The House Financial Services Committee debated the role of a Consumer Financial Protection Agency (CFPA) in response to the proposal in the Obama Administration’s “Financial Regulatory Reform: A New Foundation” white paper issued last week. Chairman Barney Frank (D-MA) opened the hearing by rebuffing criticism of the initiative by noting that “[t]here is no pattern of overregulation I can see in the consumer area, and I don't see one here.” The hearing focused on two issues: (1) what sectors of the financial services industry should be subject to the proposed CFPA; and (2) the limits of the proposed CFPA’s authority to regulate financial products under the auspices of consumer protection.

Rep. Bill Delahunt (D-MA) testified before the Committee regarding the Financial Product Safety Commission Act of 2009 (H.R. 1705), legislation he introduced in March 2009 that is paralleled by the Obama Administration’s white paper. Delahunt’s bill does not appear to contemplate regulation of insurance by the federal consumer protection regulator; rather, it contains language expressly preserving the McCarran-Ferguson Act. Indeed, Delahunt’s testimony focused primarily on mortgages, credit cards and other banking products rather than insurance.

Insurers and insurance regulators alike argued that the insurance industry should not be subject to oversight by a federal consumer protection regulator. Maryland Insurance Commissioner Ralph Tyler, testifying on behalf of the National Association of Insurance Commissioners, explained that insurance is subject to an array of consumer protections at the state level such as rate and form filing, market conduct exams, unfair trade practices laws, unfair claims settlement practices laws, licensing for companies and producers and antifraud provisions. He also explained that separating consumer protection regulation from prudential regulation would be ill-suited for insurance because solvency is fundamental to consumer protection, and product design directly affects solvency. His comments were echoed by Gary Hughes, Executive Vice President and General Counsel, American Council of Life Insurers. Hughes indicated, however, that ACLI supports the creation of a federal functional regulator for insurance that would have responsibility for both prudential and consumer protection. Until there is such a regulator, ACLI stated that the proposed Office of National Insurance would be the appropriate liaison between the federal government and the states on consumer protection issues, rather than a new federal consumer protection regulator. Several witnesses from both the banking and insurance industries argued that Congress should not separate prudential regulation from consumer protection because they are interrelated, and splitting regulatory authority between agencies would subject industry to jurisdictional tug-of-war between competing bureaucracies.

One notable Democratic skeptic of the proposal was Capital Markets Subcommittee Chairman Paul Kanjorski (D-PA), who wondered whether there were more appropriate areas for regulatory reform that warranted more immediate attention. Kanjorski wryly observed that any bill with the term “consumer” in the title seems to get an express ticket through the Congress without regard to whether it is, in fact, necessary. He worried that if such an agency were created, it would require years of litigation regarding congressional intent to adequately establish the limits of its jurisdiction. He questioned why consumer groups, appearing before his subcommittee a few months back, opposed federal regulation by testifying that the existing state consumer protection mechanisms in insurance were adequate, but now came before this committee and sought the creation of a new consumer protection agency. Kanjorski stated that, if federal consumer protection oversight was necessary, perhaps a federal charter for insurance is the right way to do it.

In contrast to Kanjorski, Rep. Jackie Speier (D-CA) stated that she is opposed to an optional federal charter and believes that states continue to be the proper home for insurance regulation. Speier asked whether the panel would support a federal consumer protection regulator if insurance were exempted from its jurisdiction. Hughes testified that ACLI could support the bill, provided that an Office of National Insurance were included. The panel generally agreed that exempting insurance from the consumer protection regulator would alleviate their concerns. Notably, Travis Plunkett, testifying on behalf of the Consumer Federation of America, and Kathleen Keest, testifying on behalf of the Center for Responsible Lending, preferred that at least certain lines of insurance, such as credit and mortgage insurance, would be subject to a federal consumer protection regulator.

Today’s hearing was the first in a series of hearings designed to respond to the Administration’s white paper. Chairman Frank stated that the Committee would examine and mark-up different pieces of financial regulatory reform throughout the summer, but that the overall package of reforms would be consolidated into one bill before moving to the Senate. Chairman Frank expects a mark-up of legislation on consumer protections sometime next month and has set an ambitious schedule for the Committee.

Witness List & Prepared Testimony:

Panel One

Panel Two

Panel Three