Today, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Creating a Consumer Financial Protection Agency: A Cornerstone of America’s New Economic Foundation.” The hearing examined the Administration’s proposal to create a new agency responsible for consumer protection with regard to financial products and services. The following witnesses testifyied before the committee.
- Michael S. Barr, Assistant Secretary for Financial Institutions, Department of Treasury
- Richard Blumenthal, Attorney General, State of Connecticut
- Edward Yingling, President and CEO,American Bankers Association (ABA)
- Travis B. Plunkett, Legislative Director, Consumer Federation of America (CFA)
- Peter Wallison, Arthur F. Burns Fellow, American Enterprise Institute
- Sendhil Mullainathan, Professor of Economics, Harvard University
Mr. Barr emphasized the need for the proposed Consumer Financial Protection Agency (CFPA), asserting that the current consumer protection regulatory authority is fragmented with respect to rule writing, supervision and enforcement and lacks accountability. He stated that the CFPA will address the fragmentation by providing comprehensive jurisdiction over all financial service providers, both banks and non-banks, and will consolidate regulatory, enforcement and supervisory authority. He further noted that the CFPA will ensure accountability and fulfill the single mission of consumer protection.
Mr. Blumenthal expressed his strong support for the CFPA, calling such agency “a consumer financial guardian,” which will serve as a “partner” to state attorneys general in protecting citizens. He noted that the creation of the CFPA would restore the historic federal-state alliance to combat financial fraud. He praised the provision in the proposed Consumer Financial Protection Agency Act of 2009 (CFPA Act) that would allow states to enact consumer protection laws in addition to federal consumer protection laws. Mr. Blumenthal stated that, for 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.”
Mr. Yingling opposed the proposed CFPA, stating stated that the creation of a separate consumer regulatory agency will complicate the current financial regulatory structure by adding another regulatory layer. These regulatory burdens, he asserted, will particularly impact community banks, while non-banks will be subject to inadequate oversight and enforcement attention. As an alternative to the CFPA, he supported improvements to existing legal and regulatory structures to increase consumer protection. Mr. Yingling expressed concern that the new agency would have far-reaching authority to regulate consumer products and services, which would undermine the creation of new products beneficial to consumers.
Mr. Plunkett testified on behalf of numerous consumer coalitions, nonprofit associations, public policy groups and other organizations in support of the CFPA. Mr. Plunkett outlined what he believed were the causes of the financial crisis, citing the failure of current federal regulators to stop abusive lending, particularly unsustainable home mortgage lending, as the primary cause. He focused on the need for a consumer-centered rather than an institution-centered regulatory system and set forth arguments in favor of an independent federal CFPA. According to Mr. Plunkett, the establishment of a CFPA will “encourage innovation by financial actors, increase competition in the marketplace and lead to better choices for consumers.”
Mr. Wallison emphasized his fear that proposed legislation set forth in the proposed CFPA Act will unfairly result in the denial of consumer access to certain financial products and services. He argues that requiring credit and other financial providers to offer “plain vanilla” or simple, low risk products, will ultimately deny access to some products based on lack of experience, sophistication or even intelligence. He notes that such suitability standards will result in a lack in innovation, increase the cost of credit and subject providers to enforcement actions or lawsuits when determining whether a particular customer is suitable for a particular product.
Professor Mullainathan articulated his support for a two-part approach to financial regulation, whereby safe products are subject to little regulation while less safe products are more heavily regulated. He suggests that a “fence” around safer products allows all consumers to access financial products while ensuring that consumers who access less safe products do so with enhanced safeguards. Professor Mullainathan concluded that the proposed CFPA would accomplish this goal, by encouraging consumer choice while allowing sophisticated consumers access to more “exotic products on the other side of the fence.”