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Weekly UpdatesOn June 24, House Financial Services Committee Chairman Barney Frank (D-Massachusetts) told a hearing before the full Financial Services Committee that he intends to move legislation creating a new federal agency for protecting consumers from risky financial products separately from a larger package of financial regulatory reforms. He said his committee will be "moving in July to a markup on this." He added, "This is a hearing that will lead to a markup" sometime between July 4 and before the summer recess.
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He said the new consumer-protection agency was "an important piece" of the larger package of financial regulatory reforms. He predicted that ultimately the committee would be "moving toward one bill," but it was clear he intended to move this component first.
The late June hearing was held before the Obama administration publicly released its proposal for creating a new Consumer Financial Protection Agency (CFPA). The administration unveiled its plan on June 30. Chairman Frank released a statement that day, stating: "The administration's release of its recommended language is very welcome because it removes any obstacle to the House Financial Services Committee reporting out legislation creating such an agency in July. The federal regulatory system has clearly failed to provide adequate protection for consumers, and that failure contributed to the broader economic crisis. That is why I have made the creation of the agency one of our highest priorities."
The chairman of the House banking committee proceeded to stake out ground for his committee to draft its own version of this legislation. Frank stated, "While the committee will, of course, exercise its own judgment on the specifics and we have already had a thorough hearing on the matter, it is helpful to have the administration's proposals as wall, because I believe there is a great deal of common ground between us. And with their text in hand we can now proceed to draft and approve a bill in committee before the August recess."
On July 8, Frank, along with 12 other members of the committee, became original co-sponsors of the Obama administration's bill creating the CFPA. The bill, H.R. 3126, would establish the agency as a "powerful independent agency with a range of rulemaking, information-gathering, supervisory and enforcement tools to better protect consumers who purchase financial products from banks and non-bank financial institutions."
In introducing H.R. 3126, Frank noted that the bill differed from the administration's draft proposal in a few significant respects. The bill that was introduced in the House "preserves the current federal banking regulators' role to enforce the Community Reinvestment Act (CRA)."
The June hearing gave members a chance to show their cards on other potential provisions or changes that could get incorporated into a final version of the bill that gets reported out of committee and then sent on to the House floor for a vote. The give-and-take of the hearing revealed some interesting perspectives held by committee Democrats and Republicans.
Ranking minority member Rep. Spencer Bachus (R-Alabama) said that the administration's proposal on this topic and a bill that had been introduced earlier in the House by Rep. William Delahunt (D-Massachusetts) (H.R. 1705) represent "fundamental and profound changes to the current regulatory regime." Bachus said his main question about the proposal is the "wisdom of bifurcating consumer-protection and safety-and-soundness regulation as suggested in the administration's proposal."
Bachus also suggested the new consumer-protection agency proposal may encounter trouble in the Senate. He noted the potential defection of at least one influential Democrat, and he referred specifically to Sen. Mark Warner (D-Virginia). Bachus said, "I am not alone in raising these questions," while noting that Warner said he would need "more convincing" that separating these two regulatory missions was a good idea.
Several witnesses, including both Alex Pollock, resident fellow at the American Enterprise Institute, and Ed Yingling, president and chief executive officer of the American Bankers Association (ABA), voiced serious concerns about splitting the safety-and-soundness function from the consumer-protection piece. Pollock said the proposal for a new consumer-protection agency reminded him of the debate over the Sarbanes-Oxley Act, which he termed "the first major regulatory overreaction." Pollack added that discussion about "requiring more consumer responsibility seemed to be missing from the administration's proposal." And when it comes to addressing Fannie Mae and Freddie Mac, the proposal "seems to lose courage" altogether, he said.
ABA's Yingling told Rep. Maxine Waters (D-California) in questioning, "I agree with you, there are products that should be banned." In response to other questioning about the Community Reinvestment Act, Yingling won extended praise from Chairman Frank for his statement that CRA did not cause the mortgage market meltdown. Yingling also conceded that the Federal Reserve was not aggressive enough in enforcing the Home Ownership and Equity Protection Act (HOEPA). He added that better HOEPA enforcement "could have addressed a lot of this," meaning the mortgage market problems.
Harvard University Professor Elizabeth Warren, who in 2007 wrote an article in the journal Democracy proposing just the kind of consumer-protection financial agency that was the main focus of the hearing, sidestepped a question as to whether she supported the Delahunt legislation. She said she had not read the proposed legislation introduced by Delahunt. Warren is widely expected to be the frontrunner to head the CFPA, should the authority to create such an agency be enacted.
Warren did say that she was surprised that the administration's proposal for a consumer-protection agency included primary enforcement responsibilities for CRA, because it was not part of her original proposal. Chairman Frank, at the time of the hearing, said the idea of moving CRA enforcement to the new CFPA "is one conflict I do think needs to be addressed." And he made good on his word by stripping that change out of the introduced version of the administration's proposal.
At the hearing, other members had some pointed comments on things they would like to see addressed in the CFPA proposal. Rep. Brad Miller (D-North Carolina) said we need to align compensation with long-term performance of financial products. He criticized the influence that he said the financial services industry has over its regulators, saying, "Other industries don't have regulators taking the industry's word for things."
Rep. Ed Royce (R-California) reiterated his view that there is a need to keep the consumer-protection piece and safety-and-soundness regulation together under the same regulatory entity. He added that Congress and existing regulation played a role in the emergence of subprime lending. He said Fannie Mae and Freddie Mac bought subprime loans and securities "because of government goals."
Waters noted at the hearing that during the boom years, a lot of mortgage-related products escaped federal regulation. She added that "a prime example of this is mortgage servicing." She said there is "no federal entity over the mortgage servicing industry."
And anticipating opposition from the financial services industry, Rep. Jackie Speier (D-California) told the hearing, "When the Consumer Product Safety Commission was formed, manufacturers all screamed foul--much like the financial services industry is screaming now." But she added, "Does anyone really want to make the argument that the status quo really works?"
Harvard Professor Warren, who was-referred to at the hearing as the "intellectual author of this proposal" by Delahunt, told the hearing that the proposal to fix what she called a "consumer credit market that is broken" is needed because products have become too complicated. She said, "I teach contract law and I can't understand them."
She said, "Keeping safety and soundness and consumer protection together--we've done that. This structure does not work."
Warren favors giving lenders a regulatory safe harbor for offering certain plain-vanilla products that the government determines. She added that banks can offer something else, but they have to show a consumer can understand it in five minutes or less.
Representing the banking industry, ABA's Yingling said banks of all sizes would be negatively impacted by the proposal to create a consumer financial-protection agency. He said the biggest flaw is the separation of safety and soundness and consumer protection. He said, "You cannot separate a business from its product."
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