Regulatory Restructuring: Enhancing Consumer Financial Products Regulation
Published: June 24, 2009
Mr. Chairman, Ranking Member Bachus, members of the Committee:
Thank you for inviting the Center for Responsible Lending to discuss consumer financial products reform – a fundamental component of the effort to modernize and repair our financial regulatory system.
Over the past decade, federal bank regulators looked the other way as responsible loans were crowded out of the market by aggressively marketed, tricky financial products carrying hidden costs and fees. Dangerous products, whose most "innovative" feature was their ability to obscure their true costs and risks, led a race to the bottom that stifled true innovation, deprived consumers of meaningful choice of products, stripped away billions of dollars in hard-earned wealth from millions of Americans, and ultimately led to today's foreclosure crisis and economic meltdown.
The key lesson of this experience is that strong consumer protections are essential to financially sound banks and a healthy economy. For too long, consumer protection has been entrusted to regulators whose primary mission and focus has been prudential ("safety and soundness") regulation. Because abusive practices often produce short-term profit, these regulators have typically viewed consumer protections as nothing more than a constraint on bank activity and revenues, rather than as an integral part of the safety and soundness of the system. These regulators' failure to restrain the abuses that led to today's credit crisis demonstrates the need for an agency solely focused on the rigorous consumer protection needed to ensure that financial institutions can flourish in a sustainable way.
For this reason, we strongly support a vibrant, innovative, state-of-the-art consumer protection agency for financial products, such as has been introduced by the Administration and in both Houses of Congress, provided that it is strong, wellresourced, independent of the companies it regulates, and fully transparent and accountable to the public. An independent consumer protection agency, dedicated and empowered to keep the markets free of abusive financial products, committed to transparency, and fully accountable to the public and Congress, would help to restore consumer trust and confidence, stabilize the markets, and put us back on the road to economic prosperity.
In other areas of economic life, American markets have been distinguished by the standards of fairness, safety and transparency of the products marketed to consumers. Financial products should not be the exception. Despite the years of rhetorical threats that more regulation would dry up credit, we now know that what dries up credit – and a great deal more – is a failure of consumer and investor confidence. CRL views these matters from the vantage point of a small, independent financial institution serving a segment of the population devastated by the market and regulatory failures that produced the current crisis. Our affiliated financial institutions would be directly regulated by this independent agency.
You have asked us to focus on three areas of inquiry:
1. Whether the agency should be independent or integrated with the prudential supervisors of depository institutions.
We believe it should be an independent, standalone regulator with the primary mission of consumer protection. An independent agency is necessary to counteract the forces that drive regulators to put concerns about consumer protection on the back burner.
2. The scope of rule-making, examination and enforcement authority of the agency and the types of financial products that should be within its regulatory purview.
The agency should have rule-making, supervision and enforcement authority over all providers of consumer credit, deposit, and payment systems (as well as over ancillary goods and services). At the same time, this authority should not displace the right of the states' to protect their citizens from abuses within their border, so federal law, including this agency's rules, should set the floor rather than the ceiling on state consumer protection. The agency should coordinate with the states to ensure robust state and federal enforcement.
3. The importance of, and the potential methods for, funding the agency.
It is essential that the agency be funded in a way that ensures its capacity, strength and independence. We recommend that the agency be funded through a combination of appropriations, user fees, and assessments to minimize the risks that attend each option as a stand-alone mechanism.