SPGGC v. Blumenthal, 505 F.3d 183 
(2d Cir. 2007). The result is pervasive consumer confusion because some 
gift cards issued by national banks may expire, but others have no such 
expiration dates.
    Other States have faced similar preemption obstacles to protecting 
consumers. My colleague in Minnesota began investigating Capital One's 
credit card marketing practices under the State's consumer protection 
laws. Capital One transferred all its credit card operations into a 
national bank, successfully halting the investigation, because 
Minnesota's consumer protection laws were preempted. Similarly, an 
Illinois investigation into Wells Fargo Financial's steering of 
minorities into high cost loans was stymied by Wells Fargo's transfer 
of those assets into a national bank.
A Historic New Alliance
    I speak for other States in my enthusiastic and energetic support 
for section 1041 provisions of the Consumer Financial Protection Agency 
Act of 2009 that establish Federal law as a minimum standard for 
consumer protection, allowing States to enact laws and regulations ``if 
the protection such statute, regulation, order, or interpretation 
affords consumers is greater than the protection provided under this 
title, as determined by the [Consumer Financial Protection] agency.'' 
In addition, the proposal amends various Federal preemption statutes to 
unshackle the States, allowing enactment of consumer protections at the 
State level that may become a model for Federal, nationwide standards.
    This law exemplifies federalism at its best--State and Federal 
authorities working in common rather than conflict, and making the 
States laboratories for new, creative measures. Many of our most 
prominent Federal consumer protection laws were first adopted by 
States.
A Federal Consumer Financial Super Cop
    I also support the establishment of the Consumer Financial 
Protection Agency, a Federal office dedicated solely to protection of 
ordinary citizens using the Federal savings and payment market.
    Currently, consumer credit products are regulated by at least seven 
different agencies whose primary focus is the proper operation of 
markets and the safety and soundness of institutions. While consumer 
protection is within their jurisdiction, it is far from their major 
focus. Nor does any existing agency dedicate significant or sufficient 
resources to this responsibility.
    They pay scant attention to consumer complaints, often reviewing 
such problems from an industry perspective rather than the consumer's. 
Indeed, these agencies face divided loyalties or even conflicts of 
interest--when high interest rates and astronomical credit card fees, 
for example, may be good for the bottom line, but bad for consumers. 
Given the understandable emphasis on safety and soundness, consumer 
protection not surprisingly receives Short shrift.
    The Consumer Financial Protection Agency would have broad authority 
to promulgate and enforce rules to protect consumers from unfair and 
deceptive practices and to ensure they understand terms and conditions. 
These regulations will encourage, not stifle, the development of 
financial products that well serve consumers. A vibrant, competitive 
market that is fair and honest is essential to consumers' and the 
Financial Industry's financial interests. Clear rules and consistent 
enforcement are vital prerequisites for innovation and wealth creation. 
To mix metaphors, what's needed is a more level playing field--
essentially rational rules of the roads. When intersections become 
busy, they need to upgrade from stop signs to traffic lights to avoid 
car crashes, collisions and pile ups. As the proposal recognizes, joint 
proactive consumer protection enforcement by both Federal and State 
agencies--without preemption or exclusive jurisdiction--best serves 
consumer interests, especially as financial products and markets grow 
in complexity and number.
    State agencies--including State attorneys general and other 
consumer protection agencies--are often the first line of defense for 
consumers. Consumers are usually far more comfortable contacting their 
State officials rather than nameless faraway Federal agencies. I have 
seen firsthand the frustration of consumers when we have had to tell 
them that my office is legally powerless to help because of Federal 
preemption of State enforcement authority.
    Under the proposal, States may enact and enforce consumer 
protection laws that are consistent with Federal law. In addition, 
State attorneys general may enforce Federal rules and regulations in 
this area provided that the Federal Consumer Financial Protection 
Agency is notified of such enforcement action and has the opportunity 
to join or assume responsibility.
    This notification process seeks Federal-State coordination without 
necessarily allocating primacy to the Federal agency. State Attorneys 
General welcome the Federal Government as an ally rather than an 
adversary. Joint efforts can involve far more effective and more 
efficient use of our resources.
    Joint State and Federal enforcement efforts are neither new nor 
novel. States regularly work with each other and the Federal Government 
in recovering hundreds of millions of dollars in Medicaid and health 
care fraud, enforcing our respective antitrust laws against 
anticompetitive mergers and acquisitions or abuse of market power, and 
applying consumer protections laws against deceptive or misleading 
advertisements. I served for several years as chair of the National 
Association of Attorneys General Antitrust Executive Committee which 
included regular meetings with the heads of the Department of Justice 
Antitrust Division and the Federal Trade Commission. Successful 
collaborations once were common--against Microsoft for example--
especially when the Federal Government was an active antitrust 
enforcer. There are plenty of successful models of joint action 
involving, for example, the Federal Trade Commission and the United 
States Department of Justice's Antitrust Division.
    Separating regulatory authority from consumer protection authority 
also has models at the State level. In Connecticut, for example, the 
Department of Banking regulates the banking industry while the 
Department of Consumer Protection through the Office of the Attorney 
General has broad consumer fraud enforcement authority. That authority 
extends to the banking industry. The Connecticut Supreme Court 
specifically applied our unfair and deceptive trade practices act to 
the banking industry. Mead v. Burns, 199 Conn. 651 (1986).
    I appreciate the industry's concern about two sets of agencies with 
enforcement authority. The industry justifiably wants predictability of 
regulation to properly plan product development and promotion. This 
bill will do so by creating a regulatory floor that applies nationwide. 
Most valuable would be predictability of vigilant and vigorous 
enforcement. The message must be that a revived and reinvigorated 
Federal-State alliance will punish any company that profits from 
illegal anticonsumer devices or unfair and deceptive practices. The 
predictable outcome is that anyone who cons or scams consumers in 
financial products will be prosecuted.
    Part of the genius of our Federal system is that it creates 
separate distinct sets of authority in Federal and State governments. 
Individual State experiments in solving problems and lawmaking can be 
models for Federal statutes as well as other States. Our United States 
Constitution assures that States cannot adopt rules inconsistent or 
conflicting with Federal authority.
    Finally, I urge the Committee to consider authorizing private 
rights of action against consumer fraud. Most State consumer protection 
statutes permit such private legal actions enabling victims to bring 
legal actions and recover damages, sometimes when State authorities may 
not do so. These initiatives supplement and strengthen State consumer 
protection enforcement efforts. They could similarly enhance and 
enlarge Federal enforcement efforts.
    I appreciate and applaud your and the Administration's dedication 
to protecting consumers in financial transactions. I commend this 
Committee's support of these efforts and offer my continuing 
assistance--along with other State attorneys general.
    Thank you.
                                 ______
                                 

                PREPARED STATEMENT OF EDWARD L. YINGLING
                 President and Chief Executive Officer,
                      American Bankers Association
                             July 14, 2009
    Chairman Dodd, Ranking Member Shelby, and Members of the Committee, 
my name is Edward L. Yingling. I am President and CEO of the American 
Bankers Association (ABA). The ABA brings together banks of all sizes 
and charters into one association. ABA works to enhance the 
competitiveness of the Nation's banking industry and strengthen 
America's economy and communities. Its members--the majority of which 
are banks with less than $125 million in assets--represent over 95 
percent of the industry's $13.5 trillion in assets and employ over 2 
million men and women.
    ABA appreciates how this Committee has responded to the financial 
crisis in a thoughtful, deliberative, and thorough manner. Changes are 
certainly needed, but the pros and cons and unintended consequences 
must be carefully evaluated before dramatic changes--affecting the 
entire structure of financial regulation--are enacted. That is why 
hearings like this one today are so important.
    I am pleased to present the ABA's views today on the proposal to 
create a new consumer regulatory body for financial services that would 
operate separate and apart from any future prudential regulatory 
structure. We believe that a separate consumer regulator should not be 
enacted, and, in fact, is in direct contradiction with an integrated, 
comprehensive approach that recognizes the reality that consumer 
protection and safety and soundness are inextricably bound. Consumer 
protection is not just about the financial product, it is also about 
the financial integrity of the company offering the product. Simply 
put, it is a mistake to separate the regulation of the banking business 
from the regulation of banking products.
    Financial integrity is at the core of good customer service. Banks 
can only operate safely and soundly if they are treating customers 
well. Banks are in the relationship business, and have an expectation 
to serve the same customers for years to come. In fact, 73 percent of 
banks (6,013) have been in existence for more than a quarter-century, 
62 percent (5,090) more than half-century, and 31 percent (2,557) for 
more than a century. These banks could not have been successful for so 
many years if they did not pay close attention to how they serve 
customers. Satisfied customers are the cornerstone of the successful 
bank franchise. The proposal for a new consumer regulator, rather than 
rewarding the good banks that had nothing to do with the current 
problems, will add an extensive layer of new regulation that will take 
resources that could be devoted to serving consumers and make it more 
difficult for small community banks to compete.
    The banking industry fully supports effective consumer protection. 
We believe that Americans are best served by a financially sound 
banking industry that safeguards customer deposits, lends those 
deposits responsibly and processes payments efficiently. Traditional 
FDIC-insured banks--more than any other financial institution class--
are dedicated to delivering consumer financial services right the first 
time and have the compliance programs and top-down culture to prove it. 
Certainly, there were deficiencies under the existing regulatory 
structure. Creating a new consumer regulatory agency, however, is not 
the solution to these problems. It would simply complicate our existing 
financial regulatory structure by adding another extensive layer of 
regulation. There is no shortage of laws designed to protect consumers. 
Making improvements to enhance consumer protection under the existing 
legal and regulatory structures--particularly aimed at filling the gaps 
of regulation and supervision of nonbank financial providers--is likely 
to be more successful, more quickly, than a separate consumer 
regulator.
    Certainly the Members of this Committee should look at this 
consumer agency proposal from the point of view of consumers, who are 
paramount. Later in this testimony, we will discuss how the proposal in 
our opinion is not the best approach for consumers and will actually 
undermine consumer choice, competition, and the availability of credit. 
However, we would also ask you to look at this issue from another point 
of view. While all banks would be negatively impacted, think of your 
local community banks, and credit unions also for that matter. These 
banks never made one subprime loan, and they have the trust and support 
of their local consumers. As Members of this Committee have previously 
noted, these community bankers are already overwhelmed with regulatory 
costs that are slowly but surely strangling them.
    Yet a few weeks ago, these community banks found the Administration 
proposing a potentially massive new regulatory burden that will fall 
disproportionately on them. The largest banks, which will certainly 
bear a significant burden as well, do have economies of scale. 
Nonbanks, the State regulated or unregulated financial entities that 
include those who are most responsible for the crisis, are covered, at 
least in part, by the new agency--and that is positive. However, based 
on history, their regulatory and enforcement burden is likely to be 
much less. In fact, according to the Administration proposal, the new 
agency will rely first on State regulation and enforcement for these 
entities, and yet we all know that the budgets for such State 
regulation and enforcement are completely inadequate to do the job. 
Community banks, on the other hand, are likely to have greatly 
increased fees to fund a system that falls disproportionately and 
unfairly on them.
    In both the Administration's white paper and the legislative 
language submitted by Treasury, it is now clear that the new agency 
would have vast and unprecedented authority to regulate in detail all 
bank consumer products and services. The agency is even empowered, in 
fact encouraged, to create its own standardized products and services--
whatever it decides is ``plain vanilla''--and may compel banks to offer 
them. Even further, the agency is given the power, and basically urged, 
to give the products and services it designs regulatory preference over 
the bank's own products and services. The agency is even encouraged to 
require a Statement by the consumer acknowledging that the consumer 
affirmatively was offered and turned down the Government's product 
first.
    The proposal goes beyond simplifying disclosures--which is needed--
to require that all bank communication with consumers be 
``reasonable.'' This is a term so vague that no banker would know what 
to do with it. But not to worry--the proposal offers to allow thousands 
of banks, and thousands of nonbanks, to preclear all communications 
with the agency.
    All existing consumer laws, carefully crafted over the years by 
Congress, are transferred to the new agency, but they are rendered 
nothing more than floors. The new agency can do almost anything else it 
wants. CRA enforcement is apparently to be increased on these community 
banks, although they already strongly serve their communities. And that 
is not to mention the inherent conflicts, discussed below, that will 
occur between the prudential regulator and the consumer regulator, with 
the bank caught in the middle. All this cost, regulation, conflicting 
requirements, and uncertainty would be placed on community banks that 
in no way contributed to the financial crisis.
    We share the vision that greater transparency, simplicity, 
accountability, fairness, and access can be achieved by establishing 
common standards uniformly applied that reflect how consumers make 
their choices among innovative products and services. But this vision 
cannot be achieved by ignoring the experience of our recent financial 
crisis and failing to directly address those deficiencies that led to 
it. It is now widely understood that the current economic situation 
originated primarily in the unregulated or less regulated nonbank 
sector. For example, the Treasury's plan noted that 94 percent of high 
cost mortgages were made outside the traditional banking system. Many 
of these nonbank providers had no interest in building a long-term 
relationship with customers but, rather, were only interested in 
profiting from a quick transaction without regard to whether the 
mortgage loan or other financial product ultimately performed as 
promised. Thus, an important lesson learned is that certain 
unsupervised nonbank financial service providers and their less 
regulated financiers--the so-called ``shadow banking system''--
undermined the entire system by abusing consumer and investor trust.
    A second lesson learned is that consumer protection and financial 
system safety and soundness are two sides of the same coin. Poor 
underwriting, and in some cases fraudulent underwriting, by mortgage 
brokers, which failed to consider the individual's ability to repay, 
set in motion an avalanche of loans that were destined to default. Good 
underwriting is the essence of both good consumer protection and good 
safety and soundness regulation. Loans that are based on the ability to 
repay protect the institution from losses on the loans and protect 
consumers from taking on more than they can handle. Thus, what is 
likely to protect both the lender and the customer cannot be, nor 
should be, separated.
    These lessons lead to two fundamental building blocks of any reform 
of consumer protection oversight.

    Uniform regulation and uniform supervision of consumer 
        protection performance should be applied to nonbanks as 
        rigorously as it has been applied to the banking industry.

    Regulatory policymakers for consumer protection should not 
        be divorced from responsibility for financial institution 
        safety and soundness.

Separating the safety of the institution from the safety of its 
products means each agency has only half the story. Without building 
upon these keystones, the hope for better transparency, simplicity, 
accountability, fairness, and access will not be realized, and we will 
have missed the opportunity to build a strong consumer protection 
infrastructure across the financial services industry.
    Unfortunately, the Consumer Financial Products Agency (CFPA) 
proposal, in our opinion, contains a number of very serious flaws. The 
proposal:

    Severs the connection between consumer protection and 
        safety and soundness--forcing each side to attempt to work 
        independently and freeing each to contradict the valid goals of 
        the other--to the detriment of consumer choice and safety and 
        soundness.

    Subjects banks to added enforcement, but leaves the ``first 
        line of defense'' for the supervision and examination of 
        nonbanks to the States, which suffer from a lack of resources 
        for meaningful enforcement. This is where the failure of 
        nonbank regulation was most severe under the current system. 
        Once again there would be perverse incentives for financial 
        products to flow out of the closely examined banking sector to 
        those who will skirt the meaning, and even the language, of 
        regulations.

    Excludes competitor financial products from its reach--
        including securities, money market funds, and insurance--thus 
        further belying the promise of uniform or systemic oversight 
        and creating incentives for development of products outside the 
        scope of the CFPA that may be risky for consumers.

    Renders all the consumer laws created by Congress largely 
        moot, as the very broad power of the CFPA would authorize the 
        agency to go well beyond such laws in every instance.

    Imposes Government designed one-size-fits-all products--so-
        called ``plain-vanilla'' products--and places them in a 
        preferred position over products that are designed by the 
        private sector for an increasingly diverse customer base. These 
        Government products would be given regulatory preference over 
        the products designed by the individual banks, and consumers 
        could even be required to sign a notice that they have first 
        turned down the Government's product.

    Requires communications with consumers to be 
        ``reasonable,'' an incredibly vague and unworkable standard 
        that will cause tremendous uncertainty for years to come.

    Basically ends uniform national standards, quickly creating 
        a patchwork of expensive and contradictory rules that will 
        create uncertainty, increase consumer costs, and lead to 
        constant litigation.

    Saddles providers, and, indirectly, consumers with a new 
        regime of fees to fund yet another agency.

    Will inhibit innovation and competition, limit consumer 
        choices, and lessen the availability of credit.

    To be successful in the regulation, examination, and enforcement of 
nonbanks, the agency will have to be very large and have a significant 
budget. We believe a better course exists. ABA offers to work with the 
Administration and the Congress to achieve meaningful regulatory reform 
to improve consumer protection and preserve financial system integrity. 
As the crisis has proven, a strong banking industry is indispensable to 
a strong economy; and a sound banking system is the greatest single 
protection of consumer access to financial services fairly delivered. 
Traditional banking is back in style, but that does not mean 
improvements cannot be made. We pledge to work with this Committee to 
find the best solutions to assure that consumers have the protection 
they deserve for any financial product.
    I would like to further discuss several points today:

    Consumer regulation should not be separated from safety and 
        soundness regulation.

    The key focus of change should be on closing existing gaps 
        in supervisory oversight across the financial institution 
        marketplace, not on adding yet another vast layer.

    The proposal would give the agency unprecedented authority 
        to control the products and services offered by banks and make 
        all current consumer laws mere floors.

    The undermining of uniform national standards will increase 
        costs and cause litigation and tremendous uncertainty.

    The question of how to pay for this new agency was left 
        very vague and raises significant issues.

    The proposal will inhibit innovation and competition, limit 
        consumer choices, and dramatically lessen the availability of 
        credit.

    The regulatory authority to address consumer concerns is 
        already there for highly regulated banks, particularly with the 
        new focus on unfair and deceptive practices. However, 
        improvements can be made, and ABA will work with the Committee 
        to make such improvements.

    I will address each of these points in turn.
Consumer Regulation Should Not Be Separated From Safety and Soundness 
        Regulation
    Consumer regulation and safety and soundness regulation are two 
sides of the same coin. Neither one can be separated from the other 
without negative consequences; nor should they be separated. An 
integrated and comprehensive regulatory approach is the best method to 
protect consumers and protect the safety and soundness of the financial 
institution. While certainly improvements can be made, the current 
regulatory structure applied to banks provides an appropriate framework 
for effective regulation for both consumer protection and bank safety 
and soundness. As I note throughout this testimony, that same framework 
was virtually nonexistent for nonbank providers of financial products.
    FDIC Chairman Sheila Bair, testifying recently before Congress, 
summarized the synergies between both these elements:

        The current bank regulation and supervision structure allows 
        the banking agencies to take a comprehensive view of financial 
        institutions from both a consumer protection and safety and 
        soundness perspective. Banking agencies' assessments of risks 
        to consumers are closely linked with and informed by a broader 
        understanding of other risks in financial institutions. 
        Conversely, assessments of other risks, including safety and 
        soundness, benefit from knowledge of basic principles, trends, 
        and emerging issues related to consumer protection. Separating 
        consumer protection regulation and supervision into different 
        organizations would reduce information that is necessary for 
        both entities to effectively perform their functions. 
        Separating consumer protection from safety and soundness would 
        result in similar problems. \1\
---------------------------------------------------------------------------
     \1\ Bair, Sheila C., ``Modernizing Bank Supervision and 
Regulation'', testimony before the Committee on Banking, Housing, and 
Urban Affairs, U.S. Senate, March 19, 2009.

    Attempts to separate out consumer protection from safety and 
soundness will lead to conflicts, duplication and inconsistent rules, 
which will likely result in finger-pointing as inevitable problems 
arise. What are banks to do when the consumer and safety and soundness 
regulators disagree, as they inevitably will?
    Almost every consumer bank product or service has both consumer 
issues and safety and soundness issues that need to be balanced and 
resolved. It is important to remember that one person's deposit funds 
another person's loan. It makes little sense to regulate the terms, 
conditions and prices of deposit products or loan products separately 
from the business aspects of a bank's fundamental process--turning 
deposits into loans.
    As I mentioned at the outset, the very nature and application of 
good underwriting standards is by definition both a consumer protection 
and a safety and soundness issue. A second simple example is check hold 
periods. Customers would like the shortest possible holds, but this 
desire needs to be balanced with complex operational issues in check 
clearing, and with the threat of fraud, which costs banks--and 
ultimately consumers in the form of increased costs that are passed 
on--billions of dollars.
    Similarly, the Electronic Funds Transfer Act contains numerous 
important consumer protections, developed and modified over the years 
based on experience, new technologies, and new types of fraud. 
Separating the consumer consideration from the safety and soundness, 
antifraud, and systems considerations would certainly seem unworkable.
    Banks also have extensive duties under ``know your customer'' 
regulations designed to fight money laundering and terrorism. These 
critical regulations must be coordinated with consumer and safety and 
soundness regulation. A simple example is in the account opening 
process, which is subject to extensive consumer and ``know your 
customer'' regulations. It would be unworkable to separate these as 
well.
    And what about employee training? Banks spend billions of dollars 
training employees to comply with the heavy regulations to which banks 
are subjected. Examiners examine banks for their training programs. 
Front-line employees must have training in numerous consumer, safety 
and soundness, and antimoney laundering regulations. ABA offers dozens 
of courses in compliance for front-line employees. How would such 
training be effectively coordinated between agencies with differing 
views and objectives? Is the new agency going to examine banks and 
nonbanks equally for compliance training? It cannot be left to the 
States, where there is little precedent for extensive examining for 
compliance training outside banking.
    Rather than take to heart the lesson of the inseparability of 
safety and soundness and consumer protection, the Administration's 
proposal creates a different form of regulatory fragmentation along the 
fault lines of the jurisdiction of a new bureaucracy. A look at the 
proposal's enumeration of existing rule-making authorities to be 
transferred--mostly from the Federal Reserve Board--to the CFPA reveals 
an assortment of likely interagency conflicts that will generate future 
regulatory gaps rather than bridge the current ones.
    For instance, consumer privacy is placed in the CFPA, but identity 
theft protection is left out. The Electronic Funds Transfer Act is 
assigned to CFPA, but the rules for clearing electronic check images 
that make funds available for customers to access with their debit 
cards remains with the Federal Reserve. Truth in Lending Act rule-
making over mortgages is assigned to the CFPA, but flood insurance 
coverage (FDPA) and private mortgage insurance (HOPA) laws protecting 
consumers who obtain mortgages remain with the banking agencies. These 
and other anomalies in the Administration proposal will set true 
consumer protection reform on the back-burner as countless hours and 
dollars are wasted grappling with the regulatory morass that will 
result from this ill-advised structural reform. The 30-year investment 
in coordinated supervision (FFIEC) will be washed away and replaced by 
interagency conflicts that are hardwired in the new bureaucracy without 
a means to resolve them.
    Finally, we are very concerned about conflicts over CRA. The 
banking industry has worked hard in serving its communities and in 
complying with CRA. We agree that CRA has not led to material safety 
and soundness concerns, and that bank CRA lending was prudent and safe 
for consumers. That is not to say that there is no debate about the 
correct balance between outreach and sound lending. However, that 
debate--that tension--is resolved now in a straightforward manner 
because the same agency is in charge of CRA and safety and soundness. 
To separate the two is a recipe for conflicting regulatory demands, 
with the bank caught in the middle.
    In the above examples and in many other areas, two different 
regulators--one focused on consumers and another focused on safety and 
soundness--will almost certainly come up with two different and 
conflicting rules and answers that, when added together, only create 
new costs, overlap and duplication, as well as an untenable situation 
for the financial institution.
The Key Focus of Change Should Be on Closing Existing Gaps in 
        Regulation, Not on Adding Yet Another Bureaucratic Layer
    The biggest failures of the current regulatory system, including 
consumer protection failures, have not been in the regulated banking 
system, but in the unregulated or weakly regulated sectors. \2\ As 
Members of Congress from both parties have noted, to the extent that 
the system did work, it is because of prudential regulation and 
oversight of banking firms. While improvements within the banking 
regulatory process can certainly be made, the most pressing need is to 
close the regulatory gaps outside the banking industry through better 
supervision and regulation--both on the consumer protection and safety 
and soundness sides of the coin.
---------------------------------------------------------------------------
     \2\ Before the recent crisis, a coalition of 46 State Attorneys 
General recognized that based on consumer complaints received, as well 
as investigations and enforcement actions undertaken by them, predatory 
lending abuses were largely confined to the subprime mortgage lending 
market and to nondepository institutions. Almost all of the leading 
subprime lenders were mortgage companies and finance companies, not 
banks or direct bank subsidiaries. We stress the past tense, because 
their lack of financial robustness assured that they would not be 
around to answer for their consumer protection misdeeds.
---------------------------------------------------------------------------
    Take the case of independent mortgage brokers and other nonbank 
originators. Again, as the Administration's own proposal States, 94 
percent of the high cost mortgages occurred outside the regulated 
banking sector. And it is likely that an even higher percent of the 
most abusive loans were made outside our sector. In contrast to banks, 
these nonbank firms operate in a much less regulated environment, 
generally without regulatory examination of their conduct, without 
strong capital provisions, and with different reputational concerns. 
They have not been subjected to the breadth of consumer protection laws 
and regulations with which banks must comply. Equally important, a 
supervisory system does not exist to examine them for compliance even 
with the comparatively few laws that do apply to them. In addition, 
independent brokers typically do not have long-term business 
relationships with their customers. Instead, they originate a loan, 
sell the loan to a third party, and collect a fee. This results in a 
very different set of incentives and can and does work at cross-
purposes with safe and sound lending practices. Proposals are also 
being offered with respect to credit derivatives, hedge funds, and 
others, and the ABA supports closing these regulatory gaps.
    In stark contrast to the weakness of oversight or examination of 
consumer compliance issues for most other financial service providers, 
bank regulators have an extraordinarily broad array of tools at their 
disposal to assure both consumer protection and safety and soundness. 
Banks are regularly examined for compliance with consumer regulations, 
and regulators devote significant resources to supervision and training 
in consumer compliance issues. \3\ These enforcement and supervisory 
options are coordinated through the Federal Financial Institutions 
Examination Council (FFIEC), \4\ which sets standards for both consumer 
and safety and soundness examination. \5\ The need is for the same 
banklike structure, supervision, and examination to be applied to 
nonbank financial service providers.
---------------------------------------------------------------------------
     \3\ Bank regulators are just as concerned about consumer 
protection as are law enforcement authorities, but the bank regulators 
are better able to achieve their objectives through an enormous array 
of enforcement and supervisory options that allow them to meet their 
broader mandate for law enforcement as well as financial stability. 
These range from the behind-the-scenes citation in an exam report as a 
matter requiring attention to the public actions of issuing a cease-
and-desist or civil money penalty order or even closing a bank and 
imposing lifetime bans from participating in banking activities. Bank 
examiners can direct a bank to stop taking an action or to take some 
different action. These tools are most appropriately and effectively 
exercised by one regulator that is focused on achieving the balance 
described above.
     \4\ The FFIEC, represented by the Federal Reserve, OCC, FDIC, OTS, 
and NCUA, is charged with prescribing ``uniform principles and 
standards for the Federal examination of financial institutions'' 
designed to ``promote consistency in such examination and to insure 
progressive and vigilant supervision.''
     \5\ In addition, the FFIEC agencies have set forth common 
standards for determining a bank's rating for consumer compliance 
performance. This rating stands as an identifiable grade, separate and 
apart from the CAMEL rating, so that boards of directors and regulators 
can hold management directly accountable for the quality of their 
institution's consumer compliance management programs and performance. 
Moreover, the FFIEC's agency members have endorsed top-down consumer 
compliance programs expected of banks that contain system controls, 
monitoring of performance, self-evaluation, accountability to senior 
management and the board, self-correcting processes, and staff 
training.
    The breadth of this supervisory authority is extensive. Consumer 
compliance management plays a role in every operational aspect where a 
bank comes into contact with customers--from the marketing of products, 
through account opening and credit Administration, to handling personal 
information and monitoring for financial crime. Further, banks hold 
their employees accountable for meeting their obligations. Every bank 
invests heavily in consumer compliance with dedicated compliance 
professionals who take great pride and apply tremendous effort to 
assure that consumers are being treated fairly.
---------------------------------------------------------------------------
    There obviously have been consumer concerns with respect to banks--
we certainly know of this Committee's concerns with credit card 
practices--but if the great majority of abuses occurred outside the 
banking industry (with toxic subprime mortgages, for example), why 
would Congress create a new regulatory agency that will end up focusing 
its resources predominately on banks and not nonbanks? We see that the 
intention is to have regulations that cover most providers. However, 
regulation without enforcement can be worse than no regulation in that 
it gives rogue institutions a veneer of legitimacy. All evidence tells 
us that the States will not have the resources to enforce all these 
regulations. We have, frankly, little confidence that the CFPA will 
apply equal examination and enforcement on nonbank lenders and others, 
or that it will have the resources to do so. This concern is 
exacerbated by the incredibly vague funding provisions in the 
legislative language. How big is this agency to be? If it is not large, 
it cannot conceivably enforce its regulations on the thousands of 
institutions it is supposed to regulate. If it is big, how is it to be 
paid for?
The Proposal Gives the CFPA Unprecedented Authority To Control the 
        Products and Services Offered by Banks
    As Stated earlier, the proposal calls for an unprecedented 
delegation of legislative authority to the agency to control the way 
consumer products and services are designed, developed, marketed, 
delivered, and priced by banks and other financial service providers. 
In fact, the agency is encouraged to design products and services, 
mandate that banks offer them, regulate the products not designed by 
the agency more heavily than the Government product, and require 
consumers to sign a document that they do not want the Government-
designed product. The agency can even heavily regulate compensation 
systems under very open-ended authority. All communications to 
consumers about products and services would have to be ``reasonable,'' 
a vague and unworkable standard if there ever was one. This would 
appear to give the agency an incredible amount of control over banks' 
and others' products without any real legislated standards. Simply put, 
this would appear to be the most powerful agency ever created in that 
it has almost unlimited power to regulate and even mandate the products 
offered by the regulated.
    It also would very much undermine incentives for innovation and 
better customer choice. Certainly banks and nonbanks would be less 
likely to create new products or consumer enhancements. Any deviations 
from the Government-designed product would be subject to additional 
regulation and clearances. Coupled with the prohibition that it is 
unlawful ``to advertise, market, offer, [or] sell . . . a financial 
product or service that is not in conformity with the [Act],'' the 
Administration's proposed new structure places banks and nonbanks alike 
at extreme risk when innovating and will chill efforts to respond to 
consumer demand for beneficial products and services.
    Proponents of the agency have regularly used the catch-phrase that 
we regulate toasters to keep them from blowing up (through the Consumer 
Product Safety Commission), but we don't regulate mortgages that can 
blow up consumers' finances. There are a number of problems with this 
analogy, including that mortgages are regulated and that, unlike a 
toaster with electrical problems, a financial product may often be a 
problem or not depending on to whom and how it is offered. More 
fundamentally, unlike the proposed CFPA, the Consumer Product Safety 
Commission is not set up to design a toaster; mandate that anyone 
selling toasters offer the Government toaster; and furthermore, to 
adjust regulation, disclosures, and liability to put the Government 
toaster in a preferred position. Of course such a Government toaster 
could not meet the multitude of preferences of single people on the 
run, small families, large families, those with small kitchens, those 
with large kitchens, those that just want toast, those that just want 
toast and English muffins, and those that want a multifunctional 
toaster oven, etc. And, of course, such a Government plain-vanilla 
toaster with such built in advantages would discourage innovation in 
the creation of new options for consumers and competition in the 
offering of alternatives.
    In many cases, the Government financial product might not fit with 
the institution's business plan. Niche banks, which serve important 
constituencies, such as small business owners or low income 
communities, would be required to offer products that simply do not 
fit. There will even be safety and soundness issues. For example, some 
banks that maintain all their loans in portfolios do not, and should 
not, hold 30-year fixed ``plain-vanilla'' mortgages.
    Furthermore, the incredible authority given to the proposed agency 
means that all the consumer laws enacted and modified by Congress over 
the years, which have resulted in hundreds and hundreds of pages of 
regulations, are to a large degree moot. They are mere floors; and, in 
fact, floors with holes in them. This new agency can do pretty much 
anything it wants in any of the areas specifically covered by the laws, 
and any other area relating to consumer financial products for that 
matter. In the final analysis, the basic premise of the 
Administration's proposal is to invite Congress to abdicate its 
legislative responsibilities to address the ever-evolving financial 
marketplace and delegate plenary discretion to a seemingly all-knowing 
and all-powerful agency.
    For example, this Congress just passed an extensive, tough new law 
on credit cards. Combined with the previous law, this creates a 
comprehensive congressionally crafted set of rules governing cards. Yet 
the proposed CFPA legislation would grant the agency authority to do 
practically anything it wants in the credit card area with respect to 
terms, delivery, disclosures, compensation and even mandated products, 
as long as it does not do less than the new card law. One wonders why 
Congress undertook such extensive reform of the credit card law if it 
was going to give almost open-ended authority to the CFPA shortly 
thereafter.
The Undermining of National Standards Will Increase Costs and Cause 
        Tremendous Litigation and Uncertainty
    The Commerce Clause of the Constitution was designed to allow 
products and services to flow freely across State lines. It is hard to 
think of an area of our economy where this should be encouraged more 
than in financial services, where the market for products from loans to 
deposits is national in scope. With changes in technology--such as the 
Internet--and the incredible mobility of our society, the free flow of 
financial services is even more pronounced. Furthermore, the National 
Bank Act, enacted during the Civil War, was created to provide for a 
national bank system that would not be subject, in its basic bank 
functions, to State laws. This national banking system, as part of the 
dual banking system, has served us well. However, a national system 
cannot function effectively if all national bank consumer products are 
subject to 50 different State laws. As we have noted, the safety and 
soundness regulator will not be able to do its job if it has no 
authority over consumer laws, much less if that authority is held by 
not only the Federal consumer regulator, but every State regulator, 
legislature, and attorney general as well.
    The multitude of rules--and do not underestimate how incredibly 
complex they would be--would subject banks to tremendous legal costs in 
order to comply, and also to deal with constant litigation. Every 
product, form, and customer communication would have to be checked and 
rechecked regularly for compliance with changing laws in all 50 States. 
Customers will move to other States regularly, and the bank would have 
to assume its customers could be in any State.
    There are many areas where problems will arise. ATM cards could be 
subject to different rules by State, resulting in their not being 
useable in every State at great inconvenience to travelers, who could 
be left stranded without funds. Online banking could be affected as 
differing rules would apply, depending on where the customer is 
located.
    Costs to consumers would increase as banks try to address all the 
different rules. Innovation would be discouraged as any changes would 
have to be tested against all the different State rules. The European 
Union is working to develop common rules in order to have greater 
efficiencies and innovation, and yet the Administration's proposal 
would go in exactly the opposite direction--toward balkanization. From 
a consumer's standpoint, such regulatory complexity will be translated 
to account or loan agreement legalese to rightfully protect the bank 
from elaborate and conflicting requirements--all to the detriment of 
simplifying consumer products and making transactions more transparent. 
Proponents of the proposal talk about providing one page of simple 
disclosures--a goal much to be sought; but how can such a goal be 
achieved if there would have to be page after page of disclosures to 
cover all the State law differences?
The Question of How To Pay for This New Agency Was Left Very Vague and 
        Raises Significant Issues
    To discharge its powers consistently over both banks and nonbanks, 
this new agency will have to be extraordinarily large. It will need to 
regulate, and in many cases examine, not just banks and credit unions, 
but finance companies, payday lenders, mortgage brokers, mortgage 
bankers, appraisers, title insurers and many others--apparently even 
pawn shops.
    However, under the proposal, no one has any idea how large this 
agency is to be. If it is small, its focus will inevitably be on the 
already regulated banks, even though, as already noted, 94 percent of 
the high cost mortgages came from outside banks. That would be 
incredibly unfair and counterproductive. To do its job as advertised by 
proponents, this agency would need to ensure that the thousands of 
nonbanks under its jurisdiction are reporting, examined, and subject to 
enforcement in the same way banks will be. While the States are 
supposed to be a front line of defense, it is not credible to argue 
that States will have the budgets to implement such reporting, 
examination, and enforcement even to a minimal degree. Therefore, the 
new agency will need to do it, or its whole rationale falls apart.
    Where is this agency's budget to come from? Apparently, the budget 
is to be based on fees on financial service products. The Consumer 
Products Safety Commission, said to be the model for the CFPA, is not 
funded by toy or appliance manufacturers, but rather by an 
appropriation. However, if the CFPA is to accomplish its goals and to 
effectively regulate nonbanks, it would need to be considerably bigger 
than the Consumer Products Safety Commission. Banks are already heavily 
burdened with funding their regulators, directly and indirectly (e.g., 
deposit insurance premiums fund the FDIC's regulatory costs). These 
costs cannot simply be split apart to pay for the banks' part of the 
consumer regulator, as the tremendous efficiencies that result from 
combining safety and soundness and consumer regulation will be lost.
    How is the agency to collect fees from nonbank providers? On what 
basis? How is it going to know about new entrants, unless they are 
required to register with the agency? As new types of providers spring 
up, how are they to be incorporated? There will, in fact, have to be a 
large bureaucracy just to collect the fees. Of course, these new costs, 
basic economics tells us, will ultimately be passed on to the users of 
the products, and so consumers will end up paying for this large new 
agency.
    Obviously, these are very difficult questions that were not 
addressed in the Administration's proposal, but which should be 
answered before proceeding. Given the incredibly broad authority and 
ambitions of the proposal, it is impossible for Congress to judge what 
it will, in fact, do without knowing the size it is going to be.
The Proposal Will Inhibit Innovation and Competition, Limit Consumer 
        Choices, and Dramatically Lessen the Availability of Credit
    The proposal will, first, create tremendous uncertainty in the 
financial community about what the rules will soon be. The entire body 
of rules that has governed the development, design, sales, marketing, 
and disclosure of all financial products would be subject to change, 
and be expected to change dramatically in many instances. When 
developing and offering products, firms rely on the basic rules of the 
road, knowing that they are subject to careful changes from time-to-
time. Now there would be no certainty. This lack of certainty will 
cause firms to pull back from developing new products and new delivery 
systems. And it will chill lending, as firms will not know what the 
rules may be when they try to collect the loan a few years out.
    This problem should not be underestimated. Why design a new product 
if you do not know what regulatory rules will be applied to it? Why 
stretch to make a loan to a deserving consumer when it may be 
determined after the fact that your stretch terms and disclosures were 
unreasonable and the contract is therefore unenforceable. Everyone will 
be on hold, to some degree, waiting for the development, which will 
take years of regulatory action and judicial interpretation, of an 
entirely new roadmap.
    What makes this situation particularly difficult is that the 
proposed legislation, and the narrative provided with it, contains 
vague terminology that has little or no legal history. What on earth 
does ``reasonable'' mean for disclosures and communications? The legal 
concept of ``unfair and deceptive,'' developed over many years, is also 
changed. It will take years for these new legal concepts to be defined 
fully by the courts. In the meantime, lenders will have no idea what 
their potential legal rights and liabilities will be.
    Second, you have the huge cost for legal and other work for redoing 
the basis on which products are offered today. The current design of 
many products and disclosures is thrown into question by the concepts 
of this proposal. This is a cost that, again, will ultimately be borne 
in large part by consumers.
    For example, credit card companies are in the process of spending 
hundreds of millions of dollars to change their systems, their 
disclosures, their risk models, and basic parts of the product to meet 
the new regulations and law. If this proposal is enacted, given the 
testimony of Treasury, it seems quite likely that additional 
significant changes will be made in regulations. How is the financial 
industry to plan for such uncertainty?
    Third, the regime surrounding Government designed products will 
undermine innovation and the availability of credit. As noted 
previously, the Government designed products, given regulatory 
advantages, will undermine the incentive to develop new products. If an 
institution develops an idea that could enhance the basic product for 
all consumers or a subset of consumers, adding it will cause the 
product to no longer be ``Government approved'' and will subject it to 
discriminatory regulation and legal uncertainty. Why bother? Ideas that 
could give consumers benefits or lower costs will never see the light 
of day.
    The impact on lending will be profound. First, loan adjustments, 
which are made constantly in today's world, to fit a borrower's needs 
or allow the loan to be made simply will not happen. Those most hurt 
will be lower income consumers. Furthermore, the very large uncertainty 
and potential legal liabilities will cause less credit to be available, 
at the very time when credit is already scarce. Our Government is in 
danger of designing policies that are absolutely contradictory--
encouraging more credit to be available, while at the same time, 
through the President's proposal, designing a legal morass that will 
have a dramatic effect in lowering the availability of credit.
Improvements Can Be Made
    ABA agrees that improvements can and should be made to protect 
consumers. The great majority of the problems occur outside the highly 
regulated traditional banks, but there are legitimate issues relating 
to banks as well. The ABA is committed to working with Congress to 
address these concerns and implement improvements. In that regard, let 
me outline some concepts that should be considered.

    Enhance capabilities to apply unfair and deceptive 
        practices: As you know, the Federal Reserve Board and the OTS 
        have long had a very powerful tool called unfair and deceptive 
        practices or UDAP. This had not been used as a broad regulatory 
        tool for banks prior to the extensive credit card rule. 
        However, use of this authority would address many of the issues 
        raised. The UDAP authority is already in place. The ABA 
        supports legislation the House passed last year to extend this 
        authority in a coordinated fashion to the OCC and FDIC. The FTC 
        has this authority for nonbanks, but there have been severe 
        constraints in using it. Congress should work to give the FTC 
        the capability and funding to apply it to nonbanks much more 
        aggressively.

    Improve disclosure, using consumer testing: Disclosures can 
        and should be improved, although it will not be easy. Current 
        disclosures are by-and-large driven by lawyers and the need to 
        cover the many legal complexities involved to protect against 
        the real threat of litigation. Congress, the regulators, the 
        industry, and consumer advocates need to overcome this bias. 
        Progress has been made through the insights gained from 
        consumer testing. Simple disclosures, perhaps in combination 
        with larger, separate ones required for legal purposes, should 
        be made in ways that most benefit consumers. Concepts gleaned 
        from behavioral science relating to how consumers really react 
        should be included in disclosure design.

    Enable basic products without stifling competition, 
        innovation and consumer choice: In some cases financial 
        products have become overly complex and difficult, if not 
        impossible, for consumers to understand. This is not unusual in 
        our economy as many product offerings--from consumer 
        electronics, to telephone plans, to insurance--have become very 
        complex. Often this complexity results from efforts to add 
        options that consumers may want. Sometimes, as we all know, the 
        complexity induces consumers to buy products or enhancements 
        that are not right for them or for which they pay too much. 
        However, as discussed previously, ABA believes the answer is 
        not to have the Government design products, mandate that they 
        be offered, and give them an advantage over private sector 
        products. Nevertheless, there is a need to have product options 
        that are basic and easily compared, and to have, at the same 
        time, a flexible, private-sector driven system that does not 
        stifle competition and innovation. For example, the private 
        sector, perhaps through the ABA as the industry's trade 
        association, could consult with the regulators, Congress, and 
        consumer advocates to develop basic product forms that could be 
        easily compared.

    Develop centralized call centers for consumer complaints: 
        It is difficult, perhaps impossible, for many consumers to 
        understand whom they should call in the Government to register 
        concerns or complaints. ABA supports a centralized call center 
        for consumers that could forward complaints to the right agency 
        and serve as a coordinated information source.

    Require regular reports to Congress: The structure of 
        consumer regulation within agencies can be reviewed and 
        strengthened. Regular reports to Congress could be required.

    Empower the systemic risk oversight regulator to look 
        specifically at consumer issues that pose systemic concerns: 
        One clear lesson from the mortgage crisis is that consumer 
        issues can raise systemic issues. If a systemic regulator had 
        been in place, we would hope that it would have identified the 
        rapid growth of subprime lending as a problem that had to be 
        addressed well before it grew to such a hurricane force. The 
        systemic regulator could be given the power to require 
        regulatory agencies to address in a timely manner systemic 
        consumer issues.
Conclusion
    The ABA has very serious concerns about the proposed CFPA and the 
authorities it is to be given under the President's proposal. We 
believe it will result in a huge regulatory burden, particularly for 
community banks, while nonbanks, which are primarily responsible for 
the crisis, will have ineffective enforcement.
    Healthy, well-regulated banks have already been hurt deeply by 
unscrupulous players and regulatory failures. They watched mortgage 
brokers and others make loans to consumers that a good banker just 
would not make. They watched local economies suffer when the housing 
bubble burst. Now they face the prospect of another burdensome layer of 
regulation. It is simply unfair to inflict another burden on these 
banks that had nothing to do with the problems that were created. The 
separate consumer regulator will only add costs to these banks, 
particularly community banks, which already suffer under the enormous 
regulatory burden placed on them. As you contemplate major changes in 
regulation--and change is needed--I urge you to ask this simple 
question: How will this change impact those thousands of banks that did 
not create the problem and are making the loans needed to get our 
economy moving again? Another question that should be asked is: How 
will this proposal really assure strong enforcement and examination of 
the nonbanks?
    Furthermore, the proposal will dramatically undermine incentives to 
innovate and to offer new products from which consumers will benefit. 
Competition will be lessened, as the Government designed products 
limits avenues for competition. Finally, the availability of credit 
will be reduced, particularly in the short run, because of great 
uncertainty about the new, evolving rules and the increased legal 
liability.
    As outlined above, we believe that separating safety and soundness 
regulation from consumer regulation would be a mistake. Nevertheless, 
there are important improvements that can and should be made in the 
consumer arena, and we will work with Members of this Committee to make 
such improvement in this arena, as well as on the many other important 
issues in regulatory reform.
                                 ______
                                 

                PREPARED STATEMENT OF TRAVIS B. PLUNKETT
                         Legislative Director,
                     Consumer Federation of America
                             July 14, 2009
Summary
    Thank you, Chairman Dodd, Ranking Member Shelby, and Members of the 
Committee. My name is Travis Plunkett and I am the Legislative Director 
of the Consumer Federation of America (CFA). \1\ I am pleased to be 
able to offer the views of leading consumer, community, and civil 
rights groups \2\ in support of the establishment of a Consumer 
Financial Protection Agency, as proposed first by Senators Durbin, 
Schumer, and Kennedy and most recently by President Obama. In addition 
to CFA, I am testifying on behalf of, Americans for Fairness in 
Lending, \3\ Americans for Financial Reform, \4\ A New Way Forward, \5\ 
the Association of Community Organizations for Reform Now (ACORN), \6\ 
Center for Responsible Lending, \7\ Community Reinvestment Association 
of North Carolina, \8\ Consumer Action, \9\ Consumers Union, \10\ 
Demos, \12\ Florida PIRG, \13\ The International Brotherhood of 
Teamsters, \14\ National Association of Consumer Advocates, \15\ 
National Community Reinvestment Coalition, \16\ National Consumer Law 
Center (on behalf of its low-income clients), \17\ National Consumers 
League, \18\ National Fair Housing Alliance, \19\ Neighborhood Economic 
Development Advocacy Project, \21\ Public Citizen, \22\ Sargent Shriver 
National Center on Poverty Law, \23\ Service Employees International 
Union, \24\ USAction, \25\ and U.S. PIRG. \26\
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     \1\ The Consumer Federation of America is a nonprofit association 
of over 280 proconsumer groups, with a combined membership of 50 
million people. CFA was founded in 1968 to advance consumers' interests 
through advocacy and education.
     \2\ The testimony was drafted by Travis Plunkett and Jean Ann Fox 
of the Consumer Federation of America, Gail Hillebrand of Consumers 
Union, Lauren Saunders of the National Consumer Law Center, and Ed 
Mierzwinski of U.S. PIRG.
     \3\ Americans for Fairness in Lending works to reform the lending 
industry to protect Americans' financial assets. AFFIL works with its 
national Partner organizations, local ally organizations, and 
individual members to advocate for reform of the lending industry.
     \4\ Americans for Financial Reform is a coalition of close to 200 
national State and local organizations representing people from every 
walk of life, including homeowners, shareowners, workers, and low and 
moderate income community residents dedicated to making sure that the 
``main street'' voice is heard in the debate on financial regulatory 
reform.
     \5\ A New Way Forward is a movement of citizens, started in March 
2009. It harnesses the voice of citizens to stop the excessive and 
dangerous partnership between Government and the largest institutions 
of the financial sector in order to reinvigorate the public sphere. 
ANWF organizers are letting the world know that the way Congress is 
handling the financial crisis rewards the wrong people, is likely to 
fail, and doesn't get at the core structural problems in our economy. 
ANWF helped organize 60 protests ad 25 educational forums in the past 4 
months.
     \6\ ACORN, the Association of Community Organizations for Reform 
Now, is the Nation's largest community organization of low- and 
moderate-income families, working together for social justice and 
stronger communities.
     \7\ The Center for Responsible Lending (CRL) is a not-for-profit, 
nonpartisan research and policy organization dedicated to protecting 
homeownership and family wealth by working to eliminate abusive 
financial practices. CRL is an affiliate of Self-Help, which consists 
of a credit union and a nonprofit loan fund focused on creating 
ownership opportunities for low-wealth families, primarily through 
financing home loans to low-income and minority families who otherwise 
might not have been able to purchase homes. Self-Help has provided over 
$5 billion in financing to more than 60,000 low-wealth families, small 
businesses and nonprofit organizations in North Carolina and across the 
United States. Another affiliate, Self-Help Credit Union, offers a full 
range of retail products, and services over 3,500 checking accounts and 
approximately 20,000 other deposit accounts, and recently inaugurated a 
credit card program.
     \8\ The Community Reinvestment Association of North Carolina's 
mission is to promote and protect community wealth through advocacy, 
research, financial literacy and community development.
     \9\ Consumer Action is a national nonprofit education and advocacy 
organization serving more than 9,000 community based organizations with 
training, educational modules, and multilingual consumer publications 
since 1971. Consumer Action's advocacy work centers on credit, banking, 
and housing issues.
     \10\ Consumers Union is a nonprofit membership organization 
chartered in 1936 under the laws of the State of New York to provide 
consumers with information, education and counsel about good, services, 
health and personal finance, and to initiate and cooperate with 
individual and group efforts to maintain and enhance the quality of 
life for consumers. Consumers Union's income is solely derived from the 
sale of Consumer Reports, its other publications and from noncommercial 
contributions, grants and fees. In addition to reports on Consumers 
Union's own product testing, Consumer Reports with more than 5 million 
paid circulation, regularly, carries articles on health, product 
safety, marketplace economics and legislative, judicial, and regulatory 
actions which affect consumer welfare. Consumers Union's publications 
carry no advertising and receive no commercial support.
     \12\ Demos is a New York City-based nonpartisan public policy 
research and advocacy organization founded in 2000. A multi-issue 
national organization, Demos combines research, policy development, and 
advocacy to influence public debates and catalyze change.
     \13\ Florida PIRG takes on powerful interests on behalf of 
Florida's citizens, working to win concrete results for our health and 
our well-being. With a strong network of researchers, advocates, 
organizers and students across the State, we stand up to powerful 
special interests on issues to stop identity theft, fight political 
corruption, provide safe and affordable prescription drugs, and 
strengthen voting rights.
     \14\ The Teamsters union represents more than 1.4 million workers 
in North America. Teamsters work from ports to airlines, from road to 
rail, from food processing to waste and recycling, from manufacturing 
to public services. The Union fights to improve the lives of workers, 
their families and their communities across the global supply chain.
     \15\ The National Association of Consumer Advocates, Inc., is a 
nonprofit 501(c)(3) organization founded in 1994. NACA's mission is to 
provide legal assistance and education to victims of consumer abuse. 
NACA, through educational programs and outreach initiatives protects 
consumers, particularly low income consumers, from fraudulent, abusive 
and predatory business practices. NACA also trains and mentors a 
national network of over 1400 attorneys in representing consumers' 
rights.
     \16\ National Community Reinvestment Coalition is an association 
of more than 600 community-based organizations that promotes access to 
basic banking services, including credit and savings, to create and 
sustain affordable housing, job development, and vibrant communities 
for America's working families.
     \17\ The National Consumer Law Center, Inc. is a nonprofit 
corporation, founded in 1969, specializing in low-income consumer 
issues, with an emphasis on consumer credit. On a daily basis, NCLC 
provides legal and technical consulting and assistance on consumer law 
issues to legal services, Government, and private attorneys 
representing low-income consumers across the country. NCLC publishes 
and regularly updates a series of 16 practice treatises and annual 
supplements on consumer credit laws, including Truth In Lending, Cost 
of Credit, Consumer Banking and Payments Law, Foreclosures, and 
Consumer Bankruptcy Law and Practice, as well as bimonthly newsletters 
on a range of topics related to consumer credit issues and low-income 
consumers. NCLC attorneys have written and advocated extensively on all 
aspects of consumer law affecting low income people, conducted training 
for tens of thousands of legal services and private attorneys on the 
law and litigation strategies to deal predatory lending and other 
consumer law problems, and provided extensive oral and written 
testimony to numerous Congressional committees on these topics. NCLC's 
attorneys have been closely involved with the enactment of the all 
Federal laws affecting consumer credit since the 1970s, and regularly 
provide comprehensive comments to the Federal agencies on the 
regulations under these laws.
     \18\ The National Consumers League has been fighting for the 
rights of consumers and workers since its founding in 1899. The League 
was instrumental in seeking a safety net for Americans during the Great 
Depression and in the New Deal years, writing legislation to gain 
passage of minimum wage laws, unemployment insurance, workers 
compensation, social security and health care programs like medicare 
and medicaid. The League continues to champion the fair treatment and 
protections for all consumers in today's marketplace.
     \19\ Founded in 1988, the National Fair Housing Alliance is a 
consortium of more than 220 private, nonprofit fair housing 
organizations, State and local civil rights agencies, and individuals 
from throughout the United States. Headquartered in Washington, DC, the 
National Fair Housing Alliance, through comprehensive education, 
advocacy and enforcement programs, provides equal access to apartments, 
houses, mortgage loans and insurance policies for all residents of the 
Nation.
     \21\ Neighborhood Economic Development Advocacy Project (NEDAP) is 
a resource and advocacy center for community groups in New York City. 
Their mission is to promote community economic justice and to eliminate 
discriminatory economic practices that harm communities and perpetuate 
inequality and poverty.
     \22\ Public Citizen is a national nonprofit membership 
organization that has advanced consumer rights in administrative 
agencies, the courts, and the Congress, for 38 years.
     \23\ Founded by Sargent Shriver in 1967, the mission of the 
Sargent Shriver National Center on Poverty Law is to provide national 
leadership in identifying, developing, and supporting creative and 
collaborative approaches to achieve social and economic justice for 
low-income people. The Community Investment Unit of the Shriver Center 
advances the mission of the organization through innovative and 
collaborative public policy advocacy to enable low-income people and 
communities to move from poverty to prosperity.
     \24\ The Service Employees International Union is North America's 
largest union with more than 2 million members. SEIU has taken a lead 
in holding financial institutions, including private equity and big 
banks, accountable for their impact on working families.
     \25\ USAction builds power by uniting people locally and 
nationally, on the ground and online, to win a more just and 
progressive America. We create and participate the Nation's leading 
progressive coalitions making democracy work by organizing issue 
campaigns to improve people's lives. Our 28 State affiliates and 
partners, and our True Majority online members, bring the voices and 
concerns of the grassroots inside the Beltway.
     \26\ The U.S. Public Interest Research Group serves as the 
federation of and Federal advocacy office for the State PIROs, which 
are nonprofit, nonpartisan public interest advocacy groups that take on 
powerful interests on behalf of their members.
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    In this testimony, we outline the case for establishment of a 
robust, independent Federal Consumer Financial Protection Agency to 
protect consumers from unfair credit, payment and debt management 
products, no matter what company or bank sells them and no matter what 
agency may serve as the prudential regulator for that company or bank. 
We describe the many failures of the current Federal financial 
regulators. We discuss the need for a return to a system where Federal 
financial protection law serves as a floor not as a ceiling, and 
consumers are again protected by the three-legged stool of Federal 
protection, State enforcement and private enforcement. We rebut 
anticipated opposition to the proposal, which we expect will come from 
the companies and regulators that are part of the system that has 
failed to protect us. We offer detailed suggestions to shape the 
development of the agency in the legislative process. We believe that, 
properly implemented, a Consumer Financial Protection Agency will 
encourage innovation by financial actors, increase competition in the 
marketplace, and lead to better choices for consumers.
    We look forward to working with you and Committee Members to enact 
a strong Consumer Financial Protection Agency bill through the Senate 
and into law. We also look forward to working with you on other 
necessary aspects of financial regulatory reform to restore the faith 
and confidence of American families that the financial system will 
protect their homes and their economic security.
SECTION 1. LEARNING FROM EXPERIENCE TO CREATE A FEDERAL CONSUMER 
        FINANCIAL PROTECTION AGENCY
    It has become clear that a major cause of the most calamitous 
worldwide recession since the Great Depression was the simple failure 
of Federal regulators to stop abusive lending, particularly 
unsustainable home mortgage lending. Such action would not only have 
protected many families from serious financial harm but would likely 
have stopped or slowed the chain of events that has led to the current 
economic crisis.
    The idea of a Federal consumer protection agency focused on credit 
and payment products has gained broad and high-profile support because 
it targets the most significant underlying causes of the massive 
regulatory failures that occurred. First, Federal agencies did not make 
protecting consumers their top priority and, in fact, seemed to compete 
against each other to keep standards low, ignoring many festering 
problems that grew worse over time. If agencies did act to protect 
consumers (and they often did not), the process was cumbersome and 
time-consuming. As a result, agencies did not act to stop some abusive 
lending practices until it was too late. Finally, regulators were not 
truly independent of the influence of the financial institutions they 
regulated.
    Meanwhile, despite an unprecedented Government intervention in the 
financial sector, the passage of mortgage reform legislation in the 
House of Representatives and the enactment of a landmark law to prevent 
abusive credit card lending, problems with the sustainability of home 
mortgage and consumer loans keep getting worse. With an estimated 2 
million households having already lost their homes to foreclosure 
because of the inability to repay unsound loans, Credit Suisse now 
predicts that foreclosures will exceed 8 million through 2012. \27\ The 
amount of revolving debt, most of which is credit card debt, is 
approaching $1 trillion. \28\ Based on the losses that credit card 
issuers are now reporting, delinquencies and defaults are expected to 
peak at their highest levels ever within the next year. \29\ One in two 
consumers who get payday loans default within the first year, and 
consumers who receive these loans are twice as likely to enter 
bankruptcy within 2 years as those who seek and are denied them. \30\ 
Overall, personal bankruptcies have increased sharply, up by one-third 
in the last year. \31\
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     \27\ ``Foreclosures Could Top 8 million: Credit Suisse,'' 9 
December 2008, MarketWatch, available at http://www.marketwatch.com/
story/more-than-8-million-homes-face-foreclosure-in-next-4-years (last 
visited 21 June 2009).
     \28\ See the Federal Reserve statistical release G19, Consumer 
Credit, available at http://www.federalreserve.gov/releases/g19/
     \29\ ``Fitch Inc. said it continues to see signs that the credit 
crunch will escalate into next year, and it said card chargeoffs may 
approach 10 percent by this time next year.'' ``Fitch Sees Chargeoffs 
Nearing 10 percent,'' Dow Jones, May 5, 2009.
     \30\ Paige Marta Skiba and Jeremy Tobacman, ``Payday Loans, 
Uncertainty, and Discounting: Explaining Patterns of Borrowing, 
Repayment, and Default,'' August 21, 2008. http://
www.law.vanderbilt.edu/faculty/faculty-personal-sites/paige-skiba/
publication/download.aspx?id=1636 and Paige Marta Skiba and Jeremy 
Tobacman, ``Do Payday Loans Cause Bankruptcy?'' October 10, 2008 http:/
/www.law.vanderbilt.edu/faculty/faculty-personal-sites/paige-skiba/
publication/download.aspx?id=2221 (last visited 21 June 2009).
     \31\ ``Bankruptcy Filings Continue to Rise'' Administrative Office 
of the U.S. Courts, news release, 8 June 2009, available at http://
www.uscourts.gov/Press_Releases/2009/BankruptcyFilingsMar2009.cfm (last 
visited 21 June 2009).
---------------------------------------------------------------------------
    The failure of Federal banking agencies to stem subprime mortgage 
lending abuses is fairly well known. They did not use the regulatory 
authority granted to them to stop unfair and deceptive lending 
practices before the mortgage foreclosure crisis spun out of control. 
In fact, it wasn't until July of 2008 that these rules were finalized, 
close to a decade after analysts and experts started warning that 
predatory subprime mortgage lending would lead to a foreclosure 
epidemic.
    Less well known are Federal regulatory failures that have 
contributed to the extension of unsustainable consumer loans, such as 
credit card, overdraft and payday loans, which are now imposing a 
crushing financial burden on many families. As with problems in the 
mortgage lending market, failures to rein in abusive types of consumer 
loans were in areas where Federal regulators had existing authority to 
act, and either chose not to do so or acted too late to stem serious 
problems in the credit markets.
    Combining safety and soundness supervision--with its focus on bank 
profitability--in the same institution as consumer protection magnified 
an ideological predisposition or antiregulatory bias by Federal 
officials that led to unwillingness to rein in abusive lending before 
it triggered the housing and economic crises. Though we now know that 
consumer protection leads to effective safety and soundness, structural 
flaws in the Federal regulatory system compromised the independence of 
banking regulators, encouraged them to overlook, ignore, and minimize 
their mission to protect consumers. This created a dynamic in which 
regulatory agencies competed against each other to weaken standards and 
ultimately led to an oversight process that was cumbersome and 
ineffectual. These structural weaknesses threatened to undermine even 
the most diligent policies and intentions. They complicated enforcement 
and vitiated regulatory responsibility to the ultimate detriment of 
consumers.
    These structural flaws include: a narrow focus on ``safety and 
soundness'' regulation to the exclusion of consumer protection; the 
huge conflict-of-interest that some agencies have because they rely 
heavily on financial assessments on regulated institutions that can 
choose to pay another agency to regulate them; the balkanization of 
regulatory authority between agencies that often results in either very 
weak or extraordinarily sluggish regulation (or both); and a regulatory 
process that lacks transparency and accountability. Taken together, 
these flaws severely compromised the regulatory process and made it far 
less likely that agency leaders would either act to protect consumers 
or succeed in doing so.
SECTION 2. CORRECTING REGULATORY SHORTCOMINGS BY CREATING A CONSUMER 
        FINANCIAL PROTECTION AGENCY
    Although a Consumer Financial Protection Agency (CFPA) would not be 
a panacea for all current regulatory ills, it would correct many of the 
most significant structural flaws that exist, realigning the regulatory 
architecture to reflect the unfortunate lessons that have been learned 
in the current financial crisis and sharply increasing the chances that 
regulators will succeed in protecting consumers in the future. A CFPA 
would be designed to achieve the regulatory goals of elevating the 
importance of consumer protection, prompting action to prevent harm, 
ending regulatory arbitrage, and guaranteeing regulatory independence.
A. Put consumer protection at the center of financial regulation.
    Right now, four Federal regulatory agencies are required both to 
ensure the solvency of the financial institutions they regulate and to 
protect consumers from lending abuses. \32\ Jurisdiction over consumer 
protection statutes is scattered over several more agencies, with rules 
like RESPA and TILA, which both regulate mortgage disclosures, in 
different agencies.
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     \32\ The Office of the Comptroller of the Currency (OCC) and 
Office of Thrift Supervision (OTC) charter and supervise national 
banks, and thrifts, respectively. State chartered banks can choose 
whether to join and be examined and supervised by either the Federal 
Reserve System or the Federal Deposit Insurance Corporation (FDIC). The 
FTC is charged with regulating some financial practices (but not safely 
and soundness) in the nonbank sector, such as credit cards offered by 
department stores and other retailer.
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    Within agencies in which these functions are combined, regulators 
have often treated consumer protection as less important than their 
safety and soundness mission or even in conflict with that mission. 
\33\ For example, after more than 6 years of effort by consumer 
organizations, Federal regulators are just now contemplating incomplete 
rules to protect consumers from high-cost ``overdraft'' loans that 
financial institutions often extend without the knowledge of or 
permission from consumers. Given the longstanding inaction on this 
issue, it is reasonable to assume that regulators were either 
uninterested in consumer protection or viewed restrictions on overdraft 
loans as an unnecessary financial burden on banks that extend this form 
of credit, even if it is deceptively offered and financially harmful to 
consumers. In other words, because regulators apparently decided that 
their overriding mission was to ensure that the short-term balance 
sheets of the institutions they regulated were strong, they were less 
likely to perceive that questionable products or practices (like 
overdraft loans or mortgage prepayment penalties) were harmful to 
consumers.
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     \33\ Occasionally, safety and soundness concerns have led 
regulators to propose consumer protections, as in the eventually 
successful efforts by Federal banking agencies to prohibit ``rent-a-
charter'' payday lending, in which payday loan companies partnered with 
national or out-of-State banks in an effort to skirt restrictive State 
laws. However, from a consumer protection point-of-view, this multiyear 
process took far too long. Moreover, the outcome would have been 
different if the agencies had concluded that payday lending would be 
profitable for banks and thus contribute to their soundness.
---------------------------------------------------------------------------
    As mentioned above, recent history has demonstrated that this 
shortsighted view of consumer protection and bank solvency as competing 
objectives is fatally flawed. If regulatory agencies had acted to 
prevent loan terms or practices that harmed consumers, they would also 
have vastly improved the financial solidity of the institutions they 
regulated. Nonetheless, the disparity in agencies' focus on consumer 
protection versus ``safety and soundness'' has been obvious, both in 
the relative resources that agencies devoted to the two goals and in 
the priorities they articulated. These priorities frequently minimized 
consumer protection and included reducing regulatory restrictions on 
the institutions they oversaw. \34\
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     \34\ For example, in 2007 the OTS cited consumer protection as 
part of its ``mission statement'' and ``strategic goals and vision.'' 
However, in identifying its eight ``strategic priorities'' for how it 
would spend its budget in Fiscal Year 2007, only part of one of these 
priorities appears to be directly related to consumer protection 
(``data breaches''). On the other hand, OTS identified both 
``Regulatory Burden Reduction'' and ``Promotion of the Thrift Charter'' 
as major strategic budget priorities. Office of Thrift Supervision, 
``OMB FY2007 Budget and Performance Plan,'' January 2007.
---------------------------------------------------------------------------
    Though the link between consumer protection and safety and 
soundness is now obvious, the two functions are not the same, and do 
conflict at times. In some circumstances, such as with overdraft loans, 
a financial product might well be profitable, even though it is 
deceptively offered and has a financially devastating effect on a 
significant number of consumers. \35\
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     \35\ Testimony of Travis Plunkett, Legislative Director, Consumer 
Federation of America and Edmund Mierzwinski, Consumer Program 
Director, U.S. PIRG, Before the Subcommittee on Financial Institutions 
and Consumer Credit of the U.S. House of Representatives, Committee of 
Financial Services, March 19, 2009.
---------------------------------------------------------------------------
    Until recently, regulatory agencies have also focused almost 
exclusively on bank examination and supervision to protect consumers, 
which lacks transparency. This process gives bank regulators a high 
degree of discretion to decide what types of lending are harmful to 
consumers, a process that involves negotiating behind-the-scenes with 
bank officials. \36\ Given that multiple regulators oversee similar 
institutions, the process has also resulted in different standards for 
products like credit cards offered by different types of financial 
institutions. In fact, widespread abusive lending in the credit markets 
has discredited claims by bank regulators like the Comptroller of the 
Currency that a regulatory process consisting primarily of supervision 
and examination results in a superior level of consumer protection 
compared to taking public enforcement action against institutions that 
violate laws or rules. \37\ Financial regulatory enforcement actions 
are a matter of public record which has a positive impact on other 
providers who might be engaged in the same practices and provides 
information to consumers on financial practices sanctioned by 
regulators.
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     \36\ ``Findings made during compliance examinations are strictly 
confidential and are not made available to the public except at the 
OCC's discretion. Similarly, the OCC is not required to publish the 
results of its safety-and-soundness orders . . . . Thus, the OCC's 
procedures for compliance examinations and safety-and-soundness orders 
do not appear to provide any public notice or other recourse to 
consumers who have been injured by violations identified by the OCC.'' 
Testimony of Arthur E. Wilmarth, Jr., Professor of Law, George 
Washington University Law School, before the Subcommittee on Financial 
Institutions and Consumer Credit of the House Financial Services 
Committee, April 26, 2007.
     \37\ `` . . . ours is not an `enforcement-only' compliance 
regime--far better to describe our approach as `supervision first, 
enforcement if necessary,' with supervision addressing so many early 
problems that enforcement is not necessary,'' Testimony of John C. 
Dugan, Comptroller of the Currency, before the Committee on Financial 
Services of the U.S. House of Representatives, June 13, 2007.
---------------------------------------------------------------------------
    Additionally, the debate about the financial and foreclosure crisis 
often overlooks the fact that predatory lending practices and the 
ensuing crisis have had a particularly harsh impact on communities of 
color. African Americans and Latinos suffered the brunt of the 
predatory and abusive practices found in the subprime market. While 
predatory and abusive lending practices were not exclusive to the 
subprime market, because of lax regulation in that sector, most abuses 
were concentrated there. Several studies have documented pervasive 
racial discrimination in the distribution of subprime loans. One such 
study found that borrowers of color were more than 30 percent more 
likely to receive a higher-rate loan than White borrowers even after 
accounting for differences in creditworthiness. \38\ Another study 
found that high-income African Americans in predominantly Black 
neighborhoods were three times more likely to receive a subprime 
purchase loan than low-income White borrowers. \39\
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     \38\ See Bocian, D.G., K.S. Ernst, and W. Li, ``Unfair Lending: 
The Effect of Race and Ethnicity on the Price of Subprime Mortgages,'' 
Center for Responsible Lending, May 2006.
     \39\ ``Unequal Burden: Income and Racial Disparities in Subprime 
Lending in America'' (Washington, DC: HUD, 2000).
---------------------------------------------------------------------------
    African Americans and Latinos receive a disproportionate level of 
high cost loans, even when they quality for a lower rate and/or prime 
mortgage. Fannie Mae and Freddie Mac estimated that up to 50 percent of 
those who ended up with a sub prime loan would have qualified for a 
mainstream, ``prime-rate'' conventional loan in the first place. \40\ 
According to a study conducted by the Wall Street Journal, as much as 
61 percent of those receiving subprime loans would ``qualify for 
conventional loans with far better terms.'' \41\ Moreover, racial 
segregation is linked with the proportion of subprime loans originated 
at the metropolitan level, even after controlling for percent minority, 
low credit scores, poverty, and median home value. \42\ The resulting 
flood of high cost and abusive loans in communities of color has 
artificially elevated the costs of homeownership, caused unprecedented 
high rates of foreclosures, and contributed to the blight and 
deterioration of these neighborhoods. It is estimated that communities 
of color will realize the greatest loss of wealth as a result of this 
crisis, since Reconstruction.
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     \40\ See the Center for Responsible Lending's ``Fact Sheet on 
Predatory Mortgage Lending'', at http://www.responsiblelending.org/
pdfs/2b003-mortgage2005.pdf, and ``The Impending Rate Shock: A Study of 
Home Mortgages in 130 American Cities'', ACORN, August 15, 2006, 
available at www.acorn.org.
     \41\ See ``Subprime Debacle Traps Even Very Creditworthy'', Wall 
Street Journal, December 3, 2007.
     \42\ Squires, Gregory D., Derek S. Hyra, and Robert N. Renner, 
``Segregation and the Subprime Lending Crisis'', Paper presented at the 
2009 Federal Reserve System Community Affairs Research Conference, 
Washington, DC (April 16, 2009).
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    A CFPA, by contrast, would have as its sole mission the development 
and effective implementation of standards that ensure that all credit 
products offered to borrowers are safe and not discriminatory. The 
agency would then enforce these standards for the same types of 
products in a transparent, uniform manner. Ensuring the safety and 
fairness of credit products would mean that the CFPA would not allow 
loans with terms that are discriminatory, deceptive or fraudulent. The 
agency should also be designed to ensure that credit products are 
offered in a fair and sustainable manner. In fact, a core mission of 
the CFPA would be to ensure the suitability of classes of borrowers for 
various credit products, based on borrowers' ability to repay the loans 
they are offered--especially if the cost of loans suddenly or sharply 
increase, and that the terms of loans do not impose financial penalties 
on borrowers who try to pay them off. As we've learned in the current 
crisis, focusing exclusively on consumer and civil rights protection 
would often be positive for lenders' stability and soundness over the 
long term. However, the agency would be compelled to act in the best 
interest of consumers even if measures to restrict certain types of 
loans would have a negative short-term financial impact on financial 
institutions.
B. Prevent regulatory arbitrage. Act quickly to prevent unsafe forms of 
        credit.
    The present regulatory system is institution centered, rather than 
consumer centered. It is structured according to increasingly 
irrelevant distinctions between the type of financial services company 
that is lending money, rather than the type of product being offered to 
consumers. Right now, financial institutions are allowed (and have 
frequently exercised their right) to choose the regulatory body that 
oversees them and to switch freely between regulatory charters at the 
Federal level and between State and Federal charters. Many financial 
institutions have switched charters in recent years seeking regulation 
that is less stringent. Two of the most notorious examples are 
Washington Mutual and Countrywide, \43\ which became infamous for 
promoting dangerous sub-prime mortgage loans on a massive scale. \44\ 
Both switched their charters to become thrifts regulated by the Office 
of Thrift Supervision (OTS). At the Federal level, where major agencies 
are funded by the institutions they oversee, this ability to ``charter 
shop,'' has undeniably led regulators like the OTS to compete to 
attract financial institutions by keeping regulatory standards weak. It 
has also encouraged the OTS and OCC to expand their preemptive 
authority and stymie efforts by the States to curb predatory and high-
cost lending. The OCC in particular appears to have used its broad 
preemptive authority over State consumer protections and its aggressive 
legal defense of that authority as a marketing tool to attract 
depository institutions to its charter. \45\
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     \43\ Of course, following their stunning collapses, Countrywide 
was acquired by Bank of America and Washington Mutual by Chase, both in 
regulator-ordered winding-downs.
     \44\ In fact, several other large national banks have chosen in 
recent years to convert their State charter to a national charter. 
Charter switches by JPMorgan Chase, HSBC, and Bank of Montreal (Harris 
Trust) alone in 2004-05 moved over $1 trillion of banking assets from 
the State to the national banking system, increasing the share of 
assets held by national banks to 67 percent from 56 percent, and 
decreasing the State share to 33 percent from 44 percent. Arthur E. 
Wilmarth, Jr., ``The OCC's Preemption Rules Threaten to Undermine the 
Dual Banking System, Consumer Protection and the Federal Reserve 
Board's role in Bank Supervision'', Proceedings of the 42nd Annual 
Conference on Bank Structure and Competition (Fed. Res. Bank of 
Chicago, 2006) at 102, 105-106.
     \45\ For a detailed analysis, see brief amicus curiae of Center 
for Responsible Lending et al. in the case currently before the Supreme 
Court, Cuomo v. Clearinghouse and OCC (08-453) available at http://
www.abanet.org/publiced/preview/briefs/pdfs/07-08/08-
453_PetitionerAmCu10ConsumerProtectionOrgs.pdf (last visited 21 June 
2009) at pp. 20-39.
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    When agencies do collaborate to apply consumer protections 
consistently to the institutions they regulate, the process has been 
staggeringly slow. As cited in several places in this testimony, 
Federal regulators dithered for years in implementing regulations to 
stop unfair and deceptive mortgage and credit card lending practices. 
One of the reasons for these delays has often been that regulators 
disagree among themselves regarding what regulatory measures must be 
taken. The course of least resistance in such cases is to do nothing, 
or to drag out the process. Although the credit card rule adopted late 
last year by Federal regulators was finalized over protests from the 
OCC, these objections were likely one of the reasons that Federal 
regulators delayed even beginning the process of curbing abusive credit 
card lending practices until mid-2008.
    The ``charter shopping'' problem would be directly addressed 
through the creation of a single CFPA with regulatory authority over 
all forms of credit. Federal agencies would no longer compete to 
attract institutions based on weak consumer protection standards or 
anemic enforcement of consumer rules. The CFPA would be required to 
focus on the safety of credit products, features and practices, no 
matter what kind of lender offered them. As for regulatory competition 
with States, it would only exist to improve the quality of consumer 
protection. Therefore, the CFPA should be allowed to set minimum 
national credit standards, which States could then enforce (as well as 
victimized consumers). States would be allowed to exceed these 
standards if local conditions require them to do so. If the CFPA sets 
``minimum'' standards that are sufficiently strong, a high degree of 
regulatory uniformity is likely to result. With strong national minimum 
standards in place, States are most likely to act only when new 
problems develop first in one region or submarket. States would then 
serve as an early warning system, identifying problems as they develop 
and testing policy solutions, which could then be adopted nationwide by 
the CFPA if merited. Moreover, the agency would have a clear incentive 
to stay abreast of market developments and to act in a timely fashion 
to rein in abusive lending because it will be held responsible for 
developments in the credit market that harm consumers.
C. Create an independent regulatory process.
    The ability of regulated institutions to ``charter shop'' combined 
with aggressive efforts by Federal regulators to preempt State 
oversight of these institutions has clearly undermined the independence 
of the OTS and OCC. This situation is made worse by the fact that large 
financial institutions like Countrywide were able to increase their 
leverage over regulators by taking a significant chunk of the agency's 
budget away when it changed charters and regulators. The OTS and OCC 
are almost entirely funded through assessments on the institutions they 
regulate (see Appendix 4). The ability to charter shop combined with 
industry funding has created a significant conflict-of-interest that 
has contributed to the agencies' disinclination to consider upfront 
regulation of the mortgage and consumer credit markets.
    Given that it supervises the largest financial institutions in the 
country, the OCC's funding situation is the most troublesome.

        More than 95 percent of the OCC's budget is financed by 
        assessments paid by national banks, and the twenty biggest 
        national banks account for nearly three-fifths of those 
        assessments. Large, multistate banks were among the most 
        outspoken supporters of the OCC's preemption regulations and 
        were widely viewed as the primary beneficiaries of those rules. 
        In addition to its preemption regulations, the OCC has 
        frequently filed amicus briefs in Federal court cases to 
        support the efforts of national banks to obtain court decisions 
        preempting State laws. The OCC's effort to attract large, 
        multistate banks to the national system have already paid 
        handsome dividends to the agency . . . . Thus, the OCC has a 
        powerful financial interest in pleasing its largest regulated 
        constituents, and the OCC therefore faces a clear conflict of 
        interest whenever it considers the possibility of taking an 
        enforcement action against a major national bank. \46\
---------------------------------------------------------------------------
     \46\ Testimony of Arthur E. Wilmarth. Jr., Professor of Law, 
George Washington University Law School, before the Subcommittee on 
Financial Institutions and Consumer Credit of the House Financial 
Services Committee, April 26, 2007.

    The leadership sofa CFPA would be held to account based on its 
ability to inform consumers and help protect them from unsafe products. 
In order to function effectively, the leadership would need to show 
expertise in and commitment to consumer protection. Crucial to the 
success of the agency would be to ensure that its funding is adequate, 
consistent and does not compromise this mission. Congress could also 
ensure that the method of agency funding that is used does not 
compromise the CFPA's mission by building accountability mechanisms 
into the authorizing statute and exercising effective oversight of the 
agency's operations. (See Section 4 below.)
    Recent history has demonstrated that even an agency with an 
undiluted mission to protect consumers can be undermined by hostile or 
negligent leadership or by Congressional meddling on behalf of special 
interests. However, unless the structure of financial services 
regulation is realigned to change not just the focus of regulation but 
its underlying philosophy, it is very unlikely that consumers will be 
adequately protected from unwise or unfair credit products in the 
future. The creation of a CFPA is necessary because it ensures that the 
paramount priority of Federal regulation is to protect consumers, that 
the agency decision making is truly independent, and that agencies do 
not have financial or regulatory incentives to keep standards weaker 
than necessary.
SECTION 3: ERRORS OF OMISSION AND COMMISSION BY THE FEDERAL BANK 
        REGULATORS
    Current regulators may already have some of the powers that the new 
agency would be given, but they haven't used them. Conflicts of 
interest and a lack of will work against consumer enforcement. In this 
section, we detail numerous actions and inactions by the Federal 
banking regulators that have led to or encouraged unfair practices, 
higher prices for consumers, and less competition.
A. The Federal Reserve Board ignored the growing mortgage crisis for 
        years after receiving Congressional authority to enact 
        antipredatory mortgage lending rules in 1994.
    The Federal Reserve Board was granted sweeping antipredatory 
mortgage regulatory authority by the 1994 Home Ownership and Equity 
Protection Act (HOEPA). Final regulations were issued on 30 July 2008 
only after the world economy had collapsed due to the collapse of the 
U.S. housing market triggered by predatory lending. \47\
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     \47\ 73 FR 147, p. 44522, Final HOEPA Rule, 30 July 2008.
---------------------------------------------------------------------------
B. At the same time, the Office of the Comptroller of the Currency 
        engaged in an escalating pattern of preemption of State laws 
        designed to protect consumers from a variety of unfair bank 
        practices and to quell the growing predatory mortgage crisis, 
        culminating in its 2004 rules preempting both State laws and 
        State enforcement of laws over national banks and their 
        subsidiaries.
    In interpretation letters, amicus briefs and other filings, the OCC 
preempted State laws and local ordinances requiring lifeline banking 
(NJ 1992, NY, 1994), prohibiting fees to cash ``on-us'' checks (par 
value requirements) (TX, 1995), banning ATM surcharges (San Francisco, 
Santa Monica and Ohio and Connecticut, 1998-2000), requiring credit 
card disclosures (CA, 2003) and opposing predatory lending and 
ordinances (numerous States and cities). \48\ Throughout, OCC ignored 
Congressional requirements accompanying the 1994 Riegle-Neal Act not to 
preempt without going through a detailed preemption notice and comment 
procedure, as the Congress had found many OCC actions ``inappropriately 
aggressive.'' \49\
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     \48\ ``Role of the Office of Thrift Supervision and Office of the 
Comptroller of the Currency in the Preemption of State Law'', USGAO, 
prepared for Financial Services Committee Chairman James Leach, 7 
February 2000, available at http://www.gao.gov/corresp/ggd-00-51r.pdf 
(last visited 21 June 2009).
     \49\ Statement of managers filed with the conference report on 
H.R. 3841, the Riegle-Neal Interstate Banking and Branching Efficiency 
Act of 1994, Congressional Record Page S10532, 3 August 1994.
---------------------------------------------------------------------------
    In 2000-2004, the OCC worked with increasing aggressiveness to 
prevent the States from enforcing State laws and stronger State 
consumer protection standards against national banks and their 
operating subsidiaries, from investigating or monitoring national banks 
and their operating subsidiaries, and from seeking relief for consumers 
from national banks and subsidiaries.
    These efforts began with interpretative letters stopping State 
enforcement and State standards in the period up to 2004, followed by 
OCC's wide-ranging preemption regulations in 2004 purporting to 
interpret the National Bank Act, plus briefs in court cases supporting 
national banks' efforts to block State consumer protections.
    We discuss these matters in greater detail below, in Section 5, 
rebutting industry arguments against the CFPA.
C. The agencies took little action except to propose greater 
        disclosures, as unfair credit card practices increased over the 
        years, until Congress stepped in.
    Further, between 1995 and 2007, the Office of the Comptroller of 
Currency issued only one public enforcement action against a Top Ten 
credit card bank (and then only after the San Francisco District 
Attorney had brought an enforcement action). In that period, ``the OCC 
has not issued a public enforcement order against any of the eight 
largest national banks for violating consumer lending laws.'' \50\ The 
OCC's failure to act on rising credit card complaints at the largest 
national banks triggered Congress to investigate, resulting in passage 
of the 2009 Credit Card Accountability, Responsibility and Disclosure 
Act (CARD Act). \51\ While this Committee was considering that law, 
other Federal regulators finally used their authority under the Federal 
Trade Commission Act to propose and finalize a similar rule. \52\ By 
contrast, the OCC requested the addition of two significant loopholes 
to a key protection of the proposed rule.
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     \50\ Testimony of Professor Arthur Wilmarth, 26 April 2007, before 
the Subcommittee on Financial Institutions and Consumer Credit, hearing 
on Credit Card Practices: Current Consumer and Regulatory Issues at 
http://www.house.gov/financialservices/hearing110/htwilmarth042607.pdf.
     \51\ H.R. 627 was signed into law by President Obama as Pub. L. 
No. 111-24 on 22 May 2009.
     \52\ The final rule was published in the Federal Register a month 
later. 74 FR 18, page 5498 Thursday, January 29, 2009.
---------------------------------------------------------------------------
    Meanwhile, this Committee and its Subcommittee on Financial 
Institutions and Consumer Credit had conducted numerous hearings on the 
impact of current credit card issuer practices on consumers. The 
Committee heard testimony from academics and consumer representatives 
regarding abusive lending practices that are widespread in the credit 
card industry, including:

    The unfair application of penalty and ``default'' interest 
        rates that can rise above 30 percent;

    Applying these interest rate hikes retroactively on 
        existing credit card debt, which can lead to sharp increases in 
        monthly payments and force consumers on tight budgets into 
        credit counseling and bankruptcy;

    High and increasing ``penalty'' fees for paying late or 
        exceeding the credit limit. Sometimes issuers use tricks or 
        traps to illegitimately bring in fee income, such as requiring 
        that payments be received in the late morning of the due date 
        or approving purchases above the credit limit;

    Aggressive credit card marketing directed at college 
        students and other young people;

    Requiring consumers to waive their right to pursue legal 
        violations in the court system and forcing them to participate 
        in arbitration proceedings if there is a dispute, often before 
        an arbitrator with a conflict of interest; and

    Sharply raising consumers' interest rates because of a 
        supposed problem a consumer is having paying another creditor. 
        Even though few credit card issuers now admit to the 
        discredited practice of ``universal default,'' eight of the ten 
        largest credit card issuers continue to permit this practice 
        under sections in cardholder agreements that allow issuers to 
        change contract terms at ``any time for any reason.'' \53\
---------------------------------------------------------------------------
     \53\ Testimony of Linda Sherry of Consumer Action, House 
Subcommittee on Financial Institutions and Consumer Credit, April 26, 
2007.

    In contrast to this absence of public enforcement action by the OCC 
against major national banks, State officials and other Federal 
agencies have issued numerous enforcement orders against leading 
national banks or their affiliates, including Bank of America, Bank 
One, Citigroup, Fleet, JPMorgan Chase, and USBancorp--for a wide 
variety of abusive practices over the past decade. \54\
---------------------------------------------------------------------------
     \54\ Testimony of Arthur E. Wilmarth, Jr., Professor of Law, 
George Washington University Law School, April 26, 2007.
---------------------------------------------------------------------------
    The OCC and PRB were largely silent while credit card issuers 
expanded efforts to market and extend credit at a much faster speed 
than the rate at which Americans have taken on credit card debt. This 
credit expansion had a disproportionately negative effect on the least 
sophisticated, highest risk and lowest income households. It has also 
resulted in both relatively high losses for the industry and record 
profits. That is because, as mentioned above, the industry has been 
very aggressive in implementing a number of new--and extremely costly--
fees and interest rates. \55\ Although the agencies did issue 
significant guidance in 2003 to require issuers to increase the size of 
minimum monthly payments that issuers require consumers to pay, \56\ 
neither agency has proposed any actions (or asked for the legal 
authority to do so) to rein in aggressive lending or unjustifiable fees 
and interest rates.
---------------------------------------------------------------------------
     \55\ Testimony of Travis B. Plunkett of the Consumer Federation of 
America, Senate Banking Committee, January 25, 2007.
     \56\ Joint press release of Board of Governors of the Federal 
Reserve System, Federal Deposit Insurance Corporation, Office of the 
Comptroller of the Currency and Office of Thrift Supervision, ``FFIEC 
Agencies Issue Guidance on Credit Card Account Management and Loss 
Allowance Practices,'' January 8, 2003, see attached ``Account 
Management and Loss Allowance Guidance'' at 3.
---------------------------------------------------------------------------
    In addition, in 1995 the OCC amended a rule, with its action later 
upheld by the Supreme Court, \57\ that allowed credit card banks to 
export fees nationwide, as if they were interest, resulting in massive 
increases in the size of penalty late and overdraft fees.
---------------------------------------------------------------------------
     \57\ The rule is at 12 C.F.R. 7.4001(a). The case is Smiley v. 
Citibank, 517 U.S. 735.
---------------------------------------------------------------------------
D. The Federal Reserve has allowed debit card cash advances (overdraft 
        loans) without consent, contract, cost disclosure, or fair 
        repayment terms.
    The FRB has refused to require banks to comply with the Truth in 
Lending Act (TILA) when they loan money to customers who are permitted 
to overdraw their accounts. While the FRB issued a staff commentary 
clarifying that TILA applied to payday loans, the Board has refused in 
several proceedings to apply the same rules to banks that make nearly 
identical loans. \58\ As a result, American consumers spend at least 
$17.5 billion per year on cash advances from their banks without 
signing up for the credit and without getting cost-of-credit 
disclosures or a contract stating that the bank would in fact pay 
overdrafts. Consumers are induced to withdraw more cash at ATMs than 
they have in their account and spend more than they have with debit 
card purchases at point of sale. In both cases, the bank could simply 
deny the transaction, saving consumers average fees of $35 each time.
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     \58\ National Consumer Law Center and Consumer Federation of 
America, Comments to the Federal Reserve Board, Docket No. R-1136, 
January 27, 2003. Appendix ``Bounce Protection: How Banks Turn Rubber 
Into Gold by Enticing Consumers To Write Bad Checks.'' Also, CFA, 
Consumers Union, and U.S. Public Interest Research Group, Supplemental 
Comments relating to Docket R-1136, May 2, 2003. CFA, et al. Comments 
to the Federal Reserve System, 12 CFR Part 230, Docket No. R-1197, 
Proposed Amendments to Regulation DD, August 6, 2004. Letter from CFA 
and national groups to the Chairman of the Federal Reserve Board and 
Federal Bank Regulators, urging Truth in Lending for overdraft loans, 
June 8, 2005. CFA, et al., Comments, Federal Reserve System, OTS, and 
NCUA, FRB Docket No. R-1314, OTS-2008-0004, NCUA RIN 3133-AD47, August 
4, 2008. CFA Comments, Federal Reserve System, FRB Docket No. R-1343, 
March 30, 2009.
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    The FRB has permitted banks to avoid TILA requirements because 
bankers claim that systematically charging unsuspecting consumers very 
high fees for overdraft loans they did not request is the equivalent to 
occasionally covering a paper check that would otherwise bounce. 
Instead of treating short term bank loans in the same manner as all 
other loans covered under TILA, as consumer organizations recommended, 
the FRB issued and updated regulations under the Truth in Savings Act, 
pretending that finance charges for these loans were bank ``service 
fees.'' In several dockets, national consumer organizations provided 
well-researched comments, urging the Federal Reserve to place consumer 
protection ahead of bank profits, to no avail.
    As a result, consumers unknowingly borrow billions of dollars at 
astronomical interest rates. A $100 overdraft loan with a $35 fee that 
is repaid in 2 weeks costs 910 percent APR. The use of debit cards for 
small purchases often results in consumers paying more in overdraft 
fees than the amount of credit extended. The FDIC found last year that 
the average debit card point of purchase overdraft is just $20, while 
the sample of State banks surveyed by the FDIC charged a $27 fee. If 
that $20 overdraft loan were repaid in two weeks, the FDIC noted that 
the APR came to 3,520 percent. \59\
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     \59\ FDIC Study of Bank Overdraft Programs, Federal Deposit 
Insurance Corporation, November 2008 at v.
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    As the Federal Reserve has failed to protect bank account customers 
from unauthorized overdraft loans, banks are raising fees and adding 
new ones. In the CFA survey of the 16 largest banks updated in July 
2009, we found that 14 of the 16 largest banks charge $35 or more for 
initial or repeat overdrafts and nine of the largest banks use a tiered 
fee structure to escalate fees over the year. For example, USBank 
charges $19 for the first overdraft in a year, $35 for the second to 
fourth overdraft, and $37.50 thereafter. Ten of the largest banks 
charge a sustained overdraft fee, imposing additional fees if the 
overdraft and fees are not repaid within days. Bank of America began in 
June to impose a second $35 fee if an overdraft is not repaid within 5 
days. As a result, a Bank of America customer who is permitted by her 
bank to overdraw by $20 with a debit card purchase can easily be 
charged $70 for a 5 day extension of credit. \60\ (For more detail, 
please see CFA Survey: Sixteen Largest Bank Overdraft Fees and Terms, 
Appendix 5.)
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     \60\ Bank of America, ``Important Information Regarding Changes to 
Your Account'' p. 2. Accessed online June 15, 2009. ``Extended 
Overdrawn Balance Charge, June 5, 2009: For each time we determine your 
account is overdrawn by any amount and continues to be overdrawn for 5 
or more consecutive business days, we will charge one fee of $35. This 
fee is in addition to applicable Overdraft Item Fees and NSF Returned 
Item Fees.''
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    Cash advances on debit cards are not protected by the Truth in 
Lending Act prohibition on banks using set off rights to collect 
payment out of deposits into their customers' accounts. If the purchase 
involved a credit card, on the other hand, it would violate Federal law 
for a bank to pay the balance owed from a checking account at the same 
bank. Banks routinely pay back debit card cash advances to themselves 
by taking payment directly out of consumers' checking accounts, even if 
those accounts contain entirely exempt funds such as Social Security.
    The Federal Reserve is considering comments filed in yet another 
overdraft loan docket, this time considering whether to require banks 
to permit consumers to opt-out of fee-based overdraft programs, or, 
alternatively, to require banks to get consumers to opt in for 
overdrafts. This proposal would change Reg E which implements the 
Electronic Fund Transfer Act and would only apply to overdrafts created 
by point of sale debit card transactions and to ATM withdrawals, 
leaving all other types of transactions that are permitted to overdraw 
for a fee unaddressed. Consumer organizations urged the Federal Reserve 
to require banks to get their customers' affirmative consent, the same 
policy included in the recently enacted credit card bill which requires 
affirmative selection for creditors to permit over-the-limit 
transactions for a fee. \61\
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     \61\ Federal Reserve Board, Docket No. R-1343, comments were due 
March 30, 2009.
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E. The Fed is allowing a shadow banking system (prepaid cards) outside 
        of consumer protection laws to develop and target the unbanked 
        and immigrants; The OTS is allowing bank payday loans (which 
        preempt State laws) on prepaid cards.
    The Electronic Funds Transfer Act requires key disclosures of fees 
and other practices, protects consumer bank accounts from unauthorized 
transfers, requires resolution of billing errors, gives consumers the 
right to stop electronic payments, and requires Statements showing 
transaction information, among other protections. The EFTA is also the 
statute that will hold the new protections against overdraft fee 
practices that the Fed is writing.
    Yet the Fed has failed to include most prepaid cards in the EFTA's 
protections, even while the prepaid industry is growing and is 
developing into a shadow banking system. In 2006, the Fed issued rules 
including payroll cards--prepaid cards that are used to pay wages 
instead of a paper check for those who do not have direct deposit to a 
bank account--within the definition of the ``accounts'' subject to the 
EFTA. But the Fed permitted payroll card accounts to avoid the 
Statement requirements for bank accounts, relying instead on the 
availability of account information on the Internet. Forcing consumers 
to monitor their accounts online to check for unauthorized transfers 
and fees and charges is particularly inappropriate for the population 
targeted for these cards: consumers without bank accounts, who likely 
do not have or use regular Internet access.
    Even worse, the Fed refused to adopt the recommendations of 
consumer groups that self-selected payroll cards--prepaid cards that 
consumers shop for and choose on their own as the destination for 
direct deposit of their wages--should receive the same EFTA protections 
that employer designated payroll cards receive. The Fed continues to 
take the position that general prepaid cards are not protected by the 
EFTA.
    This development has become all the more glaring as Federal and 
State government agencies have moved to prepaid cards to pay many 
Government benefits, from Social Security and Indian Trust Funds to 
unemployment insurance and State-collected child support. Some 
agencies, such as the Treasury Department when it created the Social 
Security Direct Express Card, have included in their contract 
requirements that the issuer must comply with the EFTA. But not all 
have, and compliance is uneven, despite the fact that the EFTA itself 
clearly references and anticipates coverage of electronic systems for 
paying unemployment insurance and other non-needs-tested Government 
benefits.
    The Fed's failure to protect this shadow banking system is also 
disturbing as prepaid cards are becoming a popular product offered by 
many predatory lenders, like payday lenders.
    Indeed, the Fed is not the only one that has recently dropped the 
ball on consumer protection on prepaid cards. One positive effort by 
the banking agencies in the past decade was the successful effort to 
end rent-a-bank partnerships that allowed payday lenders to partner 
with depositories to use their preemptive powers to preempt State 
payday loan laws. \62\ But more recently, one prepaid card issuer, Meta 
Bank, has developed a predatory, payday loan feature--iAdvance--on its 
prepaid cards that receive direct deposit of wages and Government 
benefits. At a recent conference, an iAdvance official boasted that 
Meta Bank's regulator--the OTS--has been very ``flexible'' with them 
and ``understands'' this product.
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     \62\ Payday lending is so egregious that even the Office of the 
Comptroller of the Currency refused to let storefront lenders hide 
behind their partner banks' charters to export usury.
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F. Despite advances in technology, the Federal Reserve has refused to 
        speed up availability of deposits to consumers.
    Despite rapid technological changes in the movement of money 
electronically, the adoption of the Check 21 law to speed check 
processing, and electronic check conversion at the cash register, the 
Federal Reserve has failed to shorten the amount of time that banks are 
allowed to hold deposits before they are cleared. Money flies out of 
bank accounts at warp speed. Deposits crawl in. Even cash that is 
deposited over the counter to a bank teller can be held for 24 hours 
before becoming available to cover a transaction. The second business 
day rule for local checks means that a low-income worker who deposits a 
pay check on Friday afternoon will not get access to funds until the 
following Tuesday. If the paycheck is not local, it can be held for 
five business days. This long time period applies even when the check 
is written on the same bank where it is deposited. Consumers who 
deposit more than $5,000 in one day face an added wait of about 5 to 6 
more business days. Banks refuse to cash checks for consumers who do 
not have equivalent funds already on deposit. The combination of 
unjustifiably long deposit holds and banks' refusal to cash account 
holders' checks pushes low income consumers towards check cashing 
outlets, where they must pay 2 to 4 percent of the value of the check 
to get immediate access to cash.
    Consumer groups have called on the Federal Reserve to speed up 
deposit availability and to prohibit banks from imposing overdraft or 
insufficient fund (NSF) fees on transactions that would not have 
overdrawn if deposits had been available. The Federal Reserve 
vigorously supported Check 21, which has speeded up withdrawals but has 
refused to reduce the time period for local and nonlocal check hold 
periods for consumers.
G. The Federal Reserve has supported the position of payday lenders and 
        telemarketing fraud artists by permitting remotely created 
        checks (demand drafts) to subvert consumer rights under the 
        electronic funds transfer act.
    In 2005, the National Association of Attorneys General, the 
National Consumer Law Center, Consumer Federation of America, Consumers 
Union, the National Association of Consumer Advocates, and U.S. Public 
Interest Research Group filed comments with the Federal Reserve in 
Docket No. R-1226, regarding proposed changes to Regulation CC with 
respect to demand drafts. Demand drafts are unsigned checks created by 
a third party to withdraw money from consumer bank accounts. State 
officials told the FRB that demand drafts are frequently used to 
perpetrate fraud on consumers and that the drafts should be eliminated 
in favor of electronic funds transfers that serve the same purpose and 
are covered by protections in the Electronic Funds Transfer Act. Since 
automated clearinghouse transactions are easily traced, fraud artists 
prefer to use demand drafts. Fraudulent telemarketers increasingly rely 
on bank debits to get money from their victims. The Federal Trade 
Commission earlier this year settled a series of cases against 
telemarketers who used demand drafts to fraudulently deplete consumers' 
bank accounts. Fourteen defendants agreed to pay a total of more than 
$16 million to settle FTC charges while Wachovia Bank paid $33 million 
in a settlement with the Comptroller of the Currency. \63\
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     \63\ Press Release, ``Massive Telemarketing Scheme Affected Nearly 
One Million Consumers Nationwide; Wachovia Bank To Provide an 
Additional $33 Million to Suntasia Victims,'' Federal Trade Commission, 
January 13, 2009, viewed at http://www.ftc.gov/opa/2009/01/
suntasia.shtm.
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    Remotely created checks are also used by high cost lenders to 
remove funds from checking accounts even when consumers exercise their 
right to revoke authorization to collect payment through electronic 
funds transfer. CFA first issued a report on Internet payday lending in 
2004 and documented that some high-cost lenders converted debts to 
demand drafts when consumers exercised their EFTA right to revoke 
authorization to electronically withdraw money from their bank 
accounts. CFA brought this to the attention of the Federal Reserve in 
2005, 2006, and 2007. No action has been taken to safeguard consumers' 
bank accounts from unauthorized unsigned checks used by telemarketers 
or conversion of a loan payment from an electronic funds transfer to a 
demand draft to thwart EFTA protections or exploit a loophole in EFTA 
coverage.
    The structure of online payday loans facilitates the use of demand 
drafts. Every application for a payday loan requires consumers to 
provide their bank account routing number and other information 
necessary to create a demand draft as well as boiler plate contract 
language to authorize the device. The account information is initially 
used by online lenders to deliver the proceeds of the loan into the 
borrower's bank account using the ACH system. Once the lender has the 
checking account information, however, it can use it to collect loan 
payments via remotely created checks per boilerplate contract language 
even after the consumer revokes authorization for the lender to 
electronically withdraw payments.
    The use of remotely created checks is common in online payday loan 
contracts. ZipCash LLC ``Promise to Pay'' section of a contract 
included the disclosure that the borrower may revoke authorization to 
electronically access the bank account as provided by the Electronic 
Fund Transfer Act. However, revoking that authorization will not stop 
the lender from unilaterally withdrawing funds from the borrower's bank 
account. The contract authorizes creation of a demand draft which 
cannot be terminated. ``While you may revoke the authorization to 
effect ACH debit entries at any time up to 3 business days prior to the 
due date, you may not revoke the authorization to prepare and submit 
checks on your behalf until such time as the loan is paid in full.'' 
(Emphasis added.) \64\
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     \64\ Loan Supplement (ZipCash LLC) Form #2B, on file with CFA.
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H. The Federal Reserve has taken no action to safeguard bank accounts 
        from Internet payday lenders.
    In 2006, consumer groups met with Federal Reserve staff to urge 
them to take regulatory action to protect consumers whose accounts were 
being electronically accessed by Internet payday lenders. We joined 
with other groups in a follow up letter in 2007, urging the Federal 
Reserve to make the following changes to Regulation E:

    Clarify that remotely created checks are covered by the 
        Electronic Funds Transfer Act.

    Ensure that the debiting of consumers' accounts by Internet 
        payday lenders is subject to all the restrictions applicable to 
        preauthorized electronic funds transfers.

    Prohibit multiple attempts to ``present'' an electronic 
        debit.

    Prohibit the practice of charging consumers a fee to revoke 
        authorization for preauthorized electronic funds transfers.

    Amend the Official Staff Interpretations to clarify that 
        consumers need not be required to inform the payee in order to 
        stop payment on preauthorized electronic transfers.

    While FRB staff was willing to discuss these issues, the FRB took 
no action to safeguard consumers when Internet payday lenders and other 
questionable creditors evade consumer protections or exploit gaps in 
the Electronic Fund Transfer Act to mount electronic assaults on 
consumers' bank accounts.
    As a result of inaction by the Federal Reserve, payday loans 
secured by repeat debit transactions undermine the protections of the 
Electronic Fund Transfer Act, which prohibits basing the extension of 
credit with periodic payments on a requirement to repay the loan 
electronically. \65\ Payday loans secured by debit access to the 
borrower's bank account which cannot be cancelled also functions as the 
modern banking equivalent of a wage assignment--a practice which is 
prohibited when done directly. The payday lender has first claim on the 
direct deposit of the borrower's next paycheck or exempt Federal funds, 
such as Social Security, SSI, or Veterans Benefit payments. Consumers 
need control of their accounts to decide which bills get paid first and 
to manage scarce family resources. Instead of using its authority to 
safeguard electronic access to consumers' bank accounts, the Federal 
Reserve has stood idly by as the online payday loan industry has 
expanded.
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     \65\ Reg E, 12 C.F.R. 205.10(e). 15 U.S.C. 1693k states that 
``no person'' may condition extension of credit to a consumer on the 
consumer's repayment by means of a preauthorized electronic fund 
transfer.
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I. The banking agencies have failed to stop banks from imposing 
        unlawful freezes on accounts containing social security and 
        other funds exempt from garnishment.
    Federal benefits including Social Security and Veteran's benefits 
(as well as State equivalents) are taxpayer dollars targeted to relieve 
poverty and ensure minimum subsistence income to the Nation's workers. 
Despite the purposes of these benefits, banks routinely freeze bank 
accounts containing these benefits pursuant to garnishment or 
attachment orders, and assess expensive fees--especially insufficient 
fund (NSF) fees--against these accounts.
    The number of people who are being harmed by these practices has 
escalated in recent years, largely due to the increase in the number of 
recipients whose benefits are electronically deposited into bank 
accounts. This is the result of the strong Federal policy to encourage 
this in the Electronic Funds Transfer Act. And yet, the banking 
agencies have failed to issue appropriate guidance to ensure that the 
millions of Federal benefit recipients receive the protections they are 
entitled to under Federal law.
J. The Comptroller of the Currency permits banks to manipulate payment 
        order to extract maximum bounced check and overdraft fees, even 
        when overdrafts are permitted.
    The Comptroller of the Currency permits national banks to rig the 
order in which debits are processed. This practice increases the number 
of transactions that trigger an overdrawn account, resulting in higher 
fee income for banks. When banks began to face challenges in court to 
the practice of clearing debits according to the size of the debit--
from the largest to the smallest--rather than when the debit occurred 
or from smallest to largest check, the OCC issued guidelines that allow 
banks to use this dubious practice.
    The OCC issued an Interpretive Letter allowing high-to-low check 
clearing when banks follow the OCC's considerations in adopting this 
policy. Those considerations include: the cost incurred by the bank in 
providing the service; the deterrence of misuse by customers of banking 
services; the enhancement of the competitive position of the bank in 
accordance with the bank's business plan and marketing strategy; and 
the maintenance of the safety and soundness of the institution. \66\ 
None of the OCC's considerations relate to consumer protection.
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     \66\ 12 C.F.R. 7.4002(b).
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    The Office of Thrift Supervision (OTS) addressed manipulation of 
transaction-clearing rules in the Final Guidance on Thrift Overdraft 
Programs issued in 2005. The OTS, by contrast, advised thrifts that 
transaction-clearing rules (including check-clearing and batch debit 
processing) should not be administered unfairly or manipulated to 
inflate fees. \67\ The Guidelines issued by the other Federal 
regulatory agencies merely urged banks and credit unions to explain the 
impact of their transaction clearing policies. The Interagency ``Best 
Practices'' State: ``Clearly explain to consumers that transactions may 
not be processed in the order in which they occurred, and that the 
order in which transactions are received by the institution and 
processed can affect the total amount of overdraft fees incurred by the 
consumers.'' \68\
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     \67\ Office of Thrift Supervision, Guidance on Overdraft 
Protection Programs, February 14, 2005, p. 15.
     \68\ Department of Treasury, Joint Guidance on Overdraft 
Protection Programs, February 15, 2005, p. 13.
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    CFA and other national consumer groups wrote to the Comptroller and 
other Federal bank regulators in 2005 regarding the unfair trade 
practice of banks ordering withdrawals from high-to-low, while at the 
same time unilaterally permitting overdrafts for a fee. One of the 
OCC's ``considerations'' is that the overdraft policy should ``deter 
misuse of bank services.'' Since banks deliberately program their 
computers to process withdrawals high-to-low and to permit customers to 
overdraw at the ATM and Point of Sale, there is no ``misuse'' to be 
deterred.
    No Federal bank regulator took steps to direct banks to change 
withdrawal order to benefit low-balance consumers or to stop the unfair 
practice of deliberately causing more transactions to bounce in order 
to charge high fees. CFA's survey of the 16 largest banks earlier this 
year found that all of them either clear transactions largest first or 
reserve the right to do so. \69\ Since ordering withdrawals largest 
first is likely to deplete scarce resources and trigger more overdraft 
and insufficient funds fees for many Americans, banks have no incentive 
to change this practice absent strong oversight by bank regulators.
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     \69\ Consumer Federation of America, Comments to Federal Reserve 
Board, Docket No. R-1343, Reg. E, submitted March 30, 2009.
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K. The regulators have failed to enforce the Truth In Savings Act 
        requirement that banks provide account disclosures to 
        prospective customers.
    According to a 2008 GAO report \70\ to Rep. Carolyn Maloney, then-
chair of the Financial Institutions and Consumer Credit Subcommittee, 
based on a secret shopper investigation, banks don't give consumers 
access to the detailed schedule of account fee disclosures as required 
by the 1991 Truth In Savings Act. From GAO:
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     \70\ ``Federal Banking Regulators Could Better Ensure That 
Consumers Have Required Disclosure Documents Prior to Opening Checking 
or Savings Accounts'', GAO-08-28I, January 2008, available at http://
www.gao.gov/new.items/d08281.pdf (last visited 21 June 2009).

        Regulation DD, which implements the Truth in Savings Act 
        (TISA), requires depository institutions to disclose (among 
        other things) the amount of any fee that may be imposed in 
        connection with an account and the conditions under which such 
        fees are imposed. [ . . . ] GAO employees posed as consumers 
        shopping for checking and savings accounts [ . . . ] Our visits 
        to 185 branches of depository institutions nationwide suggest 
        that consumers shopping for accounts may find it difficult to 
        obtain account terms and conditions and disclosures of fees 
        upon request prior to opening an account. Similarly, our review 
        of the Web sites of the banks, thrifts, and credit unions we 
        visited suggests that this information may also not be readily 
        available on the Internet We were unable to obtain, upon 
        request, a comprehensive list of all checking and savings 
        account foes at 40 of the branches (22 percent) that we 
        visited. [ . . . ] The results are consistent with those 
        reported by a consumer group [U.S. PIRG] that conducted a 
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        similar exercise in 2001.

    This, of course, keeps consumers from being able to shop around and 
compare prices. As cited by GAO, U.S. PIRG then complained of these 
concerns in a 2001 letter to then Federal Reserve Board Chairman Alan 
Greenspan. \71\ No action was taken. The problem is exacerbated by a 
2001 Congressional decision to eliminate consumers' private rights 
olfaction for Truth In Savings violations.
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     \71\ The 1 November 2001 letter from Edmund Mierzwinski, U.S. 
PIRG, to Greenspan is available at http://static.uspirg.org/reports/
bigbanks2001/greenspanltr.pdf (last visited 21 June 2009). In that 
letter, we also urged the regulators to extend Truth In Savings 
disclosure requirements to the Internet. No action was taken.
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L. The Federal Reserve actively campaigned to eliminate a Congressional 
        requirement that it publish an annual survey of bank account 
        fees.
    One of the consumer protections included in the 1989 savings and 
loan bailout law known as the Financial Institutions Reform, Recovery 
and Enforcement Act was Section 1002, which required the Federal 
Reserve to publish an annual report to Congress on fees and services of 
depository institutions. The Fed actively campaigned in opposition to 
the requirement and succeeded in convincing Congress to sunset the 
survey in 2003. \72\ Most likely, the Fed was unhappy with the report's 
continued findings that each year bank fees increased, and that each 
year, bigger banks imposed the biggest fees.
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     \72\ The final 2003 report to Congress is available here http://
www.federalreserve.gov/boarddocs/rptcongress/2003fees.pdf (last visited 
21 June 2009). The 1997-2003 reports can all be accessed from this 
page, http://www.federalreserve.gov/pubs/reports_other.htm (last 
visited 21 June 2009).
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SECTION 4. STRUCTURE AND JURISDICTION OF A CONSUMER FINANCIAL 
        PROTECTION AGENCY
    If the CFPA is to be effective in its mission, it must be 
structured so that it is strong and independent with full authority to 
protect consumers. Our organizations have strongly endorsed President 
Obama's proposal regarding what should be the agency's jurisdiction, 
responsibilities, rule-writing authority, enforcement powers and 
methods of funding. \73\ His proposal would create a Consumer Financial 
Protection Agency (CFPA) with a broad jurisdiction over credit, savings 
and payment products, as well as fair lending and community 
reinvestment laws. \74\ (Recommendations for improvement to the 
Administration bill are flagged below.) The legislation has been 
introduced (without providing the agency jurisdiction over the 
Community Reinvestment Act) by House Financial Services Chairman Barney 
Frank as H.R. 3126.
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     \73\ Senators Durbin, Schumer, Kennedy and Dodd offered the first 
legislative proposal to create a consumer financial agency (S. 566), 
known as the Financial Product Safety Commission. The bill was 
originally introduced in the last Congress.
     \74\ ``Financial Regulatory Reform, A New Foundation: Rebuilding 
Financial Supervision and Regulation,'' Department of the Treasury, 
June 17, 2009, pp. 55-70. The White House has since proposed 
legislation to effectuate the proposal in this ``White Paper.''
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    In its work to protect consumers and the marketplace from abuses, 
the CFPA as envisioned by the Administration would have a full set of 
enforcement and analytical tools. The first tool would be that the CFPA 
could gather information about the marketplace so that the agency 
itself could understand the impact of emerging practices in the 
marketplace. The agency could use this information to improve the 
information that financial services companies must offer to customers 
about products, features or practices or to offer advice to consumers 
directly about the risk of a variety of products on the market. For 
some of these products, features or practices, the agency might 
determine that no regulatory intervention is warranted. For others, 
this information about the market will inform what tools are used. A 
second tool would be to address and rein in deceptive marketing 
practices or require improved disclosure of terms. The third tool would 
be the identification and regulatory facilitation of ``plain-vanilla,'' 
low risk products that should be widely offered. The fourth tool would 
be to restrict or ban specific product features or terms that are 
harmful or not suitable in some circumstances, or that don't meet 
ordinary consumer expectations. Finally, the CFPA would also have the 
ability to prohibit dangerous financial products. We can only wonder 
how much less pain would have been caused for our economy if a 
regulatory agency had been actively exercising the latter two powers 
during the run up to the mortgage crisis.
A. Agency structure and jurisdiction.
    Under the Administration's proposal, the agency would be governed 
by a five-member board. Four of these members would be appointed by the 
President and confirmed by the Senate. The final member would be the 
director of the consolidated bank supervisory agency proposed by the 
President. We strongly recommend that the stipulated qualifications for 
board membership be improved to require that board members have actual 
experience and expertise with consumer protection in the financial 
services arena. An agency focused solely on protecting consumers must 
be governed by leaders who have expertise not just in the financial 
services marketplace, but with protecting consumers in that 
marketplace.
    The Administration proposes to have the agency oversee the sale and 
marketing of credit, deposit and payment products and services and 
related products and services, and will ensure that they are being 
offered in a fair, sustainable and transparent manner. This should 
include debit, prepaid debit, and stored value cards; loan servicing, 
collection, credit reporting and debt-related services (such as credit 
counseling, mortgage rescue plans and debt settlement) offered to 
consumers and small businesses. Our organizations support this 
jurisdiction because credit products can have different names and be 
offered by different types of entities, yet still compete for the same 
customers in the same marketplace. Putting the oversight of competing 
products under one set of minimum Federal rules regardless of who is 
offering that product will protect consumers, promote innovation, 
provide consumers with valuable options, and spur vigorous competition.
    As with the Administration, we recommend against granting this 
agency jurisdiction over investment products that are marketed to 
retail investors, such as mutual funds. While there is a surface logic 
to this idea, we believe it is impractical and could inadvertently 
undermine investor protections. Giving the agency responsibility for 
investment products that is comparable to the proposed authority it 
would have over credit products would require the agency to add 
extensive additional staff with expertise that differs greatly from 
that required for oversight of credit products. Apparently simple 
matters, such as determining whether a mutual fund risk disclosure is 
appropriate or a fee is fair, are actually potentially quite complex 
and would require the new agency to duplicate expertise that already 
exists within the SEC. Moreover, it would not be possible simply to 
transfer the staff with that expertise to the new agency, since the SEC 
would continue to need that expertise on its own staff in order to 
fulfill its responsibilities for oversight of investment advisers and 
mutual fund operations. In addition, unless the new agency was given 
responsibility for all investment products and services a broker might 
recommend, brokers would be able to work around the new protections 
with potentially adverse consequences for investors. A broker who 
wanted to avoid the enhanced disclosures and restrictions required when 
selling a mutual fund, for example, could get around them by 
recommending a separately managed account. The investor would likely 
pay higher fees and receive fewer protections as a result. For these 
reasons, we believe the costs and risks of this proposal outweigh the 
potential benefits.
    The Administration's plan wisely provides the agency with 
jurisdiction over a number of insurance products that are central or 
ancillary to credit transactions, including credit, title, and mortgage 
insurance. \75\ This principal behind this approach is to provide the 
agency with holistic jurisdiction over the entire credit transaction, 
including ancillary services often sold with or in connection with the 
credit. Additionally, there is ample evidence of significant consumer 
abuses in many of these lines of insurance, including low loss ratios, 
high mark ups, and ``reverse competition'' where the insurer competes 
for the business of the lender, rather than of the insurance consumer. 
\76\ This Federal jurisdiction could apply without interfering with the 
licensing and rate oversight role of the States.
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     \75\ The agency should also be given explicit authority over 
``forced-place'' homeowner's insurance, which banks can require 
borrowers to purchase if they cannot procure their own coverage.
     \76\ Testimony of J. Robert Hunter, Director of Insurance, 
Consumer Federation of America, before the Subcommittee on Capital 
Markets, Insurance and Government Sponsored Enterprises of the U.S. 
House Financial Services Committee, October 30, 2007, pp. 8-9.
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    The United States has never sufficiently addressed the problems and 
challenges of lending discrimination and red lining practices, the 
vestiges of which include the present day unequal, two-tiered financial 
system that forces minority and low-income borrowers to pay more for 
financial services, get less value for their money, and exposes them to 
greater risk. It is therefore, imperative that the Consumer Financial 
Protection Agency also focus in a concentrated way on fair lending 
issues. To that end, the Agency must have a comprehensive Office of 
Civil Rights, which would ensure that no Federal agency perpetuated 
unfair practices and that no member of the financial industry practices 
business in a way that perpetuates discrimination. Compliance with 
civil rights statutes and regulations must be a priority at each 
Federal agency that has financial oversight or that enforces a civil 
rights statute. There must be effective civil rights enforcement of all 
segments of the financial industry. Moreover, each regulatory and 
enforcement agency must undertake sufficient reporting and monitoring 
activities to ensure transparency and hold the agencies accountable. A 
more detailed description of the civil rights functions that must be 
undertaken at the CFPA and at other regulatory and enforcement agencies 
can be found in the Civil Rights Policy Paper available at 
www.ourfinancialsecurity.org. \77\
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     \77\ See http://ourfinancialsecurity.org/issues/leveling-the-
playing-field/
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B. Rule writing.
    Under the Administration proposal, the agency will have broad rule-
making authority to effectuate its purposes, including the flexibility 
to set standards that are adequate to address rapid evolution and 
changes in the marketplace. Such authority is not a threat to 
innovation, but rather levels the playing field and protects honest 
competition, as well as consumers and the economy.
    The Administration's plan also provides that the rule-making 
authority for the existing consumer protection laws related to the 
provision of credit would be transferred to this agency, including the 
Truth in Lending Act (TILA), Truth in Savings Act (TISA), Home 
Ownership and Equity Protection Act (HOEPA), Real Estate Protection Act 
(RESPA), Fair Credit Reporting Act (FCRA), Electronic Fund Transfer Act 
(EFTA), and Fair Debt Collection Practices Act (FDCPA). Current rule-
writing authority for nearly 20 existing laws is spread out among at 
least seven agencies. Some authority is exclusive, some joint, and some 
is concurrent. However, this hodgepodge of statutory authority has led 
to fractured and often ineffectual enforcement of these laws. It has 
also led to a situation where Federal rule-writing agencies may be 
looking at just part of a credit transaction when writing a rule, 
without considering how the various rules for different parts of the 
transaction affect the marketplace and the whole transaction. The CFPA 
with expertise, jurisdiction, and oversight that cuts across all 
segments of the financial products marketplace, will be better able to 
see inconsistencies, unnecessary redundancies, and ineffective 
regulations. As a marketwide regulator, it would also ensure that 
critical rules and regulations are not evaded or weakened as agencies 
compete for advantage for the entities they regulate.
    Additionally the agency would have exclusive ``organic'' Federal 
rule-writing authority within its general jurisdiction to deem 
products, features, or practices unfair, deceptive, abusive or 
unsustainable, and otherwise to fulfill its mission and mandate. The 
rules may range from placing prohibitions, restrictions, or conditions 
on practices, products, or features to creating standards, and 
requiring special monitoring, reporting, and impact review of certain 
products, features, or practices.
C. Enforcement.
    A critical element of a new consumer protection framework is 
ensuring that consumer protection laws are consistently and effectively 
enforced. As mentioned above, the current crisis occurred not only 
because of gaps and weaknesses in the law, but primarily because the 
consumer protection laws that we do have were not always enforced. For 
regulatory reform to be successful, it must encourage compliance by 
ensuring that wrongdoers are held accountable.
    A new CFPA will achieve accountability by relying on a three-legged 
stool: enforcement by the agency, by States, and by consumers 
themselves.
    First, the CFPA itself will have the tools, the mission and the 
focus necessary to enforce its mandate. The CFPA will have a range of 
enforcement tools under the Administration proposal. The 
Administration, for example, would give the agency examination and 
primary compliance authority over consumer protection matters. This 
will allow the CFPA to look out for problems and address them in its 
supervisory capacity. But unlike the banking agencies, whose mission of 
looking out for safety and soundness led to an exclusive reliance on 
supervision, the CFPA will have no conflict of interest that prevents 
it from using its enforcement authority when appropriate. Under the 
Administration proposal, the agency will have the full range of 
enforcement powers, including subpoena authority; independent authority 
to enforce violations of the statues it administers; and civil penalty 
authority.
    Second, both proposals allow States to enforce Federal consumer 
protection laws and the CFPA's rules. As Stated in detail in Section 5, 
States are often closer to emerging threats to consumers and the 
marketplace. They routinely receive consumer complaints and monitor 
local practices, which will permit State financial regulators to see 
violations first, spot local trends, and augment the CFPA's resources. 
The CFPA will have the authority to intervene in actions brought by 
States, but it can conserve its resources when appropriate. As we have 
seen in this crisis, States were often the first to act.
    Finally, consumers themselves are an essential, in some ways the 
most essential, element of an enforcement regime. Recourse for 
individual consumers must, of course, be a key goal of a new consumer 
protection system. The Administration's plan appropriately States that 
the private enforcement provisions of existing statutes will not be 
disturbed.
    A significant oversight of the Administration's plan is that it 
does not allow private enforcement of new CFPA rules. It is critical 
that the consumers who are harmed by violations of these rules be able 
to take action to protect themselves.
    Consumers must have the ability to hold those who harm them 
accountable for numerous reasons:

    No matter how vigorous and how fully funded a new CFPA is, 
        it will not be able to directly redress the vast majority of 
        violations against individuals. The CFPA will likely have 
        thousands of institutions within its jurisdiction. It cannot 
        possibly examine, supervise or enforce compliance by all of 
        them.

    Individuals have much more complete information about the 
        affect of products and practices, and are in the best position 
        to identify violations of laws, take action, and redress the 
        harm they suffer. An agency on the outside looking in often 
        will not have sufficient details to detect abusive behavior or 
        to bring an enforcement action.

    Individuals are an early warning system that can alert 
        States and the CFPA of problems when they first arise, before 
        they become a national problem requiring the attention of a 
        Federal agency. The CFPA can monitor individual actions and 
        determine when it is necessary to step in.

    Bolstering public enforcement with private enforcement 
        conserves public resources. A Federal agency cannot and should 
        not go after every individual violation.

    Consumer enforcement is a safety net that ensures 
        compliance and accountability after this crisis has passed, 
        when good times return, and when it becomes more tempting for 
        regulators to think that all is well and to take a lighter 
        approach.

    The Administration's plan rightly identifies mandatory 
        arbitration clauses as a barrier to fair adjudication and 
        effective redress. We strongly agree--but it is also critically 
        important regarding access to justice that consumers have the 
        right to enforce a rule.

    Private enforcement is the norm and has worked well as a complement 
to public enforcement in the vast majority of the consumer protection 
statutes that will be consolidated under the CFPA, including TILA, 
HOEPA, FDCPA, FCRA, EFTA and others.
    Conversely, the statutes that lack private enforcement mechanisms 
are notable for the lack of compliance. The most obvious example is the 
prohibition against unfair and deceptive practices in Section 5 of the 
FTC Act. Though the banking agencies eventually identified unfair and 
deceptive mortgage and credit card practices that should be prohibited 
(after vigorous congressional prodding), individuals were subject to 
those practices for years with no redress because they could not 
enforce the FTC Act. Not only consumers, but the entire economy and 
even financial institutions would have been much better off if 
consumers had been able to take action earlier on, when the abusive 
practices were just beginning.
D. Product evaluation, oversight, and monitoring.
    Under the Administration's proposal, the agency would have 
significant enforcement and data collection authority to evaluate and 
to remove, restrict, or prevent unfair, deceptive, abusive, 
discriminatory, or unsustainable products, features or practices. The 
agency could also evaluate and promote practices, products, and 
features that facilitate responsible and affordable credit, payment 
devices, asset-building, and savings. Finally, the agency could assess 
the risks of both specific products and practices and overall market 
developments for the purpose of identifying, reducing and preventing 
excessive risk (e.g., monitoring longitudinal performance of mortgages 
with certain features for excessive failure rates; and monitoring the 
market share of products and practices that present greater risks, such 
as weakening underwriting).
    Specifically, we would recommend that the agency take the following 
approach to product evaluation, approval and monitoring under the 
proposal:

    Providers of covered products and services in some cases 
        could be required to file adequate data and information to 
        allow the agency to make a determination regarding the 
        fairness, sustainability, and transparency of products, 
        features, and practices. This could include data on product 
        testing, risk modeling, credit performance over time, customer 
        knowledge and behavior, target demographic populations, etc. 
        Providers of products and services that are determined in 
        advance to represent low risk would have to provide de minimus 
        or no information to the agency.

    ``Plain-vanilla'' products, features or practices that are 
        determined to be fair, transparent and sustainable would be 
        determined to be presumptively in compliance and face less 
        regulatory scrutiny and fewer restrictions.

    Products, features or practices that are determined to be 
        potentially unfair, unsustainable, discriminatory, deceptive or 
        too complex for its target population might be required to meet 
        increased regulatory requirements and face increased 
        enforcement and remedies.

    In limited cases, products, features or practices that are 
        deemed to be particularly risky could face increased filing and 
        data disclosure requirements, limited roll-out mandates, post-
        market evaluation requirements and, possibly, a stipulation of 
        preapproval before they are allowed to enter or be used in the 
        marketplace.

    The long-term performance of various types of products and 
        features would be evaluated, and results made transparent and 
        available broadly to the public, as well as to providers, 
        Congress, and the media to facilitate informed choice.

    The Agency should hold periodic public hearings to examine 
        products, practices and market developments to facilitate the 
        above duties, including the adequacy of existing regulation and 
        legislation, and the identification of both promising and risky 
        market developments. These hearings would be especially 
        important in examination of new market developments, such as, 
        for example, where credit applications will soon be submitted 
        via a mobile phone, for example, and consumer dependence on the 
        Internet for conducting financial transactions is expected to 
        grow dramatically. In such hearings, in rule-makings, and in 
        other appropriate circumstances, the Agency should ensure that 
        there is both opportunity and means for meaningful public 
        input, including consideration of existing models such as 
        funded public interveners.
E. Funding.
    The Administration's proposal would authorize Congressional 
appropriations as needed for the agency. It also allows the agency to 
recover the amount of funds it spends through annual fees or 
assessments on financial services providers it oversees.
    Our view is that the agency should have a stable (not volatile) 
funding base that is sufficient to support robust enforcement and is 
not subject to political manipulation by regulated entities. Funding 
from a variety of sources, as well as a mix of these sources, should be 
considered, including Congressional appropriations, user fees or 
industry assessments, filing fees, priced services (such as for 
compliance examinations) and transaction-based fees. See Appendix 4 for 
a comparison of current agency funding and fee structures.
    None of these funding sources is without serious weaknesses. 
Industry assessments or user fees can provide the regulated entity with 
considerable leverage over the budget of the agency and facilitate 
regulatory capture of the agency, especially if the regulated party is 
granted any discretion over the amount of the assessment (or is allowed 
to decide who regulates them and shift its assessment to another 
agency.) Transaction-based fees can be volatile and unpredictable, 
especially during economic downturns. Filing fees can also decline 
significantly if economic activity falls. Congressional appropriations, 
as we have seen with other Federal consumer protection agencies over 
the last half-century, can be fairly easily targeted for reduction or 
restriction by well' funded special interests if these interests 
perceive that the agency has been too effective or aggressive in 
pursing its mission.
    If an industry-based funding method is used, it should ensure that 
all providers of covered products and services are contributing equally 
based on their size and the nature of the products they offer. A 
primary consideration in designing any industry-based funding structure 
is that certain elements of these sectors should not be able to evade 
the full funding requirement, through charter shopping or other means. 
If such requirements can be met, we would recommend a blended funding 
structure from multiple sources that requires regulated entities to 
fund the baseline budget of the agency and Congressional appropriations 
to supplement this budget if the agency demonstrates an unexpected or 
unusual demand for its services.
F. Consumer complaints.
    The Administration proposal would require the agency to collect and 
track federally directed complaints rewarding credit or payment 
products, features, or practices under the agency's jurisdiction. \78\ 
This is a very important function but it should be improved in two 
significant respects. First, the agency should also be charged with 
resolving consumer complaints. Existing agencies, particularly the OCC, 
have generally not performed this function well. \79\ Secondly, the 
agency should be designated as the sole repository of consumer 
complaints on products, features, or practices within its jurisdiction, 
and should ensure that this is a role that is readily visible to 
consumers, simple to access and responsive. The agency should also be 
required to conduct real-time analysis of consumer complaints regarding 
patterns and practices in the credit and payment systems industries and 
to apply these analyses when writing rules and enforcing rules and 
laws.
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     \78\ The CFPA should have responsibility for collecting and 
tracking complaints about consumer financial services and facilitating 
complaint resolution with respect to federally supervised institutions. 
Other Federal supervisory agencies should refer any complaints they 
receive on consumer issues to the CFPA; complaint data should be shared 
across agencies . . . , ``A New Foundation'', pp. 59-60, The Obama 
Administration, June 2009.
     \79\ Travis Plunkett testimony, July 2007 ``Improving Federal 
Consumer Protections in Financial Services'', p. 10.
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G. Federal preemption of State laws.
    As the Administration proposal States, the agency should establish 
minimum standards within its jurisdictions. CFPA rules would preempt 
weaker State laws, but States that choose to exceed the standards 
established by the CFPA could do so. The agency's rules would preempt 
statutory State law only when it is impossible to comply with both 
State and Federal law.
    We also strongly agree with the Administration's recommendation 
that federally chartered institutions be subject to nondiscriminatory 
State consumer protection and civil rights laws to the same extent as 
other financial institutions. A clear lesson of the financial crisis, 
which pervades the Administration's plan, is that protections should 
apply consistently across the board, based on the product or service 
that is being offered, not who is offering it.
    Restoring the viability of our background State consumer protection 
laws is also essential to the flexibility and accountability of the 
system in the long run. The specific rules issued by the CFPA and the 
specific statutes enacted by Congress will never be able to anticipate 
every innovative abuse designed to avoid those rules and statutes. The 
fundamental State consumer protection laws, both statutory and common 
law, against unfair and deceptive practices, fraud, good faith and fair 
dealing, and other basic, longstanding legal rules are the ones that 
spring up to protect consumers when a new abuse surfaces that falls 
within the cracks of more specific laws. We discuss preemption in 
greater detail in the next section.
H. Other aspects of the Administration proposal.
    As discussed briefly above, the CFPA should also have the authority 
to grant intervener funding to consumer organizations to fund expert 
participation in its stakeholder activities. The model has been used 
successfully to fund consumer group participation in State utility rate 
making. Second, a Government chartered consumer organization should be 
created by Congress to represent consumers' financial services 
interests before regulatory, legislative, and judicial bodies, 
including before the CFPA. This organization could be financed through 
voluntary user fees such as a consumer check-off included in the 
monthly Statements financial firms send to their customers. It would be 
charged with giving consumers, depositors, small investors and 
taxpayers their own financial reform organization to counter the power 
of the financial sector, and to participate fully in rulemakings, 
adjudications, and lobbying and other activities now dominated by the 
financial lobby. \80\
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     \80\ As his last legislative activity, in October 2002, Senator 
Paul Wellstone proposed establishment of such an organization, the 
Consumer and Shareholder Protection Association, S 3143.
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    Moreover, we recommend that the Administration's proposal deal more 
explicitly with incentives that are paid to and whistleblower 
protections that are provided to employees working in the credit 
sector. An incentive system similar to one at the top is at work at the 
street level of the biggest banks. In the tens of thousands of bank 
branches and call centers of our biggest banks, employees-including 
bank tellers earning an average of $11.32 an hour-are forced to meet 
sales goals to keep their jobs and earn bonuses. Many goals for 
employees selling high-fee and high-interest products like credit cards 
and checking accounts have actually gone up as the economy has gone 
down.
    Risk-taking in the industry will quickly outpace regulatory 
coverage unless financial sector employees can challenge bad practices 
as they develop and direct regulators to problems. Whistleblowers are 
critical to combating fraud and other institutional misconduct. The 
Federal Government needs to hear from and protect finance sector 
employees who object to bad practices that they believe violate the 
law, are unfair or deceptive, or threaten the public welfare. If we 
previously had more protections for whistleblowers, we would have had 
more warning of the eventual collapse of Wall Street.
    Since 2000, Congress has enacted or strengthened whistleblower 
protections in six laws. They include consumer product manufacturing 
and retail commerce, railroads, the trucking industry, metropolitan 
transit systems, defense contractors, and all entities receiving 
stimulus funds. All of these laws provide more incentives and 
protections for disclosure of wrongdoing than does the current proposal 
from the Administration. For example, it does not protect disclosures 
made to an employer, which is often the first action taken by loyal, 
concerned employees, and the impetus for retaliation. Also 
conspicuously absent are administrative procedures and remedies that 
include best practices for fair and adequate consideration of claims by 
employees.
    We recommend the following improvements in any reform legislation 
before the Committee.
    Whistleblower protections. Innovation in the industry will quickly 
outpace regulatory coverage unless bank branch, call-center, and other 
financial sector employees can challenge bad practices as they develop 
and direct regulators to problems. The Federal Government needs to hear 
from and provide best practice whistleblower rights consistent with 
those in the stimulus and five laws passed or strengthened last 
Congress to protect finance sector employees who object to bad 
practices that they believe violate the law, are unfair or deceptive, 
or threaten the public welfare.
    Fair compensation. New rules need to restructure pay and incentives 
for front-line finance sector employees away from the current ``sell-
anything'' culture. The hundreds of thousands of front-line workers who 
work under pressure of sales goals need to be able to negotiate 
sensible compensation policies that reward service and sound banking 
over short-term sales.
SECTION 5. REBUTTAL TO ARGUMENTS AGAINST THE CFPA
    Proactive, affirmative consumer protection is essential to 
modernizing financial system oversight and to reducing risk. The 
current crisis illustrates the high costs of a failure to provide 
effective consumer protection. The complex financial instruments that 
sparked the financial crisis were based on home loans that were poorly 
underwritten; unsuitable to the borrower; arranged by persons not bound 
to act in the best interest of the borrower; or contained terms so 
complex that many individual homeowners had little opportunity to fully 
understand the nature or magnitude of the risks of these loans. The 
crisis was magnified by highly leveraged, largely unregulated financial 
instruments and inadequate risk management.
    Opponents of reform of the financial system have made several 
arguments against the establishment of a strong independent Consumer 
Financial Protection Agency. Indeed, the new CFPA appears to be among 
their main targets for criticism, compared with other elements of the 
reform plan. They have basically made six arguments. They have argued 
that regulators already have the powers it would be given, that it 
would be a redundant layer of bureaucracy, that consumer protection 
cannot be separated from supervision, that it will stifle innovation, 
that it would be unfair to small institutions and that its anti-
preemption provision would lead to balkanization. Each of these 
arguments is fatally flawed:
A. Opponents argue that regulators already have the powers that the 
        CFPA would be given.
    This argument is effectively a defense of the status quo, which has 
led to disastrous results. Current regulators already have between them 
some of the powers that the new agency would be given, but they haven't 
used them. Conflicts of interest and missions and a lack of will have 
worked against consumer enforcement. While our section above goes into 
greater detail on the failures of the regulators, two examples will 
illustrate:

    No HOEPA Rules Until 2008: The Federal Reserve Board was 
        granted sweeping antipredatory mortgage regulatory authority by 
        the 1994 Home Ownership and Equity Protection Act (HOEPA). 
        Final regulations were issued on 30 July 2008 only after the 
        world economy had collapsed due to the collapse of the U.S. 
        housing market triggered by predatory lending. \81\
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     \81\ 73 FR 147, Page 44522, Final HOEPA Rule, 30 July 2008.

    No Action on Abusive Credit Card Practices Until Late 2008: 
        Further, between 1995 and 2007, the Office of the Comptroller 
        of Currency issued only one public enforcement action against a 
        Top Ten credit card bank (and then only after the San Francisco 
        District Attorney had brought an enforcement action) and only 
        one other public enforcement order against a mortgage 
        subsidiary of a large national bank (only after HUD initiated 
        action). In that period, ``the OCC has not issued a public 
        enforcement order against any of the eight largest national 
        banks for violating consumer lending laws.'' \82\ The OCC's 
        failure to act on rising credit card complaints at the largest 
        national banks triggered Congress to investigate, resulting in 
        passage of the 2009 Credit Card Accountability, Responsibility 
        and Disclosure Act (CARD Act). \83\ While that law was under 
        consideration, other Federal regulators used their authority 
        under the Federal Trade Commission Act to propose and finalize 
        a similar rule. \84\ By contrast, the OCC requested the 
        addition of two significant loopholes to a key protection of 
        the proposed rule.
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     \82\ Testimony of Professor Arthur Wilmarth, 26 April 2007, before 
the Subcommittee on Financial Institutions and Consumer Credit, hearing 
on Credit Card Practices: Current Consumer and Regulatory Issues http:/
/www.house.gov/financialservices/hearing110/htwilmarth042607.pdf.
     \83\ H.R. 627 was signed into law by President Obama as Pub. L. 
No. 111-24 on 22 May 2009.
     \84\ The final rule was published in the Federal Register a month 
later. 74 FR 18, p. 5498 Thursday, January 29, 2009.

    Federal bank regulators currently face at least two conflicts. 
First, their primary mission is prudential supervision, with 
enforcement of consumer laws taking a back seat. Second, charter 
shopping in combination with agency funding by regulated entities 
encourages a regulatory race to the bottom as banks choose the 
regulator of least resistance. In particular, the Office of the 
Comptroller of the Currency and the Office of Thrift Supervision have 
failed utterly to protect consumers, let alone the safety and soundness 
of regulated entities. Instead, they competed with each other to 
minimize consumer protection standards as a way of attracting 
institutions to their charters, which meant that they tied their own 
hands and failed to fulfill their missions. (Note: they weren't trying 
to fail, but that was a critical side effect of the charter 
competition.)
    Establishing a new consumer agency that has consumer protection as 
its only mission and that regulated firms cannot hide from by charter-
shopping is the best way to guarantee that consumer laws will receive 
sustained, thoughtful, proactive attention from a Federal regulator.
B. Opponents argue that the CFPA would be a redundant layer of 
        bureaucracy.

        We do not propose a new regulatory agency because we seek more 
        regulation, but because we seek better regulation. The very 
        existence of an agency devoted to consumer protection in 
        financial services will be a strong incentive for institutions 
        to develop strong cultures of consumer protection. (The Obama 
        Administration, Financial Regulatory Reform: A New Foundation, 
        p. 57)

    The new CFPA would not be a redundant layer of bureaucracy. To the 
contrary, the new agency would consolidate and streamline Federal 
consumer protection for credit, savings and payment products that is 
now required in almost 20 different statutes and divided between seven 
different agencies. As the New Foundation document continues:

        The core of such an agency can be assembled reasonably quickly 
        from discrete operations of other agencies. Most rule-writing 
        authority is concentrated in a single division of the Federal 
        Reserve, and three of the four Federal banking agencies have 
        mostly or entirely separated consumer compliance supervision 
        from prudential supervision. Combining staff from different 
        agencies is not simple, to be sure, but it will bring 
        significant benefits for responsible consumers and 
        institutions, as well as for the market for consumer financial 
        services and products. \85\
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     \85\ The Obama Administration, ``Financial Regulatory Reform: A 
New Foundation'', p. 57.

    And today, a single transaction such as a mortgage loan is subject 
to regulations promulgated by several agencies and may be made or 
arranged by an entity supervised by any of several other agencies. 
Under the CFPA, one Federal agency will write the rules and see that 
they are followed.
C. Opponents argue that consumer protection cannot be separated from 
        supervision.
    The current regulatory consolidation of both of these functions has 
led to the subjugation of consumer protection in most cases, to the 
great harm of Americans and the economy. Nevertheless, trade 
associations for many of the financial institutions that have inflicted 
this harm claim that a new approach that puts consumer protection at 
the center of financial regulatory efforts will not work. The American 
Bankers Association, for example, States that while the length of time 
banks hold checks under Regulation CC may be a consumer issue, ``fraud 
and payments systems operational issues'' are not. \86\
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     \86\ Letter of 28 May 2009 from the American Bankers Association 
to Treasury Secretary Tim Geithner, available at http://www.aba.com/NR/
rdonlyres/4640E4F1-4BC9-4187-B9A6-E3705DD9B307/60161/
GeithnerMay282009.pdf (last viewed 21 June 2009).
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    Again, as the Administration points out in its carefully thought-
out blueprint for the new agency:

        The CFPA would be required to consult with other Federal 
        regulators to promote consistency with prudential, market, and 
        systemic objectives. Our proposal to allocate one of the CFPA's 
        five board seats to a prudential regulator would facilitate 
        appropriate coordination. \87\
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     \87\ The Obama Administration, Financial Regulatory Reform: A New 
Foundation, p. 59.

    We concur that the new agency should have full rulemaking authority 
over all consumer statutes. The checks and balances proposed by the 
Administration, including the consultative requirement and the 
placement of a prudential regulator on its board and its requirement to 
share confidential examination reports with the prudential regulators 
will address these concerns. In addition, the Administration's plan 
provides the CFPA with full compliance authority to examine and 
evaluate the impact of any proposed consumer protection measure on the 
bottom line of affected financial institutions. While collaboration 
between regulators will be very important, it should not be used as an 
excuse by either the CFPA or other regulators to unnecessarily delay 
needed action. The GAO, for example, has identified time delays in 
interagency processes as a contributor to the mortgage crisis. \88\ 
This is why it is important that the CFPA retain final rulemaking 
authority, as proposed under the Administration's plan. Such authority, 
along with the above mentioned mandates, will ensure that both the CFPA 
and the Federal prudential regulator collaborate on a timely basis.
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     \88\ ``As we note in our report, efforts by regulators to respond 
to the increased risks associated with the new mortgage products were 
sometimes slowed in part because of the need for five Federal 
regulators to coordinate their response.'' ``Financial Regulation: A 
Framework for Crafting and Assessing Proposals to Modernize the 
Outdated U.S. Financial Regulatory System'', Testimony before the U.S. 
Senate Committee on Banking, Housing, and Urban Affairs, February 4, 
2009, pp. 15-16.
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    For most of the last 20 years, bank regulators have shown little 
understanding of consumer protection and have not used powers they have 
long held. OCC's traditional focus and experience has been on safety 
and soundness, rather than consumer protection. \89\ Its record on 
consumer protection enforcement is one of little experience and little 
evidence of expertise. In contrast, as already noted, the States have 
long experience in enforcement of non-preempted State consumer 
protection laws. OCC admits that it was not until 2000 that it invoked 
long-dormant consumer protection authority provided by the 1975 
amendments to the Federal Trade Commission Act. \90\
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     \89\ See Christopher L. Peterson, ``Federalism and Predatory 
Lending: Unmasking the Deregulatory Agenda'', 78 Temp. L. Rev. 1, 73 
(2005).
     \90\ See Julie L. Williams and Michael L. Bylsma, ``On the Same 
Page: Federal Banking Agency Enforcement of the FTC Act To Address 
Unfair and Deceptive Practices by Banks'', 58 Bus. Law. 1243, 1244, 
1246 and n. 25, 1253 (2003) (citing authority from the early 1970s 
indicating that OCC had the authority to bring such an action under 
Section 8 of the Federal Deposit Insurance Act, noting that OCC brought 
its first such case in 2000, and conceding that ``[a]n obvious question 
is why it took the Federal banking agencies more than 25 years to reach 
consensus on their authority to enforce the FTC Act'').
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D. Opponents argue that a single agency focused on consumer protection 
        will ``stifle innovation'' in the financial services 
        marketplace.
    To the contrary, protecting consumers from traps and tricks when 
they purchase credit, savings or payment products should encourage 
confidence in the financial services marketplace and spur innovation. 
As Nobel Laureate Joseph Stiglitz has said:

        There will be those who argue that this regulatory regime will 
        stifle innovation. However, a disproportionate part of the 
        innovations in our financial system have been aimed at tax, 
        regulatory, and accounting arbitrage. They did not produce 
        innovations which would have helped our economy manage some 
        critical risks better-like the risk of home ownership. In fact, 
        their innovations made things worse. I believe that a well-
        designed regulatory system, along the lines I've mentioned, 
        will be more competitive and more innovative-with more of the 
        innovative effort directed at innovations which will enhance 
        the productivity of our firms and the well-being, including the 
        economic security, of our citizens. \91\
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     \91\ ``Too Big to Fail or Too Big to Save? Examining the Systemic 
Threats of Large Financial Institutions'', Joseph E. Stiglitz, April 
21, 2009, p. 10.
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E. Opponents argue that the CFPA would place an unfair regulatory 
        burden on small banks and thrifts.
    Small banks and thrifts that offer responsible credit and payment 
products should face a lower regulatory burden under regulation by a 
CFPA. Members of Congress, the media and consumer organizations have 
properly focused on the role of large, national banks and thrifts in 
using unsustainable, unfair and deceptive mortgage and credit card 
lending practices. In contrast, many smaller banks and thrifts have 
justifiably been praised for their more responsible lending practices 
in theses areas. In such situations, the CFPA would promote fewer 
restrictions and less oversight for ``plain-vanilla'' products that are 
simple, straightforward and fair.
    However, it is also important to note that some smaller hanks and 
thrifts have, unfortunately, been on the cutting edge of a number of 
other abusive lending practices that are harmful to consumers and that 
must be addressed by a CFPA. More than 75 percent of State chartered 
banks surveyed by the FDIC, for example, automatically enrolled 
customers in high-cost overdraft loan programs without consumers' 
consent. Some of these banks deny consumers the ability to even opt out 
of being charged high fees for overdraft transactions that the banks 
chose to permit. Smaller banks have also been leaders in facilitating 
high-cost refund anticipation loans, in helping payday lenders to evade 
State loan restrictions and in offering deceptive and extraordinarily 
expensive ``fee harvester'' credit cards. (See Appendix 1 for more 
information.)
F. Opponents argue that the agency's authority to establish only a 
        Federal floor of consumer protection would lead to regulatory 
        inefficiency and balkanization.
    The loudest opposition to the new agency will likely be aimed at 
the Administration's sensible proposal that CFPA's rules be a Federal 
floor and that the States be allowed to enact stronger consumer laws 
that are not inconsistent, as well as to enforce both Federal and State 
laws. This proposed return to common sense protections is strongly 
endorsed by consumer advocates and State attorneys general.
    We expect the banks and other opponents to claim that the result 
will be 51 balkanized laws that place undue costs on financial 
institutions that are then passed onto consumers in the form of higher 
priced or less available loans. In fact, this approach is likely to 
lead to a high degree of regulatory uniformity (if the CFPA sets high 
minimum standards,) greater protections for consumers without a 
significant impact on cost or availability, increased public confidence 
in the credit markets and financial institutions, and less economic 
volatility. For example, comprehensive research by the Center for 
Responsible Lending found that subprime mortgage loans in States that 
acted vigorously to rein in predatory mortgage lending before they were 
preempted by the OCC had fewer abusive terms. In States with stronger 
protections, interest rates on subprime mortgages did not increase, and 
instead, sometimes decreased, without reducing the availability of 
these loans. \92\ Additionally, as Nobel Laureate Joseph Stiglitz has 
pointed out, the cost of regulatory duplication is miniscule to the 
cost of the regulatory failure that has occurred. \93\
---------------------------------------------------------------------------
     \92\ Wei Li and Keith S. Ernst, Center for Responsible Lending, 
``The Best Value in the Subprime Market: State Predatory Lending 
Reforms'', February, 23, 2006, p. 6.
     \93\ ``Some worry about the cost of duplication. But when we 
compare the cost of duplication to the cost of damage from inadequate 
regulation--not just the cost to the taxpayer of the bail-outs but also 
the costs to the economy from the fact that we will be performing well 
below our potential--it is clear that there is not comparison,'' 
Testimony of Dr. Joseph E. Stiglitz, Professor, Columbia University, 
before the House Financial Services Committee, October 21, 2008, p. 16.
---------------------------------------------------------------------------
    It is also clear that the long campaign of preemption by the OTS 
and OCC, culminating in the 2004 OCC rules, contributed greatly to the 
current predatory lending crisis. After a discussion of the OCC's 
action eliminating State authority, we will discuss more generally why 
Federal consumer law should always be a floor.
    F.1. The OCC's Preemption of State Laws Exacerbated The Crisis. In 
2000-2004, the OCC worked with increasing aggressiveness to prevent the 
States from enforcing State laws and stronger State consumer protection 
standards against national banks and their operating subsidiaries, from 
investigating or monitoring national banks and their operating 
subsidiaries, and from seeking relief for consumers from national banks 
and subsidiaries.
    These efforts began with interpretative letters stopping State 
enforcement and State standards in the period up to 2004, followed by 
OCC's wide-ranging preemption regulations in 2004 purporting to 
interpret the National Bank Act, plus briefs in court cases supporting 
national banks' efforts to block State consumer protections.
    In a letter to banks on November 25, 2002, the OCC openly 
instructed banks that they ``should contact the OCC in situations where 
a State official seeks to assert supervisory authority or enforcement 
jurisdiction over the bank . . . . \94\ The banks apparently accepted 
this invitation, notifying the OCC of State efforts to investigate or 
enforce State laws. The OCC responded with letters to banks and to 
State banking agencies asserting that the States had no authority to 
enforce State laws against national banks and subsidiaries, and that 
the banks need not comply with the State laws. \95\
---------------------------------------------------------------------------
     \94\ Office of the Comptroller of the Currency, Interpretive 
Letter No. 957 n.2 (Jan. 27, 2003) (citing OCC Advisory Letter 2002-9 
(Nov. 25, 2002)) (viewed Jun. 19, 2009, at http://www.occ.treas.gov/
interp/mar03/int957.doc, and available at 2003 OCC Ltr. LEXIS 11).
     \95\ E.g., Office of the Comptroller of the Currency, Interpretive 
Letter No. 971 (Jan. 16, 2003) (letter to Pennsylvania Department of 
Banking, that it does not have the authority to supervise an unnamed 
national bank's unnamed operating subsidiary which engages in subprime 
mortgage lending (unnamed because the interpretive letter is 
unpublished) (viewed Jun. 19, 2009, at http://
comptrollerofthecurrency.gov/interp/sep03/int971.doc, and available at 
2003 OCC QJ LEXIS 107).
---------------------------------------------------------------------------
    For example, the OCC responded to National City Bank of Indiana, 
and its operating subsidiaries, National City Mortgage Company, First 
Franklin Financial Corporation, and Altegra Credit Company, regarding 
Ohio's authority to monitor their mortgage banking and servicing 
businesses. That opinion concluded that ``the OCC's exclusive 
visitorial powers preclude States from asserting supervisory authority 
or enforcement jurisdiction over the Subsidiaries.'' \96\
---------------------------------------------------------------------------
     \96\ Office of the Comptroller of the Currency, Interpretive 
Letter No. 958 (Jan. 27, 2003) (viewed Jun. 19, 2009, at http://
www.occ.treas.gov/interp/mar03/int958.pdf, and available at 2003 OCC 
Ltr. LEXIS 10).
---------------------------------------------------------------------------
    The OCC responded to Bank of America, N.A., and its operating 
subsidiary, BA Mortgage LLC, regarding California's authority to 
examine the operating subsidiary's mortgage banking and servicing 
businesses and whether the operating subsidiary was required to 
maintain a license under the California Residential Mortgage Lending 
Act. That opinion concluded that ``the Operating Subsidiary also is not 
subject to State or local licensing requirements and is not required to 
obtain a license from the State of California in order to conduct 
business in that State.'' \97\
---------------------------------------------------------------------------
     \97\ The OCC's exclusive visitorial powers preclude States from 
asserting supervisory authority or enforcement jurisdiction over the 
Subsidiaries (Jan. 27, 2003) (viewed Jun. 19, 2009, at http://
www.occ.treas.gov/interp/mar03/int957.doc), and available at 2003 OCC 
Ltr. LEXIS 11).
---------------------------------------------------------------------------
    The OCC wrote the Pennsylvania Department of Banking, stating that 
Pennsylvania does not have the authority to supervise an unnamed 
national bank's unnamed operating subsidiary which engages in subprime 
mortgage lending. \98\ (The national bank and operating subsidiary were 
not named because this interpretive letter was unpublished.)
---------------------------------------------------------------------------
     \98\ Office of the Comptroller of the Currency, Interpretive 
Letter No. 971 (unpublished) (Jan. 16, 2003) (viewed Jun. 19, 2009, at 
http://comptrollerofthecurrency.gov/interp/sep03/int971.doc, and 
available at 2003 OCC QJ LEXIS 107).
---------------------------------------------------------------------------
    The OCC even issued a formal preemption determination and order, 
stating that ``the provisions of the GFLA [Georgia Fair Lending Act] 
affecting national banks' real estate lending are preempted by Federal 
law'' and ``issuing an order providing that the GFLA does not apply to 
National City or to any other national bank or national bank operating 
subsidiary that engages in real estate lending activities in Georgia.'' 
\99\
---------------------------------------------------------------------------
     \99\ Office of the Comptroller of the Currency, Preemption 
Determination and Order, 68 Fed. Reg. 46,264, 46,264 (Aug. 5, 2003).
---------------------------------------------------------------------------
    As Business Week pointed out in 2003, not only did States attempt 
to pass laws to stop predatory lending, they also attempted to warn 
Federal regulators that the problem was getting worse. \100\
---------------------------------------------------------------------------
     \100\ Robert Berner and Brian Grow, ``They Warned Us About the 
Mortgage Crisis'', Business Week, 9 October 2008, available at http://
www.businessweek.com/magazine/content/08_42/b4104036827981.htm, (last 
visited 21 June 2009).
---------------------------------------------------------------------------
    A number of factors contributed to the mortgage disaster and credit 
crunch. Interest rate cuts and unprecedented foreign capital infusion 
fueled thoughtless lending on Main Street and arrogant gambling on Wall 
Street. The trading of esoteric derivatives amplified risks it was 
supposed to mute. One cause, though, has been largely overlooked: the 
stifling of prescient State enforcers and legislators who tried to 
contain the greed and foolishness. They were thwarted in many cases by 
Washington officials hostile to regulation and a financial industry 
adept at exploiting this ideology.
    Under the proposal, critical authority will be returned to those 
attorneys general, who have demonstrated both the capacity and the will 
to enforce consumer laws. In addition to losing the States' experience 
in enforcing such matters, depriving the States of the right to enforce 
their non-preempted consumer protection laws raises serious concerns of 
capacity. According to a recent congressional report, State banking 
agencies and State attorneys general offices employ nearly 700 full 
time staff to monitor compliance with consumer laws, more than 17 times 
the number of OCC personnel then allocated to investigate consumer 
complaints. \101\
---------------------------------------------------------------------------
     \101\ See H. Comm. on Financial Services, 108th Cong., Views and 
Estimates on Matters To Be Set Forth in the Concurrent Resolution on 
the Budget for Fiscal Year 2005, at 16 (Comm. Print 2004). ``In the 
area of abusive mortgage lending practices alone, State bank 
supervisory agencies initiated 20,332 investigations in 2003 in 
response to consumer complaints, which resulted in 4,035 enforcement 
actions.''
---------------------------------------------------------------------------
    Earlier this year, Illinois Attorney General Lisa Madigan testified 
before this Committee and outlined the numerous major, multistate cases 
against predatory lending that have been brought by her office and 
other State offices of attorneys general. However, she included this 
caveat:

        State enforcement actions have been hamstrung by the dual 
        forces of preemption of State authority and lack of Federal 
        oversight. The authority of State attorneys general to enforce 
        consumer protection laws of general applicability was 
        challenged at precisely the time it was most needed--when the 
        amount of sub prime lending exploded and riskier and riskier 
        mortgage products came into the marketplace. \102\
---------------------------------------------------------------------------
     \102\ Testimony of Illinois Attorney General Lisa Madigan Before 
the Committee on Financial Services, Hearing on Federal and State 
Enforcement of Financial Consumer and Investor Protection Laws, 20 
March 2009, available at http://www.house.gov/apps/list/hearing/
financialsvcs_dem/il_-_madigan.pdf (last visited 22 June 2009).

    This month, General Madigan and seven colleagues sent President 
Obama a letter supporting a Consumer Financial Protection Agency 
---------------------------------------------------------------------------
preserving State enforcement authority:

        [W]e believe that any reform must (1) preserve State 
        enforcement authority, (2) place Federal consumer protection 
        powers with an agency that is focused primarily on consumer 
        protection, and (3) place primary oversight with Government 
        agencies and not depend on industry selfregulation. \103\
---------------------------------------------------------------------------
     \103\ Letter of 15 June 2009, from the chief legal enforcement 
officers of eight States (California, Connecticut, Illinois, Iowa, 
Maryland, Massachusetts, North Carolina, and Ohio) to President Obama, 
on file with the authors.

    F.2. Why Federal Law Should Always Be a Floor. Consumers need State 
laws to prevent and solve consumer problems. State legislators 
generally have smaller districts than members of Congress do. State 
legislators are closer to the needs of their constituents than members 
of Congress. States often act sooner than Congress on new consumer 
problems. Unlike Congress, a State legislature may act before a harmful 
practice becomes entrenched nationwide. In a September 22, 2003, speech 
to the American Bankers Association in Hawaii, Comptroller John D. 
Hawke admitted that consumer protection activities ``are virtually 
always responsive to real abuses.'' He continued by pointing out that 
Congress moves slowly. Comptroller Hawke said, ``It is generally quite 
unusual for Congress to move quickly on regulatory legislation--the 
Gramm-Leach-Bliley privacy provisions being a major exception. Most 
often they respond only when there is evidence of some persistent abuse 
in the marketplace over a long period of time.'' U.S. consumers should 
not have to wait for a persistent, nationwide abuse by banks before a 
remedy or a preventative law can be passed and enforced by a State to 
protect them.
    States can and do act more quickly than Congress, and States can 
and do respond to emerging practices that can harm consumers while 
those practices are still regional, before they spread nationwide. 
These examples extend far beyond the financial services marketplace.
    States and even local jurisdictions have long been the laboratories 
for innovative public policy, particularly in the realm of 
environmental and consumer protection. The Federal Clean Air Act grew 
out of a growing State and municipal movement to enact air pollution 
control measures. The national organic labeling law, enacted in October 
2002, was passed only after several States, including Oregon, 
Washington, Texas, Idaho, California, and Colorado, passed their own 
laws. In 1982, Arizona enacted the first ``Motor Voter'' law to allow 
citizens to register to vote when applying for or renewing drivers' 
licenses; Colorado placed the issue on the ballot, passing its Motor 
Voter law in 1984. National legislation followed suit in 1993. Cities 
and counties have long led the smoke-free indoor air movement, 
prompting States to begin acting, while Congress, until this month, 
proved itself virtually incapable of adequately regulating the tobacco 
industry. A recent and highly successful FTC program--the National Do 
Not Call Registry to which 58 million consumers have added their names 
in 1 year--had already been enacted in 40 States.
    But in the area of financial services, where State preemption has 
arguably been the harshest and most sweeping, examples of innovative 
State activity are still numerous. In the past 5 years, since the OCC's 
preemption regulations have blocked most State consumer protections 
from application to national banks, one area illustrating the power of 
State innovation has been in identity theft, where the States have 
developed important new consumer protections that are not directed 
primarily at banking. In the area of identity theft, States are taking 
actions based on a non-preemptive section of the Fair Credit Reporting 
Act, where they still have the authority to act against other actors 
than national banks or their subsidiaries.
    There are 7 to 10 million victims of identity theft in the U.S. 
every year, yet Congress did not enact modest protections such as a 
security alert and a consumer block on credit report information 
generated by a thief until passage of the Fair and Accurate Credit 
Transactions Act (FACT Act or FACTA) in 2003. That law adopted just 
some of the identity theft protections that had already been enacted in 
States such as California, Connecticut, Louisiana, Texas, and Virginia. 
\104\
---------------------------------------------------------------------------
     \104\ See California Civil Code 1785.11.1, 1785.11.2, 1785,16.1; 
Conn. SB 688 9(d), (e), Conn. Gen. Stats. 36a-699; IL Re. Stat. Ch. 
505 2MM; LA Rev. Stat. 9:3568B.1, 9:3568C, 9:3568D, 9:3571.1 (H)-
(L); Tex. Bus. & Comm. Code 20.01(7), 20.031, 20.034-039, 20.04; VA 
Code 18.2-186.31 :E.
---------------------------------------------------------------------------
    Additionally FACTA's centerpiece protection against both 
inaccuracies and identity theft, access to a free credit report 
annually on request, had already been adopted by seven States: 
Colorado, Georgia, Maine, Maryland, Massachusetts, New Jersey, and 
Vermont. Further, California in 2000, following a joint campaign by 
consumer groups and realtors, became the first State to prohibit 
contractual restrictions on realtors showing consumers their credit 
scores, ending a decade of stalling by Congress and the FTC. \105\ The 
FACT act extended this provision nationwide.
---------------------------------------------------------------------------
     \105\ See 2000 Cal. Legis. Serv. 978 (West). This session law was 
authored by State Senator Liz Figueroa. ``An act to amend Sections 
1785.10, 1785.15, and 1785.16 of, and to add Sections 1785.15.1, 
1785.15.2, and 1785.20.2 to the Civil Code, relating to consumer 
credit.''
---------------------------------------------------------------------------
    Yet, despite these provisions, advocates knew that the 2003 Federal 
FACTA law would not solve all identity theft problems. Following 
strenuous opposition by consumer advocates to the blanket preemption 
routinely sought by industry as a condition of all remedial Federal 
financial legislation, the final 2003 FACT Act continued to allow 
States to take additional actions to prevent identity theft. The 
results have been significant.
    Since its passage, fully 47 States and the District of Columbia 
have granted consumers the right to prevent access to their credit 
reports by identity thieves through a security freeze. Indeed, even the 
credit bureaus, longtime opponents of the freeze, then adopted the 
freeze nationwide. \106\
---------------------------------------------------------------------------
     \106\ Consumers Union, U.S. PIRG and AARP cooperated on a model 
State security freeze proposal that helped ensure that the State laws 
were not balkanized, but converged toward a common standard. More 
information on the State security freeze laws is available at http://
www.consumersunion.org/campaigns/learn_more/003484indiv.html (last 
visited 21 June 2009).
---------------------------------------------------------------------------
    A key principle of federalism is the role of the States as 
laboratories for the development of law. \107\ State and Federal 
consumer protection laws can develop in tandem. After one or a few 
States legislate in an area, the record and the solutions developed in 
those States provide important information for Congress to use in 
deciding whether to adopt a national law, how to craft such a law, and 
whether or not any new national law should displace State law.
---------------------------------------------------------------------------
     \107\ New State Ice Co. v. Leibman, 285 U.S. 262, 311 (1932) 
(Brandeis, J., dissenting).
---------------------------------------------------------------------------
    A few more examples from California illustrate the important role 
of the States as a laboratory and a catalyst for Federal consumer 
protections for bank customers. In 1986, California required that 
specific information be included in credit card solicitations with 
enactment of the then-titled Areias-Robbins Credit Card Full Disclosure 
Act of 1986. That statute required every credit card solicitation to 
contain a chart showing the interest rate, grace period, and annual 
fee. \108\ Two years later, Congress chose to adopt the same concept in 
the Federal Fair Credit and Charge Card Disclosure Act (FCCCDA), 
setting standards for credit card solicitations, applications and 
renewals. \109\ The 1989 Federal disclosure box \110\ (know as the 
``Schumer Box'') is strikingly similar to the disclosure form required 
under the 1986 California law.
---------------------------------------------------------------------------
     \108\ 1986 Cal. Stats., Ch. 1397, codified at California Civil 
Code 1748.11.
     \109\ Pub. L. 100-583, 102 Stat. 2960 (Nov. 1, 1988), codified in 
part at 15 U.S.C. 1637(c) and 1610(e).
     \110\ 54 Fed. Reg. 13855 (April 6, 1989, Appendix G, form G-
10(B)).
---------------------------------------------------------------------------
    States also led the way in protecting financial services consumers 
from long holds on deposited checks. California enacted restrictions on 
the length of time a bank could hold funds deposited by a consumer in 
1983; Congress followed in 1986. California's 1983 funds availability 
statute required the California Superintendent of Banks, Savings and 
Loan Commissioner, and Commissioner of Corporations to issue 
regulations to define a reasonable time after which a consumer must be 
able to withdraw funds from an item deposited in the consumer's 
account. \111\ Similar laws were passed in Massachusetts, New York, New 
Jersey, and other States. Congress followed a few years later with the 
Federal Expedited Funds Availability Act of 1986. \112\ California led 
the way on security breach notice legislation. Its law and those of 
other States have functioned as a de facto national security breach 
law, while Congress has failed to act. \113\
---------------------------------------------------------------------------
     \111\ 1983 Cal. Stat. Ch. 1011, 2, codified at Cal. Fin. Code 
866.5.
     \112\ Pub. L. 100-86, Aug. 10, 1987, 101 Stat. 552, 635, codified 
at 12 U.S.C. 4001.
     \113\ More information on State security breach notice laws is 
available at http://www.consumersunion.org/campaigns/
financialprivacynow/002215indiv.html (last visited 21 June 2009).
---------------------------------------------------------------------------
    It is certainly not the case that States always provide effective 
consumer protection. The States have also been the scene of some 
notable regulatory breakdowns in recent years, such as the failure of 
some States to properly regulate mortgage brokers and nonbank lenders 
operating in the subprime lending market, and the inability or 
unwillingness of many States to rein in lenders that offer 
extraordinarily high-cost, short term loans and trap consumers in an 
unsustainable cycle of debt, such as payday lenders and auto title loan 
companies. Conversely, Federal lawmakers have had some notable 
successes in providing a high level of financial services consumer 
protections in the last decade, such as the Credit Repair Organizations 
Act and the recently enacted Military Lending Act. \114\ This is why it 
is necessary for this new Federal agency to ensure that a minimum level 
of consumer protection is established in all States.
---------------------------------------------------------------------------
     \114\ Military Lending Act, 10 U.S.C. 987. Credit Repair 
Organizations Act, 15 U.S.C. 1679h (giving State Attorneys General and 
FTC concurrent enforcement authority).
---------------------------------------------------------------------------
    Nonetheless, as these examples show, State law is an important 
source of ideas for future Federal consumer protections. As Justice 
Brandeis said in his dissent in New State Ice Co., ``Denial of the 
right [of States] to experiment may be fraught with serious 
consequences to the Nation'' (285 U.S. at 311). A State law will not 
serve this purpose if States cannot apply their laws to national banks, 
who are big players in the marketplace for credit and banking services. 
State lawmakers simply won't pass new consumer protection laws that do 
not apply to the largest players in the banking marketplace.
    Efficient Federal public policy is one that is balanced at the 
point where even though the States have the authority to act, they feel 
no need to do so. Since we cannot guarantee that we are ever at that 
optimum, setting Federal law as a floor of protection as the default--
without also preempting the States--allows us to retain the safety net 
of State-Federal competition to guarantee the best public policy. \115\
---------------------------------------------------------------------------
     \115\ For further discussion, see Edmund Mierzwinski, ``Preemption 
of State Consumer Laws: Federal Interference Is a Market Failure,'' 
Government, Law, and Policy Journal of the New York State Bar 
Association, Spring 2004 (Vol. 6, No. 1, pp. 6-12).
---------------------------------------------------------------------------
Conclusion
    As detailed above, a strong Federal commitment to robust consumer 
protection is central to restoring and maintaining a sound economy. The 
Nation's financial crisis grew out of the proliferation of 
inappropriate and unsustainable lending practices that could have and 
should have been prevented. That failure harmed millions of American 
families, undermined the safety and soundness of the lending 
institutions themselves, and imperiled the economy as a whole. In 
Congress, a climate of deregulation and undue deference to industry 
blocked essential reforms. In the agencies, the regulators' failure to 
act, despite abundant evidence of the need, highlights the inadequacies 
of the current regulatory regime, in which none of the many financial 
regulators regard consumer protection as a priority.
    As outlined in the testimony above, establishment of a single 
Consumer Financial Protection Agency is a critical part of financial 
reform. As detailed above, its funding must be robust, independent and 
stable. Its board and governance must be structured to ensure strong 
and effective consumer input, and a Consumer Advocate should be 
appointed to report semi-annually to Congress on agency effectiveness.
    Our organizations, along with many other consumer, community, civil 
rights, labor and progressive financial institutions, believe that 
restoring consumer protection should be a cornerstone of financial 
reform. It will reduce risk and make the system more accountable to 
American families. We recognize, however, that other reforms are needed 
to restore confidence to the financial system. Our coalition ideas on 
these and other matters can be found at the Web site of Americans For 
Financial Reform, available at ourfinancialsecurity.org.
    Thank you for the opportunity to testify. Our organizations look 
forward to working with you to move the strongest possible Consumer 
Financial Protection Agency through the Senate and into law.
Appendices:

Appendix 1: Abusive Lending Practices by Smaller Banks and Thrifts

Appendix 2: Private Student Loan Regulatory Failures and Reform 
Recommendations

Appendix 3: Rent-A-Bank Payday Lending

Appendix 4: Information on Income (Primarily User and Transaction Fees 
Depending on Agency) of Major Financial Regulatory Agencies

Appendix 5: CFA Survey: Sixteen Largest Bank Overdraft Fees and Terms 



                                 ______
                                 

                  PREPARED STATEMENT OF PETER WALLISON
                        Arthur F. Burns Fellow,
                     American Enterprise Institute
                             July 14, 2009
    The Consumer Financial Protection Agency (CFPA), as proposed by the 
Obama Administration, is intended to be an independent agency with sole 
rule-making and enforcement authority for all Federal consumer 
financial protection laws (with the exception of those covered by the 
SEC and the CFTC). The draft legislation \1\ submitted by the 
Administration gives the agency jurisdiction over all companies, 
regardless of size, that are engaged generally in providing credit, 
savings, collection, or payment services. This is accomplished by 
transferring to the CFPA most or all of the authorities in 16 Federal 
statutes--ranging from the CRA to the Truth in Savings Act--that cover 
lending, mortgage financing, fair housing, credit repair, debt 
collection practices, fair credit reporting, and a multitude of other 
consumer financial products and services. The agency will be funded by 
fees imposed on the thousands of companies--from banks and credit card 
companies to local finance companies and department stores--that are 
subject to the legislation. In many cases, the agency's jurisdiction 
will be concurrent with the jurisdiction of State agencies, but the 
CFPA will not preempt State law.
---------------------------------------------------------------------------
     \1\ Consumer Financial Protection Agency Act of 2009, 1018, as 
proposed by the U.S. Department of the Treasury, June 30, 2009, 
available at www.financialstability.gov/docs/CFPA-Act.pdf (accessed 
July 6, 2009).
---------------------------------------------------------------------------
    Prior to submitting the legislation, the Administration circulated 
a white paper \2\ that contains clear Statements of the policies and 
intentions underlying the legislation. In this testimony, I will refer 
to the white paper as well as the legislation itself.
---------------------------------------------------------------------------
     \2\ U.S. Department of the Treasury, ``Financial Regulatory 
Reform: A New Foundation'' (June 30, 2009), 55-56, available at 
www.financialstability.gov/docs/regs/FinalReport_web.pdf (accessed July 
6, 2009).
---------------------------------------------------------------------------
    As might be expected, the new agency will have jurisdiction over 
disclosure to consumers. This is the customary way that consumer 
protection has proceeded at the Federal level. In the past, consumers 
were generally expected to have the ability to make decisions for 
themselves if they were given the necessary information. The securities 
laws, for example, are largely consumer protection laws, developed 
during the New Deal period. In selling a security, an issuing company 
and any underwriter or dealer must supply investors with all material 
facts, including any additional facts needed to ensure that the 
information disclosed is not misleading. This approach has worked well 
for 75 years.
    The material facts standard of the SEC is of course subject to 
interpretation, but it is possible to give it some content by imagining 
what an investor would want to know about the risks a company faces and 
its financial and business prospects. The white paper States that the 
CFPA will use a ``reasonableness'' standard, which it defines as 
``balance in the presentation of risks and benefits, as well as clarity 
and conspicuousness in the description of significant product costs and 
risks.'' The draft legislation follows this pattern, so that disclosure 
to consumers must--perhaps like a drug label or a securities 
prospectus--include both the benefits and the risks of a product or 
service. These will be difficult guidelines for the regulated industry 
to follow, especially because enforcement actions and lawsuits may 
result from violations. Despite substantial disclosure on drug labels 
and in securities prospectuses--in some cases ordered by the regulatory 
agency--successful law-suits in both areas have claimed that the 
disclosure was not sufficient.
The Suitability Problem
    The real trouble begins, however, when the Administration's plan 
gets beyond the relatively simple issue of disclosure and proposes that 
the CFPA define standards for what the white paper calls ``plain-
vanilla'' products and services. The draft legislation describes them 
as ``standard consumer financial products or services'' that will be 
both ``transparent'' and ``lower risk.'' According to the white paper, 
the CFPA will have authority ``to require all providers and 
intermediaries to offer these products prominently, alongside whatever 
other lawful products they choose to offer.'' \3\ This idea, seemingly 
quite simple, raises a host of significant questions. If there is a 
plain-vanilla product, who is going to be eligible for the product that 
has strawberry sauce? In other words, once the baseline is established 
for a product that can or must be offered to everyone, who is going to 
be eligible for the product that, because of its additional but more 
complex features, offers financial advantages? This is the suitability 
problem--requiring providers to decide whether a particular product or 
service is suitable for a particular customer--and the Administration's 
plan is caught in its web.
---------------------------------------------------------------------------
     \3\ Ibid., 15.
---------------------------------------------------------------------------
    As an example, consider a mortgage with a prepayment penalty. The 
white paper notes that the ``CFPA could determine that prepayment 
penalties should be banned for certain types of products, because 
penalties make loans too complex for the least sophisticated consumers 
or those least able to shop effectively.'' \4\ This seems logical if 
one assumes--as the Administration seems prepared to do--that some 
consumers can be denied access to products they want. As the white 
paper notes, ``[t]he CFPA should be authorized to use a variety of 
measures to help ensure alternative mortgages were obtained only by 
consumers who understood the risks and could manage them.'' \5\
---------------------------------------------------------------------------
     \4\ Ibid., 68.
     \5\ Ibid., 66.
---------------------------------------------------------------------------
    So, what about the husband and wife who intend to keep their home 
until their children are grown and are willing, for this reason, to 
accept a prepayment penalty in order to get a lower rate on their 
fixed-rate mortgage? The Administration is suggesting that this option 
might not be available to them if the mortgage provider (and ultimately 
the CFPA) does not consider them ``sophisticated'' consumers. This kind 
of discrimination between and among Americans is something new and 
troubling. The Administration's plan clearly intends for some consumers 
to be denied access to certain products and services. ``As mortgages 
and credit cards illustrate,'' the white paper declares, ``even 
seemingly `simple' financial products remain complicated to large 
numbers of Americans. As a result, in addition to meaningful 
disclosure, there must also be standards of appropriate business 
conduct and regulations that help ensure providers do not have undue 
incentives to undermine those standards.'' \6\ In other words, by 
requiring that all providers offer plain-vanilla products and services 
in addition to other products, the Administration is creating a regime 
in which providers must keep ``complicated'' products out of the hands 
of Americans who may not be able to understand them.
---------------------------------------------------------------------------
     \6\ Ibid., 67.
---------------------------------------------------------------------------
    This approach bears a strong resemblance to a paper published in 
October 2008 by the New America Foundation. \7\ One of the authors of 
the piece, Michael Barr, is now an assistant secretary of the Treasury. 
The underlying theory of the Barr paper is that consumers should be 
offered a baseline, simple and low risk version of every product 
offered by credit and other financial providers. This simple product is 
called a ``plain-vanilla'' product in the New America Foundation paper, 
just as it is in the Administration's white paper. Referring to 
mortgages, the Barr paper describes this sequence of events: 
``Borrowers . . . would get the standard mortgage offered, unless they 
chose to opt out in favor of a nonstandard [i.e., more complex and 
risky] option offered by the lender, after honest and comprehensible 
disclosures from brokers and lenders about the terms and risks of the 
alternative mortgages. An opt-out mortgage system would mean borrowers 
would be more likely to get straightforward loans they could 
understand.'' \8\
---------------------------------------------------------------------------
     \7\ Michael Barr, et al., ``Behaviorally Informed Financial 
Services Regulation'', New America Foundation, October 2008.
     \8\ Ibid., 9.
---------------------------------------------------------------------------
    What the Barr paper fails to understand is the risks that are faced 
by the provider in offering to customers anything more complex than the 
plain-vanilla product. Although providers will be free to do so, the 
possibility of enforcement actions by the CFPA or the Federal Trade 
Commission, suits by State attorneys general (specifically authorized 
to enforce the CFPA's regulations), and the inevitable class action 
lawsuits will make the offering of the more complex product very risky. 
Although the Barr paper suggests that the provider can protect itself 
by making a full and fair disclosure, even the white paper recognizes 
that this is unlikely to be effective. The white paper notes: ``Even if 
disclosures are fully tested and all communications are properly 
balanced, product complexity itself can lead consumers to make costly 
errors.'' \9\ When these costly errors are made, they will be prima 
facie evidence that the product was too complex for the consumer, and 
the provider will be faced with a fine, an expensive enforcement 
action, or worse. Thus, we are not talking about a question of 
disclosure--making the risks and costs plain. Instead, what the 
Administration is setting up is a mechanism that will ultimately deny 
some people access to some products because of their deficiencies in 
experience, sophistication, and perhaps even intelligence.
---------------------------------------------------------------------------
     \9\ White paper, 66.
---------------------------------------------------------------------------
    This approach seems to be an unprecedented departure by the U.S. 
Government from some of the fundamental ideas of individual equality 
that have underpinned U.S. society since its inception. Conservatives 
have long argued that liberalism reflects a paternalistic desire on the 
part of elites to control and limit others' choices while leaving 
themselves unaffected. The white paper seems to validate exactly that 
critique. Providers will be at risk if they offer some products to 
ordinary consumers but could feel safe in offering the same products to 
those who are well educated and sophisticated. In important ways, the 
Administration's approach raises the issues in the famous Louis 
Brandeis Statement, quoted by Milton and Rose Friedman at the beginning 
of their book, Free to Choose: ``Experience should teach us to be most 
on our guard to protect liberty when the Government's purposes are 
beneficial. Men born to freedom are naturally alert to repel invasion 
of their liberty by evil-minded rulers. The greater dangers to liberty 
lurk in insidious encroachment by men of zeal, well-meaning but without 
understanding.'' \10\
---------------------------------------------------------------------------
     \10\ Olmstead v. United States, 277 U.S. 479 (1928).
---------------------------------------------------------------------------
    In addition, there are troubling questions about how determinations 
of sophistication or even mental capacity are going to be made, who is 
going to make them, and what standards will be followed. It appears 
that the provider must make this decision, but what kinds of guidelines 
will the CFPA provide to protect the provider against the inevitable 
legal attacks? Vague language in the legislation suggests the consumer 
can opt out of the plain-vanilla alternative, but as noted above this 
simply changes the nature of the provider's risk from the qualities of 
the product to the qualities of the disclosures that were made to the 
consumer about what such an opt out would mean. Finally, the elements 
of a plain-vanilla mortgage can be quite arbitrary, forcing people into 
structures that are financially disadvantageous. How can anyone know, 
for example, whether a 30-year fixed-rate mortgage is better than a 30-
year adjustable-rate loan with a reasonable cap on interest costs? If 
interest rates rise in the future, the fixed-rate mortgage is best, but 
if they fall, a variable rate should be preferred. Should a Government 
agency have the power to determine whether a homebuyer is allowed to 
make this choice?
    In contrast, the disclosure system has always seemed appropriate in 
our society because it does not require invidious or arbitrary 
discrimination between one person and another. As long as the 
disclosure is fair and honest, why should anyone be prohibited from 
buying a product or service? While it is apparent that everyone is not 
equal in understanding or sophistication, our national sensibility has 
been that these differences should be ignored in favor of the higher 
ideal of equality. Where consumers of limited understanding are 
protected by this system is through consumer protection actions that 
charge providers with fraud and deception while taking into account the 
limited capacities of the consumer. Under this approach, fraud and 
deception are punished, but the Government is not involved ex ante in 
deciding whether one person or another is eligible to receive what our 
economy has to offer. Yet the white paper says: ``The CFPA should be 
authorized to use a variety of measures to help ensure that alternative 
mortgages were obtained only by consumers who understood the risks and 
could manage them. For example, the CFPA could . . . require providers 
to have applicants fill out financial experience questionnaires.'' \11\ 
If this sounds a bit like a literacy or property test for voting--ideas 
long ago discredited--it is not surprising. Both impulses spring from 
the same source: a sense that some people are not as capable as others 
to make important choices.
---------------------------------------------------------------------------
     \11\ White paper, 66.
---------------------------------------------------------------------------
    To be sure, the securities laws contemplate that some distinctions 
will be made among customers on the basis of suitability. A broker-
dealer may not sell a securities product to a customer if the customer 
does not have the resources to bear the risk or the ability to 
understand its nature. This is the closest analogy to what the 
Administration is contemplating for all consumers, but as a precedent 
it is inapposite. Owning a security is not a necessity for living in 
our economically developed society, but obtaining credit certainly is. 
Whether through a credit card, an account at a food or department 
store, a car loan, or a lay-away savings plan at a local furniture 
dealer, credit is a benefit that enables every person and every family 
to live better in our economy. Denying a credit product suitable to 
one's needs but deemed to be beyond one's capacity to understand has a 
far greater immediate adverse effect on a family's standard of living 
than telling an investor that a collateralized debt obligation is not a 
suitable product for his 401(k).
    Moreover, investors tend to be customers of broker-dealers over 
extended periods, so their financial and other capacities are well 
known to the brokers who handle their accounts. This is unlikely to be 
true for various credit products, which are likely to be established in 
single transactions and with little follow-up. Any attempt to determine 
a customer's ability to handle the risks associated with, say, a credit 
card could also involve investigation into matters that the customer 
considers private. Neither the draft legislation nor the white paper 
suggests how the provider of a financial service is to determine 
suitability while still protecting the customer's privacy. As discussed 
below, simply determining what other credit products and obligations 
particular applicants might have--and thus whether they are able to 
meet their obligations--will be difficult and costly. These problems do 
not normally arise in the suitability inquiry that broker-dealers must 
undertake.
Other Effects
    Several other serious problems arise out of the structure that the 
Administration seems to have in mind. The decision on a particular 
consumer's eligibility for a product will not be made by the CFPA but 
by the provider of the product or service. Apart from consumers 
themselves, providers are the first victims of this legislation. They 
will have to decide--at the risk of a CFPA enforcement action or a 
likely lawsuit--whether a particular customer is suitable for a 
particular product. This will place them in a difficult, if not 
impossible, position. If they accede to a customer's demand, and the 
customer later complains, the provider may face a costly enforcement 
proceeding or worse, but if the provider denies the customer the 
desired product, the provider will be blamed, not the Government 
agency. In not a few cases, the provider may be sued for denial of 
credit to someone later deemed suitable, rather than for granting 
credit to a person later deemed unsuitable. The white paper points out 
that the Administration does not intend to disturb private rights of 
action and in some cases ``may seek legislation to increase statutory 
damages.'' As noted above, State attorneys general are specifically 
authorized to enforce the CFPA's regulations. Although the white paper 
offers the possibility that a provider might get a ``no action letter'' 
or approval of its product and its disclosure, the personal financial 
condition and other capacities of the customer are what will count, not 
the simplicity of the product.
    The second victim will be innovation. Why should anyone take the 
risk to create a new product? Even if the CFPA will review it to 
determine whether it is accurately and fairly described--a process that 
may require the services of a lawyer and the usual expenses of 
completing applications and answering questions from a Government 
agency--the developer will still have to decide whether the people who 
want it are suitable to have it. The suitability decision can be 
expensive; a provider's better choice might be to stay with plain-
vanilla products and give up the idea of developing new products to 
attract new customers.
    The third victim will be low-cost credit. The tasks of getting 
approval for a product and investigating the suitability of every 
person who wants something more than a plain-vanilla product--whatever 
that may be--will substantially increase the cost of credit and reduce 
its availability. Leaving aside the effect on economic growth 
generally, higher credit costs and the denial of credit facilities that 
are deemed to be unsuitable for particular consumers will seriously 
impair the quality of life for many people of modest means or limited 
education. Credit provided by stores to regular customers may become 
too costly to administer. As a result, small neighborhood 
establishments may simply abandon the idea of providing credit and 
small finance companies and other small enterprises engaged in consumer 
financial services may well go out of business or merge with larger 
competitors. Even large credit providers may find that the additional 
business they attract with this service does not compensate for the 
risk and expense. Withdrawal of these competitors from the market will 
not only mean that many customers will be deprived of any credit 
sources and other services, but also that the reduced competition will 
allow credit fees to rise.
    Litigation will also be a factor in the decision of credit sources 
about whether to develop new products or offer the complex products and 
services that might lead to disputes with customers or the CFPA. 
Investor complaints about suitability in the securities field are 
handled through an arbitration process, so that an investor who claims 
that he was sold a product for which he was unsuitable must make his 
case to an arbitrator rather than a court. The current costs of a 
mistake in the suitability judgment are thus much smaller for the 
broker-dealer. The legislation would give the CFPA the authority to ban 
mandatory arbitration clauses in credit arrangements, and the white 
paper recommends that the SEC consider ending the arbitration process 
for securities. If the SEC decides to do this, litigation in the 
securities field will substantially increase the costs of broker-
dealers and investment advisers.
    Finally, inherent conflicts between consumer protection and 
prudential regulation will arise when consumer protection 
responsibility is moved from the bank supervisors to the CFPA. How 
these might be resolved has not been described in the legislation and, 
perhaps was not considered. For example, as noted above, the white 
paper suggests that prepayment penalties should be banned for certain 
types of products because they make loans too complex for the least 
sophisticated consumers. A prudential supervisor, however, might want 
prepayment penalties to be included in a prudently underwritten 
mortgage, since the ability of the borrower to prepay at any time 
without penalty raises the lender's interest rate risk. It is likely 
that the bank supervisors and the CFPA will have different policies on 
this and many other issues, and the banks will be caught in the middle.
Conclusion
    The Consumer Financial Protection Agency Act of 2009 is one of the 
most far-reaching and intrusive Federal laws ever proposed by an 
Administration. Not only does it reach down to regulate the most local 
levels of commercial activity, but the act would also set up procedures 
and incentives that will inevitably deny some consumers an opportunity 
to obtain products and services that are readily available to others. 
This legislation should be rejected.
                                 ______
                                 

               PREPARED STATEMENT OF SENDHIL MULLAINATHAN
                        Professor of Economics,
                           Harvard University
                             July 14, 2009
    Chairman Dodd, Ranking Member Shelby, and Members of the Committee, 
thank you for providing me with an opportunity to testify. By way of 
background, I am a Professor of Economics at Harvard who specializes in 
behavioral economics, a topic that combines two areas--economics and 
psychology. Any discussion of financial regulation must incorporate 
both areas--economists have a healthy respect for market forces while 
psychologists have a healthy respect for both people's immense 
capacities and limitations; they recognize that people are not 
financial engines churning out optimal choices in all environments. 
Understanding the current crisis--with its combination of competing 
lenders and sometimes-confused borrowers--requires behavioral 
economics.
    In my comments I will make four points:

    First, some decision environments allow consumers to choose 
        well while others result in poor choices.

    Second, when customers choose well there is healthy 
        competition: firms clamor to provide better products at lower 
        prices. When customers choose badly, there can be a race to the 
        bottom. Even a few unprincipled firms offering products that 
        exploit human fallibility can put pressure on the entire 
        market.

    Third, a two-part approach to financial regulation can 
        promote consumers capacity to choose well. Safe products would 
        be lightly regulated while less safe ones--where low road firms 
        could potentially exploit customers--would be more heavily 
        regulated. A fence around the safer products creates a more 
        level playing field between safe and less safe but 
        superficially attractive products. It provides an additional 
        tool that is less intrusive than bans, mandates or selective 
        bans for some customers. It allows all customers to access 
        products but simply ensures that those who access less safe 
        ones would be doing so with greater safeguards.

Though the scope of the proposed regulation is broad, I will use the 
choice between mortgages--at the heart of the current financial 
crisis--to illustrate my points.
Choosing Well and Badly
    First, let me describe the psychology of choice. Over the decades 
much research has helped us understand how people choose. I will 
illustrate the insights from this research using two familiar examples.
    Most of you have painted a room in your house. You probably 
remember choosing from thousands of colors; Benjamin Moore alone 
proudly offers 140 shades of white. How do you tackle this ocean of 
choice? You pick a general color--blue, yellow, whatever. You pick a 
few shades within that color. You try them out in small swatches on one 
wall, see if you like them and repeat until you have a color you like. 
The bottom line: despite the explosion of choice people are largely 
happy with the end outcome. And certainly we don't think the Government 
could step in and improve this market through regulation.
    I am also sure most of you have bought a digital camera. Going into 
the electronics store, you have some sense of what you want--do you 
need a small camera or a big one, do you prefer one brand over another? 
But once there the problem gets tougher. One camera has 8 megapixels 
and is smaller and cheaper; another has 12 megapixels and is bigger and 
more expensive. How do you choose? What is a megapixel? How many is 
enough? Are 8 megapixels 50 percent better than 12? You can ask the 
camera salesman but are his incentives to give you the best advice? If 
the bigger camera is the cheaper per megapixel it may draw you to buy 
that one even without knowing fully understanding what megapixels are. 
Though there are far fewer cameras than paint colors the choice is far 
more difficult. At the end of the process, you hope you have bought the 
best camera but you're never really sure.
    Part of choosing a mortgage is like choosing a paint color. 
Choosing a 30-year fixed rate mortgage means deciding on what is an 
affordable monthly payment. How much do you earn? What are your other 
expenses? The consumer can intuit much of this--in fact they may know 
it better than any outsider.
    But sometimes when choosing a mortgage you encounter features all 
too similar to megapixels. Suppose one mortgage costs $1,000 a month 
for the first 2 years and then the payment is 3 points above 1 month 
LIBOR, while another says it is $900 a month and then the payment is 4 
points about the 1 year constant Treasury bills rate. How do you make 
this choice? What is the difference between the LIBOR and the T-Bill 
rate? How much do they vary? Are 3 and 4 points about the right number? 
If the provider says you can refinance in 2 years, should you worry 
about being able to get another loan? Notice that in this morass, the 
$900 mortgage has some appeal; whatever else, it is cheaper now and 
allows you afford a bigger house. Few know the answers to these 
questions and those who do are the kind of people you avoid at a dinner 
party. This is worse than megapixels.
    Choices such as these are at the heart of why choosing mortgages 
and other financial products pose so many difficulties for customers. 
With paint, you can try different colors; you can't really try on many 
mortgages. With paint, you get feedback; with mortgages feedback comes 
rarely and far too late--when the payments explode. With paint, a 
mistake is, well, easily painted over; with mortgages mistakes have 
lifetime consequences. And most importantly, we understand the colors 
we like whereas few of us understand the financial technicalities that 
can have large consequences.
    Under such conditions, errors abound. For example, as Bucks and 
Pence show in their recent study ``40 percent of borrowers with income 
less than $50,000--corresponding roughly to the bottom half of the 
income distribution of ARM borrowers--do not know the per-period caps 
on their interest rate changes.'' \1\ To cite another example, nearly 
50 percent of ARM borrowers think their mortgages can be converted to 
fixed rate ones whereas only 9 percent actually appear to be 
convertible.
---------------------------------------------------------------------------
     \1\ Brian Bucks and Karen Pence (2006) ``Do Homeowners Know Their 
House Values and Mortgage Terms?'' Federal Reserve Board of Governors. 
FEDS Working Paper No. 2006-03. Available at SSRN: http://ssrn.com/
abstract=899152.
---------------------------------------------------------------------------
    Put simply, confusing choices do not represent real choices. Rather 
than empowering consumers it can frustrate them. To promote effective 
free choice one must ensure the choices can be made sense of.
Competition
    This leads to my second point: how markets operate depends on how 
people choose. It is useful to separate the world between high road and 
low road lenders. High road lenders are in the game for the long run 
and trying to do what is best for their customers. They recognize that 
a bad mortgage is bad for business in the long run. Low road lenders 
have shorter time horizons; their management is focusing on the bottom 
line now. These firms would give out a bad mortgage--one that hurts 
consumers--if it makes them money today, even if it costs them in the 
long term.
    The fortunes of high and low road firms depend on how people 
choose. When people choose well, low road firms can do no better than 
offer better products or lower prices. Here markets work well and 
innovation helps consumers.
    Things change when consumers are choosing badly. High road firms 
now suffer from the actions of low road ones. Suppose a consumer is 
offered a reasonable 30-year fixed rate mortgage by one firm and 
offered a balloon ARM with an appealing teaser rate. Unless they 
understand the arcane financial details of the adjustable rate jump and 
amortization clauses, the balloon ARM will look deceptively attractive. 
The better product can look like the worse product. One lender offers a 
reasonable debt-to-income; another a much less safe debt-to-income. One 
lender offers standard principal payments while another offers a 
payment option ARM and advertises the minimum payments that do not even 
cover interest and lead to negative amortization. In all these cases, 
customers could easily be misled as to which is the good safe product 
and which is the bad unsafe one. Good firms suffer again when they 
start losing staff to bad firms who can pay more. And so on. This can 
lead all firms to begrudgingly adopt low road strategies.
    John Bogle, founder of Vanguard, has personal insight into this 
process. Vanguard faced it directly in marketing a no-load minimum-fee 
index fund. He points out that competition from (what I refer to as) 
low-road funds has shifted the ``industry's focus from management to 
marketing.'' He further notes, ``Small wonder that in all the rush to 
salesmanship in the fund industry, stewardship seems to have been left 
in the dust.'' \2\
---------------------------------------------------------------------------
     \2\ See http://johncbogle.com/wordpress/wp-content/uploads/2009/
03/iacompliance2.pdf.
---------------------------------------------------------------------------
    The experience of credit unions provides another interesting window 
in to the race to the bottom. Because of their structure--they are not 
for profit cooperatives--they may be better equipped to resist low road 
approaches. According to a recent Experian-Oliver Wyman study, credit 
unions are experiencing as little as one-fifth the delinquency rate on 
mortgages and half the delinquency rate on credit cards as banks, even 
within the same credit score band. \3\ This does not mean credit unions 
are necessarily a panacea to the mortgage problem; it merely 
illustrates the possibility of a high-road strategy.
---------------------------------------------------------------------------
     \3\ See http://www.marketintelligencereports.com.
---------------------------------------------------------------------------
    When consumers choose badly innovation--one of the greatest 
benefits of markets--is also perverted. What did mortgage markets 
innovate in the beginning of this decade? Teaser rates, negatively 
amortizing loans, exploding subprime interest rates, prepayment 
penalties and low- or no-doc lending are hardly shining examples of how 
financial innovation helps consumers. Instead these products, while 
surely useful for a few customers, have been abused because they have a 
superficial appeal to confused customers. They likely contributed 
heavily to the defaults we must now deal with. In short, when borrowers 
choose badly innovation can be geared towards exploiting mistakes 
rather than producing products that help customers.
The Challenge of Regulation
    I believe the financial crisis we have faced illustrates the 
importance of how market forces combine with how people choose. When 
the worst of these collide--bad banks introducing mortgages that 
exploit confused customers--the result is a toxic combination that 
leaves not just consumers but the entire financial system at risk. 
Successful financial regulation must pay attention to both of these.
    The challenge of regulation is to ensure a system where customers 
can choose well according to their needs. In such a system, high road 
lenders will face a level playing field; competition and innovation 
will benefit customers. This is much like the need for a referee in any 
sport. If there are no referees, dirty players cheat and good players 
lose or must follow suit. It's not a foul unless a referee calls it. A 
good referee applying sensible rules can ensure that all players--
honest and dishonest--play by the same rules. At the same time, the 
referee must let players play the game and not interfere too often. I 
believe appropriately implemented the Consumer Financial Products 
Agency (CFPA) can be like a good referee for the financial sector. It 
can ensure that firms compete on a level playing field. It can allow 
players to play the game as long as they are within the bounds of the 
rules.
    As Michael Barr, Eldar Shafir, and I have proposed, a two-part 
approach to regulation is particularly important to accomplishing this 
goal. \4\ Some financial products--call them first choice products--are 
easily understood and easy to choose between. First choice products are 
regulated minimally: ensure disclosure, prevent fraud; we know how to 
do this, do much of it already and know how to do more of it. But 
notice this is not enough.
---------------------------------------------------------------------------
     \4\ Michael Barr, Sendhil Mullainathan, and Eldar Shafir, 
``Behaviorally Informed Home Mortgage Regulation'', In Borrowing To 
Live: Consumer and Mortgage Credit Revisited, eds. N. Retsinas and E. 
Belsky, 170-202. Washington, DC: Brookings Institution Press, 2008. 
Also see ``Behaviorally Informed Financial Services Regulation.'' New 
America Foundation, 2008.
---------------------------------------------------------------------------
    This is because other products--option ARMs, subprime ARMs with 
interest rates set to increase substantially--can pose significant 
risks for the typical consumer. They allow bad choices and for low road 
lenders to enter. These exotic products may make sense for some 
sophisticated consumers of course. But unchecked they are dangerous 
because their superficial appeal--with hidden risks--makes them unfair 
competition for the first choice products. These products would need to 
be regulated far more stringently. The Federal Reserve, for example, 
has put forward fact sheets that might serve as disclosure for more 
exotic mortgages. \5\ While a good start to what can be done this is 
not enough. New products appear all the time, and marketing can be 
endlessly inventive in sidestepping disclosure. As a result, an agency 
like the CFPA would need to constantly update as the product mix 
changes. Done correctly, it would assure that customers could access 
exotic products. But they would do so with a greater understanding that 
their superficial attractiveness comes laden with hidden risks.
---------------------------------------------------------------------------
     \5\ See http://www.federalreserve.gov/newsevents/press/bcreg/
20070531b.htm.
---------------------------------------------------------------------------
    This is analogous to how we regulate drugs. Those with minimal 
risks that consumers understand--ibuprofen, cold medicine--are 
regulated only to prevent fraud and malfeasance. More complicated 
drugs--powerful antibiotics--are more stringently regulated. Testing 
mechanisms ensure efficacy. Independent advisors--a prescriber--ensure 
those who receive them understand their purposes and risks. In short, 
we create a fence around a set of products within which firms can 
compete freely. Outside of this fence, for the more exotic products, 
there is greater regulation. Individuals taking a door through the 
fence would know they are moving to a less safe suite of products.
    A few points are worth noting about this two-part approach.

    The vast majority of the market is already inside the 
        fence. For example, Freddie Mac reports that fixed rate 
        mortgages made up 67-75 percent of applications in 2006. \6\ 
        First choice products of course would include more than just 
        fixed rate mortgages and not all fixed rates (because we do not 
        know the LTV or DTI of these mortgages) would be first choice. 
        Still this number gives us the sense that most products offered 
        would likely fall into the first rate category. So such 
        regulation would in fact help most lenders; it would insulate 
        them from competition by low road products, which would now sit 
        outside the fence facing higher scrutiny.
---------------------------------------------------------------------------
     \6\ See http://www.freddiemac.com/news/finance/refi-
arm_archives.htm.

    It is not necessary to mandate the offer of first choice or 
        vanilla products. Done correctly, the ring-fenced area will be 
        made attractive enough that firms will--as they do now--want to 
        offer products there. The challenge here is to ensure 
        sufficient safeguards for the nonfirst choice products. 
        Otherwise high road firms wanting to offer good products will 
---------------------------------------------------------------------------
        once again face unfair competition from bad products.

    There are several precedents for this type of two-part 
        approach. Individuals wishing to trade options or other 
        sophisticated products must initially complete more paperwork 
        and are given greater warnings of their dangers. In July 2008, 
        the Federal Reserve placed higher-priced mortgages (which 
        include all loans in the subprime market but excludes nearly 
        all prime market loans) under far greater scrutiny such as a 
        greater requirement for income verification, an explicit 
        affordability requirement, ad higher-than-normal penalties for 
        violation of these requirements. I understand that the 
        authority for this regulation would permit the Federal Reserve, 
        or the CFPA, to place other mortgages, such as option ARMs, in 
        this category of mortgages that receive greater scrutiny and 
        higher penalties. \7\
---------------------------------------------------------------------------
     \7\ See http://www.federalreserve.gov/newsevents/press/bcreg/
20080714a.htm.

    For credit cards, Rep. Hensarling (R-Texas) has proposed a 
        close cousin in the form of an amendment to the bill that 
        eventually became the Credit Card Act in 2009. For potentially 
        harmful features, as long as all of a lender's customers are 
        offered a card without the feature, allow customers to opt-in 
        to one with the feature. By ensuring the opt-in includes 
        sufficient warnings, the CFPA could allow exactly this type of 
        door in the fence between first choice and more exotic 
        products. In this particular case, Congress' judgment was that 
        the ``first choice'' approach would not work to protect 
        consumers, and that a ban of these features was necessary. I 
        believe, however, that it is important for the CFPA to have the 
        first choice tool as an alternative to outright bans even if in 
---------------------------------------------------------------------------
        some cases the ban is used.

    Private firms already realize the value of clarifying and 
        simplifying choice. Charles Schwab for example has created a 
        category of ``Select Funds'' which are prescreened for loads, 
        fees and other qualitative criteria. \8\ Of course, no firm can 
        control the choice set offered by the entire market; however 
        well structured one firms' choice set is, it sits and competes 
        with other firms' offerings.
---------------------------------------------------------------------------
     \8\ ``Schwab's Income Select List was developed and is managed by 
the Schwab Center for Financial Research (SCFR) experts and includes 
mutual funds that have met their rigorous criteria, including both 
quantitative and qualitative factors. All are no-load and no-
transaction fee and are selected based on their ability to generate 
income in their respective asset classes. The list is designed to help 
you achieve income and growth.'' http://www.schwab.wallst.com/retail/
public/research/mutualfunds/oneSource.asp.

    For such an approach to be successful there must be a transparent, 
predictable process by which products become first choice. First choice 
is not a one-size fits all solution. Since it aims to facilitate choice 
by customers, first choice products must include a suite of products. 
Who decides what is in this suite? On what basis? This is especially 
important as we look forward to the financial innovations that are 
surely on the horizon. A transparent, predictable will give lenders who 
create a good product comfort that they can reap rewards from it. I 
believe such a process can be put in place. At the very least this 
ought to be one of the injunctions to the CFPA to develop and codify 
this process.
Conclusion
    The financial crisis has lain bare the dangers of bad financial 
products and generated a strong and understandable impetus for consumer 
protection. I believe that the research on behavioral economics gives 
guidance on how best to express this urge. The challenge is to provide 
protection while promoting healthy market competition. The two-part 
approach in the proposed legislation accomplishes this by providing an 
attractive tool that is an alternative to bans and mandates.
    On the one hand, the proposed CFPA would regulate strongly the most 
exotic products. On the other hand, vanilla or first choice products--
the ones consumers really can choose well between--would be given far 
greater freedom. This promotes competition and helps high-road firms 
who operate in the part of the market that the typical consumer 
operates in. The result I feel will be a financial sector that benefits 
consumers by allowing them to choose better; that benefits firms by 
allowing good firms to not be undercut by bad firms offering bad 
products and that benefits sophisticated consumers by still letting 
them access more exotic products on the other side of the fence.
        RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD
                      FROM MICHAEL S. BARR

Q.1. Correcting Incentives--We have heard a number of reports 
of how financial sector employees are incentivized to push 
harmful financial products on to customers--sometimes to keep 
their jobs. For example, one Bank of America call-center worker 
claimed, ``the more money [she] sold [a customer] and the 
higher the rate, the more money [she] made. That's what the 
bank rewards--sales, not service.'' These products harmed not 
just customers but the entire U.S. economy. The President's 
plan recognizes that ``an important component of risk 
management involves properly aligning incentives, and that 
properly designed compensation practices for both executives 
and employees are a necessary part of ensuring safety and 
soundness in the financial sector.'' \1\ Secondly, it suggests 
the creation of a whistleblower fund, saying that ``financial 
firms and public companies should be accountable to their 
clients and investors by expanding protections for 
whistleblowers.'' \2\ This raises two questions:
---------------------------------------------------------------------------
     \1\ See http://www.financialstability.gov/docs/regs/
FinalReport_web.pdf, p. 30.
     \2\ See http://www.financialstability.gov/docs/regs/
FinalReport_web.pdf, pp. 15 and 72.
---------------------------------------------------------------------------
    How could a Consumer Financial Protection Agency ensure 
that employees are not provided with these incentives to push 
negative financial products onto customers?

A.1. The Consumer Financial Protection Agency (CFPA) will have 
the authority and tools to address practices that harm 
consumers in the marketplace for consumer financial products 
and services. This authority would extend to business 
practices, including compensation practices that push consumers 
to purchase inappropriate products and services.
    The authority the CFPA would have to address harmful 
employee incentive practices includes, for example, the 
following: Under Section 1031, the CFPA could issue rules to 
restrict unfair, deceptive or abusive acts and practices. The 
CFPA will also have the authority, under Section 1033, to 
promulgate rules regarding sales practices, to ensure that 
consumer financial products and services are provided in a 
manner, setting and circumstances which ensure that the risks, 
costs, and benefits of the products or services are fully and 
accurately represented to consumers. In addition, under Section 
1037, the CFPA will have the authority to prescribe rules 
imposing duties on a covered person, or an employee of a 
covered person, who deals directly with consumers in providing 
financial products and services, as the CFPA deems appropriate 
to ensure fair dealing with consumers. With this authority, the 
CFPA will be able to impose duties on salespeople and mortgage 
brokers to offer appropriate loans, take care with the 
financial advice they offer, and meet the duty of best 
execution. The CFPA also would be able to prevent lenders from 
paying higher commissions to brokers or salespeople (yield 
spread premiums) for selling loans to consumers with higher 
rates than consumers qualify for.

Q.2. Would the Consumer Financial Protection Agency play any 
role in protecting whistleblowers who call attention to abuses 
against consumers, much like the whistleblower protections 
given to employees of contractors and State and local 
governments in this year's stimulus bill? \3\
---------------------------------------------------------------------------
     \3\ American Recovery & Reinvestment Act of 2009, Pub. L. No. 111-
5, 1553.
---------------------------------------------------------------------------
A.2. Yes, the CFPA will play a role in protecting 
whistleblowers who call attention to abuses against consumers. 
Section 1057 provides protections for employees who, among 
other things, provide information to the Agency or testify in 
any proceeding resulting from the enforcement of the CFPA Act. 
Employees who believe they have been terminated or otherwise 
discriminated against because of the information they have 
provided have a right to review by the Agency of such action, 
including a right to a public hearing as part of the required 
investigation by the Agency. After investigation, the Agency 
has the authority to issue an order which provides for 
reinstating or rehiring the employee.

Q.3. Senators Wyden and Whitehouse's Amendments From the Credit 
Card Bill--Earlier this year when the Credit Card 
Accountability, Responsibility and Disclosure Act was on the 
Senate floor, Senator Wyden and Senator Whitehouse each had an 
amendment that ultimately did not get incorporated into the 
final legislation. Senator Wyden's amendment would have 
established a five-star rating system for credit cards, and 
Senator Whitehouse's amendment would have overturned the 
Supreme Court's Marquette decision that allowed interest rates 
to be exported across State lines.
    How would your proposal deal with the issues that these two 
amendments sought to address? Would the proposal allow the 
Consumer Financial Protection Agency to set up some type of 
rating system for credit cards to the extent it determines 
necessary to protect cardholders?
    And what effects would your proposal have on the Marquette 
decision?

A.3. The CFPA would have the authority to achieve the same ends 
as the proposed credit card rating system--fairness and 
transparency. It is given the mandate to ensure that consumers 
have the clear and accurate information they need to make 
responsible financial decisions. Ensuring that consumers have, 
reasonably can understand, and can use the information they 
need to make responsible decisions is the first of the CFPA's 
four objectives under Section 1021(b)(1).
    We do not propose to alter existing law under Marquette, 
which allows banks to charge the interest rate permitted by 
their chartering State.

Q.4. In his testimony, Mr. Yingling cites the Treasury's plan 
as saying ``that 94 percent of high cost mortgages were made 
outside the traditional banking system,'' (p. 4). On the other 
hand, you testify that ``about one-half of the subprime 
originations in 2005 and 2006--the shoddy originations that set 
off the wave of foreclosures--were by banks and thrifts and 
their affiliates.'' Please explain the discrepancy.

A.4. Mr. Yingling's assertion is incorrect. Here is the 
relevant paragraph from our white paper, Financial Regulatory 
Reform: A New Foundation (pp. 68-69). http://10.75.16.79:8080/
docs/regs/FinalReport_web.pdf. See in particular the last 
sentence.

        Rigorous application of the Community Reinvestment Act (CRA) 
        should be a core function of the CFPA. Some have attempted to 
        blame the subprime meltdown and financial crisis on the CRA and 
        have argued that the CRA must be weakened in order to restore 
        financial stability. These claims and arguments are without any 
        logical or evidentiary basis. It is not tenable that the CRA 
        could suddenly have caused an explosion in bad subprime loans 
        more than 25 years after its enactment. In fact, enforcement of 
        CRA was weakened during the boom and the worst abuses were made 
        by firms not covered by CRA. Moreover, the Federal Reserve has 
        reported that only 6 percent of all the higher-priced loans 
        were extended by the CRA-covered lenders to lower income 
        borrowers or neighborhoods in the local areas that are the 
        focus of CRA evaluations.

    The information from the last sentence is from an article 
by Federal Reserve economists and refers just to subprime loans 
made by a bank or thrift (a) to lower-income people or 
neighborhoods and (b) in a bank or thrift's CRA assessment 
area. See http://www.minneapolisfed.org/publications_papers/
pub_display.cfm?id=4136. This statistic does not refer to the 
whole population of subprime loan originations. Of that 
population, banks and thrifts held a significant share.
    That fact is evident in Table 1 below (http://
www.minneapolisfed.org/pubs/cd/09-2/table1.pdf.) from the same 
article. It shows that, in 2005, 36 percent of higher-priced 
loans were by depositories or their subsidiaries; in 2006 the 
figure rose to 41 percent. If you add in bank affiliates, in 
2005, banks, their subsidiaries and affiliates made 48 percent 
of all higher-cost loans, and 54 percent in 2006.



Q.5. Mr. Yingling claims that the creation of the CFPA will 
result in a ``potentially massive new regulatory burden.'' He 
then goes on to assert ``community banks will have greatly 
increased fees to fund a system that falls disproportionately 
on them.'' How do you respond?

A.5. We believe that the Federal regulatory structure for 
consumer protection needs fundamental reform. We have proposed 
to consolidate rule-writing, supervision, and enforcement 
authority under one agency, with marketwide coverage over both 
nonbanks and banks that provide consumer financial products and 
services. With this consolidated authority and marketwide 
coverage, the CFPA will be able to regulate in a manner that is 
more streamlined and effective, not more burdensome.
    The authorities for rulemaking, supervision, and 
enforcement for consumer financial products and services are 
presently scattered among seven different Federal agencies, 
sometimes with overlapping authority. For example, the Federal 
Reserve Board (FRB) has jurisdiction over required mortgage 
disclosures under the Truth in Lending Act (TILA), while the 
Department of Housing and Urban Development has authority to 
require mortgage disclosure under the Real Estate and 
Settlement Protection Act (RESPA). As another example, the 
Federal Trade Commission (FTC) has authority to issue rules 
relating to mortgage loans in the nonbank sector, while the 
Federal Reserve has similar authority under the Home Ownership 
and Equity Protection Act to issue rules regarding the entire 
mortgage market. Such balkanization and overlap of regulatory 
authority does not make sense. With consolidated authority, the 
CFPA will, for example, be able to integrate the mortgage 
disclosures required under TILA and RESPA into one, integrated 
form. This simplification--and others like it--would decrease, 
not increase, the compliance burden, while improving 
protections for consumers.
    Moreover, with respect to regulations, the CFPA will be 
statutorily required to consider the potential costs and 
benefits to consumers and institutions, including the potential 
reduction in consumer access to financial products and 
services. The CFPA will be required to consult with safety and 
soundness regulators before issuing rules. As a result, the 
CFPA's rules and supervisory approach will be balanced and 
effective.
    It is simply not true under our proposal that community 
banks will pay higher fees to fund the CFPA. The Administration 
proposes to provide by statute that community banks will pay no 
more for Federal consumer protection supervision after the CFPA 
is created than they do today. Moreover, we believe that 
community banks will benefit from the CFPA in several ways.
    First, today, community banks have to compete against 
nonbank entities like mortgage brokers and mortgage companies, 
which, unlike banks, are not subject to Federal oversight. In 
recent years, nonbank firms won market share by lowering 
lending standards and offering irresponsible--and often 
deceptive--loans. Community banks were forced either to lower 
their own standards or to become uncompetitive. The CFPA will 
provide a level playing field, extending the reach of Federal 
oversight to all providers of consumer financial products and 
services, banks and nonbanks alike, for the first time. The 
CFPA will put an end to community banks' competitive 
disadvantage.
    Second, CFPA's marketwide coverage and consolidated 
authority for rule writing, supervision, and enforcement will 
enable it to choose the least-cost, most-effective tools. For 
example, it will be able to use ``supervisory guidance'' in 
place of new regulations. Supervisory guidance is less 
burdensome for financial institutions, but is not an effective 
consumer protection tool today because it requires coordination 
between numerous Federal and State agencies. With one Federal 
agency in charge, supervisory guidance can more often be used 
in place of new regulations.
    Finally, the CFPA will have a mandate to allocate more 
resources to those companies that pose more risks to consumers 
when providing consumer financial products and services. 
Community banks are close to their customers and have often 
provided simpler, easier-to-understand products with greater 
care and transparency than other segments of the market. Such 
banks will receive proportionally less oversight from the CFPA.

Q.6. Mr. Yingling asserts that the CFPA is ``instructed to 
create its own products and mandate that banks offer them. . . 
. Community banks whether it fits their business model or not, 
would be required to offer Government-designed products, which 
would be given preference over their own products.'' This 
raises two questions:
    Would the Administration's proposal require the CFPA to 
create its own products?
    In the area of mortgages, for example, are the kinds of 
``plain-vanilla'' mortgages that the plan would encourage 
similar to products that community banks currently offer, or do 
community banks tend to offer more exotic mortgages that might 
attract the additional scrutiny contemplated by the proposal? 
What about nonmortgage products such as credit cards, auto 
loans, and the like?

A.6. The Administration's proposal would not require the CFPA 
to design products. The proposal would permit the CFPA only to 
identify a standard product that is commonly provided in the 
marketplace already, and that is proven, simple, and poses less 
risk to consumers. In the mortgage context, such standard 
products would likely include both 30-year, fixed rate 
mortgages and adjustable rate mortgage (ARM) products.
    Most community banks that offer residential mortgages, 
offer 30-year fixed rate and conventional ARM mortgage 
products. These loans would generally meet the definition of 
standard products. Some community banks certainly offered more 
exotic mortgages such as payment option ARMs or subprime loans 
with nontraditional features, but those institutions likely 
offered conventional loans too.
    The mortgage market has known standard products for years. 
The Agency would have the authority to determine if the concept 
would also apply in other contexts, such as credit cards and 
auto loans. Recently at least one major card issuer has offered 
a ``plain-vanilla'' credit card and it is possible that this 
practice would spread.

Q.7. Had lenders been required to offer ``plain-vanilla'' 
mortgage products such as fixed-rate mortgages or traditional 
ARMs during the significant growth in subprime lending starting 
in 2003, what impact do you think it might have had on the 
crisis?

A.7. Subprime mortgages grew extremely rapidly, reaching $600 
billion in originations and 20 percent of the market by 2005. 
It is clear today that the rapid development of this segment of 
the market was disastrous; a Federal Reserve economist has 
projected that approximately 45 percent of subprime loans 
originated in 2006 and 2007 will end in foreclosure. A 
substantial proportion of subprime borrowers qualified for much 
safer conventional, standard mortgages, which had lower 
interest rates, stable payments, escrows for taxes and 
insurance, no barriers to exit such as prepayment penalties, 
and substantially lower default rates. The financial incentives 
for originators, however, were to steer borrowers into subprime 
loans even if borrowers qualified for conventional loans.
    A requirement to provide the consumer a comparison between 
these more complex products and simpler products might have 
made a difference. The banking agencies ultimately required 
lenders to disclose these comparisons, but the agencies took so 
long to agree on the disclosures that they made little 
difference.

Q.8. Chairman Bernanke appeared before the Committee on July 23 
to discuss monetary policy. At that hearing, he was asked about 
the requirement that consumers be offered ``plain-vanilla'' 
choices. Bernanke said ``there is some economic analysis which 
suggests that there might be benefits in some cases of having a 
basic product available, so-called `vanilla product'.'' He goes 
on to say, however, that the regulators would have to take care 
not to ``roll back all of the innovation in financial markets 
that has taken place over the past three decades or so.'' Do 
you have any observations to make regarding these comments by 
Chairman Bernanke?

A.8. Chairman Bernanke's comments are well taken. Our specific 
proposal on ``plain vanilla'' is lighter touch regulation. A 
vanilla product would serve to provide a standard of comparison 
for borrowers, so they can make more informed choices about 
what loan product would be best for them. It is another tool 
besides disclosure, but less intrusive than outright banning 
contract terms that harm consumers (as Congress just did on 
credit cards). Our proposal would not dictate business plans or 
decide for consumers what products are right for them. The goal 
is to make it easier for consumers who want to choose simple 
products to make that choice, and to make sure consumers who 
choose more complicated products understand the risks they are 
taking.
    Here's an example. When the regulators put out a model 
disclosure on subprime mortgages in 2008, it required mortgage 
lenders to compare the payment schedule of a subprime 
mortgage--with a big jump in interest rates in the third or 
fourth year--to the payment schedule on a fixed-rate, 30-year 
mortgage. That's the sort of action this agency would take. 
Only, it would be able to act much faster--the regulators' 
disclosure came out after the subprime mortgage market had 
imploded.
    I also agree with Chairman Bernanke on innovation. Our 
proposals are designed to preserve the incentives and 
opportunities for innovation. Many of the consumer lending 
practices that led to this crisis gave innovation a bad name 
and served simply to hide costs in a deceptive manner. We need 
to create an agency that restores confidence of consumers in 
innovation. We also need to restore confidence of the financial 
investors who would fund innovation but have become wary of it. 
This is why preserving innovation and promoting access are key 
objectives of the agency. The agency will be required to 
measure every proposal against these objectives.
    Innovation has to be sustainable and respond to consumer 
preferences. That requires transparency and fairness. We are 
equipping the agency with the authority to ensure transparency 
and fairness so that sustainable innovations can thrive.

Q.9. Mr. Wallison argued at the hearing that the 
Administration's proposal would require lenders to determine 
the ability of a potential customer to understand various 
products, which, he goes on to assert will lead to limitations 
on what they offer. How do you respond?

A.9. The intent of the standard products provision is to 
provide a standard of comparison for borrowers, so they can 
make more informed choices about what loan product would be 
best for them. The Agency will also improve disclosures so that 
it will be easier for consumers to understand the loan products 
they are getting. It will remain the consumer's right and 
responsibility to make the choice.

Q.10. Mr. Wallison said during the hearing that the liability 
faced by lenders for offering more complex products would 
effectively eliminate those options for consumers. How do you 
respond?

A.10. A standard product would serve to provide a standard of 
comparison for borrowers, so they can make more informed 
choices about what loan product would be best for them. It's 
another tool besides disclosure, but less intrusive than 
outright banning complex contract terms (as Congress just did 
on credit cards). Since borrowers would be entirely free to 
select alternative, more complex products and many would do so, 
lenders would have substantial incentives to offer them.

Q.11. Title X, section 1022(b)(2)(A) of the Administration's 
proposal describes special rulemaking requirements applicable 
to the Consumer Financial Products Agency (CFPA). These 
requirements state that when engaged in a rulemaking, the CFPA 
must ``consider the potential benefits and costs to consumers 
and covered persons, including the potential reduction of 
consumers' access to consumer financial products or services, 
resulting from such rule.''
    Please explain the rationale for requiring the CFPA to 
conduct additional analysis beyond the typical notice and 
comment procedures required of agencies engaged in a rulemaking 
under the Administrative Procedures Act.

A.11. The goal of the CFPA is not more regulation, but smarter 
regulation. There is no question that existing consumer 
protection statutes and rules were not protective enough of 
consumers, and we are all paying a price for that failure. 
Better rules are needed. An essential part of the solution is 
one agency, with marketwide reach, and consolidated authorities 
of rule writing, supervision, and enforcement.
    These rules must be balanced. Supervising and, when 
necessary, enforcing against banks and nonbanks will provide 
the new agency with essential information about which problems 
to address, as well as market realities in banks and credit 
unions that need to be respected. CFPA will consult with 
prudential supervisors before writing rules, and the national 
bank supervisor will be on the CFPA board.
    The CFPA proposal requires that the Agency weigh costs in 
addition to benefits, and consider impact on businesses as well 
as access to credit, in order to ensure that it is a balanced 
agency that acts in the most effective, prudent way possible. 
This requirement is consistent with the Agency's mission of not 
removing all risk from consumer financial products and 
services, but rather providing consumers with clear and 
unbiased information that permits them to make their own 
decisions and weigh their own costs and benefits in a reasoned 
manner. It is also the practice the Federal Reserve has 
followed in implementing the consumer financial protection 
statutes.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHNSON
                      FROM MICHAEL S. BARR

Q.1. The Treasury's ``white paper'' on financial regulation 
notes that one of the key goals of the consumer protection 
agency is to establish consistent regulation of financial 
products. In fact, the paper notes that ``[State insurance 
regulation] has led to a lack of uniformity and reduced 
competition across State and international boundaries, 
resulting in inefficiency, reduced product innovation, and 
higher costs for consumers.'' However, the bill forwarded to 
Congress permits States to add additional and different 
consumer protection standards for financial products. Does this 
undercut the goal of consistent regulation? Should not all 
consumers have the same protection regardless of where they 
reside? Why not simply direct the new agency to write strong 
rules in the first place? This ensures consumer protection, yet 
avoids potential for conflict, confusion, and cost.

A.1. Since the adoption of the first major Federal financial 
consumer protection law in 1969, the Truth in Lending Act, 
Congress has with limited exceptions explicitly allowed the 
States to adopt laws to protect financial consumers so long as 
these laws do not conflict with Federal statutes or 
regulations. Federal law thus establishes a floor, not a 
ceiling. We propose to preserve that arrangement. It reflects a 
decades-long judgment of Congress, which we share, that States 
should retain authority to protect the welfare of their 
citizens with respect to consumer financial services. Federal 
law ensures all citizens a minimum standard of protection 
wherever they reside. Citizens of a State, however, should be 
able to provide themselves--through their legislators and 
governors--more protection.
    The continued ability of citizens to protect themselves 
through their States is crucial to ensuring a strong Federal 
standard. State initiatives can be an important signal to 
Congress and Federal regulators of a need for action at the 
Federal level. Even with the best of intentions and the best of 
staff, it is impossible to simply mandate that Federal laws or 
rules remain updated, since practices change so quickly. States 
are much closer to abuses as they develop and they are able to 
move more quickly when necessary. For example, a number of 
States were far ahead of the Federal Government in regulating 
subprime mortgages. If States were not permitted to take the 
initiative to enact laws providing greater protection for 
consumers, the Federal Government would lose a critical source 
of information and incentive to adjust standards over time to 
address emerging issues.
    If the Consumer Financial Protection Agency (CFPA) is 
created and endowed with the authorities we have proposed, we 
expect the standards adopted by the Agency will promote 
regulatory consistency, even while it respects the role of the 
States.
    We believe a strong and independent CFPA that is assigned a 
clear mission to keep protections up-to-date with changes in 
the marketplace will reduce the incentives for State action and 
increase legal uniformity. If States retain the ability to 
protect their citizens as new consumer protection problems 
appear and the CFPA has the authority it needs to follow the 
market and keep Federal protections up-to-date, then the CFPA 
will be more likely to set a high standard that will satisfy a 
substantial majority of States.
    To be sure, federally chartered institutions have recently 
enjoyed immunity from certain State consumer protection laws. 
We propose to change that to ensure a level playing field. 
National banks must already comply with a host of State laws, 
such as those dealing with foreclosures, debt collection, and 
discrimination. Under our proposal, federally chartered 
depository institutions and their State-incorporated 
subsidiaries would be subject to nondiscriminatory State 
consumer protection to the same extent as other financial 
institutions.
    We would preserve preemption where it is critical to the 
Federal charter. Our proposal explicitly does not permit the 
States to discriminate against federally chartered 
institutions. Discriminatory State laws would continue to be 
preempted. Moreover, we do not seek to overturn preemption of 
State laws limiting interest rates and fees (the Smiley and 
Marquette decisions). Nor do we seek to disturb the exclusive 
authority of the national bank prudential supervisor over 
national banks with respect to prudential regulation and 
supervision. Thus, we would preserve the value of the national 
bank charter.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                      FROM MICHAEL S. BARR

Q.1. Mr. Barr, do you agree with Sheila Bair, Chair of the 
Federal Deposit Insurance Corporation, that safety and 
soundness cannot be separated from consumer protection?

A.1. I agree with Ms. Bair and other regulators who have 
testified that safety and soundness and consumer protection 
need not conflict. Following all applicable laws, including 
consumer protection laws, is a requirement of a safe and sound 
institution. And as we've seen in the mortgage and credit card 
markets, poor treatment of consumers actually undermines the 
safety and soundness of financial institutions. I think, 
however, that these complementarities can be preserved with 
separate agencies. Two banking agencies today, including the 
FDIC, typically conduct their consumer compliance and safety 
and soundness examinations with separate teams of examiners. It 
is a further step to separate the examiners into different 
agencies, but we would propose to require the CFPA and the 
prudential agencies to communicate and coordinate closely, and 
to share examination reports. Ultimately, we believe the 
complementarities will be strengthened if the CFPA is given the 
mandate and authority, as we propose, to identify questionable 
practices and provide the market and institutions clear rules 
of the road. The CFPA can help the prudential regulator 
identify practices that exploit consumer confusion for short-
term profits but undermine bank earnings and reputations in the 
long run.

Q.2. Appearing before the House Energy and Commerce Committee, 
you said that this new agency would not set prices, dictate 
what products could be offered, or regulate a firm's 
advertising practices. Section 1039 of the President's 
proposals states that, ``It shall be unlawful for any person to 
advertise, market, offer, sell, enforce, or attempt to enforce, 
any term, agreement, change in terms, fee or charge in 
connection with a consumer financial product or service that is 
not in conformity with this title or applicable rule or order 
issued by the Agency.'' How do you explain this discrepancy?

A.2. In my testimony before the House Energy and Commerce 
Committee on July 8, I did state that the CFPA would not set 
prices. Section 1022(g) of the legislation specifically forbids 
the CFPA from establishing usury limits. I also stated 
correctly that the CFPA could not dictate what products firms 
could offer. With respect, however, I did not testify that the 
CFPA would not regulate the advertising practices of those 
offering financial products and services to consumers. 
Advertising regulations have long been a core element of 
Federal consumer protection statutes such as the Truth in 
Lending Act. Regrettably these regulations were not kept up-to-
date. Indeed, before the mortgage market collapsed, the 
marketplace was awash with misleading advertising about low-
rate mortgage loans, credit cards, or financial products. 
Accordingly, the CFPA would have authority, as you note, to 
regulate advertising practices of persons that provide consumer 
financial products and services to prevent incomplete or 
misleading information from undermining competition.

Q.3. In the past, Mr. Barr, you've argued that derivation from 
a standard, plain-vanilla product ``would require heightened 
disclosures and additional legal exposure for lenders.'' Please 
explain why this would, or would not, discourage lenders from 
offering any products that are deemed unstandard or outside of 
the agency's safe harbor?

A.3. A standard product would serve to provide a standard of 
comparison for borrowers, so they can make more informed 
choices about what loan product would be best for them. It's 
another tool besides disclosure, but less intrusive than 
outright banning complex contract terms (as Congress just did 
on credit cards). Since borrowers would be entirely free to 
select alternative, more complex products and many would do so, 
lenders would have substantial incentives to offer them.

Q.4. How much latitude would this new agency have over 
determining what is a ``consumer financial product or 
service?'' The President's proposal says ``any financial 
product or service to be used by a consumer primarily for 
personal, family, or household purposes.'' Could agency have 
authority over small business loans or commercial real estate?

A.4. As you note, the definition of ``consumer financial 
product or service'' in the CFPA Act is limited to any 
``financial product or service to be used by a consumer 
primarily for personal, family or household purposes.'' In 
applying that language, the CFPA would need to determine 
whether the product or service is used ``primarily'' for 
personal, family or household purposes as a factual matter.
    Similar language appears in the definitions of several 
other consumer protection statutes, including the Truth in 
Lending Act (15 U.S.C. 1602(h)), the Electronic Funds Transfer 
Act (15 U.S.C. 1693a(2)), the Fair Debt Collection Practices 
Act (15 U.S.C. 1692a(5)), the Fair Credit Reporting Act (15 
U.S.C. 1681a(d)(1)(A)), and the Equal Credit Opportunity Act 
(12 CFR 202.2(h)), which implements 15 U.S.C. 1691, et seq.). 
The use of such language is generally understood as meaning to 
exclude business credit.
    As a general matter, under the new authority granted to the 
CFPA under the CFPA Act, the CFPA would not have authority over 
small business loans or commercial real estate loans. However, 
the Equal Credit Opportunity Act (ECOA) prohibits 
discrimination against certain protected classes in lending for 
business as well as personal and household purposes, and the 
proposal would grant the CFPA rulemaking and enforcement 
authority under the ECOA. To that extent, the CFPA would have 
authority over business loans under the ECOA.

Q.5. How did the Treasury determine that the Securities and 
Exchange Commission has done an adequate job protecting 
consumers? For example, many of Allan Stanford's victims were 
everyday people, not large, sophisticated institutional 
investors.

A.5. In establishing a regulatory framework for the protection 
of consumers and investors, the Administration's goal was for 
there to be a Federal agency with the mission of consumer 
protection. In the consumer financial products and services 
area, this agency is lacking; in the nonbank sector, no Federal 
agency has supervision and examination authority, regardless of 
the mission, and in the banking sector, five different agencies 
share this responsibility but each has safety and soundness as 
its primary mission. The Securities and Exchange Commission 
(SEC), on the other hand, does have as its mission the 
protection of retail investors, so there was no need to 
duplicate this responsibility within the CFPA. As the SEC has 
acknowledged with respect to the Stanford and Madoff cases, 
existing authority should have been sufficient to address these 
frauds much earlier. The SEC needs additional authorities, 
however, to provide the broader and more effective oversight 
that is needed, and that is why the Administration proposes 
strengthening the agency's authority in several important ways.

Q.6. Should one of the goals of the CFPA be to ``optimize 
household behavior''? What do you think optimal savings means?

A.6. The CFPA will not optimize household behavior. It is for 
every family to make its own financial decisions. In order to 
help families make responsible decisions, the CFPA will work to 
ensure that markets are transparent, people have the 
information they need about their financial decisions, and bank 
and nonbank firms alike follow clear rules of the road.
    For many years, until the current recession, the personal 
saving rate in the United States has been exceedingly low. In 
addition, tens of millions of U.S. households have not placed 
themselves on a path to become financially prepared for 
retirement. In order to address this problem, the President has 
proposed two innovative initiatives in his 2010 Budget: (1) 
introducing an ``Automatic IRA'' (with opt-out) for employees 
whose employers do not offer a plan; and (2) increasing tax 
incentives for retirement savings for families that earn less 
than $65,000 by modifying the ``saver's credit'' and making it 
refundable. The proposals would offer a meaningful saving 
incentive to tens of millions of additional households while 
simplifying the current complex structure of the credit and 
raising the eligibility income threshold to cover millions of 
additional moderate-income taxpayers.

Q.7. Mr. Barr, do you believe that the Government should steer 
people's choices in directions that will ``improve their 
lives'' or should the Government allow consumers to make their 
own choices free of interference or direction?

A.7. We believe that it is the responsibility of consumers to 
make their own decisions on financial matters. There must be 
clear rules of the road so that firms do not deceive consumers 
by hiding the true costs of products. The CFPA will create a 
level playing field with high standards for all firms, bank and 
nonbank alike, which means that the marketplace will provide a 
broader array of high quality products from which consumers can 
freely choose.

Q.8. Do you believe that it is more profitable for a bank to 
issue a mortgage or credit card loan to a customer who defaults 
or to one who makes their payments?

A.8. If incentives are properly aligned, banks should make as 
much or more money when a mortgage or credit card borrower pays 
their loan as when they default. Problems arise, however, when 
markets are structured so that the bank is indifferent to 
future loan performance, as when the lender immediately sells 
the loan into an investment conduit without retaining any of 
the risk of default. This ``originate to distribute'' model 
caused incentives to deviate. The lenders--the parties in the 
best position to determine the creditworthiness of the 
borrowers--had no incentive to carefully underwrite; they were 
paid up front when the loan was made regardless of future 
performance. That is why the Administration proposes that 
originators of loans or the securitizer must retain 5 percent 
of the credit risk associated with loans sold into a conduit.

Q.9. Will you please define what an ``objective reasonableness 
standard'' means?

A.9. Disclosure mandates for consumer credit and other 
financial products are typically very technical and detailed, 
and it takes time for regulators to update them because of the 
need for consumer testing and public input. The growth in the 
types of risks stemming from new and complex credit card plans 
and mortgages that preceded the credit crisis far outpaced the 
ability of disclosure regulations to keep up. We propose a 
regime strict enough to keep disclosures standard throughout 
the marketplace, yet flexible enough to adapt to new products. 
Our proposed legislation authorizes the CFPA to prescribe rules 
that require disclosures and communications to be reasonable, 
not merely technically compliant. The proposal is based in part 
on the banking agencies' supervisory guidance on subprime and 
nontraditional mortgages. This guidance requires originators to 
make balanced disclosures.

Q.10. If a financial institution developed a new product today, 
under the CFPA would that product be able to be brought to the 
marketplace tomorrow? What will financial institutions be 
required to do before introducing a new product?

A.10. If a financial institution developed a new product today, 
under the CFPA Act that product could be offered in the market 
tomorrow--the CFPA will not be approving financial products. Of 
course, all products must comply with existing laws. For 
example, credit cards may not contain terms, such as 
retroactive rate increases, that would violate the Credit CARD 
Act of 2009. It is the institution's responsibility to 
determine that a new product complies with applicable laws 
before the institution brings the product to the market. It is 
CFPA's role to help ensure that products offered in the market 
comply with applicable laws, and to take appropriate steps if a 
product does not.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD
                    FROM EDWARD L. YINGLING

Q.1. In assessing the need for and scope of a new Consumer 
Financial Protection Agency (CFPA), the Committee must conduct 
an objective evaluation regarding the responsibility of various 
types of financial services providers for the lending problems 
that have occurred in recent years. In your written testimony, 
you identify nonbank lenders as the source for the vast 
majority of abusive mortgage lending in recent years. 
Specifically you write that `` . . . the Treasury's plan noted 
that 94 percent of high cost mortgages were made outside the 
traditional banking system.'' Your testimony also says that `` 
. . . it is likely that an even higher percent of the most 
abusive loans were made outside our sector.''
    On the other hand, the Committee heard testimony from 
Professor McCoy of the University of Connecticut on March 3, 
2009, that such an assertion, ``fails to mention that national 
banks moved aggressively into Alt-A low-documentation and no-
documentation loans during the housing boom.'' Professor McCoy 
cites data indicating that national banks and thrifts issued 
mortgage loans from 2006-2008 with higher default rates than 
State-chartered thrifts and banks. Moreover, Assistant 
Secretary Barr testified on the panel prior to you that ``about 
one-half of the subprime originations in 2005 and 2006--the 
shoddy that set off the wave of foreclosures--were by banks and 
thrifts and their affiliates.''
    Is it your view that national banks and thrifts did not 
play a significant role, either directly or through their 
subsidiaries, in offering abusive or unsustainable mortgage 
loans?

A.1. Thank you for your question, Mr. Chairman. Certainly, some 
banks--both national and State chartered--were involved in 
subprime lending, but the fundamental fact remains that the 
vast majority of banks in the country never made a toxic 
subprime loan. These regulated banks did not cause the problem; 
rather, they are the solution to the economic problem we face.
    The comment by Professor McCoy you cite in your question is 
not directed at the Treasury's statistic we referenced, i.e., 
that a very high percentage of high cost loans were made 
outside the banking industry. In fact, Professor McCoy refers 
to a study by the OCC which finds that national banks only 
accounted for 10 percent of subprime lending in 2006--thus 
confirming the evidence that the heart of the problem is with 
nonbanks.
    Even though attempts have been made to increase Federal 
regulation of the nonbank sector, the fact remains that in the 
key areas of examination and enforcement, nonbanks still are 
not regulated as strictly or robustly as banks. In fact, the 
GAO recently released a study on Fair Lending (July 2009) which 
found that the independent mortgage lenders represented 
``higher fair lending risks than depository institutions'' yet 
``Federal reviews of their activities are limited.'' 
Furthermore, GAO found that ``[d]epository institution 
regulators also have established varying policies to help 
ensure that many lenders not identified through HMDA screening 
routinely undergo compliance examinations, which may include 
fair lending components.'' This increased focus on insured 
depository institutions occurs because the banking agencies 
``have large examination staffs and other personnel to carry 
out fair lending oversight.''
    Traditional banks are the survivors of this financial 
crisis, not the cause. The fly-by-night nonbank mortgage 
lenders have disappeared as fast as they appeared. As I 
mentioned in detail in my written statement, the focus of 
policymaking should be on the core cause of the problem--the 
unregulated nonbank financial sector--and not end up punishing 
the very institutions that are most likely to restart our 
economy.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD
                    FROM TRAVIS B. PLUNKETT

Q.1. Both Mr. Yingling and Mr. Wallison testified repeatedly 
that the Administration's plan would result in credit being 
rationed to consumers, particularly consumers who need the 
credit the most. They also argued that the requirement that 
additional disclosures or warnings accompany products that are 
not ``plain-vanilla'' products would result in only those 
standard products being offered. Specifically, Mr. Wallison 
testified that `` . . . when a provider is confronted with the 
choice of whether to offer only the plain-vanilla product or 
the more complex product, he has to decide whether this 
particular consumer is going to be able to understand the 
product.'' Because lenders will be reluctant to make such 
judgments, they will, by default, offer the plain-vanilla 
product only, thereby constraining consumer choices. How do you 
respond to these arguments?

A.1. Poor regulation of abusive credit products by Federal 
regulators over many years has led to exactly the result that 
Mr. Yingling and Mr. Wallison are concerned about: credit 
rationing. Deceptive and unsustainable lending practices by 
credit card companies and mortgage lenders led to record 
defaults and foreclosures by consumers, record losses by 
lenders, a crisis in the housing markets and the recession. 
These developments, in turn, have led to a ``credit crunch'' 
where credit card lenders, for example, have significantly 
reduced credit lines and sharply increase interest rates, even 
for borrowers with stellar credit scores. Had a Consumer 
Financial Protection Agency existed to prevent the excesses 
that occurred in the lending markets, there is a very good 
chance that this country could have avoided the worst aspects 
of the housing and economic crisis, and of the somewhat 
indiscriminate reduction in credit availability that has 
occurred. In other words, proper regulation will create the 
kind of stability in the credit markets that encourages lenders 
to offer credit to consumers, especially those who do not have 
perfect credit ratings.
    Similarly, the ``plain-vanilla'' requirement is designed to 
create choices in the credit marketplace that don't exist now, 
and certainly did not exist during the credit boom. 
``Choices,'' such as prepayment penalties that lock consumers 
into unaffordable loans and ``exploding ARM'' loans that 
lenders knew many of their borrowers could not afford, crowded 
out less abusive options from the marketplace and ultimately 
harmed consumers and the economy. Lenders are quite capable of 
designing simple, understandable financial products that are 
profitable for them and useful for consumers, if they chose to 
do so.
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