Yesterday, the House Financial Services Committee’s Subcommittee on Domestic Monetary Policy and Technology held a hearing entitled, “Regulatory Restructuring: Safeguarding Consumer Protection and the Role of the Federal Reserve.” The focus of the hearing was on how well the Federal Reserve has discharged its consumer protection responsibilities and whether those functions might be better handled by a newly created agency that would focus solely on consumer protection, as proposed by the Obama Administration and in legislation introduced by Barney Frank (D-MA). The Committee heard testimony from the following witnesses:
- Elizabeth A. Duke , Governor, Board of Governors of the Federal Reserve System
- Patricia McCoy, George J. & Helen M. England Professor of Law, University of Connecticut School of Law
- Lauren K. Saunders, Managing Attorney, National Consumer Law Center (NCLC)
- Jim Carr, Chief Operating Officer, National Community Reinvestment Coalition (NCRC)
Governor Duke discussed the importance of consumer protection to the overall strength of the economy and the stability of the financial markets, and emphasized the Federal Reserve’s considerable expertise and experience in the area of consumer protection. She asserted that consumer protection is complementary to and reinforces the other responsibilities of the Federal Reserve, and the creation of a new agency singularly dedicated to consumer protection would functionally result in the loss of valuable time and accumulated resources. She expressed the view that Congress should maintain the Federal Reserve’s consumer protection responsibilities going forward, while increasing regulatory accountability by codifying consumer protection as a core mission of the Federal Reserve or establishing periodic reporting requirements.
Ms. McCoy focused on the importance of the creation of one regulatory agency to be charged solely with consumer financial protection. In her view, the currently “fragmented and ineffective” system of consumer protection has led to an industry-wide “race to the bottom” in which financial institutions shop for the most lenient state or federal banking regulator and related laws, and regulators are pressured to weaken standards and relax their enforcement efforts. Establishing uniform standards and enforcement for all lenders through the creation of one consumer protection agency is the only way to prevent the current credit crisis from recurring.
Ms. Saunders emphasized the repeated failures of the Federal Reserve and other agencies to protect consumers and the resulting need for the proposed Consumer Financial Protection Agency (CFPA). The CFPA, if provided with the necessary resources, would still consult and coordinate with the existing banking agencies, but would provide more focus, attention, consistency, and the regulatory independence necessary to effectively protect consumers. The CFPA would reduce the risk of the financial system and would make the system as a whole more accountable to the consumers it both depends on and needs to protect.
Mr. Carr focused on the role of safety and soundness of the financial products sold to consumers as the foundation for the safety and soundness of the financial system as a whole. The consolidation of consumer protection expertise into a single, independent agency with a single mission would greatly increase the effectiveness of federal consumer protection regulation, while creating a floor of protection that would encourage state involvement in regulatory oversight. In lieu of this needed consolidation, at the very least, the financial regulatory system as it is today and the Federal Reserve in particular need significant attention and reform to address critical structural and accountability deficiencies.