The Senate Banking Committee debated the Obama Administration's draft legislation proposing the creation of a federal Consumer Financial Protection Agency (CFPA) designed to regulate all consumer financial products, such as credit products, mortgages and auto loans. The CFPA would take most consumer financial product regulation away from the federal financial services regulators (e.g., the Federal Reserve and the Office of the Comptroller of the Currency) and the Federal Trade Commission, and place that authority in the new CFPA. Under the Administration bill--and the companion legislation introduced in the House by Financial Services Committee Chairman, Rep. Barney Frank (D-MA)--the states would also have the authority to issue more restrictive rules on these same consumer financial practices, thus opening--if not inviting--multiple rules governing the same products. Insurers have been concerned about the possibility of the proposed CFPA creating yet another layer of insurance regulation, even though, on its face, the legislation expressly excludes oversight of insurance products other than credit, mortgage and title insurance. These issues, however, were not addressed in today's hearing. Instead, the hearing focused on the general regulatory philosophy represented by the CFPA, specifically that the financial regulators are too far removed from the needs of ordinary consumers to be able to focus on their interests and protect them, thus necessitating a new agency that is dedicated solely to doing so.

To calm some industry concerns and set the tone for the hearing, Chairman Chris Dodd (D-CT) noted that, "No senator on this committee wants to stifle product innovation, limit consumer choice or create regulation that is unnecessary or unduly burdensome." Dodd strongly endorsed the creation of an agency focused on protecting consumers and said that had stronger consumer protections been in place, much of the current financial crisis could have been prevented. Such an independent agency would benefit both consumers and financial services providers alike, he said, by eliminating the regulatory overlap and inefficiency in the current balkanized structure and ensuring a transparent and level playing field.

In contrast, Ranking Member Sen. Richard Shelby (R-AL), expressing reservations about the scope of authority for the proposed agency, said, "I think this would be a very significant and paternalistic departure from the notions of liberty and personal responsibility that have previously guided our regulatory efforts." Shelby fears that by allowing the CFPA to determine what types of products are appropriate for consumers, the Administration has moved from "Yes We Can" to "No, You Can't." "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 the legislative process," he said, regarding the potential authorization of the CFPA to tell consumers what types of products they may and may not buy.

Assistant Secretary of Treasury Michael Barr appeared on behalf of the Administration to explain its vision for the CFPA. Secretary Barr explained that the current financial crisis evidenced the failure of prudential regulators to adequately protect consumers, justifying the creation of an agency focused solely on consumer protection. He stated that the CFPA would have one mission: creating a level playing field for all players in financial markets to increase transparency and consumer protection. According to Barr, a single-regulator approach would alleviate inter-regulatory finger pointing, lessen regulatory costs, prevent regulatory arbitrage and ensure accountability.

The CFPA would have a number of regulatory tools to protect consumers, ranging from outright bans of certain products, to increased disclosure. Among the most controversial features of the CFPA is its proposed authority to require the development or designation of "plain vanilla" products. So-called "plain vanilla" products would serve as a baseline of comparison for more exotic products. For example, as Barr explained, if a company wanted to offer a pay-option adjustable-rate mortgage, it would also have to make available a "plain vanilla" product such as a 30-year fixed-rate mortgage as well as an explanation of the potential costs to the consumer.

Edward Yingling, testifying on behalf of the American Bankers Association, expressed concern about the scope of these requirements, noting that the CFPA legislation exposes product providers to tremendous risks if they choose to offer anything more than a "plain vanilla" product to consumers. A "plain vanilla" product, he said, has the blessing of the CFPA but anything beyond that raises difficult questions regarding the suitability of a consumer for a product and exposes the provider to CFPA enforcement actions and potential consumer class actions. Peter Wallison, appearing on behalf of the American Enterprise Institute, echoed these concerns, noting that such requirements could reduce the array of products available to consumers, limiting consumer choice. On the other hand, Travis Plunkett, of the Consumer Federation of America, argued that "buyer beware" doesn't always work, and that suitability requirements have emerged as a feature of other aspects of financial regulation.

From a political standpoint, the hearing confirmed general Democratic support for the CFPA with Republican caution and bipartisan judgment that the Administration's proposal is a first draft--with Sen. Bob Corker (R-TN) saying it is overreaching--that will require tightening and revision. The Administration argues that the prudential regulators were unable and unwilling to enforce their consumer protection authority and so an independent CFPA is needed to protect consumers. Sens. Shelby and Corker were the most vocal critics of the Administration's proposal. On the Democratic side, Sens. Dodd and Schumer emerged as staunch supporters of the proposed CFPA, while Sen. Mark Warner (D-VA), with his venture capital background, seemed a bit more hesitant. The broad concerns of the Republicans, including Ranking Committee Member, Richard Shelby, and the hesitation of some Democrats, probably translates into a long road to Senate passage of the Administration bill.