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S. HRG. 111–274 

CREATING A CONSUMER FINANCIAL PROTECTION 

AGENCY: A CORNERSTONE OF AMERICA’S NEW 

ECONOMIC FOUNDATION 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

ON 

THE CREATION OF A CONSUMER FINANCIAL PROTECTION AGENCY TO 

BE THE CORNERSTONE OF AMERICA’S NEW ECONOMIC FOUNDATION 

JULY 14, 2009 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

MEL MARTINEZ, Florida 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

KAY BAILEY HUTCHISON, Texas 

EDWARD SILVERMAN, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

AMY S. FRIEND, Chief Counsel 

JONATHAN N. MILLER, Professional Staff Member 

KARA STEIN, Legislative Assistant 

RANDALL FASNACHT, GAO Detailee 

MARK OESTERLE, Republican Chief Counsel 

ANDREW J. OLMEM, JR., Republican Counsel 

DAWN RATLIFF, Chief Clerk 

DEVIN HARTLEY, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

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C O N T E N T S 

TUESDAY, JULY 14, 2009 

Page 

Opening statement of Chairman Dodd .................................................................. 1 

Prepared statement .......................................................................................... 57 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 4 

Senator Johnson 

Prepared statement ................................................................................... 58 

WITNESSES 

Michael S. Barr, Assistant Secretary for Financial Institutions, Department 

of the Treasury ..................................................................................................... 6 

Prepared statement .......................................................................................... 59 

Responses to written questions of: 

Chairman Dodd ......................................................................................... 141 

Senator Johnson ........................................................................................ 148 

Senator Vitter ............................................................................................ 149 

Richard Blumenthal, Attorney General, State of Connecticut ............................. 34 

Prepared statement .......................................................................................... 66 

Edward L. Yingling, President and Chief Executive Officer, American 

Bankers Association ............................................................................................. 36 

Prepared statement .......................................................................................... 69 

Responses to written questions of: 

Chairman Dodd ......................................................................................... 153 

Travis B. Plunkett, Legislative Director, Consumer Federation of America ...... 38 

Prepared statement .......................................................................................... 79 

Responses to written questions of: 

Chairman Dodd ......................................................................................... 154 

Peter Wallison, Arthur F. Burns Fellow, American Enterprise Institute ........... 39 

Prepared statement .......................................................................................... 132 

Sendhil Mullainathan, Professor of Economics, Harvard University .................. 41 

Prepared statement .......................................................................................... 136 

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(1) 

CREATING A CONSUMER FINANCIAL PROTECTION AGENCY: A CORNERSTONE OF AMERICA’S NEW ECONOMIC FOUNDATION 

TUESDAY, JULY 14, 2009 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 9:05 a.m., in room SD–538, Dirksen Senate Office Building, Senator Christopher J. Dodd (Chairman of the 

Committee) presiding. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Chairman DODD. The Committee will come to order. 

I would like to welcome all here this morning for this morning’s 

hearing on ‘‘Creating a Consumer Financial Protection Agency: A 

Cornerstone of America’s New Economic Foundation.’’ We want to 

thank you, Mr. Barr, for joining us, and our other witnesses we will 

hear from after your testimony, and the Members of the Committee 

who are here this morning. And, obviously, my good friend and colleague Richard Shelby, former Chairman of the Committee, will be 

making some opening comments as well. So let me take a few minutes and share with you my thoughts on this question and then 

turn to Richard for any comments he has. And since only a few of 

us are here this morning, Bob, if you have got any opening comments you would like to make as well, I will turn to you, and then 

we will go to you, Mr. Barr, for your testimony. 

This morning we are taking an important step in our efforts to 

modernize our financial regulatory system. The failure of that system in recent years has left our economy in peril, as we all know, 

and caused real pain for many hard-working Americans who did 

nothing wrong themselves. And so I would like to start by reminding everyone that the work we do here matters to real people, men 

and women in my home State of Connecticut and all across our Nation who work hard every day, play by the rules, and want nothing 

more than to make a better life for themselves and their families. 

These families are the foundation, as all of us know, of our economy and the reason that we are here in Washington working on 

this historic and critically important legislation. That is why the 

first piece of the Administration’s comprehensive plan to rebuild 

our regulatory regime and our economy is something that I have 

championed as well, and that is, an independent agency whose job 

it will be to ensure that American consumers are treated fairly and 

honestly. 
2 

Think about the moments when Americans engaged with financial service providers. Now, I am not talking about big-time investors or financial experts. We know those people have a level of sophistication. I am talking about just ordinary citizens, working people trying to secure a stable future for themselves and their families. They are opening checking accounts. They are taking out 

loans. They are building their credit. They are trying to build a 

foundation upon which their families’ economic security can rest for 

years to come. These can be among the most important and stressful moments a family can face. 

Think of younger people who have carefully saved up for that 

down payment on a home. It might be a modest house, but it will 

be their first home, a starter home. Before they can move into their 

new home, however, they must sign on the dotted line for that first 

mortgage, with its pages and pages of complex and confusing disclosures. Who is looking out for them in that process? 

Think of a factory worker who drives 30 miles to and from work 

every day and that old car that is about to give out. He or she 

needs another one to make it through the winter, but wages are 

stagnant and the family budget is stretched to the max. He has got 

no choice but to go to navigate the complicated world of an auto 

loan. Who is looking out for that person at that moment? 

Think of a single mother—and there are many in our country— 

whose 17-year-old son or daughter has just gotten into his or her 

first choice of going to college. She is overjoyed for him or her, but 

worried about how she is going to pay for that tuition, which grows 

every year astronomically. Financial aid might not be enough, and 

she knows that as her son or daughter begins the next chapter in 

their lives filled with promise, they may be saddled with overwhelming debt. Who is looking out for that family under those circumstances? 

These moments are the reason that we have invested so much 

of our time and money to rebuild our financial sector, even though 

some of the very institutions that the taxpayers have propped up 

are responsible for their own predicaments. These moments are the 

reason why we serve on this Committee and why I believe we have 

all come to the Senate to try and make a difference in the lives of 

the people we represent. And these moments are the reason that 

I and many of my colleagues were enraged by the spectacular failure of consumer protection that destroyed economic security for so 

many of our American families. 

In my home State of Connecticut and around the country, working men and women who did nothing wrong have watched this 

economy fall through the floor, taking with it their jobs, their 

homes, their life savings, and the cherished promise of the American middle class. These people are hurting. They are angry and 

they are worried, and they are wondering whether anyone is looking out for them. 

Since the very first hearings before this Committee on modernizing our financial regulatory structure, I have said that consumer 

protection should be a top priority in our deliberations. Stronger 

consumer protection could have stopped the crisis before it started, 

in my view. And where were the regulators in all of this? 
3 

We know now that for 14 years, despite a clear directive from the 

U.S. Congress, the Federal Reserve Board took no action to ban 

abusive home mortgages. Gaping holes in the regulatory fabric allowed mortgage brokers and bankers to make and sell predatory 

loans to Wall Street that turned into toxic securities and brought 

our economy to its knees. 

That is why many of us call for the creation of an independent 

consumer protection agency whose sole focus is the financial wellbeing of consumers, an agency whose goal it is to put an end to 

lending practices that have ripped off far too many American families, and the Administration has sent us a very bold and I believe 

thoughtful plan for that agency. 

You would think financial services companies would support protections that ensure the financial well-being of their consumers. An 

independent consumer protection agency can and should be very 

good for business, not just for consumers. It can and should protect 

the financial well-being of American consumers so that businesses 

can rely on a healthy customer base as they seek to build long-term 

profitability. It can and should eliminate the regulatory overlap 

and bureaucracy that comes from the current Balkanized system of 

consumer protection regulation. It can and should level the playing 

field by applying a meaningful set of standards, not only to the 

highly regulated banks but also to their nonbank competitors that 

have slipped under the regulatory radar screen. 

Financial services companies that want to make an honest living 

should welcome this effort to create a level playing field. Indeed, 

the good lenders—and there are many—are the most disadvantaged when fly-by-night brokers and fly-by-night finance companies 

set up shop down the street. Then we see bad lending pushing out 

the good. 

No Senator on this Committee, Democrat or Republican, wants 

to stifle product innovation, limit consumer choice, or create regulation that is unnecessary or unduly burdensome. And I welcome the 

constructive input from those in the financial services sector—who 

share our commitment, by the way, to making sure that American 

families get a fair shake. We all want financial services companies 

to thrive and succeed, but they are going to have to make their 

money, in my view, the old-fashioned way: by developing innovative 

products, pricing competitively, providing excellent consumer service, and engaging in fair competition on the open market. 

The days of profiting from misleading or predatory practices need 

to be over with completely. The path to recovery of our financial 

services companies and our economy is based on the financial 

health of American consumers. I believe that very deeply. We need 

a system that rewards products and firms that create wealth for 

American families, not one that rewards financial engineering that 

generates profits for financial firms by passing on hidden risks to 

investors and borrowers. 

The fact that the consumer protection agency is the first legislative item the Administration has sent to Congress since it released 

its white paper on regulatory reform last month tells me that our 

President’s priorities are in the right place. Nevertheless, with the 

backing of the Administration, with the support of many in the financial community who understand the importance of this reform, 
4 

and, most of all, with a mandate from the American families I have 

discussed who count on a fair and secure financial system, I believe 

that we will push forward and succeed. 

I thank all of you for being with us here today as we move forward on this issue. Let me say, as I have said many times already 

in discussions both informally and formally, Richard Shelby, my 

partner in all of this, he and I are determined to work together on 

this to get this right. This is not one where we bring a lot of ideology to this debate but, rather, what works, what makes sense, 

what will restore the confidence and optimism of people all across 

this country—and, for that matter, around the world, who look to 

the United States as a safe and secure place and an innovative 

place to come and park their hard-earned dollars and hard-earned 

money. 

And so, with that, I thank again everyone for being here, and let 

me turn to Senator Shelby. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman. 

The Committee today, as the Chairman has already said, will examine the Administration’s proposal to establish a stand-alone consumer protection agency. Well-regulated and transparent financial 

markets have been and must continue to be one of the central goals 

of our financial regulatory system. The purpose of our markets is 

to benefit consumers by giving them ways to save, invest, and conduct transactions. 

Consumers are not likely to participate in our markets, however, 

unless they know they are protected against fraud and unfair dealings. In addition, consumers are more likely to use financial products if they have the information they need to make good financial 

decisions. 

By creating confidence in our markets, consumer protection promotes consumer participation, which in turn provides additional 

benefits by increasing the size, vitality, and resilience of our financial system. Good consumer protection, therefore, makes good economic sense. 

Since the start of the ongoing financial crisis, I have stated that 

we should approach regulatory reform in a thorough and deliberate 

manner. I believe this Committee should examine what caused this 

financial crisis, develop solutions to the problems identified by that 

examination, and then consider the practical consequences of any 

reform measures. 

This morning, we begin our examination of the Administration’s 

proposal. This is our first chance to review the Administration’s 

findings regarding the problems they have identified and the solutions that they seek. As part of our consideration, I believe it would 

be very useful, if not necessary, for the Administration to submit 

for the record the data and the evidence they used to craft a regulatory restructuring proposal. It might be very helpful to us here. 

In addition, the fact that the Administration has produced a legislative draft gives us a chance to consider some of the practical 

questions associated with the proposal. For example, how will this 

new agency interact with the other banking regulators? Who will 

have the final discretion over things like capital treatment for al-
5 

ternative mortgage products or other consumer credit products? 

What authority would the Administration leave to State banking 

regulators? 

What if there is a disagreement between a prudential supervisor 

and the new consumer protection agency? What if a prudential supervisor fails to operate in a manner consistent with the consumer 

protection agency’s guidelines? Will a prudential supervisor be allowed to overrule the consumer protection agency? 

Will certain types of financial products be banned? What standards would be used to make the decision to remove products from 

the marketplace? 

Beyond the practical issues regarding the program, I want to 

highlight some conceptual issues that I believe we must recognize 

as we consider financial consumer protection reform. 

First, I believe that we must clearly acknowledge and accept that 

risk cannot be eliminated from our financial markets? It is risk 

taking that generates return. It would be both false and irresponsible to lead the American people to believe that an enhanced regulator can provide them with risk-free opportunities. 

Second, I believe that we must also acknowledge that the risk associated with financial products are largely depending on the circumstances surrounding a particular transaction and the consumer. Some have tried to make oversimplistic analogies comparing defective consumer products to certain financial products. 

This is inaccurate, and I believe it is highly inappropriate. 

For example, a defective electrical device is dangerous under 

every circumstance where it is used. We know that. But that is not 

the case for financial products. A plain-vanilla 30-year fixed mortgage is not inherently safer, some argue, than a shorter adjustable 

rate product? In fact, a 30-year fixed mortgage could involve high 

costs and provide less value to the consumer. We have to look at 

the circumstances. 

Consumers need the relevant information and the means to understand it so they can purchase products and engage in the transactions that best fit their needs and circumstances. This point 

bears on what I believe is finally the most important issue associated with consumer protection reform. Who is best able to decide 

about the value and the necessity of any particular financial product or service? 

Some, including those in the Administration, have decided that 

consumers will not act in their own best interests and, therefore, 

it is necessary that we remove or greatly restrict products that in 

some situations might cause financial harm. Implied in this belief 

is the notion that some people, such as the Government bureaucrats, can make informed decisions about the value of products and 

services while others, such as the American consumer, cannot. In 

other words, ‘‘Yes, we can,’’ has become ‘‘No, you can’t.’’ 

While I can accept the view that in some cases consumers do not 

have the necessary information or understanding to make sound financial decisions, I do not accept the premise that the remedy is 

to deny consumers decision-making power altogether. I think this 

would be a very significant and paternalistic departure from the 

notions of liberty and personal responsibility that have previously 

guided all our regulatory efforts. Quite frankly, I find it a bit dis-
6 

turbing and somewhat offensive that the concept of the ‘‘intellectually deficient consumer’’ has now found a voice in our legislative 

process. 

To the extent that there is any merit to this theory, I believe it 

would be better to provide those with deficiencies the means to address them rather than seizing from them their right to make free 

and informed choices. And while I look forward to hearing from our 

witnesses, I am greatly concerned over many aspects of the President’s plan, not to mention its underlying premise. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 

And with that, we will turn to you, Mr. Barr, for your opening 

statement and any supporting material or data you think would be 

valuable for the Committee to have at this point. Why don’t you go 

ahead? Try and keep your remarks down, if you can, to 5 or 10 

minutes or so. 

STATEMENT OF MICHAEL S. BARR, ASSISTANT SECRETARY 

FOR FINANCIAL INSTITUTIONS, DEPARTMENT OF THE 

TREASURY 

Mr. BARR. Certainly. Thank you very much, Chairman Dodd, 

thank you very much, Ranking Member Shelby. It is a pleasure to 

be back here to talk with you about the Administration’s proposal 

for a Consumer Financial Protection Agency, a strong financial regulatory agency charged with just one job: looking out for consumers 

across the financial services landscape. 

The need could not be clearer. Today’s consumer protection system is fundamentally broken. It has just experienced a massive 

failure. This failure cost millions of responsible consumers their 

homes, their savings, and their dignity. And it contributed to the 

near collapse of our financial system. 

There are voices today saying that the status quo is fine or good 

enough, that we should just keep the bank regulators in charge of 

protecting consumers, that we just need some patches to our broken system. They even claim consumers are better off with the current approach. It is not surprising that we are hearing these voices. 

As Secretary Geithner observed last week, the President’s proposals would reduce the ability of financial institutions to choose 

their own regulator and to continue financial practices that were 

lucrative for a time, but that ultimately proved so damaging to 

households and our economy. Entrenched interests resist change 

always. Major reform always brings out fear mongering. But responsible financial institutions and providers have nothing to fear. 

We all aspire to the same objectives for consumer protection regulation: independence, accountability, effectiveness, and balance. 

The question is how to achieve them. A successful regulatory structure for consumer protection requires a focused mission, 

marketwide coverage, and consolidated authority. 

Today’s system has none of these qualities. It fragments jurisdiction for consumer protection over many regulators, most of which 

have higher priorities than protecting consumers. Nonbanks avoid 

Federal supervision; no Federal consumer compliance examiner 

lands at their doorsteps. Banks can choose the least restrictive supervisor among several different banking agencies with respect to 
7 

consumer protection. Fragmentation of rule writing, supervision, 

and enforcement leads to finger-pointing in place of action and 

makes the action that is taken less effective. 

The President’s proposal for one agency, for one marketplace 

with one mission—to protect consumers—will change that. The 

Consumer Financial Protection Agency will create a level playing 

field for all providers, regardless of their charter or corporate form. 

It will ensure high and uniform standards across the financial services marketplace. It will end profits based on misleading sales 

pitches and hidden fee traps, along the lines of those that Senator 

Shelby and Chairman Dodd worked together to end in the credit 

card market. But there will be plenty of profits made on a level 

playing field where banks and nonbanks can compete fairly on the 

basis of price and quality. 

If we create one Federal regulator with consolidated authority, 

we will be able to leave behind regulatory arbitrage and interagency finger-pointing. And we will be assured of accountability. 

Our proposal ensures, not limits, consumer choice; it preserves, 

not stifles, innovation; it strengthens, not weakens, depository institutions; it will reduce, not increase, regulatory costs; and it will 

increase, not reduce, national regulatory uniformity. 

Successful consumer protection regulation requires mission focus, 

marketwide coverage, and it requires expertise and effectiveness 

through a consolidated supervisory entity. 

Consumer protection requires a mission focus for accountability, 

expertise, and effectiveness. 

A new supervisor must have marketwide jurisdiction to ensure 

consistent and high standards for everyone. 

And an effective regulator requires authority for regulation, supervision, and enforcement to be consolidated. A regulator without 

the full kit of tools is frequently forced to choose between acting 

with minimal effect and not acting at all. We need to end the finger-pointing. The rule writer that does not supervise providers 

lacks information it needs to determine when to write or revise 

rules and how best to do so. The supervisor that does not write 

rules lacks a marketwide perspective or adequate incentives to act. 

Splitting authorities is a recipe for inertia, inefficiency, and lack of 

accountability. 

The present system of consumer protection is not designed to be 

independent or accountable, effective, or balanced. It is designed to 

fail. It is simply incapable of earning and keeping the trust of the 

American people. 

Today’s system does not meet a single one of the requirements 

I just laid out. The system fragments jurisdiction and authority for 

consumer protection over many agencies, most of which have higher priorities than protecting consumers. Nonbanks avoid Federal 

supervision; banks can choose the least restrictive supervisor; and 

fragmentation of rule writing, supervision, and enforcement leads 

to finger-pointing in place of action. 

This structure is a welcome mat for bad actors and irresponsible 

practices. Responsible banks and credit unions are forced to choose 

between keeping market share and treating consumers fairly. The 

least common denominator sets the standard, standards inevitably 

erode, and consumers pay the price. 
8 

Mr. Chairman, if you look at the range of problems that have 

been occurring in the marketplace through this fragmented jurisdiction, I think that it is clear that the American public cannot afford more of the same. The problems that we had in the mortgage 

market—exploding ARMs, rising loan balances, credit card tricks 

such as double-cycle billing and late fee traps, the extent of failures 

in the past—are just unacceptable for us in the future, and the system we have had that led to this is structurally flawed. It is not 

capable of being fixed through tinkering around the edges. The 

problem is the structure itself. 

That problem has only one effective solution: the creation of one 

agency for one marketplace with one mission—to protect consumers 

of financial products and services, and the authority to achieve that 

mission. 

It is time for a level playing field for financial services competition based on strong rules, not based on exploiting consumer confusion. It is time for an agency that consumers—and their elected 

representatives—can hold fully accountable. The Administration’s 

legislation fulfills these needs. 

Thank you for this opportunity to discuss our proposal, and I 

would be happy to answer any questions. 

Chairman DODD. Well, thank you very much, and I did not give 

you a proper introduction to begin with, and I apologize. Mr. Barr 

is the Assistant Secretary for Financial Institutions at the Department of Treasury, and I should have made the formal introduction, 

so forgive me for not doing so. 

Mr. BARR. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much for your testimony. As I 

said at the outset, if you have any additional data that you think 

would be helpful for the Committee in its consideration, we would 

appreciate your submitting that to us as well. And I will ask the 

clerk to put us on a 5-minute clock, if you would here, and we will 

try and stay to that time. 

Let me, if I can, be sort of the devil’s advocate with you because 

I anticipate these sorts of questions will be raised by my colleagues 

as well. I know you have spent a lot of time in your testimony on 

this point, but I think it is worth reiterating. Why do you think a 

separate consumer protection agency is necessary? And why 

wouldn’t we just simply beef up the existing regulatory bodies? Let 

us even assume we end up consolidating a number of these regulatory bodies so they are far more efficient, we stop the regulatory 

arbitrage that is going on too often, the shopping, the charter shopping that we talked about. Why not just beef them up, give them 

additional personnel, and tell them they ought to be doing a better 

job? In effect, aren’t they supposed to be consumer protection agencies in their own right? And so why in the world would you go 

around and create a whole new one? And wouldn’t you, in fact, be 

then minimizing the importance of these other bodies if they end 

up deferring that consumer protection function to one agency and 

they are not doing the job they were supposed to be doing in addition to their regulatory functions? 

Mr. BARR. Thank you, Mr. Chairman. I think we have had a long 

experiment with having the prudential supervisors over banks responsible for consumer protection supervision, having another 
9 

agency—the Federal Reserve—responsible for rule writing, having 

yet another agency—the Federal Trade Commission—responsible 

for after-the-fact enforcement in the nonbanking sector. And I 

think what we have seen and what the American public has just 

experienced is a massive failure of that system. And it was a massive failure of that system because of the very structure of the system. 

There were good people at the Federal Reserve, for example, who 

wanted to effectuate strong consumer protections. You might even 

say there were heroic people at the Federal Reserve who wanted 

to effectuate consumer protection. Ned Gramlich, who was a dear 

friend of mine, the Vice Chair of the Federal Reserve, wanted to 

get consumer protection done, and the very structure of the Federal 

Reserve, its very focus on what it viewed as prudential supervision, 

its inability to move quickly on consumer protection blocked reform 

in the mortgage market that could have helped avert this crisis. 

So I think we have had a long and disastrous experience with 

having bank agencies with a mixed mission, with no one focused 

on protecting consumers, with no one able to set rules and supervise across the financial services marketplace, with no one able to 

say there is going to be a level playing field with high standards 

for everybody. And what we saw is the market tipped to bad practices. We saw it tip to bad practices in credit cards, practices which 

you and Mr. Shelby so effectively blocked in the credit card bill this 

spring. We saw it shift, tilt to bad practices in the mortgage market in ways that were disastrous for the American people. And I 

just don’t think we can afford that experiment any longer. We have 

to have a fresh start with a new agency whose sole mission is 

standing up for the American people. 

Chairman DODD. Let me continue my role as the devil’s advocate. 

One of the arguments we are going to hear is this will restrict the 

availability of credit to consumers, restrict their choices; that a way 

that the financial institutions will respond to this is just start saying no to a lot of people who otherwise might have a chance to get 

that car loan, get that started house; and so if you want us to make 

sure we are not going to make any mistakes at all, not take any 

risks at all, then we just won’t provide that kind of extension of 

credit to an awful lot of people out there. 

How do we respond to the question that consumer credit and consumer choices are going to be severely limited if, in fact, you get 

so heavy-handed with a consumer protection agency that the very 

people you are designing it to help here are actually going to be 

hurt by this idea? 

Mr. BARR. Mr. Chairman, I think that is exactly the thing to be 

focused on, and in our legislative draft, we suggest that the agency 

be required to assess not just the benefits of its rules, but the costs 

of its rules; that it be required not just to look at questions of consumer protection but also questions of access; that it be required 

to evaluate its major rule writing every 5 years to ensure that it 

is keeping up with changes in the marketplace at a minimum; that 

it be required to be held accountable through notice and comment 

rulemaking, even when it is not going to do a rule, to let the public 

and financial institutions comment on how it is doing its job. 
10 

I think it has got to weigh the costs and the benefits. It has got 

to be a balanced entity. But what we want to see is a level playing 

field, access for everyone based on high standards. We want consumers to be able to choose whatever product they want, whatever 

credit card they want, whatever mortgage loan they want, whatever payday loan they want. We want them to be able to choose 

loans, to choose products, to choose services. We want the consumer to be empowered to do that. We want it to be done on a level 

playing field with high standards. So what they are choosing is 

based on transparency and honesty and integrity in the process. 

Chairman DODD. Two final questions for you. I made the point 

in my opening statement that I thought if this were done well and 

right—as I plan to do so—that it is not only going to be beneficial 

to consumers, but the one argument we do not hear is that it is 

very beneficial to business, very beneficial to the financial institutions themselves to have a consumer protection agency, number 

one. 

And, number two, a witness who will appear in the second panel, 

Mr. Wallison from the American Enterprise Institute, says in his 

statement here, ‘‘If we are looking for a primary cause of today’s 

financial crisis, it is here,’’ referring to the Community Reinvestment Act. 

Why don’t you respond to the issue of whether or not you believe 

the Community Reinvestment Act was the primary cause of the financial crisis as well? 

Mr. BARR. Thank you, Mr. Chairman. Let me first say I agree 

with you that the Consumer Financial Protection Agency is good 

for banks as well as for consumers. If banks are competing on the 

basis of price and quality, that is good for them. If banks and credit 

unions and their communities can compete on a level playing field 

so we do not have a situation where a community bank wants to 

do the right thing but an independent mortgage company is stealing all market share with a policy that consumers cannot understand, we don’t want that in the future. We want a level playing 

field based on fair competition, based on transparency to consumers. 

With respect to the Community Reinvestment Act, I think the 

empirical evidence here, Mr. Chairman, is quite strong. I looked at 

this when I was researching at the University of Michigan. The 

Federal Reserve economists have looked at this question. The Federal Reserve found that about 6 percent of subprime mortgage 

loans were made by CRA-regulated institutions with respect to lowincome communities or low-income borrowers. Six percent is unlikely to have driven, highly unlikely to have driven the subprime 

mortgage crisis. 

If you look at the timing of our subprime mortgage crisis in the 

mid-2000’s, it is hard to imagine that that was caused by changes 

in CRA regulations a decade earlier in 1995. If you look at the performance of CRA lending with respect to equivalent subprime 

loans, comparable performance levels. So I think the empirical evidence just does not support that claim. 

Chairman DODD. They have very strong underwriting standards 

with CRA. The Community Reinvestment Act required very strong 

underwriting standards to be met by the borrowers. Is that true? 
11 

Mr. BARR. That is correct. 

Chairman DODD. Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. 

Secretary Barr, the proposed Consumer Financial Protection 

Agency embodies the notions of behaviorally informed regulation 

that you wrote about in an article published in October of last year. 

The premise of that article, as I understood it, was that—and I will 

quote—‘‘Individuals consistently make choices that they themselves 

agree diminish their own well-being in significant ways.’’ That was 

in the article. 

This dim view of the capabilities of the average American contrast with the author’s belief, as we understood it, that bureaucrats 

are capable of discerning what financial products and services 

would maximize the well-being of individuals that they don’t even 

know. 

Why do you believe that bureaucrats working for a Consumer Financial Protection Agency would be able to make better decisions 

than American consumers themselves? 

Mr. BARR. Thank you, Mr. Chairman. I appreciate the opportunity to make clear that that is not my view. In the first case—— 

Senator SHELBY. Was that in this article? 

Mr. BARR. The quote is in the article, but the material that followed that you articulated was not in the article. So the material 

that followed is the point that I would say is not my view. I would 

say it in two particular respects. 

One is I think the common human failing that we identified in 

the article are not about us versus them. They are common human 

failings that all of us have. All of us make mistakes in our daily 

lives. I get overdraft—— 

Senator SHELBY. We learn from those mistakes, don’t we? 

Mr. BARR. We do learn from those mistakes, and sometimes 

those mistakes are quite costly. But we all make them, is the only 

point I—I wasn’t trying to say—I am not speaking for you, sir, but 

I know I make those mistakes all the time. 

Senator SHELBY. I probably make more. Go ahead. 

Mr. BARR. So just to be clear on that. 

So these are mistakes that I make, at least, and that other people make and that are common mistakes, and our idea in the legislation is not to prevent people from making mistakes. It is to make 

it easier for them to avoid mistakes. Just easier for them to avoid 

mistakes. 

So if you have a product that people cannot understand, then we 

need to figure out a way of making it easier for them to understand. 

Senator SHELBY. I agree with that. 

Mr. BARR. And, Mr. Shelby, I know you worked very hard on the 

credit card legislation to make sure that credit card products and 

services are offered in a transparent way, and to let people know 

the consequences of their financial decisions for the cost of making 

those choices, and that is exactly the kind of approach that is embodied in this legislation. 

Senator SHELBY. Is your premise basically trying to take risk out 

of a marketplace? And if there is no risk, there is no marketplace, 

is there? 
12 

Mr. BARR. Sir, I think that risk and innovation are central to our 

financial system. 

Senator SHELBY. We benefit from it, don’t we? 

Mr. BARR. We at times benefit from it and at times have costs 

from it, and on balance, financial innovation and risk taking are 

central to our system. What we are talking about here is not eliminating risk, certainly not eliminating financial innovation. Quite 

the contrary. I think those are central concepts. But we have to see 

that happen on a level playing field with high standards so that 

people are competing based on price and quality and not consumer 

confusion. 

Senator SHELBY. The board of the consumer—the composition of 

the board, the proposal of the Consumer Financial Protection Agency would include the Director of the National Bank Supervisors 

and four members of the President’s choosing. There is no limit on 

the number of members who are from the same political party. 

This contrasts, as you well know, with the limits on the composition of both the Securities and Exchange Commission and the Consumer Product Safety Commission. 

Why did you choose such a politically biased construct at this 

point knowing that would raise red flags for some? 

Mr. BARR. Senator Shelby, I would not describe it as politically 

biased in any way. In fact, it is designed to be not political, so there 

is not an identification of parties with respect to those matters. 

And the board—— 

Senator SHELBY. You do not say that, but that is what the result 

would be. 

Mr. BARR. And if you look, for example, Mr. Shelby, at the Federal Reserve Board, we see a balanced range of individuals on the 

Federal Reserve Board without a particular requirement of party 

identification. 

Senator SHELBY. I would like to just restate a request I made in 

my opening statement. I am sure the Administration used a great 

deal of detailed data—you know, you had to—and analysis that led 

to this proposal, because we would do this, too. Would you please 

provide that data and your analysis of that data to the Committee—not just to me, but the Chairman and all of us, staff on 

both sides—so that we can use it in our effort to evaluate your proposal? In other words, look at your data, evaluate it, weigh it, because we might agree with it. We might not. Would you do that? 

Mr. BARR. We would be happy to work with the Committee to 

provide whatever information would be available and useful to you. 

Senator SHELBY. You state, Mr. Secretary, repeatedly that the 

status quo is not acceptable because things are changing every day 

in the marketplace, as we know, and the need for a new independent consumer protection regime could not be clearer. In addition, you state that, ‘‘Banks can choose the least restrictive supervisor among several banking supervisors.’’ Yet the Administration 

leaves in place in their overall proposal exactly that fragmented 

system for prudential supervision, four or five regulators. 

Why is it that we must and why would you propose only one 

agency responsible for consumer protection, but four Federal banking agencies is entirely appropriate for safety and soundness regulation of our system? Why would you do that if you are going to 
13 

have the other? If we had one prudential banking regulator, you 

could draw the analogy, but I don’t know how you do it here. 

Mr. BARR. Thank you, Mr. Chairman. Our view was that in the 

context of prudential supervision and the arbitrage that we had 

seen on the prudential side, that we could effectively deal with that 

problem by merging the OCC and the OTS into a new national 

bank supervisor, and eliminating the thrift charter, eliminating the 

remaining distinctions between State member banks, State nonmember banks, and national banks, and requiring a series of protections against charter conversion in the event that there were 

pending enforcement matters, pending problems at any of the institutions. 

It is not, I would agree, a perfect answer to that question, and 

in the context of the Consumer Financial Protection Agency, the 

problems that we saw were so pervasive, the basic structural problems so severe, the extent of mission conflict and mission confusion 

so strong, that we felt the only real answer there was a Consumer 

Financial Protection Agency. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much. 

Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Mr. Secretary, in a panel that will follow you, Mr. Yingling, who 

is the representative of the American Bankers Association, has a 

series of critiques, and I would like to go through some of them 

with you and see what your responses are. 

First of all, he talks about how community banks are likely to 

have greatly increased fees to fund a system that falls disproportionately and unfairly on them, as they were not part of the 

present crisis. 

Second, he talks about this agency having the power to compel 

the use of certain products that the agency would define. 

Third, he talks about two lessons that he believes are fundamental building blocks of any reform of consumer protection oversight: One is that the uniform regulation and supervision of consumer protection performance should be applied to nonbanks as 

rigorously as it has been applied to the banking industry; and two, 

that regulatory policymakers for consumer protection should not be 

divorced from the responsibility for financial institution safety and 

soundness. And he talks about how the failure of nonbank regulation was the most severe under the current system. 

So looking at those as some of the main points of critique of the 

legislation, how do you respond to those? 

Mr. BARR. Thank you, Senator Menendez. I would be happy to 

address those four concerns. 

First, with respect to community banks, community banks have 

endured a system under which they are forced to compete with 

independent mortgage companies and other unregulated lenders in 

the system. They have been forced essentially by market pressure 

to offer products and services that, if you are in their community 

and you talk to community bankers, they would rather not have offered. They would rather not have gotten engaged in pay option 

ARMs. But because or the unlevel playing field in supervision and 

regulation, the market tilted to bad practices, and market pressure 
14 

drove the market to a place that was bad for community banks and 

it was bad for consumers. 

What we are saying here is there is going to be a level playing 

field for community banks, for big banks, for independent mortgage 

brokers, for anybody else in the marketplace. One regulator is 

going to set the standards, everybody can compete equally, on an 

equal footing. 

Senator MENENDEZ. Are you saying that the proposed legislation 

that the Administration advocates is going to reach to those previously unregulated entities? 

Mr. BARR. Absolutely, sir. One of the key features of this legislation is that nonbank providers for the first time are going to get 

subject to supervision and examination and enforcement with the 

same tools available to bank regulators. So the legislation would 

say the new Consumer Financial Protection Agency would apply 

these strong consumer standards across the board so that no one 

competes on the basis of an unlevel playing field or hiding the ball. 

Second, with respect to the point about compelling the use of 

products, the agency here is offering a lighter touch form of regulation than banning or restricting products or services. What the legislation provides is if the agency sees a problem in the marketplace 

where some products and services are more confusing based on 

more difficult terms for consumers, instead of saying you can’t offer 

that product at all—right?—which in some instances an agency 

would want to say, Oh, we want to ban that kind of product or 

service, in this instance the agency has a different tool, a more 

flexible and more nuanced tool. They can say, Look, if you want to 

offer a pay option ARM, you have to show a consumer first what 

a 30-year fixed-rate mortgage would look like or what a regular adjustable rate mortgage looks like, what a 5–1 ARM without hidden 

features or terms looks like, so they can compare and make their 

own judgment, make their own choice, but make it based on something that they can understand and that is comparable across the 

marketplace. 

Third, with respect to nonbanks, let me just reiterate nonbanks 

will be subject to the same high standards, the same rules, the 

same supervision, the same examination, the same enforcement as 

banks for the first time ever. 

And, last, with respect to the link to safety and soundness, again, 

I think we have had a system. We just experienced what it is like 

to have massive failure in a system in which bank supervisors do 

safety and soundness and also do consumer protection. And what 

happened is they did not do safety and soundness in a good way, 

and they did not do consumer protection in a good way. We had 

a massive failure in our system. And we need to reform it. We need 

to give them a single—the bank regulators need to have a single 

mission focused on safety and soundness, and we need a new consumer protection agency whose sole mission is consumer protection. 

Agencies can then have one job. They can be held accountable for 

doing that job. And you all can go out and talk to them and say, 

‘‘This is your job. Why aren’t you doing it?’’ 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 

Senator Corker. 
15 

Senator CORKER. Mr. Chairman, thank you, and thanks for having this hearing. Mr. Secretary, thank you for your service. 

I am going to digress just for 1 second. I think you may be the 

overall architect, if you will, of much of what has been put forth 

as it relates to regulatory changes, and I have been somewhat curious that the GSEs were not addressed, and if we could just spend 

about 30 seconds on that. Obviously, the largest liabilities that we 

as a country have, other than Medicare and Social Security, are 

within those GSEs, and yet at a time when you in essence own 

them, we are not in any way looking at changing their status or 

moving them along into a different direction. I am just wondering 

why you all chose not to address that. 

Mr. BARR. Thank you, Senator Corker. In the Treasury Department’s report, we highlighted the fundamental need that you articulated just now to reform those institutions, and we promised to 

come back to the Congress at the time of the President’s budget 

submission in February with a reform proposal, and really our 

judgment was just about sequencing of what we could get done 

with you. 

We think it is a high priority to get done. We will be proposing 

legislation to you with respect to reform of the Government-sponsored enterprises, looking at our mortgage finance system as a 

whole. And between now and then, we will be holding a series of 

public meetings as well as engaging in our own internal deliberations to focus exactly on that question. You are right. We need to 

address it. 

Senator CORKER. When is ‘‘then’’? When is ‘‘then,’’ when you are 

going to be proposing this—— 

Mr. BARR. Oh, I am sorry. At the time of the President’s budget 

submission, which is in February of the coming year. 

Senator CORKER. So would you urge us to wait on regulatory reform until after that point so that we can address it all? 

Mr. BARR. Our judgment, again, Senator Corker, I do not have— 

you all are obviously keepers of your own calendar, and I would not 

want to suggest anything with respect to that. Our own judgment 

in terms of the sequencing is that we could move forward expeditiously on the financial reforms measure we have put in place, that 

we have suggested that you put in place, and next turn to the Government-sponsored enterprises in February. 

I do not think we can afford to wait for 6 or 7 months to do that. 

I think we need to act now and put in place these essential measures for the financial system. 

Senator CORKER. So sort of a developing theme, I think, within 

the Administration, not necessarily with yourself, is that we have 

a lot of smart people who work with us that know better than the 

average citizen what ought to happen in so many areas, and it is 

just a theme that continues to evolve. So as I look at this agency— 

and I no doubt believe that consumer protection ought to take 

place. For the first time—and a lot of people have sort of compared 

this to consumer product safety, but, in essence, you all are advocating that you design products for the financial industry. That is 

a major departure from anything that has happened in any other 

category of the economy that I am aware of. But you guys would 

be designing products that all institutions had to conform to, which 
16 

is very different than product safety. They usually test products 

that are designed by others afterwards to see that they are safe. 

I am just wondering, what is it that drives you all to that extreme? 

Mr. BARR. Senator Corker, thank you for the opportunity to clarify again that that is not at all what we have in mind. So under 

this Consumer Financial Protection Agency, financial institutions 

can continue to offer any product or service that they want. The 

point of having a simple product offering is to say if you are going 

to offer a complex product like a pay option ARM, you also have 

to offer a straightforward product that exists in the marketplace— 

a 30-year fixed-rate mortgage with straightforward pricing and 

terms; a 5–1 or 7–1 ARM with straightforward pricing and terms. 

So I think that if you look at the language that we have proposed, the factors that the agency is supposed to take into account, 

this is not designed to dictate all the products and services. It is 

not designed to—— 

Senator CORKER. But it does dictate some, right? Because you 

are dictating by virtue of what you just said. 

Mr. BARR. It says certain products or services that are standard 

products and services, if you are going to offer exotic products and 

services, you also have to show the consumer what it would cost 

to take out a straightforward product that exists in the marketplace. 

Senator CORKER. So if Senator Warner, who has been a tremendous entrepreneur, wanted to create a niche product to serve the 

public, he would not be able to offer that niche product unless he 

offered all of these other standard products, which if he were a new 

boutique kind of company that was trying to meet the need of a 

small part of our population that needed that service, he would be 

unable to do that under your legislation unless he offered all of 

these other types. Is that correct? 

Mr. BARR. Senator, if you look at the areas in which this might 

apply, we are talking about, let’s say, again, in the mortgage context, if an entrepreneur wanted to offer a pay option ARM, they 

would need to show the consumer what a 30-year fixed-rate or regular ARM would look like in terms of cost so the consumer can 

compare and make their own choices. They would still be able to 

offer these other products and services in whatever way they would 

like, but they would need to have a point of comparison that shows 

what the costs and risks are in relation to that standard. 

Senator CORKER. I have a number of questions, and I guess we 

may have another round. I do not know if that is true or not. So 

what you are saying is this new entity under your proposal is not 

going to lay out basic requirements for certain types of products. 

You are not going to do that. Yes or no? 

Mr. BARR. Senator, with respect to what a standard product is, 

you would be able to say a 30-year fixed-rate or a regular ARM is 

a standard product, and if you wanted to offer other products, that 

is fine; but you have got to compare it to this product, too. You 

would not be saying—— 

Senator CORKER. And you have to offer that product—— 

Mr. BARR. You have to offer the standard product if you are 

going to offer the exotic product. 
17 

Senator CORKER. OK. Well, I think my time is up, but I think 

what you have just said, again, is that smaller innovative companies that want to enter a market, which is what our country is 

about as it relates to innovation—that is why we are the leader 

that we are in the world. You are basically saying that these entities, unless they offer other standard products, would not be able 

to be in business. That is a large departure from where we have 

been as a country, and I want to revisit that with you. And I thank 

you for your service and your testimony. 

Chairman DODD. Thank you, Senator, very much. 

Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair, and thank 

you for your testimony and for your presentation of this agency. It 

certainly has been a long time since we have had an agency that 

was dedicated to consumers in the financial world, and we have 

certainly seen many practices that have damaged the financial 

foundations of our working families. And so I certainly applaud the 

Administration for bringing this forward. 

In your testimony and in follow-up questions, you talked about 

a level playing field. I wanted to ask about one aspect of that. If 

a State, for example, decided that it wanted to ban yield spread 

premiums or incentives to brokers to basically sell a more complicated product, a more expensive product, wanted to ban those or 

make them perhaps transparent, at least to be displayed to the 

consumer so the consumer understands where the broker is receiving their compensation, would they be able to do that under this 

legislation? And would it apply to all folks who offer or only for 

State-chartered institutions? 

Mr. BARR. Thank you very much, Senator Merkley. So under our 

proposal, if a State wanted to have higher standards than exist 

under Federal law, they would be able to apply those standards. 

Under our proposal, the broad preemption provisions that had previously applied to national banks and their subsidiaries would not 

apply in that circumstance, so the higher standard would be available for institutions operating in that marketplace. 

Senator MERKLEY. So this would eliminate the unfairness that 

has arisen in part in the past where State-chartered institutions 

might have been subject to higher standards imposed by the State, 

but had federally chartered competitors who were not subject to 

those standards? 

Mr. BARR. That is correct. 

Senator MERKLEY. Second, I wanted to ask you about a phrase, 

there is a set of tests in the law for what can be done, and to quote, 

‘‘The agency must have a reasonable basis to conclude that the act 

or practices cause or are likely to cause substantial injury to consumers which is not reasonably avoidable by consumers, and such 

substantial injury is not outweighed by countervailing benefits.’’ So 

we have a ‘‘substantial’’ test, a ‘‘not reasonably avoidable’’ test, and 

a ‘‘not outweighed by countervailing benefits.’’ 

Can you expand a little bit on those, and particularly this ‘‘not 

reasonably avoidable’’? And let me give you an example. I have a 

constituent, an elderly constituent, who cashed in a check that 

came in the mail that was from an established financial institution 

that he did business with. He thought it was related to simply a 
18 

refund of an excess escrow fees or something of that nature. And, 

in fact, what it was in the fine print on the back was a high-interest loan—a very high-interest loan. And then the bank turned 

around and asked him to consolidate that loan with his other debt, 

and he ended up converting basically a very sound financial situation in short order into a situation that destroyed his equity in 

short order. 

But one could argue that he could reasonably have avoided that 

by simply not depositing the check, that he could have read all of 

the fine print on the back of the check and made sure he understood it. 

How does this test work in kind of the real world? 

Mr. BARR. Thank you very much, Senator. The intent of the provision is to ensure that when the agency is thinking about the options available to it in regulating a particular product or service or 

sector, that it first try methods such as disclosure. So if we have 

a strong disclosure regime in place, could a consumer in that circumstance reasonably avoid the practice? 

In the context, say, of credit cards, thinking back again to the 

work that the Senate did in getting that bill passed, the judgment 

was that double-cycle billing was not a practice that a consumer 

could reasonably—with disclosure could reasonably understand, 

and so the Senate decided that that practice was a practice that 

should be banned. 

So the basic idea of this legislation is to say, let us try disclosure 

first. Let us see if there are ways to make disclosure work. Let us 

try and have robust disclosure. If disclosure can’t work because the 

consumer can’t reasonably shape his or her conduct to be responsible based on that disclosure because the information, the terms 

are so confusing that consumers can’t get enough information to actually understand them, then it ought to think about other regulatory tools, and in doing that, it needs to consider the costs as well 

as the benefits. 

Senator MERKLEY. So certainly a very clear set of reasonable 

tests to be met, moving from disclosure forward. 

Mr. BARR. That is correct. 

Chairman DODD. Thank you very much, Senator. 

Senator Crapo. 

Senator CRAPO. Thank you, Mr. Chairman and Secretary Barr. 

I want to return to the issue that Senator Corker had raised with 

you just so that I understand it more clearly. As I understand the 

proposal, the new agency would, in fact, have authority and direction to create what are called plain-vanilla or basic products and 

services. Do I understand that to mean that in a number of different categories, the agency would decide what the basic vanilla 

product is, like the basic 30-year loan or the basic ARM and so 

forth? 

Mr. BARR. The agency could decide to say a basket of loans is a 

standard basket of loans, so a 30-year fixed-rate loan and an ARM 

with straightforward pricing might be the standard loan or set of 

loans. And then consumers would have the opportunity to see what 

the costs of that loan were and compare it to the costs of, say, a 

pay option ARM. 
19 

Senator CRAPO. But conceivably, as we get more distinct and varied types of products, we could see more distinct and varied types 

of what we are calling plain-vanilla versions of those products and 

we could have a pretty long list or vast array of agency-established 

products, is that correct? 

Mr. BARR. Senator, the intent and purpose of the provision is 

not, precisely not to have a proliferation of product-level decisions 

at a micro level but a basic set of standards that people can use 

as a point of comparison in making their decisions in choosing 

which product or service that they want. They will have a standard, a comparative point to look across the sector, as we did essentially with respect to the mortgage market until quite recently. 

Senator CRAPO. I guess my point is, where does it end? Theoretically, the agency could just create one vanilla product, a 30-year 

loan, or a 15-year loan, or what have you, but it seems to me that 

what I am understanding you to be saying is that that is not what 

is contemplated and that there is, in fact, going to be an agencyestablished product for more than just a 30-year loan, but for other 

types of products and services that are going to be marketed. Am 

I correct there? 

Mr. BARR. Senator, you can have the agency engage in this process in the mortgage sector. You might see it, say, in credit cards. 

I would think you would want to look at areas in which there is 

broad market participation, lots of consumers are involved, and 

there is a way of anchoring decision making in a comparable product. But I don’t imagine it would be the primary tool of the new 

agency. It is an additional tool that it has, along with the other 

tools of disclosure and banning unfair and deceptive acts and practices. 

Senator CRAPO. And am I correct that the proposal also contemplates that the consumer would be required to acknowledge in 

yet another notice or acknowledgment that they were offered these 

basic products as well as any other products that were offered? 

Mr. BARR. Again, the agency has flexibility there, Senator. So it 

could, instead of—it could have a requirement that the consumer 

opt into an alternative product. It need not do it that way. There 

is flexibility built into the agency’s structure so that it can choose 

that approach if it feels it is warranted under the circumstances. 

Senator CRAPO. All right. Thank you. I would like to—because of 

time, I want to shift gears very quickly here to the issue of whether 

it is wise to separate safety and soundness regulation from consumer protection. I am sure you are aware that a number of authorities have indicated that there’s a great danger in doing so. 

I see a couple of problems. One, proliferation of regulatory agencies. I think we should be trying to consolidate and streamline our 

regulatory system rather than adding yet another regulatory layer. 

But also the fact that you could have inconsistent regulations between the safety and soundness regulators and the consumer protection regulators. And finally, the fact that the safety and soundness regulators or the prudential regulators will have access to information that could be very relevant to consumer protection and 

vice-versa. Why should we separate these two functions? 

Mr. BARR. Thank you very much, Senator Crapo. I think that the 

key here is that in the past, we have had a system in which we 
20 

had a joining of the safety and soundness function and the consumer protection function in the banking sector and then no supervision or examination at all in the nonbanking sector and I think 

we have seen the results of that. We have had a system that hasn’t 

protected consumers and hasn’t been good for the safety and soundness of banks. It is very hard, I think, to say that our current 

structure with respect to consumer protection is good for consumers. It is very hard to say that it is good for banks. 

I don’t think we will see inconsistent approaches because the 

consumer regulator will have clear authority for the items that the 

consumer regulator has to do. The prudential supervisor has clear 

authority for what it has to do. And they each have to do their jobs. 

And third, with respect to information, there is a requirement of 

information sharing between the prudential supervisor and the 

consumer agency. The examiners are going to share examination 

reports. The prudential supervisor sits on the board of the consumer agency. The consumer agency and the prudential supervisor 

both sit on the Financial Services Oversight Council. So I do believe there will be quite good coordination. 

Senator CRAPO. Well, thank you. I have heard that explanation 

before, the fact that it didn’t happen before, therefore, we should 

change. I am not sure that that really is a good reason to separate 

those two functions, but thank you very much anyway. 

Chairman DODD. Thank you, Senator Crapo, very much. 

Senator Tester. 

Senator TESTER. Yes, thank you, Mr. Chairman. Thank you, Secretary Barr, for being here. 

The proposal provides authority for the agency to collect annual 

fees or assessments. How do you see this impacting smaller financial institutions? 

Mr. BARR. Thank you, Senator Tester. I believe that the new 

agency will be able to use existing fees that are collected for this 

purpose by the banking agencies—— 

Senator TESTER. OK. 

Mr. BARR. ——and it will not increase the overall level of fees 

that are being collected in the system. 

Senator TESTER. So they are going to be pulling some of the fees 

they are already paying to pay for the regulation that already exists? 

Mr. BARR. That is correct. 

Senator TESTER. So no increase in fees? 

Mr. BARR. Well, under the legislation, there is broad authority 

for the agency. We don’t anticipate that it would result in any increase in fees. It would likely result in a reduction in fees because 

the agency is consolidating functions across all the existing entities. There will be efficiencies of scale and scope in doing that. 

Senator TESTER. All right. How do you see the States fitting into 

the Consumer Financial Protection Agency? 

Mr. BARR. The States would have a quite important role. States 

have been at the forefront in many ways of consumer protection. 

States would be able to enforce Federal law. States would have a 

strong role with respect to their own examination and supervision 

processes. 

Senator TESTER. Would they be able to go beyond the Federal? 
21 

Mr. BARR. And States would be able to set higher rules if they 

believe that the Federal standards weren’t sufficient. 

Senator TESTER. All right. There can be debate on why we have 

regulation. I can tell you, safety and soundness and consumer protection, I mean, if you don’t have—it is all consumer protection in 

the end, as far as I am concerned. I think that is fundamentally, 

from my perspective, why regulation is set up. You may disagree. 

But in your statement, and it is in the written statement and you 

verbalized it again, you talked about how screwed up the current 

system is, and I agree and I think everybody in this Committee understands that it is severely flawed right now. And I appreciate the 

Administration coming forward with their proposal. 

But the question is, does the proposal, this part of the proposal, 

other parts of the proposal, does it really fix the problem, because 

we do have a fragmented system and you can shop for regulators 

and all that stuff. Does it fix it? 

Mr. BARR. In our judgment, sir, it does. I think it would prevent 

the kind of regulatory arbitrage that we saw in the past. 

Senator TESTER. OK—— 

Mr. BARR. It sets high standards across the playing field that 

apply to everybody. 

Senator TESTER. Correct me if I am wrong, but as far as consolidation of agencies so things don’t fall through the cracks, the proposal is for the OCC and the OTS to be combined. Any others? 

Mr. BARR. Yes, sir. I think if you look across the range of the proposals that we put in place, we would merge the OCC and the OTS 

into a new national bank supervisor. 

Senator TESTER. Right. 

Mr. BARR. We would prevent kind of shopping for regulators by 

firms that are in enforcement trouble. We would eliminate all the 

exceptions to the Bank Holding Company Act, the loopholes in the 

past that have permitted firms to escape consolidated supervised 

regulation at the Federal level. We would remove the Fed Light restrictions from the Gramm-Leach-Bliley Act so that the Federal Reserve can act as a consolidated supervisor. And each of those measures is designed to ensure that the kind of regulatory arbitrage we 

saw on the prudential side does not occur in the future. 

Senator TESTER. OK. One of the things that has concerned me 

and I have expressed in this Committee many times is that community banks, credit unions, for the most part, have been pretty 

good actors in this whole thing. They haven’t created the problem. 

And yet when it gets down to the nuts and bolts of regulation, they 

are being clamped as much as the Wall Street bankers that I think 

in a lot of cases should be doing time for what they have done. 

So in this proposal, what can you tell me—Consumer Financial 

Protection Agency aside, what can you tell me that will make it so 

that this doesn’t happen again or has a lot less possibility of happening again? 

Mr. BARR. Senator Tester, we have a very strong proposal in our 

report and will soon be sending up legislation with respect to consolidated supervision of very large financial firms, what are called 

under our proposal Tier 1 financial holding companies. They will 

be subject to stringent supervision on a consolidated basis. They 

will have higher capital standards. They will have higher require-
22 

ments with respect to liquidity. And the basic goal of that system 

is to create large cushions in the system so that when failures happen, if failures happen, there is a lot more give—— 

Senator TESTER. Are we doing the same thing to the community 

banks that you just talked about to the Wall Street banks? 

Mr. BARR. The communities are not getting extra requirements—— 

Senator TESTER. Are we requiring higher capital standards? Are 

we doing some of the other stuff you talked about? What I am 

hearing that is happening on the ground because of what the bad 

actors did above them, if you want to call them above them, is they 

are getting pinched on capital standards across the board. 

Mr. BARR. Sir, I think I want to separate, Senator Tester, what 

may be happening in the field with respect to examination today 

and what the proposals are for the future, and under our legislative proposal, we are focusing on raising capital in the system and 

raising it even more so and higher with respect to Tier 1 financial 

holding companies so that any incentive to be large is taken away. 

Senator TESTER. All right. OK. Thank you very much. Thank 

you. 

Chairman DODD. Thank you, Senator Tester. 

Let me just comment here. I think Senator Tester has raised a 

good point. I think all of us would tell you up here, and I am sure 

you are aware of this, as well, that from our community bankers 

and, for the most part, the credit unions in our State acted very 

responsibly through all of this and what they worry about is being 

saddled with a lot of the cost that comes down. That will not be 

warmly received, I can tell you right now, just looking at it. 

We need to make that case over and over again. There is a distinction in performance. We have a tendency to talk about banks 

in a generic context and don’t draw the distinctions between those 

who acted responsibly and those who didn’t. And so as we look at 

these proposals and ideas, we ought to keep that very much in 

mind. I can just guarantee you, there will be no willingness up 

here to levy kind of additional fees and costs on the community 

banking system of the country that is feeling a lot of pressure already. 

Mr. BARR. Absolutely, Mr. Chairman. 

Chairman DODD. Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary, for your testimony. Let me start by 

simply saying I concur that there have been failures in the systems 

and that we need to figure out how to do a better job on consumer 

protection. I do have some questions about the approach the Administration is taking. I want to go back to some of the comments 

that Senator Corker and Senator Merkley made. 

I am still struggling with kind of what the underlying theory 

here is. Is the underlying theory that the goal is enhanced disclosure in comparison, or as you raised, that there are times when 

disclosure in comparison may not be enough as was evidenced by 

the Fed’s action on double-cycle billing? Take me through again 

what the basis is here. Are we going to look for some bright-line 

prohibitions or do we feel like a disclosure regime alone is enough? 
23 

Mr. BARR. Thank you, Senator Warner. I think that in the first 

instance, we need an independent, single-focused mission Consumer Financial Protection Agency. So the first principle would be 

clear mission, clear accountability, clear responsibility by one agency. That agency will have different tools that it needs to use in different market contexts. Some of those tools—the bulk of those tools 

will be disclosure. Disclosure can often solve many of the problems 

in our financial services marketplace, because if you clearly disclose a product or services, then consumers can choose the product 

or service they want. That is the best answer in many circumstances. 

In some circumstances, you want that agency to do more. You 

want it, for example, to say to a consumer, not just here is the information about the transaction, but here is the consequence of this 

decision or that decision. So one of the things that this Committee 

and the Congress did in the credit card bill was say to credit card 

companies, you need to let consumers know how much it would 

cost them if they only paid the minimum on their credit card balance. That is an additional item beyond the traditional disclosure 

that in some contexts can make a big difference to consumers. 

In other contexts, you need a standard point of comparison to 

make that disclosure meaningful, so not just the pay-option ARM 

costs X, but that is what it costs in relation to, say, a standard 30- 

year mortgage or in the kinds of pay-option ARM, a 5–1 ARM with 

straightforward terms. So points of comparison can matter a lot, 

too. 

And then in the last instance, you have the ability to ban terms 

in products or services where they are unfair and deceptive and 

these other tools don’t work. 

Senator WARNER. But you would see this agency having that 

ability to ban certain products? 

Mr. BARR. Again, as—— 

Senator WARNER. In a preclearance way or after the product has 

already been out in the marketplace? 

Mr. BARR. There is no preclearance requirement under this legislation. It is not like other legislation the Committee may have considered in the past. There is no preclearance procedure with respect to all products and services. There is a requirement of disclosure. 

Senator WARNER. But let us assume you have a product. It has 

been disclosed. You have got a comparison basis. In effect, the Federal agency has fostered that that is appropriate. But we are still 

allowing, then, the 50 independent Attorneys General to go out and 

raise the bar higher, correct? 

Mr. BARR. Yes. So under the legislation, the traditional preemption by national banks would not be available and States could set 

higher rules for products and services. But with respect to the unfair acts and practices, the agency could step in and say, if you are 

offering a credit card with double-cycle billing, that is unfair. We 

can’t disclose our way around it. So that particular term—— 

Senator WARNER. I guess what I just want to make sure I understand, you are saying that a product, that if the Federal agency 

had determined disclosure alone was enough, it then comes out 

into the marketplace and an Attorney General decides, no, disclo-
24 

sure is not enough. We want to actually ban this product in State 

X. They can go ahead and initiate that action, and if it is successful 

at a State level, what does the financial institution—there is no 

kind of pass, that once you have passed the disclosure requirement 

at the Federal level, that you have got an ability then to go into 

the marketplace and offer this because you can still have the State 

Attorney General raise a separate action, is that correct? 

Mr. BARR. No, sir. So the State Attorney General can only enforce State law that exists or Federal law that exists. If a State legislature decided to set a higher standard in a particular area, it 

would be free to do that as States are free in many areas of consumer life to set higher standards to that—— 

Senator WARNER. I know my time is up. Just one quick other 

comment. I am not sure I fully got your answer there, but I am 

interested in this area on the nonbank supervision, the question of 

going after financial products. Do you envision at some point the 

Administration coming forward on these noncurrently covered financial institutions? Are you going to look at their product mix underneath this legislation? Will you also envision at some point laying out some kind of safety and soundness oversight, prudential 

oversight, as well, for a series of nonbank financial institutions? 

Mr. BARR. Senator Warner, this only applies to consumer financial protections. So in our proposal, consumer financial protection 

issues would be at this one agency and the consumer issues would 

be able to be examined across the financial services sector. But 

there is no proposal to have broad Federal prudential—— 

Senator WARNER. No prudential regulation on the whole 

nonbank sector of the—— 

Mr. BARR. Not with respect to, say, an independent mortgage 

company. Certainly with respect to, if you are a—within a bank 

holding company, the Federal Reserve would have consolidated supervision of all the entities within a bank holding company and it 

would be required to ensure that all the elements of the holding 

company are not undermining safety and soundness. So in that respect, yes, but not a broad new authority with respect to prudential 

supervision outside the bank holding company context. 

Senator WARNER. Thank you, Mr. Chairman. I hope we get another round. 

Chairman DODD. Thank you, Senator Warner. 

Senator Johnson. 

Senator JOHNSON. Mr. Barr, one of the objectives of the CFPA is 

to fill regulatory gaps, a goal I share. If a State does not examine 

a mortgage broker, would this agency? If a State does not examine 

a check casher, would this agency? 

Mr. BARR. The agency, Senator Johnson, would have the authority to set uniform rules to examine and supervise mortgage brokers. It could also do that with respect to other financial services 

providers, including check cashers, with a goal again of having 

high standards across the financial services marketplace and a 

level playing field for competition, so banks and community banks 

and credit unions are not at a competitive disadvantage. 

Senator JOHNSON. According to the draft bill submitted by the 

Administration, the CFPA would have the authority to oversee financial advisors who provide financial and other related advisory 
25 

services. Since the bill appears to exclude from the CFPA’s jurisdiction all products and services regulated by the SEC, the CFTC, and 

State insurance departments, will you please clarify who this language is intended to impact. 

Mr. BARR. Thank you, Senator. The basic language there is designed to deal with scams that have come up around the corners 

of the marketplace, where institutions that are not generally subject to any regulation offer what they call financial advice to consumers. It is primarily not aimed at State-regulated financial advisors, where there already is a system in place at the State level for 

regulating those institutions. 

Senator JOHNSON. Could an unintended consequence of products 

be the consolidation of markets? 

Mr. BARR. I think, Senator Johnson, that we will see lots of financial innovation in the future, lots of choice in the future in financial products. This agency will enable choice cross the financial 

services sector, enable financial innovation across the financial 

services sector based on a level playing field with high standards. 

Senator JOHNSON. I can probably say that most mortgages are 

originated within the terms of 30-year fixed-rate mortgages. These 

products work for most of my constituents. That said, sometimes 

there are other products that are not plain vanilla that work for 

a consumer. Your proposal seems to create many hurdles for both 

banks that offer these types of products and consumers that use 

them. Do you think your proposal creates a disincentive for institutions to offer different products? Do you think that fewer products 

will reduce consumer choice? Could this indirectly increase the cost 

of credit? 

Mr. BARR. Thank you, Senator. Our judgment is that the new 

agency will have the ability to set high standard across the financial services marketplace, including for mortgages, that we will 

continue to see innovation in the mortgage sector, but that if firms 

want to offer products that are difficult for consumers to understand, there will be a higher burden on them to explain those products and services. And I think that we have seen the consequences 

of a system in which there is inadequate supervision of those kinds 

of practices. 

So I do think we are going to see a rebalancing, if you will, where 

it is a much lighter regulatory burden even than we have today 

with respect to straightforward products. So you can do things like 

combine the Truth in Lending Form and the Real Estate Settlement Practices Form into one simple Mortgage Disclosure Form everybody can use. That is easy under the new approach, very hard 

under the current approach. It is a way of reducing regulatory burden for banks, improving disclosure for consumers. We can see a 

lot of that happening in this space with the new agency. 

Senator JOHNSON. My time is up. 

Chairman DODD. Thank you very much, Senator. 

Senator Bayh. 

Senator BAYH. Thank you, Mr. Chairman. 

Thank you, Mr. Barr, for your service. I know you guys have a 

lot on your plate over at Treasury, so I am grateful for your time 

this morning and your focus on this important issue. 
26 

Can you outline for the Committee, what were some of the 

abuses that have been brought to light by the current crisis that 

this proposal intends to prevent? 

Mr. BARR. Thank you, Senator Bayh. I think one key area where 

we saw abuse was in mortgage broker conduct. We saw brokers 

who were offered incentives to get consumers to take out loans that 

were more costly than the ones they qualified for—— 

Senator BAYH. And you forgive me for interrupting you. I agree 

with that wholeheartedly. That has been fairly well documented. 

How about in areas beyond mortgage lending? 

Mr. BARR. I think, again, in the credit card context, this Committee has discussed problems with unfair practices in credit cards, 

problems we have seen with respect to bank overdraft fees, which 

are not disclosed as credit problems, problems in the payday lending sector, where there have been significant failings, problems in 

the auto loan sector, where disclosures have been inadequate and 

abuses have occurred. I think if you look really across the consumer financial services marketplace, at credit products, at payment products, and the like, bank products, there have been a series of failures of our existing regime to take account of the needs 

of consumers. And I am sure you hear the complaints from your 

constituents on these matters. 

Senator BAYH. Certainly in the credit card area we did, and that 

is one of the reasons the Committee and the Congress acted in that 

area. So it is your judgment, Mr. Barr—and I agree with your assessment of many of the practices you have outlined there—it is 

your judgment that the problem can’t be addressed by simply proscribing some of those things or tightening existing enforcement 

and regulation to prevent a recurrence or to require greater disclosure in the future? 

Mr. BARR. That is our judgment, sir. I think if you look across 

the history of this matter, we don’t want to fix one problem only 

to ignore and miss the next problem. We need an agency that is 

looking out for consumers all the time. 

Senator BAYH. Let me ask you about the responsibility that consumers have, because an enlightened, vigilant consumer is really 

their best protection. It is hard to regulate against all these sorts 

of things. So what responsibilities do consumers bear under this regime? 

Mr. BARR. I think consumers bear the responsibility to act responsibly based on the best information they have, and it is the job 

of the financial services industry to compete based on price and 

quality and not based on confusing consumers. But in our current 

system, the incentives to have hidden features are very large. We 

have seen that across the financial services marketplace. And so if 

you have an agency that can set rules of the road, everybody can 

compete based on transparent pricing and services. Consumers 

win. Financial services firms win. It is good for the economy. It is 

good for the country. So that is the kind of system we want to see 

going forward. 

Senator BAYH. Several of my colleagues have touched upon the 

importance of disclosure, and you have touched upon the importance of prohibiting abusive practices. I think we all agree on that. 

But disclosure only works if consumers do their part, too, and that 
27 

is why I asked the question. We need to build in incentives for 

them to actually take advantage of the information that is being 

offered, process it, and then bear some responsibility for their own 

outcome, because if there is not some responsibility on the individual, the system is not going to work too well. 

Mr. BARR. I think that is absolutely right. Consumers need to behave responsibly and we need to make the path available to them 

to do so. 

Senator BAYH. Thank you, Mr. Barr. 

Mr. BARR. Thank you. 

Chairman DODD. Thank you very much, Senator. 

Senator Schumer. 

Senator SCHUMER. Thank you, Mr. Chairman, and we appreciate 

your being here, Under Secretary Barr. Sorry I couldn’t be here the 

whole time. We have the Judiciary hearings. That is why I am in 

the back here. 

But I am very much for a Consumer Financial Protection Agency. 

In fact, Senator Durbin, Senator Kennedy, and I introduced legislation quite along the lines of this a while back and I am glad that 

the Chairman has made this an important hearing, an important 

part of our bill, and I am glad that the White House has supported 

it. 

The bottom line is that the present regulatory structure has been 

an abject failure. I worked with the Fed on, for instance, credit 

card interest rates for 15 years. The progress was slow, it was 

muted, and way behind what the credit card issuers would come 

out with. And so to have an agency whose sole focus is on protecting consumers when the Fed has so many other responsibilities, 

and we are considering giving them even more responsibility, 

makes sense. Having the FTC do it, again, they are all across the 

board. 

And look, let us face it, the kinds of deceptive practices that, for 

instance, occurred in the mortgage industry brought down the 

whole economy, and it is amazing to me that people say we don’t 

need stronger regulation given that that has happened. It is just 

amazing. 

And as for this idea, and I want to ask you about this, stifling 

innovation—some of the critics have said this—yes, it will. It will 

stifle innovation, clever ways to dupe the consumer, to sell people 

mortgages that they shouldn’t have, to issue people more credit 

card debt than they can pay for. You bet, it is going to stifle that 

kind of innovation. But will it stifle a new product, as long as it 

is fully disclosed, that the consumer or mortgagor needs? No. 

So please, we have had such a sorry history in the regulation of 

consumer financial products—sorry history, despite the efforts of 

you, Mr. Chairman, and others on this Committee on both sides of 

the aisle—that I would argue that if we don’t include this in our 

financial regulation bill, there will be a gaping hole. 

But I want to ask you the question about innovation, Mr. Barr. 

What about the argument that this new agency will stifle innovation of new products and things? 

Mr. BARR. Senator Schumer, I think that the agency will enable 

financial innovation to occur based on a level playing field with 

high standards. It will prevent the kind of competition that we 
28 

have seen in the past based on—competition based on who can provide the most confusing terms and the most hidden fees. 

Senator SCHUMER. Right. 

Mr. BARR. But competition based on financial innovation for 

price and quality, transparency to consumers, that kind of financial 

innovation we will see more of, not less. 

Senator SCHUMER. Right. Let me ask you this. What about the 

FTC? Some have said, well, the FTC can do these kinds of things. 

Has the FTC done at all a decent job in regulating financial products in the last decade? 

Mr. BARR. Senator, I think that the FTC is a good agency with 

many good people in it. I think that it has not had the tools to do 

this kind of action. It is structurally not set up to supervise or examine the nonbank sector. It can only act long after the fact with 

enforcement when it is too late—— 

Senator SCHUMER. Right. 

Mr. BARR. and that is just not enough. It can’t act at all with 

respect to banks, and so we have a fractured system where everybody can point fingers and nobody gets the job done. 

Senator SCHUMER. Right. And let me just ask one more question 

of you, and that is this. Right now, one of the things that hamstrung us was the fact that there were unregulated areas. In other 

words, if a bank issued a mortgage, there was some degree of regulation—I would say not enough, but some. But if a mortgage broker 

got from a nonbank financial institution financing, there was virtually no regulation at the Federal level, and when you talked to 

the Fed about it, which I did, they would say, well, we don’t have 

jurisdiction. Isn’t another reason to have this financial product regulator, which regulates the product and not the specific institution 

that issues the product, a way when the next new innovation comes 

up that there won’t be a hole in the regulatory structure, because 

right now, we regulate by the type of institution, not the type of 

product issued? 

Mr. BARR. Senator Schumer, that is exactly right. This institution, this new agency will have the authority to examine and supervise any financial institution. It won’t be limited to banks. It 

won’t be limited to nonbanks. It can supervise and examine and set 

rules across the financial services industry. So if you are a community bank and a credit union, you are not going to be put in a place 

of competing with an unregulated mortgage company ever again. 

Senator SCHUMER. It will, as you say, create a level playing field 

across the board based on the product. 

I thank you, Mr. Chairman. 

Chairman DODD. Senator Schumer, thank you very much. 

Senator Shelby has a comment he wants to make. I know Bob 

had a quick question. I am trying to get to the second panel if we 

can, as well, so I don’t want to limit my colleagues here who want 

to raise another question or two here, but I do want to get to the 

second panel. 

Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. I will try to be fast. 

I do have a number of questions for the Secretary that I would like 

to be made part of the record. 
29 

Chairman DODD. And I have, as well, and I will submit those for 

the record. 

Senator SHELBY. Mr. Secretary, you were one of the authors, and 

we have talked about this this morning, of the article that appeared, published by the New American Foundation, ‘‘Behaviorally 

Informed Financial Service Regulation,’’ right? 

Mr. BARR. Yes, sir. 

Senator SHELBY. OK. Among other things in that article, I just 

want to quote from this, and this will be as quickly as I can say. 

It says, ‘‘We explore a different approach based on insights from 

behavioral economics on the one hand and an understanding of individual organization on the other. At the core of our analysis is 

the interaction between individual psychology and market competition. This is in contrast to the classic model, which relies on the 

interaction between rational choice and market competition. In the 

classic model, absent market failures, because rational agents 

choose well, firms compete to provide products and improve welfare. Because rational agents process information well, firms compete to provide information that improves decision quality. 

‘‘By contrast, in our model,’’ and some of this is in this proposal, 

as I understand it, ‘‘individuals depart from neoclassical assumptions in important ways. The introduction of richer psychology complicates the impact of competition. Now firms compete based on 

how actual individuals will respond to products in the marketplace 

and actual competitive outcomes may not always and in all contexts closely align with the improved decisional choice and increase 

consumer welfare.’’ 

This is a real departure from, as you said in your paper, from 

the model that we have relied on for a long time. I am not saying 

that model is pure and perfect, because it is not, but this is a heck 

of a departure, is it not? 

Mr. BARR. And, Senator Shelby, in that article, we are highlighting different models of thinking about human decision making—— 

Senator SHELBY. Sure. 

Mr. BARR. and in most circumstances, competitive outcomes are 

going to lead to welfare enhancement. But in some circumstances 

where individuals are consistently prone to failure, it won’t, and 

then the question is should the Government do something about 

that. Many times, the answer is no. It is sort of a trivial difference 

in outcomes. It would cost more to get engaged than it would to not 

get engaged and so you want the Government to do nothing. 

In some contexts, though, the failures are so deep that you think 

some kind of step needs to happen, whether that is through disclosure or through providing information about the consequences of financial decision making, or in some particular circumstances saying a particular term should be banned, as this Committee did with 

respect to double-cycle billing. 

Senator SHELBY. I understand, I think, where you are going, or 

trying to go. I hope you don’t go too far here, or we don’t. But on 

the other hand, an informed consumer—an informed consumer— 

that has relevant information will generally make a rational decision in the marketplace. 
30 

Mr. BARR. I think that is absolutely right. So I think that in 

most circumstances, most of the time, disclosure is going to get you 

most of the way there. And then the question is, in what context 

is that not enough? And again, as the Committee did with respect 

to credit cards, some practices you can’t disclosure your way 

around. They are too complicated. Consumers can’t—a responsible 

consumer trying to do the right thing couldn’t actually figure out 

how to behave responsibly in that context. 

Senator SHELBY. Wait a minute. But you are really saying that 

you don’t trust the consumer to make decisions for themselves, in 

a sense. 

Mr. BARR. No, I think consumers are—I trust consumers tremendously. What I don’t trust is that if we set up the marketplace so 

that the incentives are to confuse consumers, that is the kind of 

competition we will get. We will get competition around confusing 

consumers. If we set up the marketplace so the rules are you compete to get consumers to your product because you have a better 

product, that is the marketplace we will get. 

Senator SHELBY. But according to Senator Corker’s question, as 

I understood it earlier, you are going to ration the products that 

you can offer. 

Mr. BARR. No, sir. There would be no product rationing under 

this—— 

Senator SHELBY. You are not going to ration—— 

Mr. BARR. No product rationing under this approach at all. Consumer choice, individual freedom are at the heart of this. The key 

provisions of this Act would enhance the ability of consumers to 

make decisions that make sense for their own lives. 

Senator SHELBY. Well, I hope we are going to have a lot of hearings on this, Mr. Chairman. 

Chairman DODD. Yes. Jack, you have a question you would like 

to raise? 

Senator REED. Thank you very much, Mr. Chairman, and thank 

you, Secretary Barr. 

Can you walk through how the proposal establishes primary and 

secondary enforcement, rulemaking, and examination responsibilities? 

Mr. BARR. Yes, Senator Reed. A core principle of our proposal is 

that supervision, examination, and rule writing should be joined together with respect to banks and nonbank institutions so there can 

be uniform rules of the road, real supervision and enforcement 

across the financial services sector. 

We leave backstop authority at the bank agencies and at the 

FTC in case something falls through the cracks, in case something 

gets picked up in an exam and they need to refer it over to the new 

agency. But the idea is not to have any duplication, to have real 

core focus on consumer issues in one place with real responsibility 

and accountability to the Congress and the American people. 

Senator REED. Can you comment about the alternative approach 

which some have suggested, which is essentially the bank regulators take the lead and then the CFPA would be sort of the 

backup? 

Mr. BARR. Senator Reed, I think we have seen a system in the 

past where rule writing was at the Federal Reserve and super-
31 

vision was spread around in the bank agencies and the system was 

fundamentally broken. The rule writer had a conflicting mission. 

The supervisory entities had conflicting missions. None of them 

thought consumer protection was at the top of what they would do. 

They would regulate banks based on reputation risk and litigation 

risk with respect to consumer issues, looking out for the interest 

of the bank and not consumers. I think we can’t have that approach going forward. 

Senator REED. Let me raise another issue and that is the funding. Your proposal, how would the CFPA be funded? 

Mr. BARR. We look forward to working with the Congress on determining the right approach to funding issues. I know that is an 

area of great concern to the Congress. We need to ensure that the 

funding is stable and strong. Under our approach, there would be 

a mix of appropriated funds as well as the transfer of fees from the 

bank regulatory agencies with respect to consumer protection functions and fees in the area where such fees have not been collected 

in the past in the nonbanking sector. So we have a mix of appropriations and fees funding the agency. We would be happy to work 

with the Congress on that approach. 

Senator REED. Mr. Secretary, a final question. There is at 

present the tension in the banking regulators between safety and 

soundness and consumer protection. Some would argue that consumer protection was always subservient to that, and that led— 

was one of the factors that led. How in this new approach do we 

balance the safety and soundness issue with the regulators who are 

responsible for it and the consumer protection issues? 

Mr. BARR. Each agency would have responsibility for the mission 

assigned to it. The consumer protection agency would need to be 

sure that, say, disclosures are clear about a product or service, and 

the bank supervisory agency would have authority with respect to 

prudential supervision, underwriting standards, capital requirements, sort of core prudential supervisory matters. So a clear assignment of authority, clear assignment of responsibility and accountability to the Congress and to the American people for achieving those aims. 

Senator REED. Thank you very much. Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator, very much. 

Bob, did you have a quick question on this? 

Senator CORKER. Out of respect for everybody’s time and knowing you want to move on, instead of asking questions, I will just 

make one statement. You have not alluded to student loans, auto 

loans. I know we have talked about mortgages. All of those are 

areas under your proposed legislation that you all would set up 

basic products. And while I said not necessarily on the front end, 

I just want to say, in listening to your testimony and answers, this 

is an example of all examples of this Administration being Big 

Brother, and I think the American people are recoiling from this. 

I think this is a tremendous overreach and very disturbing to listen 

to. 

I hope that as you move along, we will be able to work together 

to do something that is not an overreach, where the Federal Government is telling citizens the types of products they should and 

shouldn’t buy, and telling companies what they should and 
32 

shouldn’t offer. This is way out of bounds and I look forward to 

working with you to get it in bounds. 

Chairman DODD. Senator Warner, do you have a quick question? 

Senator WARNER. I just want to make sure we try to get it right 

and I have still got a series of questions, but I will reserve those 

until another time. 

Chairman DODD. I thank my colleagues. Let me just say, that is 

our intention, obviously, to get this right. I think your testimony 

has been very valuable this morning. Maybe Senator Schumer hit 

the note in a way. We don’t want to forget what has happened over 

the last several years. It is unprecedented. You have got to go back 

to the generation of our grandparents to talk about a time similar 

to the ones we have been through. We have got 15 million homes 

underwater today—15 million—and every likelihood of those foreclosures continuing at a rate that is unprecedented, certainly in 

modern times, and the obvious implications of that are spread far 

beyond just home mortgages to other aspects of our economy. 

And so the notion—when we lost sight of the—three great things 

done by the Depression Era Congress and Administrations were 

the establishment of the Securities and Exchange Commission, the 

establishment of the Federal Deposit Insurance Corporation, and 

Glass-Steagall, in my view. Those three things gave us virtually 60 

years almost of unprecedented stability. When we began to wander 

away from having oversight of our financial institutions, we began 

to mix commerce and banking to the point where we thought we 

were going to have firewalls to protect people but did not do so, as 

well as not having adequate insurance under the Federal Deposit 

Insurance Corporation. We began to see the problems, and I can 

point to other aspects to all of this. 

And so getting back to the notion that when that consumer—and 

the consumer, in my view, is the shareholder, it is the policy holder 

on an insurance policy, it is the borrower whether it is a mortgage 

or a car loan or a student loan—when we lose sight of that individual, if we don’t take into view that individual’s concerns and 

begin to look just top-down and not bottom-up, then you begin to 

lose sight of what this is all about to people. These are highly complicated areas. 

Now, I think the issues raised about mandating or dictating or 

somehow driving certain product lines is something that we have 

got to be careful how we engage in that. Bob Corker has raised an 

interesting point and one that we ought to examine thoroughly. 

But the idea that we are going to have sort of disregard for what 

is going on, too often, in too many cases is where consumer issues 

have been lost in this process here. 

The idea that when people walk in and they are being marketed—60 percent—according to the Wall Street Journal, 60 percent of the subprime mortgages went to people who otherwise 

qualified for a conventional mortgage, a lot cheaper product than 

that subprime mortgage. That is an outrage. That is people marketing products that they knew very well that that borrower could 

not afford, never at the fully indexed rate, and were going to be in 

trouble. And having a process which protects people against that 

kind of behavior, I think is critical. 
33 

Now, how we do this and shake this up obviously is a challenge 

to the Committee, working with the Administration and others. 

But my view is we have got to take this issue on and find a mechanism here that certainly fills that gap that has existed for far too 

long and created for the first time in 60 years the kind of break 

that occurred that we are all struggling with today. 

So I appreciate your testimony. We will have additional questions for you to submit, but I want to get to the second panel here 

if we can, very quickly. 

Senator SHELBY. Mr. Chairman, can I have one word? 

Chairman DODD. One word. 

Senator SHELBY. If I could, maybe one or two. We appreciate you 

coming here today, but even you admit in your studies, and this 

is an outgrowth of some of those studies, that this is a radical departure from the way we have regulated things before. We have 

tried to let the market work, let the consumer, an informed consumer, make decisions, not a bureaucrat make the decisions. And 

there are a lot of flaws in these proposals and that is why we are 

holding hearings, political and otherwise. But to move away fast 

and furious from a classical model of regulation, we had better be 

really careful. What we ultimately will do probably is really ration 

credit to people who need it the most. 

Chairman DODD. Let me just say, and then we will give you a 

chance to quickly respond, we have been faced with a radical situation in our country. This is unprecedented. I respect that the classical model has fallen apart and the people who have paid the price 

for it are consumers. That home owner or that potential home 

owner, that person out there today who is losing their home, they 

are losing their jobs, they are losing their retirement, they are losing their health care, to them, this is pretty radical. This is not an 

abstract problem for them, it is a real one. And when you get 

10,000 people a day losing their homes and 20,000 people a day losing their jobs, that is radical, believe me. 

And so I am not looking for radical solutions here that don’t meet 

the problem. But if we don’t understand the depth of this problem, 

the anger of the people of this country of what they are going 

through and the demand that we start paying attention to what 

happens to them every single day they walk into an institution to 

borrow money, to buy a policy, to invest in a corporation because 

they want to increase their stability, then we are losing something 

here. So we need to get this right. 

Do you have any comments you want to make quickly as we end 

up? 

Mr. BARR. Thank you, Mr. Chairman. The Administration’s proposal would represent a fundamental break from the past. I think 

it is clear that our system of financial regulation failed the American people and we need to have a new foundation, a firm foundation that protects consumers, and that is what this proposal does. 

Thank you very much to you, Mr. Chairman, to Mr. Shelby, and 

to the Committee as a whole for hearing from me. 

Chairman DODD. We will stay in touch. As Bob Corker said and 

others said, we want to work with you. We have got a lot of work 

to do, but we appreciate you being here. 

Senator SHELBY. A lot of work. 
34 

Chairman DODD. Very good. 

Mr. BARR. Thank you. 

Chairman DODD. Let me go to our second panel, and we appreciate their patience, but I hope it has been worthwhile to be here 

with us. The introductions are going to be brief, so I don’t have 

long introductions. 

Let me first of all introduce my Attorney General. Dick 

Blumenthal is here with us. Richard has been our Attorney General for a long time and done a fabulous job, served in the Connecticut House of Representatives, the State Senate, a Sergeant in 

the U.S. Marine Corps Reserves, distinguished record, and I think 

the greatest Attorney General in the United States of America. I 

say that every time I get to introduce him. He does a great job. 

Ed Yingling is an old friend and a person we respect immensely. 

Ed is the President and CEO of the American Bankers Association. 

All of us here have worked with Ed Yingling for many, many years 

and have a high regard for him and his abilities. 

Travis Plunkett is the Legislative Director for the Consumer 

Federation of America and has appeared before this Committee on 

numerous occasions involving any number of issues, most recently 

on the credit card efforts, and I want to thank publicly Travis and 

the Consumer Federation of America for the tremendous job they 

did in promoting and advocating the legislative success we had 

with the credit card bill. 

Peter Wallison, I have already drawn into the debate, having 

quoted from his testimony, but we thank you very much, Peter. I 

hope you didn’t mind me mentioning your quote on CRA. Peter is 

the Arthur F. Burns Fellow in Financial Policy Studies at the 

American Enterprise Institute. I often quote Arthur Burns about 

the race to the bottom, he used to talk about, in regulatory processes. 

And Mr. Sendhil Mullainathan is a Professor of Economics at 

Harvard University, and we thank you very much, Professor, for 

being with us. 

Let me begin with the Attorney General and thank him for his 

testimony in advance and for your incredible career of public service to our State and the country. 

STATEMENT OF RICHARD BLUMENTHAL, ATTORNEY 

GENERAL, STATE OF CONNECTICUT 

Mr. BLUMENTHAL. Thank you, Senator. I am very, very honored 

by those kind words, especially from someone who has led consumer protection efforts in the country, most recently in the credit 

reform bill, and I want to thank you very sincerely for all that you 

have done in other areas of consumer protection and the leadership 

that you will no doubt provide the Committee in this area, which 

as you have said marks what seems to be a radical departure from 

past practices in a time that demands radical solutions. 

It is a fundamental break with the past that is very well justified 

by recent history. This proposal would create a new agency, a very 

strong financial products watchdog and guardian, similar to the 

one that now exists at the Federal level in the Federal Trade Commission for other kinds of products, the Consumer Product Safety 

Commission for certain kinds of other goods and services, and es-
35 

sentially would restore the historic State–Federal alliance that existed for so many years so productively in combating financial 

fraud and abuse. 

This financial State partnership was riven and destroyed by excessive resort to Federal preemption, which displaced State enforcement and replaced that collegiality between Federal and State 

officials with conflict and tension that need not have existed. In 

fact, that conflict was one of the reasons why we saw the kinds of 

abuses that led to the financial meltdown. 

That meltdown was foreseeable. Indeed, it was foreseen. I used 

the word ‘‘regulatory black hole’’ to characterize hedge funds and 

many of the other inventive and innovative financial instruments 

that very few people understood even as they used them, and the 

excessive risk taking, often with other people’s money, that was enabled by that regulatory black hole. 

And so I think that the genius of this proposal, or its great advantage, is to restore the alliance between consumer protectors at 

the Federal and State level. 

The doctrine of Federal preemption has essentially led to the 

Federal Government abandoning the battlefield and then foreclosing the States from fighting on that battlefield. It has in so 

many areas prevented States, in fact, in many of those same areas 

that Secretary Barr answered to Senator Warner’s question—payday loans, tax preparer anticipation refund loans, credit card 

issues, mortgage abuses—and I describe in my testimony—I am not 

going to read the testimony but just briefly say that in many of 

those areas where these abuses developed, our opponent was most 

frequently the Office of the Comptroller of the Currency. 

I litigated more against the OCC than I did against any other 

single institution. And the most recent Supreme Court decision, 

Cuomo v. Clearinghouse Association, which restores some of our 

authority under the National Bank Act, was really against the 

OCC. 

And so it isn’t only that Federal authority has been fragmented, 

that the culture has been wanting, that the FTC has lacked the 

tools and resources, it is the hostility, the overt antagonism and adversarial posture of the Federal Government as against the States 

in consumer protection. And if it does nothing else—and it does a 

lot else—this proposal will help restore that alliance between State 

Attorneys General and the Federal Government. 

I believe very strongly that this proposal is a good idea. There 

are details, as many Senators have already remarked, that need to 

be refined and perhaps changed. But in concept, the idea of having 

one central point accountable, fully accountable to those consumers 

out there who don’t know where to call—and right now call my office—is a very, very important concept. The accountability to this 

body of the Consumer Financial Products Commission or Agency 

will be a tremendous advantage. 

And let me just close by saying I couldn’t agree more, based on 

18 years as Attorney General, that consumers ultimately have to 

be their own protectors. But anybody who right now reads most of 

these documents, and I am trained to read them, will find them extraordinarily perplexing and confusing, not just in the fine print 

but in their concepts. And so this agency, as job number one, ought 
36 

to not only fill that regulatory black hole, but provide for clear, 

truthful, accurate disclosure, and that is one of the essential missions that has been completely absent. 

I agree completely that the prudential responsibilities of the Fed 

and other existing agencies probably conflict, or at least create divided loyalties so far as consumer protection is concerned, another 

reason why we can’t use either the FTC or the Federal Reserve to 

carry these important responsibilities, because consumer protection, especially in disclosure, is a mission that really requires, in 

financial products, a separate and distinct agency that has that accountability and will replace the current culture, the current 

mindset of conflict with the States and resistance to aggressive and 

vigorous consumer protection. 

Thank you very much. 

Chairman DODD. Thank you very much, General. Thank you 

very, very much. 

Let me just also note that the Attorney General’s son is with us 

today. We are delighted to have him in the room, by the way. We 

thank him for being with us. 

Mr. BLUMENTHAL. Thank you. 

Chairman DODD. Thank you. 

Ed Yingling. Ed, thank you very much. You have been before this 

Committee on countless occasions over the years. We have a high 

regard and respect for you. 

STATEMENT OF EDWARD L. YINGLING, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, AMERICAN BANKERS ASSOCIATION 

Mr. YINGLING. Thank you, Mr. Chairman. I appreciate your introduction. It may be my high-water mark this morning, but I really appreciate it. Thank you, Senator Shelby and Members of the 

Committee. 

It would be expected that your Committee would look at this proposal from the point of view of consumers, who should be paramount in your consideration. However, the ABA believes that this 

proposal is not, unfortunately, the best approach for consumers and 

will actually undermine consumer choice, competition, and the 

availability of credit. 

But I would also ask you to look at this issue from an additional 

point of view. While banks of all sizes would be negatively impacted, think of your local community banks and credit unions, for 

that matter. These banks never made one subprime loan, yet these 

community banks have found the Administration proposing a potentially massive new regulatory burden. While the shadow banking industry, which includes those most responsible for the crisis, 

is covered by the new agency, their regulatory and enforcement 

burden is, based on history, likely to be much less. 

The proposed new agency will rely first on State enforcement, 

and yet we all know that the budgets for such State enforcement 

are completely inadequate to do the job. Therefore, innocent community banks will have greatly increased fees to fund a system 

that falls disproportionately and unfairly on them. 

The agency would have vast and unprecedented authority to regulate in detail all bank consumer products. The agency is even instructed to create its own products and mandate that banks offer 
37 

them. And Senator Corker, this is the part that was missing from 

your discussion with the Secretary. The agency is urged to give the 

products it designs regulatory preference over the bank’s own products. The agency is even encouraged to require a statement by the 

consumer acknowledging that the consumer was offered and turned 

down the Government’s product first, and every nongovernment 

product would be subject to more regulation than the Government 

product. Community banks, whether it fits their business model or 

not, would be required to offer Government-designed products, 

which would be given preference over their own products. 

On disclosure, the proposal goes beyond simplification, which is 

needed, to require that all bank communication with consumers be, 

quote, ‘‘reasonable.’’ This is a term that is so vague that no banker 

and no lawyer would know what to do with it. But not to worry. 

The proposal offers to allow thousands of banks and thousands of 

nonbanks to preclear communications with the agency. So before a 

community bank runs an ad in the local newspaper or sends a customer a letter, it would need to preclear it with the new agency. 

All this cost, regulation, conflicting requirements, and uncertainty would be placed on community banks that in no way contributed to the crisis. 

The fundamental flaw in the proposal is that consumer regulation and safety and soundness regulation are two sides of the same 

coin. You cannot separate a business from its products. The simple 

example is check-hold periods. Customers would like the shortest 

possible hold, but this desire needs to be balanced with complex 

operational issues in check clearing and with the threat of fraud, 

which costs banks and ultimately consumers billions of dollars. 

The breadth of this proposal is, in many respects, shocking. 

Every financial consumer law Congress has ever enacted and every 

existing regulation is rendered to a large degree moot, mere floors. 

No one will know for years what the new rules are and what they 

mean. When developing products and making loans, providers must 

rely on legal rules of the road, but now everything will be changed, 

subject to vast and vague powers of this new agency and anything 

States may want to add. 

This problem is exacerbated by the use of new, untested terminology, again such as the requirement that disclosures be reasonable, whatever that means, which will take years to be defined in 

regulation and court decisions. If industry has no idea what the 

rules will be, what the terms will mean, and how broad legal liability will be, there is no doubt what will happen. Innovative products 

will be put on the shelf and credit will be less available. 

We agree that improvements need to be made. The great majority of the problems occurred outside the highly regulated traditional banks, but there are legitimate issues relating to banks, as 

well. We want to work with Congress to address these concerns 

and implement improvements, and in that regard, my written testimony outlines concepts that should be considered. 

I do want to put one fact back on the table that Secretary Barr 

referred to, and that is as we look at this and as we look at preemption, as we look at where the problems were, 94—this is the 

Administration’s own numbers—94 percent of the high-cost mortgages occurred outside the traditional banking industry in areas 
38 

that are either unregulated, lightly regulated, or in theory supposed to be regulated at the State level. 

Thank you, Mr. Chairman. 

Senator REED [presiding]. Thank you, Mr. Yingling. 

Mr. Plunkett, please. 

STATEMENT OF TRAVIS B. PLUNKETT, LEGISLATIVE 

DIRECTOR, CONSUMER FEDERATION OF AMERICA 

Mr. PLUNKETT. Mr. Chairman, Ranking Member Shelby, Members of the Committee, it is good to be back with you. I am testifying today on behalf of the Consumer Federation of America and 

23 consumer, community, civil rights, and labor organizations. We 

strongly support the Administration’s proposal to create a Federal 

Consumer Protection Agency focused on credit, banking, and payment products because it targets the most significant underlying 

causes of the massive regulatory failures that have led to harm for 

millions of Americans. 

First, agencies did not make protecting consumers from lending 

abuses a priority. In fact, they appeared to compete against each 

other to keep standards low and reduce oversight of financial institutions, ignoring many festering problems that grew worse over 

time. If they did act, and they often didn’t, the process was cumbersome and time consuming. As a result, they did not stop abusive 

lending practices in many cases until it was too late. Finally, regulators were not truly independent of the influence of the financial 

institutions they regulated. 

The extent and impact of these regulatory failures is breathtaking. I offer 10 pages of detail on 12 separate regulatory collapses in my testimony over the last decade that have harmed consumers and increased their financial vulnerability in the middle of 

a deep recession. This involves not just the well-known blunders 

that we have heard about on mortgage lending and credit card 

lending. I also offer lesser-known but quite damaging cases of regulatory inaction, such as the failure of regulators to stop banks from 

offering extremely high-cost overdraft loans without consumer consent, the permission that Internet payday lenders have gotten from 

regulators to exploit gaps in Federal law, and the fact that regulators have not stopped banks that impose unlawful freezes on accounts containing Social Security and other protected funds. 

Meanwhile, the situation for consumers keeps getting worse as 

a result of these regulatory failures and the economic problems in 

our country. One in two consumers who get payday loans default 

within the first year. Mortgage defaults and credit card charge-offs 

are at record levels. Personal bankruptcies have increased sharply, 

up by one-third in the last year. 

Combining safety and soundness supervision with its focus on 

bank profitability in the same institutions, regulatory institutions, 

as consumer protection magnified an ideological predisposition or 

antiregulatory bias by Federal officials that led to unwillingness to 

rein in abusive lending before it triggered the housing and economic crisis. But we now know that effective consumer protection 

leads to effective safety and soundness. Structural flaws in the 

Federal regulatory system compromised the independence of bank-
39 

ing regulators and encouraged them to overlook, ignore, and minimize their mission to protect consumers. 

The Administration’s proposal would correct these structural 

flaws. Key facets of this proposal include streamlining the Federal 

bureaucracy by consolidating consumer protection rulemaking for 

seven different agencies in almost 20 statutes; providing the agency 

with authority to address unfair, abusive, and deceptive practices; 

ensuring that agency rules would be a floor and not a ceiling and 

that States could exceed and enforce these standards. 

In response to this far-sighted proposal, the financial services industry has launched an elaborate defense of the status quo by minimizing the harm that the current disclosure-only regime has 

caused Americans, making the usual threats that improving consumer protection will increase costs and impede access to credit, 

and offering recommendations for reform that barely tinker with 

the existing failed regulatory regime. These critics are hoping that 

this Committee will overlook the fact that the deregulatory regime 

that they championed and largely controlled has allowed deceptive, 

unsustainable, and abusive loan products to flourish, which has 

helped cause an economic crisis and a credit crunch. In other 

words, the regulatory system that creditors helped create has not 

only led to direct financial harm for millions of vulnerable Americans, but it has reduced their access to and increased their costs 

on the credit they are offered. 

Only a substantial restructuring of the regulatory apparatus 

through the creation of this kind of agency offers the possibility of 

meaningful improvement for consumers in the credit markets. The 

agency will be charged with spurring fair practices, transparency, 

and positive innovation in the credit markets, which should lead to 

a vibrant, competitive credit marketplace for many years to come. 

We strongly urge the Committee to support this proposal. Thank 

you. 

Senator REED. Thank you, Mr. Plunkett. 

Mr. Wallison, please. 

STATEMENT OF PETER WALLISON, ARTHUR F. BURNS 

FELLOW, AMERICAN ENTERPRISE INSTITUTE 

Mr. WALLISON. Thank you, Mr. Chairman and Ranking Member 

Shelby, Members of the Committee. I must say candidly that I was 

shocked when I realized how this legislation will actually work. 

For me, it raised the following questions. Are consumers protected when they cannot buy products and services that are available to others? Is that what consumers want? Does it matter what 

they want? These questions occur because the Administration’s proposal for a Consumer Financial Protection Agency, the CFPA, results in the Government, I believe, essentially deciding which 

Americans will have access to certain financial products and which 

will not. 

Traditionally, consumer protection in the United States has focused on disclosure. It has always been assumed that with adequate disclosure, all consumers at whatever level of education or 

sophistication could make rational purchase decisions. Consumer 

protection under these circumstances focused on fraud and decep-
40 

tion and could take account of differences in consumer sophistication. 

But the Administration’s plan is based on an entirely different 

idea. That idea is that many consumers should not be allowed to 

have particular products or services because they are not sophisticated, educated, and perhaps intelligent enough to understand 

what they have been offered. 

It is clear that in the Administration’s plan, disclosure, no matter 

how complete, is not enough. The white paper that the Administration circulated before submitting its legislation contains the following language: ‘‘Even if disclosures are fully tested and all communications are properly balanced, product complexity itself can 

lead consumers to make costly errors.’’ 

As a result, under the proposed legislation, every provider of a 

financial service, and that term, incidentally, includes everything 

from banks to check cashing services, and from furniture rental 

companies to Western Union, every one of these institutions—not 

including, incidentally, securities firms or insurance companies, 

which are also involved in financial activity—is required to offer a 

plain-vanilla product or service to be defined and approved by the 

CFPA that will be simpler and entail, ‘‘lower risks’’ for consumers. 

This raises, to me, the obvious question. Once the CFPA has prescribed a simpler and lower-risk mortgage, who will be eligible to 

buy the more complex product that is tailored to a consumer’s particular needs? In effect, this question places on the provider the 

burden of deciding which of his customers is qualified for the more 

complex or riskier product. 

Going beyond the plain-vanilla product will entail risks for the 

provider, who could face an enforcement proceeding and a fine from 

the CFPA, action by a State Attorney General or a State Consumer 

Protection Agency also to enforce the CFPA’s regulations, and a 

class action by disgruntled consumers who claim they did not understand the risks associated with the nonplain-vanilla product. 

As the white paper states, the CFPA should be authorized to use 

a variety of measures to help ensure that nonplain-vanilla mortgages were obtained only by consumers who understood the risks 

and could manage them. How would a provider determine whether 

a product with more features than the plain-vanilla product is suitable for a particular consumer? The white paper suggests that the 

CFPA could, ‘‘require providers to have applicants fill out financial 

experience questionnaires.’’ This will be a humiliating experience 

for anyone, especially a consumer whose credit record up to that 

point has been completely unblemished. It is not a question of what 

he can afford, but what he can understand, a much more difficult 

question. 

These elements are troubling enough, but this regime will be bad 

for all consumers. Product innovation will be stymied. Product variety will be diminished. Costs of credit will rise, and many small 

credit providers, small stores, finance companies, and others will 

have to leave the market. This will reduce competition and in some 

cases eliminate the only sources of credit for some consumers. 

So those who will be able to get these more complex plain-vanilla 

products—more products than are plain vanilla—who are these 

people? Not ordinary Americans, in my view, whose lack of demon-
41 

strable financial sophistication will make the risks of selling to 

them very difficult for most providers. The more complex products, 

the ones with useful features, will be offered only to the more sophisticated and the better educated, in other words, to the Nation’s 

elites. 

In this way and for the first time in our history, it will be Government policy to deny products and services to a large proportion 

of the population, not because the products and services are inherently dangerous, like drugs or explosives, but because this Administration apparently believes that no amount of disclosure can 

make some Americans capable of understanding what they are 

buying. Thank you. 

Senator REED. Thank you, Mr. Wallison. 

Professor. 

STATEMENT OF SENDHIL MULLAINATHAN, PROFESSOR OF 

ECONOMICS, HARVARD UNIVERSITY 

Mr. MULLAINATHAN. Mr. Chairman, Ranking Member Shelby, 

and Members of the Committee, thank you for providing me with 

an opportunity to testify. 

As an academic, my comments will lay out some of the ideas and 

research behind consumer protection. By way of background, my 

area of expertise is behavioral economics. It combines economists’ 

healthy respect for markets with psychologists’ recognition that 

people are not financial engines churning out optimal decisions. 

I will focus on making three points. First, the quality of choice 

is a result of the context in which we choose. Some contexts—many 

contexts allow people to choose well, but others do not. 

Second, when people choose well, markets work very well. They 

provide healthy competition. But when people choose badly, they 

can race to the bottom. 

Third, one tool in the proposed legislation, ring fencing so-called 

‘‘standard products,’’ provides a way to promote competition and 

prevent this race to the bottom. 

So let me start with the psychology of choice. I am going to try 

and use two examples that are pretty familiar to all of you to illustrate decades of psychological research on how people actually 

choose. I want you to think back to the last time you painted a 

room in your house. You have thousands of colors to choose from. 

Benjamin Moore alone offers 140 shades of white. Yet, you sifted 

through this explosion of options and were probably happy with 

your final choice. 

Contrast this with the last time you bought an electronic device, 

such as a digital camera. How do you choose between a smaller, 

cheaper 8-megapixel camera and a bigger, more expensive 12- 

megapixel camera? What is a megapixel? How many do you need? 

Are 12 megapixels 50 percent more than 8 megapixels? At the end 

of this process, you probably weren’t really sure whether you 

bought the right camera. 

The distinction here is that choosing between things you don’t 

understand—megapixels is very different from choosing between 

things you do understand—color. 

Part of choosing a mortgage is like picking a color. What monthly 

payment fits within your budget? Part of choosing a mortgage, 
42 

however, is like choosing a megapixel. How do you choose between 

a fixed-rate mortgage at $1,000 a month and one that begins at 

$900 a month but after 2 years changes to three points above the 

1-year LIBOR? What does LIBOR mean? How much does it vary? 

Is three points above it reasonable? The provider says, ‘‘Hey, you 

can refinance this mortgage in 2 years.’’ Should you worry about 

being able to get another loan in 2 years? 

Note, this has nothing to do with elites or intellectuals. This is 

true for all people. These features of the difficulty of choice are the 

challenges of being human in choice context that are really not 

your area of expertise. The problem is not disclosure alone, it is 

about understanding. Sometimes disclosure produces understanding, but sometimes it does not. 

Financial technicalities simply do not resonate with the concepts 

you use in everyday life. As a result, errors abound. For example, 

a recent study shows that 40 percent of borrowers with income less 

than $50,000 do not know the per period caps on their ARMs. It 

wouldn’t surprise me if, like megapixels, they barely understood 

what a pro period cap is. Why should they? 

Now let me turn to competition. As I pointed out, when people 

choose well, low road firms with short time horizons cannot do 

much harm. The best they can do is offer a product the consumer 

likes. In this case, markets work well and innovation helps consumers. However, when people are choosing badly, low road firms 

can confound both the consumer and high road firms. 

Next to the $1,000 fixed-rate mortgage, the $900 balloon ARM 

has a superficial appeal. It is cheaper today. Nine-hundred is 

smaller than $1,000. Its risks down the road are harder to understand. The worse product can look like the better product. The high 

road firm can be pulled down by the low road option. 

Now to my final point. I feel one powerful tool in the proposed 

legislation can be particularly useful in preventing the race to the 

bottom. Ring fence the standard, well-understood products and the 

more exotic ones. Regulate the standard ones minimally, ensure 

disclosure, prevent fraud, but regulate the more exotic ones stringently. The goal of this regulation should be to ensure that customers understand not just that the risks of these products be mechanically disclosed. Marketing can be endlessly inventive in 

sidestepping disclosure. The Consumer Financial Protection Agency 

needs stronger tools for products beyond the fence. 

Ring fencing, though, is far more market friendly than a banner 

or mandate. It retains customers’ ability to access exotic products. 

The CFPA would simply ensure that there is a door on the fence 

that requires conscious choice to go through. No one should unknowingly end up on the other side of the fence. 

There are several precedents for this approach. I do not think 

this is the first time in American history this has happened. In 

fact, the SEC uses it as a way to regulate the trading of options 

and derivatives. If any of you would like to see this, try and buy 

an option. The Federal Reserve in July of 2008 placed some mortgages under far greater scrutiny. It is also analogous to how we 

regulate drugs. If you want to buy ibuprofen, you simply go and 

buy it. If you like a strong antibiotic, there are more barriers in 

place. 
43 

Ring fencing, however, requires a variety of things to work. First, 

there must be sufficient choice within the fence. This cannot be a 

one-size-fits-all solution. The goal of this is to maximize choice. It 

is not to create standard products designed by the Government. 

That would be a failure. 

Second, there must be a clear, transparent process for how products enter the fence. This is necessary to encourage innovation. 

Lenders who create a good product must have the comfort that 

they can reap rewards from it. For this reason, it is important that 

the legislation should instruct the CFPA to develop and codify a 

transparent process by which products will be declared within the 

fence. 

To summarize, real people choose badly when faced with technical features as financial choices sometimes require. To prevent a 

race to the bottom, financial regulation must prevent unfair competition from products with hard-to-understand risks. Ring financial provides one way to accomplish this goal. When effective, it 

provides a market-friendly alternative to bans and mandates. 

Thank you. 

Senator REED. Thank you very much. Thank you, gentlemen, for 

your testimony. 

Let me take 5 minutes and then recognize Senator Shelby. 

General, thank you not only for your testimony, but for your 

service. 

Mr. BLUMENTHAL. Thank you, Senator. 

Senator REED. As a neighbor in Rhode Island, I am well aware 

of what you have done for your State and for the Nation. 

Mr. Yingling suggested that we should put our attention on the 

nonbanking system, and yet your testimony suggests that there are 

real problems within the banking system because Federal regulators have essentially interfered with your ability to regulate what 

might be Connecticut chartered companies. Is that fair, and can 

you elaborate? 

Mr. BLUMENTHAL. What has happened, Senator, and that question is a very good one, is that many nonbanking institutions have, 

in effect, invoked the shield by aligning themselves with national 

banks. In the gift card area, for example, we have been prevented 

from stopping expiration dates and dormancy fees on gift cards, 

from enforcing our State law, because they have used national 

banks. On payday loans or tax anticipation loans, again, the litigation is cited in my testimony. These institutions have, in effect, allied themselves with national banks to shield themselves from 

State authority. Again and again, what we have seen is that there 

has been a very knowing and purposeful resort to the national 

bank shield to protect these State and even local institutions because they have succeeded in invoking that Federal doctrine. 

And so the proposal here to put a floor rather than ceiling on the 

impact of Federal regulation, I think is a very important one. It is 

hardly novel or new. It is essentially what is done in antitrust and 

other forms of consumer protection enforcement with the FTC and 

I think it would eliminate the incentive for these local institutions 

to, in effect, become part of or integrate their activities with the national banks. 

Senator REED. Thank you, General. 
44 

Mr. Yingling, you have just laid out, I think, in your very good 

testimony, as always, the notion, and one that I think we all ascribe to, that safety and soundness and consumer protection are 

sort of two sides of one coin. And yet we have seen examples over 

the last several months where that doesn’t seem to be the case. 

Maybe safety and soundness is not the word, but profitability 

seems to have come before consumer protection in credit card cases 

and many other instances, which leads, I think, to the thrust of 

what the Administration is proposing, that you have an agency 

that is, in fact, devoted not to this balance between safety and 

soundness and consumer protection, but has a focus on consumer 

protection. Your response? 

Mr. YINGLING. Well, first, they are two sides of the same coin 

and I would just use the famous example now of the mortgage crisis, where that was in many ways a consumer issue, a terrible failure of regulation at both the Federal and State level with respect 

to regulating these toxic mortgages. At the same time, it is a tremendous safety and soundness question because it has blown up 

our economy to a large degree in a number of markets. Local banks 

that maybe never made a subprime loan in their life are being 

dragged down because the local economy is dragged down. 

I think the main question we would have with respect to separation is just to use example after example where we feel that we are 

going to be caught in the middle. So take the account opening process. That is a combination. So we are going to have one examiner 

come in and say, in your account opening process, you need to 

change this disclosure. It needs to be clearer. You need to change 

this process. You need to change the way you are training your tellers. We spend billions of dollars training tellers on all kinds of compliance issues. The safety and soundness examiner comes in and 

says, I completely disagree with that. If you do it that way, you are 

going to encourage fraud, and by the way, you are not complying 

with the Bank Secrecy Act. What are we to do? All the legislation 

talks about is consulting, but ultimately, both sides have the power 

to say, you will do it our way. And there is just example after example. Check hold periods are another example where we would be 

caught in the middle. 

Senator REED. Right now, could a Federal regulator make those 

same calls? 

Mr. YINGLING. One Federal regulator could make the same calls. 

Senator REED. And that Federal regulator, it seems, based on the 

record of the last several years, to make the call in favor of not consumer protection, but to the ability of the bank to continue to operate, reputational and other—— 

Mr. YINGLING. I would not argue with you, Senator, that there 

have not been failures and that things need to be done. But it is 

not always profitability. If you look at the check hold period, they 

have to balance what the consumers would like, which is the 

money right away, with the fact that we have a multibillion-dollar 

processing system that is evolving for checks with the fact that we 

are subject to billions of dollars in check fraud which is ultimately 

paid for by the consumers. 

Senator REED. Mr. Plunkett, if you could comment on this discussion, I think it has been a good one. 
45 

Mr. PLUNKETT. The concern I have is that there are, until the 

last year, virtually no examples of the current safety and soundness structure putting consumer protection concerns first. The reason we need to go this route is because safety and soundness regulators, and we have to say this based on experience over the last 

30 years, the norm for them is to consider the bottom line for the 

institutions that are regulated, and there is just example after example. 

I mentioned in my statement overdraft loans, where the regulators appear to have dithered because primarily what is a deceptive practice, that is offering a loan without telling the consumer, 

charging the consumer fees without giving them a real right to 

choose to accept those fees, it is a very profitable line of business. 

So again and again, the norm for safety and soundness regulators 

has been to ignore consumer protection. It is all well and good to 

say, well, that should change, but I don’t think that that is how 

safety and soundness regulators typically think. 

Senator REED. Thank you very much. 

Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. 

Mr. Wallison, in your written testimony, you quote Justice Brandeis, who wrote, and I will quote, ‘‘The greater dangers to liberty 

lurk in insidious encroachment by men of zeal, well meaning but 

without understanding.’’ Elaborate on that, if you would, because 

as I raised earlier the question to Secretary Barr, this is a radical 

approach, different from our classical approach to regulation, is it 

not? 

Mr. WALLISON. Yes, I think this is a very paternalistic approach 

and quite different from anything we have had in the past. In the 

past, we have always used disclosure, and disclosure can be improved. There is no question—— 

Senator SHELBY. Absolutely, it can. 

Mr. WALLISON. Actually, my AEI colleague, Alex Pollock, has 

come up with a one-page disclosure form for a mortgage which you 

would have to look at before you signed up for the mortgage—not 

at the closing, but when you sign up for the mortgage—and that 

would list all of the various risks and so forth and the costs of the 

kind of mortgage that you are taking. That is an improvement—— 

Senator SHELBY. In plain English, right? 

Mr. WALLISON. In plain English, that is exactly right. People can 

understand that. Instead, what we are proposing to do here is really to say to providers, you are going to take the risk of offering 

something more than this plain-vanilla product. If you take this 

risk and it turns out that the consumer is not pleased with it or 

we, the regulatory agency, are not pleased with it, you are going 

to have to pay some very substantial costs in the form of enforcement. This is a completely different way of looking at consumer 

protection and radical in my view, too. 

Senator SHELBY. Could this in a big way ration credit to some 

people who need it the most? 

Mr. WALLISON. Well, exactly. The effect of this, of course, is when 

a provider is confronted with the choice of whether to offer only the 

plain-vanilla product or the more complex product, he has to decide 

whether this particular consumer is going to be able to understand 
46 

the product. And as I quoted in my testimony, the white paper says 

here that disclosure itself may not be enough. For some people, 

complexity itself is going to make it difficult for them to sign up 

for something that they may not understand. 

So the provider has to make this decision, and what the provider 

is mostly going to do is say, I am sticking with the plain-vanilla 

product because if I go any further with that, with this particular 

consumer, I could get in trouble, and that will reduce the products 

that are available to consumers, I am afraid. 

Senator SHELBY. Financial institutions, as I understand the proposal, will no longer be primarily concerned with discerning and 

meeting the needs of their customers. Instead, they would be concerned with gaining regulatory approval and avoiding taking any 

steps that would lead to enforcement actions or, obviously, costly 

litigation down the road. Do you agree with that? 

Mr. WALLISON. Yes, of course. That is the thing that I think the 

people in the Administration missed—that there is a very important problem for providers, a very difficult problem in fending off 

litigation and enforcement activities. They want to comply with the 

law, and so they have to know exactly what it is that they can do. 

If they are left in a position where they have to make a decision 

about the ability of someone sitting in front of them across the desk 

to understand something, well, there is only one decision they can 

make and that is to limit what they offer. 

Senator SHELBY. Mr. Yingling, the proposal states that the agency would have to, quote, ‘‘consider the potential benefits and cost 

to consumers and covered persons.’’ Consider and potential are not 

very definite words, I would think. Shouldn’t the language require 

that the real benefits must outweigh real costs to consumers and 

covered persons instead of that? The agency could not meet its 

mandate, as I understand it, to promote efficient markets if in the 

end the transaction is not beneficial for both parties in the transaction. That is the way the market works, does it not? 

Mr. YINGLING. Senator, that is basically the only general standard in it. The authority of this agency is broader than any agency, 

I would say, that has ever been proposed. If I could, let me just 

read you the one section. This is Section 1037(1)(a). In general, the 

agency shall prescribe rules imposing duties on a covered person. 

Now, a covered person is anyone that offers consumer financial 

services. So the agency shall prescribe rules imposing duties on a 

covered person as the agency deems appropriate or necessary to ensure fair dealing with consumers. That is it. 

Every single law you have ever passed, every regulation on the 

books is trumped by this. They are just floors. And the standard 

you cited, I could go in the hall with a couple of lawyers and in 

an hour come back with a paragraph, a boilerplate paragraph with 

a couple of blanks in it that this agency could put in every rule 

they write to meet that standard. 

This agency is empowered to do anything it wants, and I don’t 

know what that means your function is, because that credit card 

bill you just worked so hard on is now nothing but a floor, trumped 

by this section. 

Senator SHELBY. Thank you. Thank you, Mr. Chairman. 

Senator REED. Thank you, Senator Shelby. 
47 

Senator Warner, please. 

Senator WARNER. Thank you, Mr. Chairman. 

I share some concerns about some of the Administration’s proposals, but I want to go back with Mr. Wallison. I am not sure that 

I would concur that the sense that the Government is going in certain cases to prohibit certain products as being too dangerous, that 

that has not been due course of doing business. I mean, we have 

done it recently. The Fed has done it recently with double-cycle 

billing in the credit card area. We have had longtime prohibitions 

against loan sharking. I used to be in a pretty good business in the 

venture capital business, but we had, as we have discussed, Peter, 

prescriptions that said not everybody can invest in venture capital 

fund. You have to be a qualified investor. 

And I understand the notional difference between investing and 

access to credit, although I would argue that some of the products 

that we have created have been all about marginally lowering the 

cost of risk, and there is some judgment of marginally lowering the 

cost of risk versus the overall societal downside risk we are taking. 

There has got to be some balancing here. 

So I know where you are going to come back at me on this, but 

I do want you to come back at me in terms of saying, would you 

say market all the time, no prohibitions at all on any product mix, 

disclosure alone always trumps? 

Mr. WALLISON. No. Thank you for the question, Senator, but that 

would not be my view. I think there are things that one could— 

the Senate could, the Congress could—forbid, and should, because 

some things can actually be abusive. But in general, what we are 

doing with this legislation is putting providers in a position where 

they have to make a judgment about the ability of the person sitting across the desk from them to understand all of the factors that 

go into a particular product that is being offered. 

And so what we are saying in this legislation essentially is, here 

is the plain-vanilla product. If you offer this product, you are not 

going to take many risks because it has been approved by the 

CFPA and here are the disclosures that the CFPA wants you to 

make about it. And the provider puts that product in front of the 

customer and says, ‘‘I think you should take this product’’ because 

the provider has made a judgment that this customer probably 

can’t understand or might not be willing to understand the complexities of the other products that the provider could offer to customers who are more sophisticated and experienced. 

So the result of that, I think, is going to be only one thing, that 

many, many people who could understand, with adequate disclosure, products that are going to be better for them and their families will never have those products offered to them. 

Senator WARNER. But in this example, I mean, in the normal 

marketplace, if we put out a symbol that says ‘‘buyer beware,’’ 

buyer makes the wrong choice and the market absorbs the consequences. But in this circumstance, at least we have seen in recent action there perhaps was not a ‘‘buyer beware’’ on some of 

these exotic financial mortgage products. I have got members of my 

family that I argued diligently against, don’t take that product. 

You are going to get it. But they saw the up-front sticker price and 

they bought it anyway. Not everybody has got a wealthy brother 
48 

to bail them out, although I guess we do have a wealthy Uncle Sam 

that is now indirectly bailing out. 

But if at the end of the day the ramifications of buyers making 

bad choices around the credit markets is that we, the taxpayers, 

are ultimately going to bail them out, don’t we have some responsibility to perhaps put some either ring fencing or some parameters 

around this? I mean, are we in a different mix of products when 

we are at the end of the day maybe having the taxpayer be on the 

hook for bad choices made by consumers? Is there—— 

Mr. PLUNKETT. Senator, buyer beware doesn’t always work. As 

you pointed out, it is not just the new credit card law. In 2005, 

Congress said payday loans and other high-cost loans are not good 

for our service members and prohibited them. There is actually a 

long line of recent Congressional and regulatory measures that 

have acknowledged that the disclosure-only approach doesn’t work. 

Telling somebody that you are going to deceive them and then deceiving them is not a good thing. So we need to recognize the limits 

of this disclosure-only approach. 

Mr. WALLISON. This makes my case, I think, and that is there 

is no way that a provider can offer a product that he is not certain 

the person sitting across from him understands. 

Mr. YINGLING. I think—— 

Mr. PLUNKETT. But that occurs all the time in the securities 

world. Suitability is embedded in the new legislation that the 

House has passed on mortgage lending. It is absolutely possible to 

make those determinations and it is done in law. 

Mr. YINGLING. Some products should be banned. Some products 

should have a ‘‘buyer beware’’ sign on them, and that is what the 

Fed has done, in effect, with their new mortgage regulations. If you 

cross a certain line, it has a ‘‘buyer beware’’ sign on it. 

What this proposal says is if you deviate in any fashion from the 

plain-vanilla product, so I will use a different example. I will use 

basic banking accounts, because that will be part of this. So they 

design a basic banking account and if the community bank in 

Nashville says, I have a great idea that the students at Vanderbilt 

will love. I will add an Internet feature. If Navy Federal Credit 

Union says, I have a great feature I can add that will be good for 

sailors at sea, they are no longer part of the plain-vanilla product. 

Let me read you what this says. This is the thing that was handed out at the White House, the report that went with this legislation. For example, the CFPA could impose a strong warning label 

on all alternative products, require providers to have applicants fill 

out a financial experience questionnaire, or require providers to obtain the applicants’ written opt-in to such products. Originators, 

talking about loans, of alternative products should be subject to 

significantly higher penalties for violations. 

Why would that bank in Nashville, why would Navy Federal 

Credit Union offer these changes to the basic vanilla product? It is 

one thing to have warning labels. It is one thing to outlaw products. It is another thing to say, if you don’t offer our product, you 

are subject to all kinds of new regulatory restrictions. I am quoting 

them. This is their proposal. 

Mr. BLUMENTHAL. If I may try to bring together these two points 

of view from the standpoint of—— 
49 

Senator WARNER. Let the record show, Mr. Chairman, that I am 

not extending my time. The panel is. 

[Laughter.] 

Senator REED. This is the General and it is the General’s preference, so go ahead. 

Mr. BLUMENTHAL. The highest I made it in the Marine Corps Reserve was Sergeant, so—— 

Senator REED. I am actually in a higher rank. 

[Laughter.] 

Mr. BLUMENTHAL. If I can bring together these somewhat differing abstract points of view from the standpoint of the cop on the 

beat, and we are talking here about an enforcement authority as 

much as a regulator, we may disagree on what should be banned. 

I think there is some agreement that certain products should be 

banned. We can disagree on where the floor in enforcement should 

be. 

But the question really for this Committee and for the Congress 

is, should we have a point person, an authority that is accountable 

for protecting consumers, whether they have a wealthy relative or 

not, and assuring disclosure, uniform disclosure nationwide in an 

age where—and this is one of our great frustrations—the mortgage 

rescue scams, the tax anticipation loans that charge 300 percent interest can disappear into the Internet ether and we need Federal 

enforcement. Otherwise, even with the best and most vigorous 

State law enforcers, including Attorneys General, that system will 

be ineffective. 

And so I think it is more than which products should be banned, 

and certainly some of these standards need to be tightened. I accept very wholeheartedly Mr. Yingling’s critique of this first draft 

of the legislation. There need to be stronger standards, perhaps. 

But do we need an authority that will ally with the States in providing stronger enforcement? My answer is yes. 

Senator WARNER. You wouldn’t end up being where you have got 

just the floor set at the Federal level. Could a financial institution 

ever have felt like they have finally passed muster and they aren’t 

going to be then still subject to 50 additional Attorneys General 

trying to come after their product, even if they have passed muster 

at the Federal level? 

Mr. BLUMENTHAL. And I think one of the challenges, Senator, 

and I will be very brief in my response, but I think you have identified, as you did earlier in your questions, one of the key questions, 

which is how to harmonize Federal and State enforcement. But 

that is a tension inherent in our Federal system. We go through 

it in the criminal system with many other areas except where there 

is total Federal preemption, as in the food and drug area. But if 

we are going to have State enforcement, there needs to be harmonization. I think the SAFE Act recognizes the potentials for harmonization. So do the recent credit card reforms. I think we are moving 

in the direction that keeps alive the Federal system, and I think 

they can be harmonized. 

Mr. PLUNKETT. Senator, I would just add that if the minimum 

is high enough, then you will achieve uniformity because most 

States won’t see the need to exceed that minimum. 

Senator REED. Thank you. 
50 

Senator Corker. 

Senator CORKER. Mr. Chairman, thank you, and I thank each of 

you as witnesses. It is always highly beneficial to us to have people 

like you here and I thank you for that. 

Mr. Wallison, I do want to thank you for your comments. I agree 

with almost everything you have said, and we have met many 

times. I appreciate certainly your testimony today. 

Professor, I listened to the pixels and the ring fences and very 

much appreciated what you had to say, also. I still was unclear, 

though, as to whether you viewed disclosure—you were talking 

about the psychology of people purchasing things in an economy— 

whether you believe that disclosure is enough or whether you believe, like this Administration, that they are wise men that govern 

ignorant souls that need to be directed as to what to buy and not 

buy. I still was unclear and I would love some edification there. 

Mr. MULLAINATHAN. Thank you very much. I think it is useful 

to set two extremes. I think by focusing on contrasts with disclosure, we are failing to recognize that sometimes in this sector we 

also engage in bans. We have done that with the credit card bill 

and it will happen again. 

So to me, the challenge is not about disclosure and moving to do 

more than disclosure. The challenge is when we are setting up an 

agency, are we going to handicap it by giving it only two extreme 

options, disclose or ban. To me, that is unfortunate. That is exactly 

a bad market solution because there are products which have benefits for some consumers but which are complicated for other consumers. As a result, disclosure might not work. It may be hard to 

get some consumers to understand fully the most exotic products, 

but we don’t want to ban them because they have genuine benefits 

for a variety of other consumers. 

I think that raises a—there is a set of products that fall in that 

middle, and to me, ring fencing and the proposals in the legislation—and I have to admit, maybe I am reading a different draft. 

I don’t see Government design or Government standards in this 

draft. To me, what this does is it gives the opportunity, and I think 

more clarity is needed in the bill and I think moving forward that 

is where we would need clarity, but it gives an opportunity to say, 

let us recognize the financial services require some middle ground. 

Sometimes, we will want to keep exotic products in the mix. Therefore, we won’t want to ban them. But we will need something more 

than disclosure, because a lot of consumers, as with double-cycle 

billing, there is no single form that is going to simply explain to 

consumers the most exotic products. 

And even if there were a single form, the reality of the way you 

buy something is such that someone can give you that single form 

and eight other pieces of paper on top of that single form. I have 

rented cars many times, and I realized the other day, they say, put 

an X here, an X here, an X here, put your initials there, and sign 

here. I don’t know what I am signing for when I sign those things. 

I have never read the disclosure on that form. Maybe some of you 

have. 

But the point I am trying to make is that marketing is very powerful. Disclosure for many customers for exotic products won’t necessarily work, but at the same time, I wouldn’t want to resort to 
51 

a ban every time we encounter that situation. And I think it is that 

middle ground that is trying to be attained by this bill. Though, I 

understand the risks if that middle ground is not done well, and 

I would think the challenge of working and crafting this bill is to 

give the agency another tool beyond either of these extremes. 

Mr. YINGLING. I will just say Section 1036 of the bill, Standard 

Consumer Financial Products or Services, clearly authorizes them 

to mandate products and to put restrictions on products that are 

not mandated. 

Senator CORKER. Which brings me—— 

Mr. PLUNKETT. The idea is not to have a bureaucrat designing 

a product, Ed. The idea is to, as we heard from the Administration, 

make sure that as a class there are alternatives. 

Mr. YINGLING. I can only deal with what the statute says and 

what their proposal—— 

Senator CORKER. I would like to interject here, if I could. 

Mr. YINGLING. Sorry, Senator. 

Senator CORKER. Thank you both for your vigorous help in this. 

So, Mr. Yingling, you have been before us before, and obviously 

because of the group that you represent, people are going to say 

that when you say that we can do this within the confines that we 

now have, you are basically arguing for the status quo. I know that 

is not what you are arguing for. But if you would, tell us how within the present regulatory system that we have we can ensure that 

there is consumer protection. And, second, what kind of products 

do you think would go away under this type of regime? Good products, by the way. 

Mr. YINGLING. Well, first we are not arguing for status quo. The 

status quo has been a failure, and so we are arguing for change. 

One thing I would point out is there has been a significant 

change in terms of the power of the agencies using UDAP. And if 

you look at the credit card regulation—which you all trumped with 

a stronger bill, but a lot of it was in that regulation—this is a new 

era. The use of UDAP by the regulatory agencies is much stronger, 

and we would recommend that a bill that was passed by the House 

last year which grants that authority in a coordinated fashion to 

all the regulatory agencies should be adopted. 

You are going to deal with a systemic oversight regulatory that 

is controversial, but that systemic oversight regulator should have 

the authority to look at these consumer issues in a coordinated 

fashion. 

One of the great obvious failures is why our Government did not 

see—did see, to a large extent, but was not really charged with saying look at the graphs in the growth of these kinds of loans, let us 

investigate it, let us stop it. The systemic regulator should be given 

that charge. 

There should be a coordinated place in the Federal Government 

where consumers can call in. You raised that point. It is a very legitimate point. They do not know where to call. There should be 

a coordinated place where they can call, and then the statistics are 

kept, and that is referred for action to the correct regulator. 

There should be greater coordination at the Federal level with 

the States. I think we have gotten into the habit of having these 

court fights, and in reality we should be sitting down at the table 
52 

between the States and the Federal regulators and figuring out 

how to do it. There are a number of things that could be done. 

In terms of products that would be innovative, every single day 

in this country in some bank they are thinking of how to adjust a 

mortgage product, adjust an automobile loan, adjust a basic banking account. They are sitting around a table saying, ‘‘Oh, if we 

could add this Internet feature, if we could add a feature for senior 

citizens.’’ They are constantly adjusting. And some of those fail; 

some of those helped in their market; some of them become great 

products that others start to offer. And I can only deal with the 

language that they have offered. All those are not plain-vanilla 

products. Any time you deviated, you would not be a plain-vanilla 

product. And so if that is not going to chill innovation, I do not 

know what is, because you are subject to all kinds of extra rules 

if you cannot make those deviations. 

Senator CORKER. Mr. Chairman, thank you, and, gentlemen, I 

want to say that the comments you have made indicate to me that 

while you want to see strong consumer protection, because that is 

what you do, and you see abuses, that you, too, even see this bill 

in its present form as an overreach and that we have a lot of work 

to do to get it right. 

Mr. BLUMENTHAL. I would agree with everything you have just 

said except perhaps with the term ‘‘overreach.’’ And I do not mean 

to quibble or criticize. I agree with you wholeheartedly that this 

bill is a first draft; it needs refinement, it needs work. And I think 

with your help, with Senator Shelby’s, and with all the Senators 

who are here, particularly Senator Dodd, we are going to reach the 

goal line. But I do think that a point of accountability somewhere 

that your constituents can call when they have a question or a 

problem and they need an enforcer to protect them against a usurious interest rate or any of the abuses we have been talking about 

here I think is tremendously important. 

Thank you. 

Senator REED. Thank you. 

Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. Thank you all for 

your testimony. 

Mr. Yingling, I appreciate many of the comments you made. I 

know you spent a lot of time in your testimony talking about community banks, and I am concerned about the pressures we are putting on them. But it was not just community banks. If it was just 

community banks, we would not be in trouble. You know, we have 

Bank of America, we have given it a lot of money; Citi, we have 

given it a lot of money. So while I understand your focus on community banks, the reality is that we have a range of banks here, 

some which clearly acted in ways that were not, I guess, in their 

interest and certainly not in our collective interest because they 

created systemic risk, and that is why we are giving them enormous amounts of money. 

And while I think you have some legitimate concerns in your testimony, I am concerned, as I have said in the past to the association on other matters, is that, you know, I read the elements of 

what you have listed here as improvements that can be made. And, 

you know, my concern is that if the industry does not get out there 
53 

and be for significant changes, then it will face a legislative action 

that it probably will not like at the end of the day. 

And so I hope that when you say that we are not for the status 

quo and we are for change—but I read the changes and, you know, 

centralized call centers and, you know, basically saying that we 

should enable basic products, you know, when even in your testimony you recognize some of those problems become overly complex 

and difficult, as well as that they often have consumers buying 

products or enhancements that are not right for them, for which 

they pay too much, you know, is not in my mind the type of reform 

we are going to need. I appreciate what you talked about on OTS. 

That is, I think, a good offer, but after that it seems very little to 

me. 

So I would urge, you know, the association to be more aggressive 

in what they are offering here in terms of a legislative response. 

And I am concerned, you know, that—I look at where we are at, 

and it seems to me that a lot of, prior to the crisis, financial institutions changed their charters to shop for lenient regulators. And 

it seems to me that by imposing uniform regulations on consumers 

financial products across all types of financial institutions, one of 

your concerns, but listening to the Secretary pretty much sound to 

me like we are talking about all types of financial institutions no 

matter who regulates them, wouldn’t the Consumer Financial Protection Agency reduce the incentives to shop for more lenient regulators, at least with respect to consumer product legislation? 

So I think that while we can tailor this a little better, the reality 

is that we need this. So, you know, I am—I hope the industry will 

be a little bit more forthcoming in terms of real change so that we 

can strike the right balance at the end of the day between having 

the financial products we all want to see open to consumers but 

having the protections that are critical at the end of the day. And 

it is in that spirit that, you know, I certainly come to this with, and 

I hope others do as well. 

I just get, you know, a sense—you know, Mr. Plunkett, when 

most Americans go apply for one of the hundreds of different kinds 

of mortgages, they do not typically bring a financial adviser along 

with them, do they? 

Mr. PLUNKETT. No. 

Senator MENENDEZ. And when a mortgage broker or lender talks 

to somebody about a 5–1 interest-only ARM or a negative amortization loan, how many people do you think really understand that? 

Mr. PLUNKETT. I wouldn’t—Senator, you make some very good 

points here. What we have heard so far from the financial services 

industry in terms of their ‘‘reforms,’’ I heard a systemic regulator 

maybe, but I heard no discussion of eliminating regulatory arbitrage. I heard no discussion of consolidating the consumer protection approach in any fashion to make it more effective. I heard no 

discussion of any systemic approach to improving consumer protection regulation. I heard the regulators are getting a little better, so 

we might as well leave things as they are. 

That is not going to work given the current situation. We need 

something broader, and we need an agency that is focused just on 

consumers. 
54 

Senator MENENDEZ. So it just seems to me that when we go 

down the list of questions of what the average consumer might find 

themselves in, we see the incentives, for example, in the mortgage 

crisis for lenders to move people into products that, at the end of 

the day, may be very beneficial to them but not very beneficial to 

the consumer. And when millions of people enter into those transactions and then have consequences when those first 5 years end 

and cannot meet their obligations, then we have systemic challenges to our economy. 

So it just seems to me why should we have the borrowers simply 

fend for themselves? I believe all in personal responsibility. I would 

love us to have greater financial literacy commitments as a country 

from education, to engagement, even our financial institutions to do 

so. But at the end of the day, if we allow millions of people based 

upon incentives that move individuals to try—entities to try to 

move individuals to products that are good for the lender and/or 

the broker but bad for the consumer and millions ultimately make 

a mistake and then create the consequences that we have today in 

the housing market, it affects all of us. 

Mr. PLUNKETT. Well, Senator, I hope that when we heard discussion today about choices, we were not hearing about choices like 

the large number of minority consumers who were steered into 

high-cost mortgage loans when they could have afforded and would 

have qualified for a lower-cost loan. I hope we are not talking about 

choices like what Congress has just eliminated in the credit card 

bill, not just double-cycle billing but interest rate increases on existing balances for no apparent reason. I mean, that is called ‘‘negative financial engineering.’’ That is not legitimate innovation. And 

that is the kind of, unfortunately, choice in many credit areas that 

has driven out positive credit, credit offered by some of the small 

banks you mentioned or credit unions. 

Senator MENENDEZ. Well, Mr. Chairman, I hope that we will— 

you know, I do have concerns about how we structure this in a way 

that affects community banks that clearly have not been at the 

forefront of our economic challenges. We need to look at that. 

I do get concerned about how we harmonize the State regulator 

process with these efforts. 

And, third, I do want to see—I think Mr. Yingling does make a 

very valid comment that we have to apply—if we are going to have 

this consumer protection agency, which I generally support, it has 

to be applied across the spectrum of financial service entities; otherwise, we would do a disservice to the consumer, to the Nation, 

and certainly to the industry as well. So I look forward to working 

toward those goals. 

Senator REED. Thank you, Senator Menendez. 

Senator Shelby, you have a comment? 

Senator SHELBY. I have got a couple of scenarios here that I 

think we ought to consider. In case one, a borrower obtains a 

subprime loan, the only loan he could qualify for, and uses it to buy 

property and then realizes a 75-percent gain on the property 3 

years later. This goes on. 

In case two, a borrower obtains a subprime loan in another market. This borrower has all the same credit and income characteristics at the time he received the loan as the borrower in the first 
55 

scenario, but later loses his job, sees the real estate market collapse, and then defaults. 

I believe we need a system where we can accommodate both. 

How do we do that? In other words, the first guy—and this goes 

on—took a subprime loan and he made money out of it. Good for 

him, good probably for the market. The second one, he had the 

same qualifications, but things turned sour on him. He lost his job, 

and then he could not make the payments and so forth. 

How do we do this? Mr. Wallison, do you have any—how do we 

balance this, I guess? 

Mr. WALLISON. I think, Senator Shelby, you are focusing on exactly the problem here, which is trying to determine in advance 

what a person understands. The first person you are talking 

about—that consumer—may or may not have understood all of the 

elements of this loan, but it worked for him. It might not even have 

been the best loan he could have gotten, but it still worked for him. 

In the second case, it did not work for him. 

I am looking at it, again—and I must do this because we have 

to consider the way this works in practice—from the standpoint of 

the provider. The provider is going to be very much at risk if he 

offers a loan to the first or the second person—the same loan—— 

Senator SHELBY. That is right. 

Mr. WALLISON. Which goes beyond the plain-vanilla structure. If 

he does, the second guy—who did not make any money—is going 

to come back to him and complain about that or complain to the 

CFPA about him. And providers have to worry about this because 

they can be driven out of business very easily. 

Senator SHELBY. By litigation. 

Mr. WALLISON. By an enforcement action or a litigation or by a 

State Attorney General. So I think when the Committee is looking 

at this, you have to look at it from the standpoint of both the consumer and the provider, because the provider’s decisions on whether to make these loans will affect very much what the consumer 

can get. 

Senator SHELBY. Thank you. 

Mr. MULLAINATHAN. If I may, I would like to add two comments 

to that, if I—— 

Senator REED. Quickly. 

Mr. MULLAINATHAN. Quickly. One comment is providers are in 

the business already of detecting whether consumers understand or 

not. It would be unfortunate if a consumer took out a loan they 

could not repay. So one of the things providers do is actually assess 

whether the person—a good provider, whether the person understands the payments owed to them. So I do not think this is novel 

business practice. 

Second, I think we have to ask the question who should bear the 

risk of a consumer not understanding. I think part of the risk 

should be borne by the consumer, but some of the risk should be 

borne by the firm. So I think the question is, do we leave the tilt 

of the balance all on the consumer or do we say the firm bears 

some of the risk as well of a consumer not understanding. 

Thank you. 

Senator REED. Thank you very much. 
56 

Senator Merkley has joined us, but he has been very gracious, 

and I just want to make two comments. I think the testimony has 

been excellent. We have several challenges. The two primary ones 

are ensuring there is a comprehensive form of consumer protection, 

which has been proposed in one agency. And then a second issue 

is the authority of that agency to conduct the operations. Those I 

think are the two basic issues. 

I think also, too, I would just point out for the record that there 

is no private right of action included in this proposal. So there 

might be complaints to regulators, but the suggestion that this is 

going to set off a wave of private claims it not included in the legislation. 

Also, I think the presumption at least that I start out with is 

that this agency will be subsuming the existing legislation authority of the Fed, of the different regulators, not have sort of an openended sort of role in crafting any sort of ideas they want. Truth in 

Lending Act, HOEPA, all those things now would shift—that legislation, that authority would shift to the agency. 

So I again want to thank you all, and I particularly want to 

thank Senator Merkley, because I think we are ready to go. Thank 

you, gentlemen. 

The hearing is adjourned. 

[Whereupon, at 12:10 p.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 
57 

PREPARED STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Good morning. Thank you all for being here today. 

This morning, we are taking an important step in our efforts to modernize our 

financial regulatory system. The failure of that system in recent years has left our 

economy in peril and caused real pain for hard-working Americans who did nothing 

wrong. 

The important work we do on this Committee is often complex and painstaking 

in its detail. 

And so, I’d like to start by reminding everyone that the work we do here, the details, matter to real people, the men and women in my home State of Connecticut 

and across America who work hard, play by the rules, and want nothing more than 

to make a better life for their families. 

These families are the foundation of our economy and the reason we’re here in 

Washington working on this historic and critically important legislation. 

That’s why the first piece of the Administration’s comprehensive plan to rebuild 

our regulatory regime and our economy is something I have championed: an independent agency whose job it will be to ensure that American consumers are treated 

fairly and honestly. 

Think about the moments when Americans engage with financial service providers. I’m not talking about big-time investors or financial experts, just ordinary 

working people trying to secure their futures. They’re opening checking accounts, 

taking out loans, building their credit, trying to build a foundation upon which their 

family’s economic security can rest. 

These can be among the most important and stressful moments a family can face. 

Think of a young couple. They’ve carefully saved up for a down payment. It might 

be a modest house—but it’ll be their home. Before they can move into their new 

home, however, they must sign on the dotted line for that first mortgage with its 

pages and pages of complex and confusing disclosures. 

Who’s looking out for them? 

Think of a factory worker who drives 30 miles to and from work every day in an 

old car that’s about to give out. He needs another one to make it through the winter, 

but his wages are stagnant and the family budget is stretched to the max. He’s got 

no choice but to navigate the complicated world of auto loans. 

Who’s looking out for him? 

Think of a single mother whose 17-year-old son just got into his top choice of colleges. She’s overjoyed for him, but worried about how she’ll pay the tuition. Financial aid might not be enough, and she knows that even as her son begins the next 

chapter in a life filled with promise, he might be saddled with debt. 

Who’s looking out for them? 

These moments are the reason we have invested so much time and money to rebuild our financial sector even though some of the very same institutions the taxpayers have propped up are responsible for their own predicaments. These moments 

are the reason we serve on this Committee. 

And these moments are the reason I and many of my colleagues were enraged 

at the spectacular failure of consumer protection that destroyed the economic security of so many American families. 

In my home State of Connecticut and around the country, working men and 

women who did nothing wrong have watched this economy fall through the floor— 

taking with it jobs, homes, life savings, and the cherished promise of the American 

middle class. 

These folks are hurting, they are angry, they are worried. And they are wondering: Is anyone looking out for me? 

Since the very first hearing before this Committee on modernizing our financial 

regulatory structure, I have said that consumer protection must be a top priority. 

Stronger consumer protection could have stopped this crisis before it started. 

And where were the regulators? For 14 years, despite a clear directive from Congress, the Federal Reserve Board took no action to ban abusive home mortgages. 

Gaping holes in the regulatory fabric allowed mortgage brokers and bankers to 

make and sell predatory loans to Wall Street that turned into toxic securities and 

brought our economy to its knees. 

That is why I called for the creation of an independent consumer protection agency whose sole focus is the financial well-being of consumers; an agency whose goal 

is to put an end to unscrupulous lenders and practices that have ripped off far too 

many American families. 

And I’m pleased that the Administration has sent us a bold and thoughtful plan 

for that agency. 
58 

You would think financial services companies would support protections that ensure the financial well-being of their customers—if not out of concern for their own 

bottom-lines, then out of simple common decency. 

But now I read that various industry groups are planning a major PR offensive 

in an effort to kill this consumer protection agency. 

To those who helped create this mess and now plan to flood the airwaves with 

misleading propaganda, I have just two words for you: Get real. 

The forces of the status quo can run as many ‘‘Harry and Louise’’ ads as they 

want. But Harry and Louise are exactly why we’re moving forward on this proposal. 

We can’t have a functioning economy if Harry and Louise can’t safely invest and 

borrow without fear of being cheated by greedy banks and Wall Street firms. And 

we will not have a financial regulatory modernization bill that doesn’t provide the 

protections American families need and deserve. 

An independent consumer protection agency can, and should, be good for business. 

It can, and should, protect the financial well-being of American consumers so that 

businesses can rely on a healthy customer base as they seek to build long-term profitability. 

It can, and should, eliminate the regulatory overlap and bureaucracy that comes 

from the current balkanized system of consumer protection regulation. 

It can, and should, level the playing field by applying a meaningful set of standards, not only to the highly regulated banks, but also to their nonbank competitors 

that have slipped under the regulatory radar screen. 

Financial services companies that want to make an honest living should welcome 

this effort to create a level playing field. 

Indeed, the good lenders are the most disadvantaged when fly-by-night brokers 

and finance companies set up shop down the street. Then we see bad lending pushing out the good. 

No Senator on this Committee wants to stifle product innovation, limit consumer 

choice, or create regulation that is unnecessary or unduly burdensome. 

And I welcome constructive input from those in the financial services sector who 

share our commitment to making sure that American families get a fair shake. 

But I do not view as constructive the opposition to the creation of this agency by 

some industry groups in order to, as Bloomberg News reported, ‘‘protect their fees.’’ 

We all want financial services companies to thrive and succeed, but they will have 

to make their money the old fashioned way—by developing innovative products, 

pricing competitively, providing excellent customer service, and engaging in fair 

competition on the open market. 

The days of profiting from misleading or predatory practices are over. 

The path to recovery of our financial services companies and our economy is based 

on the financial health of American consumers. 

We need a system that rewards products and firms that create wealth for American families, not one that rewards financial engineering that generates profits for 

financial firms by passing on hidden risks to investors and borrowers. 

The fact that the consumer protection agency is the first legislative item the Administration has sent to Congress since it released its white paper on regulatory reform last month tells me that our President’s priorities are in the right order. 

I wish I could say the same for everyone in the industry. 

Nevertheless, with the backing of the Administration, with the support of many 

in the financial community who understand the importance of this reform, and, 

most of all, with a mandate from the American families who count on a fair and 

secure financial system, we will push forward. 

I thank you all for being here today. Now let’s get to work. 

PREPARED STATEMENT OF SENATOR TIM JOHNSON 

Thank you Mr. Chairman for holding today’s hearing. This hearing could be one 

of the most important held this month as the Committee takes up legislation to 

modernize our financial regulatory system. 

The current economic crisis has exposed regulatory gaps that allowed institutions 

to offer products with minimal regulation and oversight. Many of these products 

were not just ill-suited for consumers, but were disastrous for American homeowners. There is a clear need to address the failures of our current system when 

it comes to protecting consumers. We need to find the correct balance between consumer protection, innovation, and sustainable economic growth. 

There is no doubt that the status quo is not acceptable. However, as Congress considers proposals to improve the protection of consumers from unfair, deceptive, and 

predatory practices, we must ask many important questions. We need to know if it 
59 

is the right thing to do to separate consumer protection from functional regulation. 

We need to know if a separate, independent consumer protection agency is better 

than a consumer protection division within an existing regulatory agency. We need 

to know who should be writing rules for consumer products and who should be enforcing those rules. We need to know if national standards or 51 set of rules made 

by each State are better for consumers. Last, while the goal of any consumer protection agency is clearly better protection of consumers, we need to know if it will also 

preserve appropriate access to credit for the consumers it is designed to protect. 

The creation of a new agency is a daunting task under any circumstances; even 

more so in this case, considering the role a consumer protection agency would play 

in our Nation’s economic recovery. It is important we get this right. I look forward 

to hearing from today’s witnesses. 

PREPARED STATEMENT OF MICHAEL S. BARR 

ASSISTANT SECRETARY FOR FINANCIAL INSTITUTIONS, 

DEPARTMENT OF THE TREASURY

JULY 14, 2009 

Thank you, Chairman Dodd and Ranking Member Shelby, for providing me with 

this opportunity to testify about the Administration’s proposal to establish a new, 

strong financial regulatory agency charged with just one job: looking out for consumers across the financial services landscape. 

The need could not be clearer. Today’s consumer protection regime just experienced massive failure. It could not stem a plague of abusive and unaffordable mortgages and exploitative credit cards despite clear warning signs. It cost millions of 

responsible consumers their homes, their savings, and their dignity. And it contributed to the near collapse of our financial system. We did not have just a financial 

crisis; we had a consumer crisis. Americans are still paying the price, and those 

forced into foreclosure or bankruptcy or put through other wrenching dislocations 

will pay for years. 

There are voices saying that the status quo is fine or good enough. That we should 

keep the bank regulators in charge of protecting consumers. That we just need some 

patches. They even claim consumers are better off with the current approach. 

It is not surprising we are hearing these voices. As Secretary Geithner observed 

last week, the President’s proposals would reduce the ability of financial institutions 

to choose their regulator, to shape the content of future regulation, and to continue 

financial practices that were lucrative for a time, but that ultimately proved so damaging. Entrenched interests always resist change. Major reform always brings out 

fear mongering. But responsible financial institutions and providers have nothing 

to fear. 

We all aspire to the same objectives for consumer protection regulation: independence, accountability, effectiveness, and balance. The question is how to achieve 

them. A successful regulatory structure for consumer protection requires mission 

focus, marketwide coverage, and consolidated authority. 

Today’s system has none of these qualities. It fragments jurisdiction and authority 

for consumer protection over many Federal regulators, most of which have higher 

priorities than protecting consumers. Nonbanks avoid Federal supervision; no Federal consumer compliance examiner lands at their doorsteps. Banks can choose the 

least restrictive supervisor among several different banking agencies. Fragmentation of rule writing, supervision, and enforcement leads to finger-pointing in place 

of action and makes actions taken less effective. 

The President’s proposal for one agency for one marketplace with one mission— 

protecting consumers—will resolve these problems. The Consumer Financial Protection Agency will create a level playing field for all providers, regardless of their 

charter or corporate form. It will ensure high and uniform standards across the 

market. It will end profits based on misleading sales pitches and hidden traps, but 

there will be profits made on a level playing field where banks and nonbanks can 

compete on the basis of price and quality. 

If we create one Federal regulator with consolidated authority, we will be able to 

leave behind regulatory arbitrage and interagency finger-pointing. And we will be 

assured of accountability. 

Our proposal ensures, not limits, consumer choice; preserves, not stifles, innovation; strengthens, not weakens, depository institutions; reduces, not increases, regulatory costs; and increases, not reduces, national regulatory uniformity. 
60 

Successful consumer protection regulation requires mission focus, 

marketwide coverage, and consolidated authority 

Consumer protection regulation should be effective and balanced, independent 

and accountable. It can be none of these without three essential qualities: mission 

focus, marketwide coverage, and consolidated authority. 

First, consumer protection regulation requires mission focus. A clear mission is 

the handmaiden of accountability. It is also the basis for the expertise and effectiveness that are essential to maintaining independence. 

Second, the regulator must have marketwide jurisdiction. This ensures consistent 

and high standards for everyone. And it prevents providers from choosing a less restrictive regulator. Carving up markets in artificial, noneconomic ways is a recipe 

for weak and inconsistent consumer protection standards and captured regulators. 

Third, authorities for regulation, supervision, and enforcement must be consolidated. A regulator without the full kit of tools is frequently forced to choose between 

acting without the right tool and not acting at all. Moreover, if different regulators 

have different authorities, each can point the finger at the other instead of acting, 

and the sum of their actions will be less than the parts. The rule writer that does 

not supervise providers lacks information it needs to determine when to write or revise rules, and how best to do so. The supervisor that does not write rules lacks 

a marketwide perspective or adequate incentives to act. Splitting authorities is a 

recipe for inertia, inefficiency, and unaccountability. 

The present system of consumer protection regulation is designed for fail- ure 

The present system of consumer protection regulation is not designed to be independent or accountable, effective or balanced. It is designed to fail. It is simply incapable of earning and keeping the trust of responsible consumers and providers. 

Today’s system does not meet a single one of the requirements I just laid out: mission focus, marketwide coverage, or consolidated authority. It does not even come 

close. The system fragments jurisdiction and authority for consumer protection over 

many Federal regulators, most of which have higher priorities than protecting consumers. Nonbanks avoid Federal supervision and banks can choose the least restrictive supervisor among several different banking agencies. Fragmentation of rule 

writing, supervision, and enforcement among several agencies lead to finger-pointing in place of action and make actions taken less effective. 

This structure is a welcome mat for bad actors and irresponsible practices. Responsible providers are forced to choose between keeping market share and treating consumers fairly. The least common denominator sets the standard, standards inevitably erode, and consumers pay the price. Let me spell out these failures in more 

detail. 

Lack of mission focus: Protecting consumers is not the banking agencies’ priority. 

The primary mission of Federal banking agencies, in law and in practice, is to ensure that banks act prudently so they remain safe and sound. Ensuring that banks 

act transparently and fairly with consumers is not their highest priority. Consumer 

protection regulation and supervision was added to the agencies’ responsibilities relatively late in their histories, and it has never fit snugly in their missions, structures, or agency cultures. 

In fact, consumer protection supervision is generally conducted through the prism 

of bank safety and soundness. The goal of such supervision has too often been to 

protect banks or thrifts from excessive litigation or reputation risk, rather than to 

protect consumers. It was thought that supervising the banks for their effective 

management of ‘‘reputation risk’’ and ‘‘litigation risk’’—aspects of a safe and sound 

institution—would ensure the banks treated their customers fairly. It didn’t. It did 

not prevent our major banks and thrifts from retroactively raising rates on credit 

cards as a matter of policy, or from selling exploding mortgages to unwitting consumers as a business expansion plan. 

It should not have come as a surprise that the agencies’ ‘‘check-the-box’’ approach 

to consumer compliance supervision missed the forest for the trees. Examiners are 

well trained to ascertain whether the annual percentage rate on a loan is calculated 

as prescribed and displayed with a large enough type size. Equally or more important questions—Could this consumer reasonably have understood this complicated 

loan? Is this risky loan remotely suitable for this consumer?—are not a priority for 

an agency whose main job is to limit risks to banks, not consumers. 

Managing risks to the bank does not and cannot protect consumers effectively. 

This approach judges a bank’s conduct toward consumers by its effect on the bank, 

not its effect on consumers. Consumer protection regulation must be based first and 

foremost on a keen awareness of the perspectives and interests of consumers, and 

a strong motivation to understand how products and practices affect them—for good 
61 

and for bad. Agencies charged primarily with safeguarding banks will lack this 

awareness or motivation. 

Fragmented jurisdiction: There are two regulatory regimes for one market, and 

nonbanks escape Federal supervision. There is one market for residential mortgages, 

one market for consumer credit, and one market for payment services—but two different and uncoordinated regimes for these and other consumer financial products 

and services. Banks are subject to an extensive supervisory regime, with lengthy 

and intensive consumer compliance examinations on-site and off-site as well as a 

legal obligation to respond to requests for internal information. 

This regime, when it works, identifies and resolves weaknesses in banks’ consumer protection systems before they harm consumers. The major failures of this 

regime were not for lack of examination hours or paperwork burdens. Failures occurred for lack of asking the right questions and taking the right perspective. These 

failures were rooted in the absence of mission focus. A Federal regime of consumer 

compliance supervision can be very effective in the right hands. 

Nonbank providers, however, are not subject to any Federal supervision. No Federal regulator sends consumer compliance examiners to nonbank providers to review 

their files or interview their salespeople. Nor does any Federal regulator regularly 

collects information from them, except limited mortgage data. 

Nonbank providers are subject only to after-the-fact, targeted investigations and 

enforcement actions by the Federal Trade Commission or State attorneys general. 

Supervision by the States of these providers is limited, uneven, and not necessarily 

coordinated. In general the same Federal consumer protection laws apply to this 

sector as apply to banks, but lack of Federal supervision and inherent limitations 

of the after-the-fact approach of investigations and enforcement resources leave the 

sector much less closely regulated. 

Lack of Federal supervision of nonbanks brings down standards across the board. 

Capital and financing flow to the unsupervised sector in part because it enjoys the 

advantages of weak consumer oversight. Less responsible actors face good odds that 

the FTC and State agencies lack the resources to detect and investigate them. This 

puts enormous pressure on banks, thrifts, and credit unions to lower their standards 

to compete—and on their regulators to let them. 

This is precisely what happened in the mortgage market. Independent mortgage 

companies and brokers grew apace with little oversight; capital and financing flowed 

their way. The independents peddled subprime and exotic mortgages—such as ‘‘option ARMs’’ with exploding payments and rising loan balances—in misleading ways, 

to consumers demonstrably unable to understand or handle their complex terms and 

hidden, costly features. The FTC and the States took enforcement actions, but their 

resources were no match for rapid market growth. And they could not set rules of 

the road for the whole industry, or examine institutions to uncover bad practices 

and prevent their spread. 

To compete over time, banks and thrifts and their affiliates came to offer the 

same risky products as their less regulated competitors and relaxed their standards 

for underwriting and sales. About one half of the subprime originations in 2005 and 

2006—the shoddy originations that set off the wave of foreclosures—were by banks 

and thrifts and their affiliates. Lenders of all types paid their mortgage brokers and 

loan officers more to bring in riskier and higher-priced loans, with predictable results. Bank regulators were slow to recognize these problems, and even slower to 

act. The consequences for homeowners were devastating, and our economy is still 

paying the price. 

Mortgages are the most dramatic example of the harm that regulatory fragmentation causes consumers, but not the only one. Take the case of short-term, small-dollar credit. Payday lenders have grown rapidly outside the banking sector. They are 

not typically subject to State examinations or information collections. On the other 

side of the bank–nonbank divide, banks compete in the short-term, small-dollar 

credit market with cash advances on credit cards and ‘‘overdraft protection’’ programs. 

Each one of these three competing products is disclosed to the consumer differently, and each has been associated with abusive or unfair practices. There is a 

clear need for a consistent approach to regulating short-term, small-dollar credit 

that protects consumers while ensuring their access to responsible credit—but our 

fragmented system cannot deliver. 

The list goes on. A wide range of credit products are offered—from payday loans 

to pawn shops, to auto loans and car title loans, many from large national chains— 

with little supervision or enforcement. Credit unions and community banks with 

straightforward credit products struggle to compete with less scrupulous providers 

who appear to offer a good deal and then pull a switch on the consumer. 
62 

Banks and thrifts can—and do—choose the most permissive supervisor, further depressing standards. Just as capital flows from the bank sector to the nonbank sector 

in search of less regulation, banks and thrifts can freely choose their Federal supervisor on the basis of which one has less restrictive oversight of consumer compliance. We saw this choice in action during the mortgage boom. 

But institutions do not actually have to switch supervisors to bring down standards. The mere fact that institutions have a choice exerts a subtle but pernicious 

drag on standards. It has little to do with who runs the agency. It is simply that 

Government agencies, like all other organizations, respond to incentives. The banking agencies, naturally, seek to retain or even compete to gain ‘‘market share.’’ 

Incomplete and fragmented supervision delays and impedes responses to emerging 

problems. When a consumer protection problem emerges, a new regulation is not 

necessarily the first and best response. It takes many months, even years, to adopt 

a new rule. And rules are often fairly rigid, detailed, and technical, especially if the 

underlying statute allows private suits. Supervisory guidance can be a much faster 

and more flexible, principles-based method to prevent problems. 

But guidance is a much weaker tool than it should be because of incomplete and 

fragmented Federal supervisory authority. There is no Federal supervision over 

nonbanks, and supervision of banks is divided among several agencies. This means 

that any effort to use supervisory guidance requires a massive and prolonged effort 

to bring many different Federal bank regulators, and State regulators of bank and 

nonbank institutions, to agreement on the precise wording of the document. 

It took the Federal banking agencies until June 2007 to reach final consensus on 

supervisory guidance imposing even general standards on the sale and underwriting 

of subprime mortgages—two years after evidence of declining underwriting standards emerged publicly in a regulator’s survey of loan officers. By that time the 

subprime explosion was nearly over. It took additional time for States to adopt parallel guidance for independent mortgage companies. And it took a third year for the 

Federal agencies to settle on a model disclosure of subprime mortgages, by which 

point the subprime market had long ago imploded. 

Fragmented authorities: Rule writing is divided across agencies and largely divorced from enforcement and supervision. Fragmented rule-writing authority produces delays and inefficiencies. Separation of rule writing from supervision and enforcement invites finger-pointing in place of action and reduces the effectiveness of 

actions taken. 

Rule-writing authority is fragmented, producing delays and inefficiencies. While 

authority to write most Federal consumer protection regulations is exclusively in the 

Federal Reserve, other agencies have joint or concurrent authority to implement 

several statutes. It is a recipe for delay and inefficiency. 

For example, HUD and the Federal Reserve each implement a different statute 

governing mortgage disclosure, the Real Estate Settlement Procedure Act and Truth 

in Lending Act, respectively. The result is two forms emphasizing different aspects 

of the same transaction and using different language to describe some of the same 

aspects. It has been 11 years since the agencies recommended an integrated form. 

Even if they succeed in adopting an integrated form, their ability to act jointly to 

keep it up-to-date as the market changes will be limited at best. 

As another example, Congress mandated joint or coordinated rulemaking by six 

Federal agencies under the Fair and Accurate Credit Transactions Act of 2003 to 

improve the accuracy of information reported to credit bureaus and, to establish procedures for consumers to file disputes with information furnishers. Those agencies 

published final rules less than two weeks ago, on July 1, 2009. Clearly consumers 

deserve faster action on issues as important in their financial lives as accuracy of 

credit reports. 

Rule writing is divorced from enforcement and supervision, causing inertia and 

undermining effectiveness. The authority to write regulations implementing the Federal consumer protection statutes is largely divorced from the authority for supervision and enforcement. This deprives the rule writer of critical information about 

the marketplace that is essential to effective and balanced regulation. 

That is one reason we did not have Federal regulations for the subprime market. 

The Federal Reserve has authority to write regulations under the Truth in Lending 

Act and Homeownership and Equity Protection Act to ensure proper disclosure and 

prevent abusive lending. But it cannot examine, obtain information from, or investigate independent mortgage companies or mortgage brokers. So it is not surprising 

that the agency was slow to recognize the need for new subprime regulations. By 

the time it proposed rules, the subprime market had evaporated. 

The separation of rule writing from supervision and enforcement also leads to finger-pointing and inertia. Take the case of credit cards. Some banks found they could 

boost fee and interest income with complex and opaque terms and features that 
63 

most consumers would not notice or understand. These tricks enabled banks to advertise seductively low annual percentage rates and grab market share. Other 

banks found they could not compete if they offered fair credit cards with more transparent pricing. So consumers got retroactive rate hikes, rate hikes without notice, 

and low-rate balance transfer offers that trapped them in high-rate purchase balances. A major culprit, once again, was fragmented regulation: One agency held the pen 

on regulations, another supervised most of the major card issuers. Each looked to 

the other to act, and neither acted until public outrage reached a crescendo. By then 

it was too late for millions of debt-entrapped consumers. 

There is only one solution to these deep structural flaws: One regulator for 

one market with one mission—protecting consumers—and the authority and resources to achieve it 

These deep structural flaws cannot be solved by tinkering with the consumer protection mandates or authorities of our existing agencies. The structure itself is the 

problem. There are too many agencies with consumer protection responsibilities, 

their authorities are too divided, and their primary missions are too distant from 

consumer protection. 

These problems have only one effective solution: a single Federal financial consumer protection agency. We need one agency for one marketplace with one mission—to protect consumers of financial products and services—and the authority to 

achieve that mission. 

A new agency with a focused mission, comprehensive jurisdiction, and broad authorities is the only way to ensure consumers and providers high and consistent 

standards and a level playing field across the whole marketplace without regard to 

the form of a product—or the type of its provider. It is the only way to ensure independence, accountability, effectiveness, and balance in consumer protection regulation. 

The CFPA will have one mission: To protect consumers. Mission focus will not be 

a problem for this agency. It will have no other mission that competes for attention 

or resources. And it will have the resources it needs to fulfill this mission and maintain its independence. The agency will have a stable funding stream in the form of 

appropriations and fee assessments akin to those regulators impose today. 

A mission of protecting consumers requires weighing competing considerations. 

Our proposal explicitly recognizes this complexity. It charges the CFPA with requiring effective disclosures and preventing abusive or unfair practices; and it also 

charges the CFPA with ensuring markets are efficient and innovative and preserving consumers’ access to financial services. A statutory mandate to weigh these 

potentially competing considerations will help ensure the CFPA’s regulations are 

balanced. 

The banking agencies will be able to concentrate their attention on bank safety 

and soundness. The Federal Reserve will be able to focus on monetary policy, financial stability, and holding company supervision without the major distractions it has 

experienced because it holds the pen on most major consumer protection regulations. 

The CFPA will have jurisdiction over the entire market. Our proposal for comprehensive jurisdiction will ensure accountability. The CFPA will not have the luxury of pointing the finger at someone else. If a problem arises in the nonbank sector, 

the agency will be as accountable as it will be for problems in the banking sector. 

Comprehensive jurisdiction will also make regulatory arbitrage a thing of the 

past. Providers will not have a choice of regulators. So, by definition, they will not 

be able to choose a less restrictive regulator. The CFPA will not have to fear losing 

‘‘market share’’ because our legislation gives it authority over the whole market. 

Ending arbitrage will prevent the vicious cycles that weaken standards across the 

market. 

Comprehensive jurisdiction will protect consumers no matter with whom they do 

business, and level the playing field for all institutions and providers. For the first 

time, a Federal agency would apply to nonbank providers the tools of supervision 

that regulators now apply to banks—including setting compliance standards, conducting compliance examinations, reviewing files, obtaining data, issuing supervisory guidance and entering into consent decrees or formal orders. With these tools, 

the Agency would be able to identify problems before they spread, stop them before 

they cause serious injury, and relieve pressures on responsible providers to lower 

their standards. 

The CFPA’s marketwide perspective and authority will help it work with the 

States to target Federal and State examination resources to nonbank providers 

based on risks to consumers. The CFPA can set and enforce national standards and 
64 

supplement State efforts with its own examiners and analytics. The agency will be 

able to use efficient supervisory techniques in the nonbank sector such as risk-based 

examinations. The CFPA will provide leadership to the States, improve information 

sharing, and leverage State resources. The FTC will continue to have full authority 

to investigate and stop financial frauds. 

The CFPA will have the full range of authorities: Rule writing, supervision, and 

enforcement. CFPA’s regulations will be based on a deep understanding of markets, 

providers, and products gained from the power to examine and collect information 

from the full range of bank and nonbank financial service providers. Combining 

rule-writing authorities with supervision and enforcement authorities in one agency 

will ensure faster and more effective rules. 

Where speed and flexibility are at a high premium, the CFPA will be able to exploit the full potential of supervisory guidance to address emerging concerns. Yearslong delays to issue guidance because of interagency wrangling will be a thing of 

the past. 

For example, the CFPA will both implement the new Credit CARD Act of 2009— 

to ban retroactive rate hikes and rate hikes without notice—and supervise the credit 

card banks for compliance. So the agency will have a feedback loop from the examiners of the banks to the staff who write the regulations, allowing staff to determine 

quickly how well the regulations are working in practice and whether they need to 

be tightened or adjusted. It will also be able to improve credit card practices with 

supervisory guidance. 

The CFPA’s rule-writing authority will be comprehensive and robust. The CFPA 

will be able to write rules for all consumer financial services and products and anyone who provides these products. (Its authority will not extend to entities registered 

with the Securities and Exchange Commission when these entities are acting within 

their registered capacities.) The CFPA will assume existing statutory authorities— 

such as the Truth in Lending Act and Equal Credit Opportunity Act. New authorities we propose—to require transparent disclosure, make it easier for consumers to 

choose simple products, and ensure fair terms and conditions and fair dealing—will 

enable the agency to fill gaps as markets change and to provide strong and consistent regulation across all types of consumer financial service providers. 

For example, our proposal gives the CFPA the power to strengthen mortgage regulation by requiring lenders and brokers to clearly disclose major product risks, and 

offer simple, transparent products if they decide to offer exotic, complex products. 

The CFPA will also be able to impose duties on salespeople and mortgage brokers 

to offer appropriate loans, take care with the financial advice they offer, and meet 

a duty of best execution. And it will be able to prevent lenders from paying higher 

commissions to brokers or salespeople (‘‘yield spread premiums’’) for delivering loans 

with higher rates than consumers qualify for. Lenders and consumers would finally 

have an integrated mortgage disclosure. 

Comprehensive standard-setting authority would improve other markets, too. For 

example, the CFPA could adopt consistent regulations for short-term loans—establishing disclosure requirements—whether these loans come in the form of bank 

overdraft protection plans or payday loans or car title loans from nonbank providers. 

The agency also could adopt standards for licensing and monitoring check cashers 

and pawn brokers. 

The new CFPA will bring higher and more consistent standards; stronger, faster 

responses to problems; the end of regulatory arbitrage; a more level playing field 

for all providers; and more efficient regulation. A dedicated consumer protection 

agency will help restore the trust and confidence on which our financial system so 

critically depends. 

The CFPA will ensure, not limit, consumer choice; preserve, not stifle, innovation; strengthen, not weaken, depository institutions; and reduce, not 

increase, regulatory burden; and increase, not reduce, uniformity 

The CFPA will ensure, not limit, consumer choice. The agency will have a mandate to promote simplicity. It will also be charged with preserving efficient and innovative markets and consumer access to financial services and products. The point 

is to make it easier for consumers to choose simpler products while preserving their 

ability to choose more complex products if they better suit consumers’ needs. 

For example, the CFPA will have the authority to require providers that offer exotic, complex, and riskier products to offer at least one standard, simple, less risky 

product. In the mortgage market, a lender or broker that peddles mortgages with 

potentially exploding monthly payments, hidden fees and prepayment penalties, and 

growing loan balances—such as the ‘‘pay option ARMs’’ of recent years—might also 

be required to offer consumers 30-year, fixed-rate mortgages or conventional ARMs 

with straightforward terms. 
65 

The idea is not new. A division between ‘‘traditional’’ and ‘‘nontraditional’’ products is deeply embedded in our mortgage markets. A similar consensus about standard and alternative products may emerge in other product markets. The CFPA’s rigorous study of consumer understanding and product performance may help produce 

a consensus in a given market about the appropriate dividing line. 

This approach, to be sure, may not work in all contexts. Our draft legislation requires the agency to consider its effect on consumer access to financial services or 

products. In some cases the costs may outweigh the benefits—that will be for the 

agency to determine. In other cases, using this approach will obviate the need for 

costlier restrictions on terms and practices that would limit consumer choices. 

The CFPA will preserve, not stifle, innovation. The present regulatory system 

clearly failed to strike the right balance between financial innovation and efficiency, 

on the one hand, and stability and protection, on the other. This imbalance was a 

major cause of the financial crisis. Ensuring that consumers who want simple products can get them, and that consumers who take complex products understand their 

risks, will re-right the scales. 

The benefits of innovation will continue to flow. By helping ensure that significant 

risks are assumed only by knowing and willing consumers, the CFPA will improve 

confidence in innovation and make it sustainable rather than tied to quarterly results. 

The CFPA will strengthen, not weaken, depository institutions. Protecting consumer is not unsafe or unsound for banks. Protecting consumers is good for banks. 

If we had protected consumers from banks that sold risky mortgages like option 

ARMs in misleading ways, then we would have made the banks more sound, not 

less. 

We reject the notion that profits based on unfair practices are sound. The opposite 

appears true. Massive credit card revenue, for example, was not sustainable. It depended on unfair practices that bore the seeds of their own demise. These practices 

led this Congress to pass, and President Obama to sign, tough new restrictions on 

credit cards. 

Examiners in the field will resolve the rare conflict that arises just as they do 

today. For larger banks, CFPA examiners could reside in the bank just as consumer 

compliance examiners often do today, right next door to safety and soundness examiners. They would regularly share information—our draft legislation mandates the 

exchange of examination reports—and coordinate approaches. Moreover, the CFPA 

could work with the banking agencies to ensure bank consumer compliance examiners are trained to understand safety and soundness, as they are today. 

For the even rarer conflict that arises and cannot be resolved on the ground, our 

proposal provides mechanisms for its resolution. A safety and soundness regulator 

will have one of five board seats, ensuring a strong voice within the agency for prudential concerns. In addition, the agency must consult with safety and soundness 

regulators before adopting rules. The Financial Services Oversight Council will 

bring these agencies together on a regular basis. 

The CFPA will reduce, not increase, regulatory costs. The CFPA is not a new layer 

of regulation; it will consolidate existing regulators and authorities. I have already 

discussed the tremendous benefits this will bring to responsible providers by ensuring consistent standards and a level playing field. And consolidating authority does 

not just increase accountability for protecting consumers, it also increases accountability for removing unnecessary regulatory burdens. 

Consolidation will also bring direct efficiencies. The agency would help to simplify 

and reduce regulatory burdens in areas where current authorities overlap or conflict. For instance, the agency would ensure we have a single Federal mortgage disclosure—eliminating confusing and unnecessary paperwork. 

Other efficiencies will flow from the CFPA’s ability to choose the best tool for the 

problem. The agency’s authority to restrict terms and conditions of contracts by regulation—as the Congress did in the Credit CARD Act of 2009—will be just one of 

many authorities. With comprehensive supervisory authority over the whole market, 

the agency will also be able to use more flexible, potentially less costly tools such 

as supervisory guidance. 

The breadth and diversity of the authorities we propose will ensure the agency 

can tailor its solution to the underlying problem with the least cost to consumers 

and institutions. The agency will have ample authority to harness the benefits of 

market discipline by improving the quality of, and access to, information in the marketplace. The CFPA will have authority to ensure that consumers receive relevant 

and concrete information in a timely manner. These measures, and measures that 

make it easier for consumers to choose simpler products, should reduce the need for 

more burdensome regulations. 
66 

Imposing Federal supervisory authority on nonbank institutions for the first time 

will increase compliance requirements on that sector. But this is well worth the benefit of higher and more consistent standards. 

The CFPA will increase, not reduce, national regulatory uniformity. The CFPA’s 

rules and regulations will set a floor for the States, not a ceiling. The contention 

that this will somehow increase variations in State laws is a red herring. Our proposal does not alter the law of the status quo: major Federal consumer protection 

statutes such as the Truth in Lending Act and Homeownership and Equity Protection Act explicitly make Federal regulations a floor, not a ceiling. 

In fact, a strong Federal consumer protection regulator should be able to increase 

regulatory uniformity. States sometimes adopt new financial services laws because 

they perceive a lack of Federal will and leadership. That is exactly what happened 

in the mortgage context, where States filled a vacuum of predatory mortgage law 

with State statutes and regulations. If the States believe an expert, independent 

Federal agency is on the job and working with the States to protect their consumers, 

the States will feel less need to adopt new laws. 

Conclusion 

We need consumer protection regulation that is independent and accountable, effective and balanced. These goals are achievable, but only if we address fundamental flaws in the structure of consumer protection. The only real solution to these 

flaws is creating an agency with a focused consumer protection mission; comprehensive jurisdiction over all financial services providers, both banks and nonbanks; and 

the full range of regulatory, enforcement, and supervisory authorities. 

It is time for a level playing field for financial services competition based on 

strong rules, not based on exploiting consumer confusion. And it is time for an agency that consumers—and their elected representatives—can hold fully accountable. 

The Administration’s legislation fulfills these needs. Thank you for this opportunity 

to discuss our proposal, and I will be happy to answer any questions. 

PREPARED STATEMENT OF RICHARD BLUMENTHAL 

ATTORNEY GENERAL, 

STATE OF CONNECTICUT

JULY 14, 2009 

I appreciate the opportunity to strongly support the Administration’s proposal to 

create a Federal agency dedicated solely to protecting consumer interests in financial products and markets, and preserve and expand State consumer protection authority. 

The new agency—a consumer financial guardian—promises to be a powerful 

watchdog and protector, and a partner of State attorneys general in fighting for our 

citizens. The proposal marks a giant step toward restoring an historic Federal–State 

alliance in combating financial fraud and abuse. This Federal–State partnership 

was riven by excessive resort to Federal preemption—displacing State enforcement 

and replacing Federal–State collegiality and cooperation with relentless conflict. 

The new agency is a necessary and appropriate response to exploding complexity, 

scope, and scale of new financial instruments and markets—and exponentially increasing impact on ordinary citizens. It fills a deeply felt consumer need. Ever more 

slick and sophisticated marketing—often misleading and deceptive—cannot be battled successfully by States alone, or the existing Federal agencies. Creating a new 

agency to fight consumer cons and abuse in alliance with the States, the Federal 

Government can muster more potent and proactive policing and prosecution. 

A new consumer guardian—we need it, and now. New firepower, focus and drive, 

all are vital. The new agency will be more an enforcer, than a regulator. At the Federal level, the new agency would investigate law breaking and enable and assist Department of Justice prosecutions, both civil and criminal. 

Unfortunately, some opponents of this agency have misrepresented its purpose. 

The Financial Consumer Protection Agency will not ‘‘regulate credit.’’ It will not 

make choices for consumers or deny them access to products and services. Instead, 

one of its main missions will be to assure that consumers are informed in clear, layman’s language of the terms and conditions of credit cards, mortgages, and loans. 

The point is to assure that consumers fully understand the financial realities and 

consequences of financial obligations, credit cards, or loans they are considering before they make commitments. 
67 

As even experienced lawyers and consumer protection advocates can attest, anyone attempting to understand their credit card agreements all too frequently faces 

incomprehensible, consuming small print with huge consequences. This agency’s 

purpose is to assure people have good information so they can make good financial 

decisions. Once they use that information and make decisions, they will have to live 

with the consequences. 

Federal Preemption Doctrine Disaster 

For far 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. Connecticut consumers have been 

scammed by fraudulent and unfair marketing schemes and products by companies 

who create or affiliate with national banks solely to avoid State consumer protection 

laws. 

Worse, Federal agencies have been complicit—aiding and abetting lawbreakers by 

supporting preemption claims when States sued to stop these unfair practices and 

recover consumer losses. Federal agencies went AWOL—not only disavowing their 

firepower but disarming State enforcers. They forced States from the battlefield and 

then abandoned it—in countless areas of consumer protection. They enabled and encouraged use of preemption as an impregnable shield to protect mortgage fraud, 

credit card abuses, securities scams, banking failure, and many deceptive and misleading snake oil pitches. 

The financial meltdown was foreseeable—and foreseen—by enforcement authorities who warned of irresponsible and reprehensible retreat and surrender in Federal 

law enforcement. There were warnings—including mine—about a regulatory black 

hole concerning hedge funds, derivatives, credit default swaps, excess leverage devices and other practices. I used this term—regulatory black hole—to characterize 

lack of oversight and scrutiny that enabled self dealing, excessive risk-taking, and 

other abuses that sabotaged the system. 

The national financial meltdown was directly due to massive Federal law enforcement failure—lax or dysfunctional Federal oversight and scrutiny of increasingly arcane, complex, opaque, risky practices and products. Federal law placed all enforcement and regulatory authority in an array of Federal agencies that were inept, underfunded, complacent or complicit. The result was a void or vacuum unprecedented 

since the Great Depression. 

Robust State investigatory and enforcement authority no doubt would have revealed unfair and illegal activities sooner and helped fill the gap left by Federal inaction and inertia. Putting State cops on the consumer protection beat would have 

sent a message—educating the public, deterring wrongdoing, punishing 

lawbreakers. 

Connecticut has been at the forefront of State efforts to protect consumers from 

unfair and fraudulent financial transactions. And two areas illustrate the obstacles 

that we and other States have faced under the current system. 

Tax preparers use the lure of instant cash to entice taxpayers—mostly low income—to borrow money at extremely high interest rates, using their tax refund to 

pay these loans. Recognizing that Connecticut could not regulate such usurious 

lending by national banks, our State sought to cap at 60 percent the interest 

charged on loans made through a tax preparer’ or other facilitator of the loan. The 

statute was challenged by lenders who charge more than 300 percent annual interest rate. As a former United States Attorney, I can tell you that organized crime 

would offer a better deal. The Federal Second Circuit Court of Appeals held that 

Connecticut law could not be applied to national banks or their agents. Pacific Capital v. Connecticut, 542 F.3d 341 (2d Cir. 2008). As a result, consumers continue to 

pay astronomical interest rates for such refund anticipation loans. 

Second, even as gift cards have become increasingly popular in Connecticut and 

the country, consumers often see their cash value erode over time because of hidden 

inactivity fees or short expiration dates. In response, Connecticut prohibited both inactivity fees and expiration dates. Mall operators and retail chain stores avoided 

such consumer protection laws by merely contracting with national banks to issue 

gift cards. The Second Circuit Court of Appeals held that State consumer protection 

laws are preempted because the State measures affect a national bank rule. It ruled 

that Visa gift cards had expiration dates so the State could not prohibit them. 

SPGGC v. Blumenthal, 505 F.3d 183 (2d Cir. 2007). The result is pervasive consumer confusion because some gift cards issued by national banks may expire, but 

others have no such expiration dates. 

Other States have faced similar preemption obstacles to protecting consumers. My 

colleague in Minnesota began investigating Capital One’s credit card marketing 
68 

practices under the State’s consumer protection laws. Capital One transferred all its 

credit card operations into a national bank, successfully halting the investigation, 

because Minnesota’s consumer protection laws were preempted. Similarly, an Illinois investigation into Wells Fargo Financial’s steering of minorities into high cost 

loans was stymied by Wells Fargo’s transfer of those assets into a national bank. 

A Historic New Alliance 

I speak for other States in my enthusiastic and energetic support for section 1041 

provisions of the Consumer Financial Protection Agency Act of 2009 that establish 

Federal law as a minimum standard for consumer protection, allowing States to 

enact laws and regulations ‘‘if the protection such statute, regulation, order, or interpretation affords consumers is greater than the protection provided under this 

title, as determined by the [Consumer Financial Protection] agency.’’ In addition, 

the proposal amends various Federal preemption statutes to unshackle the States, 

allowing enactment of consumer protections at the State level that may become a 

model for Federal, nationwide standards. 

This law exemplifies federalism at its best—State and Federal authorities working in common rather than conflict, and making the States laboratories for new, creative measures. Many of our most prominent Federal consumer protection laws were 

first adopted by States. 

A Federal Consumer Financial Super Cop 

I also support the establishment of the Consumer Financial Protection Agency, a 

Federal office dedicated solely to protection of ordinary citizens using the Federal 

savings and payment market. 

Currently, consumer credit products are regulated by at least seven different 

agencies whose primary focus is the proper operation of markets and the safety and 

soundness of institutions. While consumer protection is within their jurisdiction, it 

is far from their major focus. Nor does any existing agency dedicate significant or 

sufficient resources to this responsibility. 

They pay scant attention to consumer complaints, often reviewing such problems 

from an industry perspective rather than the consumer’s. Indeed, these agencies 

face divided loyalties or even conflicts of interest—when high interest rates and astronomical credit card fees, for example, may be good for the bottom line, but bad 

for consumers. Given the understandable emphasis on safety and soundness, consumer protection not surprisingly receives Short shrift. 

The Consumer Financial Protection Agency would have broad authority to promulgate and enforce rules to protect consumers from unfair and deceptive practices 

and to ensure they understand terms and conditions. These regulations will encourage, not stifle, the development of financial products that well serve consumers. A 

vibrant, competitive market that is fair and honest is essential to consumers’ and 

the Financial Industry’s financial interests. Clear rules and consistent enforcement 

are vital prerequisites for innovation and wealth creation. To mix metaphors, what’s 

needed is a more level playing field—essentially rational rules of the roads. When 

intersections become busy, they need to upgrade from stop signs to traffic lights to 

avoid car crashes, collisions and pile ups. As the proposal recognizes, joint proactive 

consumer protection enforcement by both Federal and State agencies—without preemption or exclusive jurisdiction—best serves consumer interests, especially as financial products and markets grow in complexity and number. 

State agencies—including State attorneys general and other consumer protection 

agencies—are often the first line of defense for consumers. Consumers are usually 

far more comfortable contacting their State officials rather than nameless faraway 

Federal agencies. I have seen firsthand the frustration of consumers when we have 

had to tell them that my office is legally powerless to help because of Federal preemption of State enforcement authority. 

Under the proposal, States may enact and enforce consumer protection laws that 

are consistent with Federal law. In addition, State attorneys general may enforce 

Federal rules and regulations in this area provided that the Federal Consumer Financial Protection Agency is notified of such enforcement action and has the opportunity to join or assume responsibility. 

This notification process seeks Federal–State coordination without necessarily allocating primacy to the Federal agency. State Attorneys General welcome the Federal Government as an ally rather than an adversary. Joint efforts can involve far 

more effective and more efficient use of our resources. 

Joint State and Federal enforcement efforts are neither new nor novel. States regularly work with each other and the Federal Government in recovering hundreds 

of millions of dollars in Medicaid and health care fraud, enforcing our respective 

antitrust laws against anticompetitive mergers and acquisitions or abuse of market 
69 

power, and applying consumer protections laws against deceptive or misleading advertisements. I served for several years as chair of the National Association of Attorneys General Antitrust Executive Committee which included regular meetings with 

the heads of the Department of Justice Antitrust Division and the Federal Trade 

Commission. Successful collaborations once were common—against Microsoft for example—especially when the Federal Government was an active antitrust enforcer. 

There are plenty of successful models of joint action involving, for example, the Federal Trade Commission and the United States Department of Justice’s Antitrust Division. 

Separating regulatory authority from consumer protection authority also has models at the State level. In Connecticut, for example, the Department of Banking regulates the banking industry while the Department of Consumer Protection through 

the Office of the Attorney General has broad consumer fraud enforcement authority. 

That authority extends to the banking industry. The Connecticut Supreme Court 

specifically applied our unfair and deceptive trade practices act to the banking industry. Mead v. Burns, 199 Conn. 651 (1986). 

I appreciate the industry’s concern about two sets of agencies with enforcement 

authority. The industry justifiably wants predictability of regulation to properly 

plan product development and promotion. This bill will do so by creating a regulatory floor that applies nationwide. Most valuable would be predictability of vigilant and vigorous enforcement. The message must be that a revived and reinvigorated Federal–State alliance will punish any company that profits from illegal 

anticonsumer devices or unfair and deceptive practices. The predictable outcome is 

that anyone who cons or scams consumers in financial products will be prosecuted. 

Part of the genius of our Federal system is that it creates separate distinct sets 

of authority in Federal and State governments. Individual State experiments in 

solving problems and lawmaking can be models for Federal statutes as well as other 

States. Our United States Constitution assures that States cannot adopt rules inconsistent or conflicting with Federal authority. 

Finally, I urge the Committee to consider authorizing private rights of action 

against consumer fraud. Most State consumer protection statutes permit such private legal actions enabling victims to bring legal actions and recover damages, 

sometimes when State authorities may not do so. These initiatives supplement and 

strengthen State consumer protection enforcement efforts. They could similarly enhance and enlarge Federal enforcement efforts. 

I appreciate and applaud your and the Administration’s dedication to protecting 

consumers in financial transactions. I commend this Committee’s support of these 

efforts and offer my continuing assistance—along with other State attorneys general. 

Thank you. 

PREPARED STATEMENT OF EDWARD L. YINGLING 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, 

AMERICAN BANKERS ASSOCIATION

JULY 14, 2009 

Chairman Dodd, Ranking Member Shelby, and Members of the Committee, my 

name is Edward L. Yingling. I am President and CEO of the American Bankers Association (ABA). The ABA brings together banks of all sizes and charters into one 

association. ABA works to enhance the competitiveness of the Nation’s banking industry and strengthen America’s economy and communities. Its members—the majority of which are banks with less than $125 million in assets—represent over 95 

percent of the industry’s $13.5 trillion in assets and employ over 2 million men and 

women. 

ABA appreciates how this Committee has responded to the financial crisis in a 

thoughtful, deliberative, and thorough manner. Changes are certainly needed, but 

the pros and cons and unintended consequences must be carefully evaluated before 

dramatic changes—affecting the entire structure of financial regulation—are enacted. That is why hearings like this one today are so important. 

I am pleased to present the ABA’s views today on the proposal to create a new 

consumer regulatory body for financial services that would operate separate and 

apart from any future prudential regulatory structure. We believe that a separate 

consumer regulator should not be enacted, and, in fact, is in direct contradiction 

with an integrated, comprehensive approach that recognizes the reality that consumer protection and safety and soundness are inextricably bound. Consumer pro-
70 

tection is not just about the financial product, it is also about the financial integrity 

of the company offering the product. Simply put, it is a mistake to separate the regulation of the banking business from the regulation of banking products. 

Financial integrity is at the core of good customer service. Banks can only operate 

safely and soundly if they are treating customers well. Banks are in the relationship 

business, and have an expectation to serve the same customers for years to come. 

In fact, 73 percent of banks (6,013) have been in existence for more than a quartercentury, 62 percent (5,090) more than half-century, and 31 percent (2,557) for more 

than a century. These banks could not have been successful for so many years if 

they did not pay close attention to how they serve customers. Satisfied customers 

are the cornerstone of the successful bank franchise. The proposal for a new consumer regulator, rather than rewarding the good banks that had nothing to do with 

the current problems, will add an extensive layer of new regulation that will take 

resources that could be devoted to serving consumers and make it more difficult for 

small community banks to compete. 

The banking industry fully supports effective consumer protection. We believe 

that Americans are best served by a financially sound banking industry that safeguards customer deposits, lends those deposits responsibly and processes payments 

efficiently. Traditional FDIC-insured banks—more than any other financial institution class—are dedicated to delivering consumer financial services right the first 

time and have the compliance programs and top-down culture to prove it. Certainly, 

there were deficiencies under the existing regulatory structure. Creating a new consumer regulatory agency, however, is not the solution to these problems. It would 

simply complicate our existing financial regulatory structure by adding another extensive layer of regulation. There is no shortage of laws designed to protect consumers. Making improvements to enhance consumer protection under the existing 

legal and regulatory structures—particularly aimed at filling the gaps of regulation 

and supervision of nonbank financial providers—is likely to be more successful, 

more quickly, than a separate consumer regulator. 

Certainly the Members of this Committee should look at this consumer agency 

proposal from the point of view of consumers, who are paramount. Later in this testimony, we will discuss how the proposal in our opinion is not the best approach 

for consumers and will actually undermine consumer choice, competition, and the 

availability of credit. However, we would also ask you to look at this issue from another point of view. While all banks would be negatively impacted, think of your 

local community banks, and credit unions also for that matter. These banks never 

made one subprime loan, and they have the trust and support of their local consumers. As Members of this Committee have previously noted, these community 

bankers are already overwhelmed with regulatory costs that are slowly but surely 

strangling them. 

Yet a few weeks ago, these community banks found the Administration proposing 

a potentially massive new regulatory burden that will fall disproportionately on 

them. The largest banks, which will certainly bear a significant burden as well, do 

have economies of scale. Nonbanks, the State regulated or unregulated financial entities that include those who are most responsible for the crisis, are covered, at least 

in part, by the new agency—and that is positive. However, based on history, their 

regulatory and enforcement burden is likely to be much less. In fact, according to 

the Administration proposal, the new agency will rely first on State regulation and 

enforcement for these entities, and yet we all know that the budgets for such State 

regulation and enforcement are completely inadequate to do the job. Community 

banks, on the other hand, are likely to have greatly increased fees to fund a system 

that falls disproportionately and unfairly on them. 

In both the Administration’s white paper and the legislative language submitted 

by Treasury, it is now clear that the new agency would have vast and unprecedented authority to regulate in detail all bank consumer products and services. The 

agency is even empowered, in fact encouraged, to create its own standardized products and services—whatever it decides is ‘‘plain vanilla’’—and may compel banks to 

offer them. Even further, the agency is given the power, and basically urged, to give 

the products and services it designs regulatory preference over the bank’s own products and services. The agency is even encouraged to require a Statement by the consumer acknowledging that the consumer affirmatively was offered and turned down 

the Government’s product first. 

The proposal goes beyond simplifying disclosures—which is needed—to require 

that all bank communication with consumers be ‘‘reasonable.’’ This is a term so 

vague that no banker would know what to do with it. But not to worry—the proposal offers to allow thousands of banks, and thousands of nonbanks, to preclear all 

communications with the agency. 
71 

All existing consumer laws, carefully crafted over the years by Congress, are 

transferred to the new agency, but they are rendered nothing more than floors. The 

new agency can do almost anything else it wants. CRA enforcement is apparently 

to be increased on these community banks, although they already strongly serve 

their communities. And that is not to mention the inherent conflicts, discussed 

below, that will occur between the prudential regulator and the consumer regulator, 

with the bank caught in the middle. All this cost, regulation, conflicting requirements, and uncertainty would be placed on community banks that in no way contributed to the financial crisis. 

We share the vision that greater transparency, simplicity, accountability, fairness, 

and access can be achieved by establishing common standards uniformly applied 

that reflect how consumers make their choices among innovative products and services. But this vision cannot be achieved by ignoring the experience of our recent financial crisis and failing to directly address those deficiencies that led to it. It is 

now widely understood that the current economic situation originated primarily in 

the unregulated or less regulated nonbank sector. For example, the Treasury’s plan 

noted that 94 percent of high cost mortgages were made outside the traditional 

banking system. Many of these nonbank providers had no interest in building a 

long-term relationship with customers but, rather, were only interested in profiting 

from a quick transaction without regard to whether the mortgage loan or other financial product ultimately performed as promised. Thus, an important lesson 

learned is that certain unsupervised nonbank financial service providers and their 

less regulated financiers—the so-called ‘‘shadow banking system’’—undermined the 

entire system by abusing consumer and investor trust. 

A second lesson learned is that consumer protection and financial system safety 

and soundness are two sides of the same coin. Poor underwriting, and in some cases 

fraudulent underwriting, by mortgage brokers, which failed to consider the individual’s ability to repay, set in motion an avalanche of loans that were destined to default. Good underwriting is the essence of both good consumer protection and good 

safety and soundness regulation. Loans that are based on the ability to repay protect the institution from losses on the loans and protect consumers from taking on 

more than they can handle. Thus, what is likely to protect both the lender and the 

customer cannot be, nor should be, separated. 

These lessons lead to two fundamental building blocks of any reform of consumer 

protection oversight. 

• Uniform regulation and uniform supervision of consumer protection performance should be applied to nonbanks as rigorously as it has been applied to the 

banking industry. 

• Regulatory policymakers for consumer protection should not be divorced from 

responsibility for financial institution safety and soundness. 

Separating the safety of the institution from the safety of its products means each 

agency has only half the story. Without building upon these keystones, the hope for 

better transparency, simplicity, accountability, fairness, and access will not be realized, and we will have missed the opportunity to build a strong consumer protection 

infrastructure across the financial services industry. 

Unfortunately, the Consumer Financial Products Agency (CFPA) proposal, in our 

opinion, contains a number of very serious flaws. The proposal: 

• Severs the connection between consumer protection and safety and soundness— 

forcing each side to attempt to work independently and freeing each to contradict the valid goals of the other—to the detriment of consumer choice and 

safety and soundness. 

• Subjects banks to added enforcement, but leaves the ‘‘first line of defense’’ for 

the supervision and examination of nonbanks to the States, which suffer from 

a lack of resources for meaningful enforcement. This is where the failure of 

nonbank regulation was most severe under the current system. Once again 

there would be perverse incentives for financial products to flow out of the 

closely examined banking sector to those who will skirt the meaning, and even 

the language, of regulations. 

• Excludes competitor financial products from its reach—including securities, 

money market funds, and insurance—thus further belying the promise of uniform or systemic oversight and creating incentives for development of products 

outside the scope of the CFPA that may be risky for consumers. 

• Renders all the consumer laws created by Congress largely moot, as the very 

broad power of the CFPA would authorize the agency to go well beyond such 

laws in every instance. 
72 

• Imposes Government designed one-size-fits-all products—so-called ‘‘plain-vanilla’’ products—and places them in a preferred position over products that are 

designed by the private sector for an increasingly diverse customer base. These 

Government products would be given regulatory preference over the products 

designed by the individual banks, and consumers could even be required to sign 

a notice that they have first turned down the Government’s product. 

• Requires communications with consumers to be ‘‘reasonable,’’ an incredibly 

vague and unworkable standard that will cause tremendous uncertainty for 

years to come. 

• Basically ends uniform national standards, quickly creating a patchwork of expensive and contradictory rules that will create uncertainty, increase consumer 

costs, and lead to constant litigation. 

• Saddles providers, and, indirectly, consumers with a new regime of fees to fund 

yet another agency. 

• Will inhibit innovation and competition, limit consumer choices, and lessen the 

availability of credit. 

To be successful in the regulation, examination, and enforcement of nonbanks, the 

agency will have to be very large and have a significant budget. We believe a better 

course exists. ABA offers to work with the Administration and the Congress to 

achieve meaningful regulatory reform to improve consumer protection and preserve 

financial system integrity. As the crisis has proven, a strong banking industry is indispensable to a strong economy; and a sound banking system is the greatest single 

protection of consumer access to financial services fairly delivered. Traditional banking is back in style, but that does not mean improvements cannot be made. We 

pledge to work with this Committee to find the best solutions to assure that consumers have the protection they deserve for any financial product. 

I would like to further discuss several points today: 

• Consumer regulation should not be separated from safety and soundness regulation. 

• The key focus of change should be on closing existing gaps in supervisory oversight across the financial institution marketplace, not on adding yet another 

vast layer. 

• The proposal would give the agency unprecedented authority to control the 

products and services offered by banks and make all current consumer laws 

mere floors. 

• The undermining of uniform national standards will increase costs and cause 

litigation and tremendous uncertainty. 

• The question of how to pay for this new agency was left very vague and raises 

significant issues. 

• The proposal will inhibit innovation and competition, limit consumer choices, 

and dramatically lessen the availability of credit. 

• The regulatory authority to address consumer concerns is already there for 

highly regulated banks, particularly with the new focus on unfair and deceptive 

practices. However, improvements can be made, and ABA will work with the 

Committee to make such improvements. 

I will address each of these points in turn. 

Consumer Regulation Should Not Be Separated From Safety and Soundness Regulation 

Consumer regulation and safety and soundness regulation are two sides of the 

same coin. Neither one can be separated from the other without negative consequences; nor should they be separated. An integrated and comprehensive regulatory approach is the best method to protect consumers and protect the safety and 

soundness of the financial institution. While certainly improvements can be made, 

the current regulatory structure applied to banks provides an appropriate framework for effective regulation for both consumer protection and bank safety and 

soundness. As I note throughout this testimony, that same framework was virtually 

nonexistent for nonbank providers of financial products. 

FDIC Chairman Sheila Bair, testifying recently before Congress, summarized the 

synergies between both these elements: 

The current bank regulation and supervision structure allows the banking 

agencies to take a comprehensive view of financial institutions from both 

a consumer protection and safety and soundness perspective. Banking agencies’ assessments of risks to consumers are closely linked with and informed 
73 

1 Bair, Sheila C., ‘‘Modernizing Bank Supervision and Regulation’’, testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, March 19, 2009. 

by a broader understanding of other risks in financial institutions. Conversely, assessments of other risks, including safety and soundness, benefit 

from knowledge of basic principles, trends, and emerging issues related to 

consumer protection. Separating consumer protection regulation and supervision into different organizations would reduce information that is necessary for both entities to effectively perform their functions. Separating 

consumer protection from safety and soundness would result in similar 

problems. 1

Attempts to separate out consumer protection from safety and soundness will lead 

to conflicts, duplication and inconsistent rules, which will likely result in fingerpointing as inevitable problems arise. What are banks to do when the consumer and 

safety and soundness regulators disagree, as they inevitably will? 

Almost every consumer bank product or service has both consumer issues and 

safety and soundness issues that need to be balanced and resolved. It is important 

to remember that one person’s deposit funds another person’s loan. It makes little 

sense to regulate the terms, conditions and prices of deposit products or loan products separately from the business aspects of a bank’s fundamental process—turning 

deposits into loans. 

As I mentioned at the outset, the very nature and application of good underwriting standards is by definition both a consumer protection and a safety and 

soundness issue. A second simple example is check hold periods. Customers would 

like the shortest possible holds, but this desire needs to be balanced with complex 

operational issues in check clearing, and with the threat of fraud, which costs 

banks—and ultimately consumers in the form of increased costs that are passed 

on—billions of dollars. 

Similarly, the Electronic Funds Transfer Act contains numerous important consumer protections, developed and modified over the years based on experience, new 

technologies, and new types of fraud. Separating the consumer consideration from 

the safety and soundness, antifraud, and systems considerations would certainly 

seem unworkable. 

Banks also have extensive duties under ‘‘know your customer’’ regulations designed to fight money laundering and terrorism. These critical regulations must be 

coordinated with consumer and safety and soundness regulation. A simple example 

is in the account opening process, which is subject to extensive consumer and ‘‘know 

your customer’’ regulations. It would be unworkable to separate these as well. 

And what about employee training? Banks spend billions of dollars training employees to comply with the heavy regulations to which banks are subjected. Examiners examine banks for their training programs. Front-line employees must have 

training in numerous consumer, safety and soundness, and antimoney laundering 

regulations. ABA offers dozens of courses in compliance for front-line employees. 

How would such training be effectively coordinated between agencies with differing 

views and objectives? Is the new agency going to examine banks and nonbanks 

equally for compliance training? It cannot be left to the States, where there is little 

precedent for extensive examining for compliance training outside banking. 

Rather than take to heart the lesson of the inseparability of safety and soundness 

and consumer protection, the Administration’s proposal creates a different form of 

regulatory fragmentation along the fault lines of the jurisdiction of a new bureaucracy. A look at the proposal’s enumeration of existing rule-making authorities to be 

transferred—mostly from the Federal Reserve Board—to the CFPA reveals an assortment of likely interagency conflicts that will generate future regulatory gaps 

rather than bridge the current ones. 

For instance, consumer privacy is placed in the CFPA, but identity theft protection is left out. The Electronic Funds Transfer Act is assigned to CFPA, but the 

rules for clearing electronic check images that make funds available for customers 

to access with their debit cards remains with the Federal Reserve. Truth in Lending 

Act rule-making over mortgages is assigned to the CFPA, but flood insurance coverage (FDPA) and private mortgage insurance (HOPA) laws protecting consumers 

who obtain mortgages remain with the banking agencies. These and other anomalies in the Administration proposal will set true consumer protection reform on the 

back-burner as countless hours and dollars are wasted grappling with the regulatory morass that will result from this ill-advised structural reform. The 30-year 

investment in coordinated supervision (FFIEC) will be washed away and replaced 

by interagency conflicts that are hardwired in the new bureaucracy without a means 

to resolve them. 
74 

2 Before the recent crisis, a coalition of 46 State Attorneys General recognized that based on 

consumer complaints received, as well as investigations and enforcement actions undertaken by 

them, predatory lending abuses were largely confined to the subprime mortgage lending market 

and to nondepository institutions. Almost all of the leading subprime lenders were mortgage 

companies and finance companies, not banks or direct bank subsidiaries. We stress the past 

tense, because their lack of financial robustness assured that they would not be around to answer for their consumer protection misdeeds. 3 Bank regulators are just as concerned about consumer protection as are law enforcement 

authorities, but the bank regulators are better able to achieve their objectives through an enormous array of enforcement and supervisory options that allow them to meet their broader mandate for law enforcement as well as financial stability. These range from the behind-the-scenes 

citation in an exam report as a matter requiring attention to the public actions of issuing a 

cease-and-desist or civil money penalty order or even closing a bank and imposing lifetime bans 

from participating in banking activities. Bank examiners can direct a bank to stop taking an 

action or to take some different action. These tools are most appropriately and effectively exercised by one regulator that is focused on achieving the balance described above. 4The FFIEC, represented by the Federal Reserve, OCC, FDIC, OTS, and NCUA, is charged 

with prescribing ‘‘uniform principles and standards for the Federal examination of financial institutions’’ designed to ‘‘promote consistency in such examination and to insure progressive and 

vigilant supervision.’’ 

Finally, we are very concerned about conflicts over CRA. The banking industry 

has worked hard in serving its communities and in complying with CRA. We agree 

that CRA has not led to material safety and soundness concerns, and that bank 

CRA lending was prudent and safe for consumers. That is not to say that there is 

no debate about the correct balance between outreach and sound lending. However, 

that debate—that tension—is resolved now in a straightforward manner because the 

same agency is in charge of CRA and safety and soundness. To separate the two 

is a recipe for conflicting regulatory demands, with the bank caught in the middle. 

In the above examples and in many other areas, two different regulators—one focused on consumers and another focused on safety and soundness—will almost certainly come up with two different and conflicting rules and answers that, when 

added together, only create new costs, overlap and duplication, as well as an untenable situation for the financial institution. 

The Key Focus of Change Should Be on Closing Existing Gaps in Regulation, Not on Adding Yet Another Bureaucratic Layer 

The biggest failures of the current regulatory system, including consumer protection failures, have not been in the regulated banking system, but in the unregulated 

or weakly regulated sectors. 2 As Members of Congress from both parties have noted, 

to the extent that the system did work, it is because of prudential regulation and 

oversight of banking firms. While improvements within the banking regulatory process can certainly be made, the most pressing need is to close the regulatory gaps 

outside the banking industry through better supervision and regulation—both on 

the consumer protection and safety and soundness sides of the coin. 

Take the case of independent mortgage brokers and other nonbank originators. 

Again, as the Administration’s own proposal States, 94 percent of the high cost 

mortgages occurred outside the regulated banking sector. And it is likely that an 

even higher percent of the most abusive loans were made outside our sector. In contrast to banks, these nonbank firms operate in a much less regulated environment, 

generally without regulatory examination of their conduct, without strong capital 

provisions, and with different reputational concerns. They have not been subjected 

to the breadth of consumer protection laws and regulations with which banks must 

comply. Equally important, a supervisory system does not exist to examine them for 

compliance even with the comparatively few laws that do apply to them. In addition, 

independent brokers typically do not have long-term business relationships with 

their customers. Instead, they originate a loan, sell the loan to a third party, and 

collect a fee. This results in a very different set of incentives and can and does work 

at cross-purposes with safe and sound lending practices. Proposals are also being 

offered with respect to credit derivatives, hedge funds, and others, and the ABA supports closing these regulatory gaps. 

In stark contrast to the weakness of oversight or examination of consumer compliance issues for most other financial service providers, bank regulators have an extraordinarily broad array of tools at their disposal to assure both consumer protection and safety and soundness. Banks are regularly examined for compliance with 

consumer regulations, and regulators devote significant resources to supervision and 

training in consumer compliance issues. 3 These enforcement and supervisory options are coordinated through the Federal Financial Institutions Examination Council (FFIEC), 4 which sets standards for both consumer and safety and soundness ex-
75 

5 In addition, the FFIEC agencies have set forth common standards for determining a bank’s 

rating for consumer compliance performance. This rating stands as an identifiable grade, separate and apart from the CAMEL rating, so that boards of directors and regulators can hold management directly accountable for the quality of their institution’s consumer compliance management programs and performance. Moreover, the FFIEC’s agency members have endorsed topdown consumer compliance programs expected of banks that contain system controls, monitoring 

of performance, self-evaluation, accountability to senior management and the board, self-correcting processes, and staff training. 

The breadth of this supervisory authority is extensive. Consumer compliance management 

plays a role in every operational aspect where a bank comes into contact with customers—from 

the marketing of products, through account opening and credit Administration, to handling personal information and monitoring for financial crime. Further, banks hold their employees accountable for meeting their obligations. Every bank invests heavily in consumer compliance with 

dedicated compliance professionals who take great pride and apply tremendous effort to assure 

that consumers are being treated fairly. 

amination. 5 The need is for the same banklike structure, supervision, and examination to be applied to nonbank financial service providers. 

There obviously have been consumer concerns with respect to banks—we certainly 

know of this Committee’s concerns with credit card practices—but if the great majority of abuses occurred outside the banking industry (with toxic subprime mortgages, for example), why would Congress create a new regulatory agency that will 

end up focusing its resources predominately on banks and not nonbanks? We see 

that the intention is to have regulations that cover most providers. However, regulation without enforcement can be worse than no regulation in that it gives rogue institutions a veneer of legitimacy. All evidence tells us that the States will not have 

the resources to enforce all these regulations. We have, frankly, little confidence 

that the CFPA will apply equal examination and enforcement on nonbank lenders 

and others, or that it will have the resources to do so. This concern is exacerbated 

by the incredibly vague funding provisions in the legislative language. How big is 

this agency to be? If it is not large, it cannot conceivably enforce its regulations on 

the thousands of institutions it is supposed to regulate. If it is big, how is it to be 

paid for? 

The Proposal Gives the CFPA Unprecedented Authority To Control the 

Products and Services Offered by Banks 

As Stated earlier, the proposal calls for an unprecedented delegation of legislative 

authority to the agency to control the way consumer products and services are designed, developed, marketed, delivered, and priced by banks and other financial 

service providers. In fact, the agency is encouraged to design products and services, 

mandate that banks offer them, regulate the products not designed by the agency 

more heavily than the Government product, and require consumers to sign a document that they do not want the Government-designed product. The agency can even 

heavily regulate compensation systems under very open-ended authority. All communications to consumers about products and services would have to be ‘‘reasonable,’’ a vague and unworkable standard if there ever was one. This would appear 

to give the agency an incredible amount of control over banks’ and others’ products 

without any real legislated standards. Simply put, this would appear to be the most 

powerful agency ever created in that it has almost unlimited power to regulate and 

even mandate the products offered by the regulated. 

It also would very much undermine incentives for innovation and better customer 

choice. Certainly banks and nonbanks would be less likely to create new products 

or consumer enhancements. Any deviations from the Government-designed product 

would be subject to additional regulation and clearances. Coupled with the prohibition that it is unlawful ‘‘to advertise, market, offer, [or] sell . . . a financial product 

or service that is not in conformity with the [Act],’’ the Administration’s proposed 

new structure places banks and nonbanks alike at extreme risk when innovating 

and will chill efforts to respond to consumer demand for beneficial products and 

services. 

Proponents of the agency have regularly used the catch-phrase that we regulate 

toasters to keep them from blowing up (through the Consumer Product Safety Commission), but we don’t regulate mortgages that can blow up consumers’ finances. 

There are a number of problems with this analogy, including that mortgages are 

regulated and that, unlike a toaster with electrical problems, a financial product 

may often be a problem or not depending on to whom and how it is offered. More 

fundamentally, unlike the proposed CFPA, the Consumer Product Safety Commission is not set up to design a toaster; mandate that anyone selling toasters offer 

the Government toaster; and furthermore, to adjust regulation, disclosures, and liability to put the Government toaster in a preferred position. Of course such a Government toaster could not meet the multitude of preferences of single people on the 
76 

run, small families, large families, those with small kitchens, those with large kitchens, those that just want toast, those that just want toast and English muffins, and 

those that want a multifunctional toaster oven, etc. And, of course, such a Government plain-vanilla toaster with such built in advantages would discourage innovation in the creation of new options for consumers and competition in the offering 

of alternatives. 

In many cases, the Government financial product might not fit with the institution’s business plan. Niche banks, which serve important constituencies, such as 

small business owners or low income communities, would be required to offer products that simply do not fit. There will even be safety and soundness issues. For example, some banks that maintain all their loans in portfolios do not, and should not, 

hold 30-year fixed ‘‘plain-vanilla’’ mortgages. 

Furthermore, the incredible authority given to the proposed agency means that 

all the consumer laws enacted and modified by Congress over the years, which have 

resulted in hundreds and hundreds of pages of regulations, are to a large degree 

moot. They are mere floors; and, in fact, floors with holes in them. This new agency 

can do pretty much anything it wants in any of the areas specifically covered by 

the laws, and any other area relating to consumer financial products for that matter. In the final analysis, the basic premise of the Administration’s proposal is to 

invite Congress to abdicate its legislative responsibilities to address the ever-evolving financial marketplace and delegate plenary discretion to a seemingly all-knowing and all-powerful agency. 

For example, this Congress just passed an extensive, tough new law on credit 

cards. Combined with the previous law, this creates a comprehensive congressionally crafted set of rules governing cards. Yet the proposed CFPA legislation would 

grant the agency authority to do practically anything it wants in the credit card 

area with respect to terms, delivery, disclosures, compensation and even mandated 

products, as long as it does not do less than the new card law. One wonders why 

Congress undertook such extensive reform of the credit card law if it was going to 

give almost open-ended authority to the CFPA shortly thereafter. 

The Undermining of National Standards Will Increase Costs and Cause Tremendous Litigation and Uncertainty 

The Commerce Clause of the Constitution was designed to allow products and 

services to flow freely across State lines. It is hard to think of an area of our economy where this should be encouraged more than in financial services, where the 

market for products from loans to deposits is national in scope. With changes in 

technology—such as the Internet—and the incredible mobility of our society, the 

free flow of financial services is even more pronounced. Furthermore, the National 

Bank Act, enacted during the Civil War, was created to provide for a national bank 

system that would not be subject, in its basic bank functions, to State laws. This 

national banking system, as part of the dual banking system, has served us well. 

However, a national system cannot function effectively if all national bank consumer 

products are subject to 50 different State laws. As we have noted, the safety and 

soundness regulator will not be able to do its job if it has no authority over consumer laws, much less if that authority is held by not only the Federal consumer 

regulator, but every State regulator, legislature, and attorney general as well. 

The multitude of rules—and do not underestimate how incredibly complex they 

would be—would subject banks to tremendous legal costs in order to comply, and 

also to deal with constant litigation. Every product, form, and customer communication would have to be checked and rechecked regularly for compliance with changing 

laws in all 50 States. Customers will move to other States regularly, and the bank 

would have to assume its customers could be in any State. 

There are many areas where problems will arise. ATM cards could be subject to 

different rules by State, resulting in their not being useable in every State at great 

inconvenience to travelers, who could be left stranded without funds. Online banking could be affected as differing rules would apply, depending on where the customer is located. 

Costs to consumers would increase as banks try to address all the different rules. 

Innovation would be discouraged as any changes would have to be tested against 

all the different State rules. The European Union is working to develop common 

rules in order to have greater efficiencies and innovation, and yet the Administration’s proposal would go in exactly the opposite direction—toward balkanization. 

From a consumer’s standpoint, such regulatory complexity will be translated to account or loan agreement legalese to rightfully protect the bank from elaborate and 

conflicting requirements—all to the detriment of simplifying consumer products and 

making transactions more transparent. Proponents of the proposal talk about providing one page of simple disclosures—a goal much to be sought; but how can such 
77 

a goal be achieved if there would have to be page after page of disclosures to cover 

all the State law differences? 

The Question of How To Pay for This New Agency Was Left Very Vague and 

Raises Significant Issues 

To discharge its powers consistently over both banks and nonbanks, this new 

agency will have to be extraordinarily large. It will need to regulate, and in many 

cases examine, not just banks and credit unions, but finance companies, payday 

lenders, mortgage brokers, mortgage bankers, appraisers, title insurers and many 

others—apparently even pawn shops. 

However, under the proposal, no one has any idea how large this agency is to be. 

If it is small, its focus will inevitably be on the already regulated banks, even 

though, as already noted, 94 percent of the high cost mortgages came from outside 

banks. That would be incredibly unfair and counterproductive. To do its job as advertised by proponents, this agency would need to ensure that the thousands of 

nonbanks under its jurisdiction are reporting, examined, and subject to enforcement 

in the same way banks will be. While the States are supposed to be a front line 

of defense, it is not credible to argue that States will have the budgets to implement 

such reporting, examination, and enforcement even to a minimal degree. Therefore, 

the new agency will need to do it, or its whole rationale falls apart. 

Where is this agency’s budget to come from? Apparently, the budget is to be based 

on fees on financial service products. The Consumer Products Safety Commission, 

said to be the model for the CFPA, is not funded by toy or appliance manufacturers, 

but rather by an appropriation. However, if the CFPA is to accomplish its goals and 

to effectively regulate nonbanks, it would need to be considerably bigger than the 

Consumer Products Safety Commission. Banks are already heavily burdened with 

funding their regulators, directly and indirectly (e.g., deposit insurance premiums 

fund the FDIC’s regulatory costs). These costs cannot simply be split apart to pay 

for the banks’ part of the consumer regulator, as the tremendous efficiencies that 

result from combining safety and soundness and consumer regulation will be lost. 

How is the agency to collect fees from nonbank providers? On what basis? How 

is it going to know about new entrants, unless they are required to register with 

the agency? As new types of providers spring up, how are they to be incorporated? 

There will, in fact, have to be a large bureaucracy just to collect the fees. Of course, 

these new costs, basic economics tells us, will ultimately be passed on to the users 

of the products, and so consumers will end up paying for this large new agency. 

Obviously, these are very difficult questions that were not addressed in the Administration’s proposal, but which should be answered before proceeding. Given the 

incredibly broad authority and ambitions of the proposal, it is impossible for Congress to judge what it will, in fact, do without knowing the size it is going to be. 

The Proposal Will Inhibit Innovation and Competition, Limit Consumer 

Choices, and Dramatically Lessen the Availability of Credit 

The proposal will, first, create tremendous uncertainty in the financial community 

about what the rules will soon be. The entire body of rules that has governed the 

development, design, sales, marketing, and disclosure of all financial products would 

be subject to change, and be expected to change dramatically in many instances. 

When developing and offering products, firms rely on the basic rules of the road, 

knowing that they are subject to careful changes from time-to-time. Now there 

would be no certainty. This lack of certainty will cause firms to pull back from developing new products and new delivery systems. And it will chill lending, as firms 

will not know what the rules may be when they try to collect the loan a few years 

out. 

This problem should not be underestimated. Why design a new product if you do 

not know what regulatory rules will be applied to it? Why stretch to make a loan 

to a deserving consumer when it may be determined after the fact that your stretch 

terms and disclosures were unreasonable and the contract is therefore unenforceable. Everyone will be on hold, to some degree, waiting for the development, which 

will take years of regulatory action and judicial interpretation, of an entirely new 

roadmap. 

What makes this situation particularly difficult is that the proposed legislation, 

and the narrative provided with it, contains vague terminology that has little or no 

legal history. What on earth does ‘‘reasonable’’ mean for disclosures and communications? The legal concept of ‘‘unfair and deceptive,’’ developed over many years, is 

also changed. It will take years for these new legal concepts to be defined fully by 

the courts. In the meantime, lenders will have no idea what their potential legal 

rights and liabilities will be. 
78 

Second, you have the huge cost for legal and other work for redoing the basis on 

which products are offered today. The current design of many products and disclosures is thrown into question by the concepts of this proposal. This is a cost that, 

again, will ultimately be borne in large part by consumers. 

For example, credit card companies are in the process of spending hundreds of 

millions of dollars to change their systems, their disclosures, their risk models, and 

basic parts of the product to meet the new regulations and law. If this proposal is 

enacted, given the testimony of Treasury, it seems quite likely that additional significant changes will be made in regulations. How is the financial industry to plan 

for such uncertainty? 

Third, the regime surrounding Government designed products will undermine innovation and the availability of credit. As noted previously, the Government designed products, given regulatory advantages, will undermine the incentive to develop new products. If an institution develops an idea that could enhance the basic 

product for all consumers or a subset of consumers, adding it will cause the product 

to no longer be ‘‘Government approved’’ and will subject it to discriminatory regulation and legal uncertainty. Why bother? Ideas that could give consumers benefits 

or lower costs will never see the light of day. 

The impact on lending will be profound. First, loan adjustments, which are made 

constantly in today’s world, to fit a borrower’s needs or allow the loan to be made 

simply will not happen. Those most hurt will be lower income consumers. Furthermore, the very large uncertainty and potential legal liabilities will cause less credit 

to be available, at the very time when credit is already scarce. Our Government is 

in danger of designing policies that are absolutely contradictory—encouraging more 

credit to be available, while at the same time, through the President’s proposal, designing a legal morass that will have a dramatic effect in lowering the availability 

of credit. 

Improvements Can Be Made 

ABA agrees that improvements can and should be made to protect consumers. 

The great majority of the problems occur outside the highly regulated traditional 

banks, but there are legitimate issues relating to banks as well. The ABA is committed to working with Congress to address these concerns and implement improvements. In that regard, let me outline some concepts that should be considered. 

• Enhance capabilities to apply unfair and deceptive practices: As you know, the 

Federal Reserve Board and the OTS have long had a very powerful tool called 

unfair and deceptive practices or UDAP. This had not been used as a broad regulatory tool for banks prior to the extensive credit card rule. However, use of 

this authority would address many of the issues raised. The UDAP authority 

is already in place. The ABA supports legislation the House passed last year 

to extend this authority in a coordinated fashion to the OCC and FDIC. The 

FTC has this authority for nonbanks, but there have been severe constraints 

in using it. Congress should work to give the FTC the capability and funding 

to apply it to nonbanks much more aggressively. 

• Improve disclosure, using consumer testing: Disclosures can and should be improved, although it will not be easy. Current disclosures are by-and-large driven 

by lawyers and the need to cover the many legal complexities involved to protect against the real threat of litigation. Congress, the regulators, the industry, 

and consumer advocates need to overcome this bias. Progress has been made 

through the insights gained from consumer testing. Simple disclosures, perhaps 

in combination with larger, separate ones required for legal purposes, should be 

made in ways that most benefit consumers. Concepts gleaned from behavioral 

science relating to how consumers really react should be included in disclosure 

design. 

• Enable basic products without stifling competition, innovation and consumer 

choice: In some cases financial products have become overly complex and difficult, if not impossible, for consumers to understand. This is not unusual in our 

economy as many product offerings—from consumer electronics, to telephone 

plans, to insurance—have become very complex. Often this complexity results 

from efforts to add options that consumers may want. Sometimes, as we all 

know, the complexity induces consumers to buy products or enhancements that 

are not right for them or for which they pay too much. However, as discussed 

previously, ABA believes the answer is not to have the Government design 

products, mandate that they be offered, and give them an advantage over private sector products. Nevertheless, there is a need to have product options that 

are basic and easily compared, and to have, at the same time, a flexible, private-sector driven system that does not stifle competition and innovation. For 
79 

1The Consumer Federation of America is a nonprofit association of over 280 proconsumer 

groups, with a combined membership of 50 million people. CFA was founded in 1968 to advance 

consumers’ interests through advocacy and education. 

example, the private sector, perhaps through the ABA as the industry’s trade 

association, could consult with the regulators, Congress, and consumer advocates to develop basic product forms that could be easily compared. 

• Develop centralized call centers for consumer complaints: It is difficult, perhaps 

impossible, for many consumers to understand whom they should call in the 

Government to register concerns or complaints. ABA supports a centralized call 

center for consumers that could forward complaints to the right agency and 

serve as a coordinated information source. 

• Require regular reports to Congress: The structure of consumer regulation within agencies can be reviewed and strengthened. Regular reports to Congress 

could be required. 

• Empower the systemic risk oversight regulator to look specifically at consumer 

issues that pose systemic concerns: One clear lesson from the mortgage crisis is 

that consumer issues can raise systemic issues. If a systemic regulator had been 

in place, we would hope that it would have identified the rapid growth of 

subprime lending as a problem that had to be addressed well before it grew to 

such a hurricane force. The systemic regulator could be given the power to require regulatory agencies to address in a timely manner systemic consumer 

issues. 

Conclusion 

The ABA has very serious concerns about the proposed CFPA and the authorities 

it is to be given under the President’s proposal. We believe it will result in a huge 

regulatory burden, particularly for community banks, while nonbanks, which are 

primarily responsible for the crisis, will have ineffective enforcement. 

Healthy, well-regulated banks have already been hurt deeply by unscrupulous 

players and regulatory failures. They watched mortgage brokers and others make 

loans to consumers that a good banker just would not make. They watched local 

economies suffer when the housing bubble burst. Now they face the prospect of another burdensome layer of regulation. It is simply unfair to inflict another burden 

on these banks that had nothing to do with the problems that were created. The 

separate consumer regulator will only add costs to these banks, particularly community banks, which already suffer under the enormous regulatory burden placed on 

them. As you contemplate major changes in regulation—and change is needed—I 

urge you to ask this simple question: How will this change impact those thousands 

of banks that did not create the problem and are making the loans needed to get 

our economy moving again? Another question that should be asked is: How will this 

proposal really assure strong enforcement and examination of the nonbanks? 

Furthermore, the proposal will dramatically undermine incentives to innovate and 

to offer new products from which consumers will benefit. Competition will be lessened, as the Government designed products limits avenues for competition. Finally, 

the availability of credit will be reduced, particularly in the short run, because of 

great uncertainty about the new, evolving rules and the increased legal liability. 

As outlined above, we believe that separating safety and soundness regulation 

from consumer regulation would be a mistake. Nevertheless, there are important 

improvements that can and should be made in the consumer arena, and we will 

work with Members of this Committee to make such improvement in this arena, as 

well as on the many other important issues in regulatory reform. 

PREPARED STATEMENT OF TRAVIS B. PLUNKETT 

LEGISLATIVE DIRECTOR, 

CONSUMER FEDERATION OF AMERICA

JULY 14, 2009 

Summary 

Thank you, Chairman Dodd, Ranking Member Shelby, and Members of the Committee. My name is Travis Plunkett and I am the Legislative Director of the Consumer Federation of America (CFA). 1 I am pleased to be able to offer the views of 
80 

2The testimony was drafted by Travis Plunkett and Jean Ann Fox of the Consumer Federation of America, Gail Hillebrand of Consumers Union, Lauren Saunders of the National Consumer Law Center, and Ed Mierzwinski of U.S. PIRG. 3 Americans for Fairness in Lending works to reform the lending industry to protect Americans’ financial assets. AFFIL works with its national Partner organizations, local ally organizations, and individual members to advocate for reform of the lending industry. 4 Americans for Financial Reform is a coalition of close to 200 national State and local organizations representing people from every walk of life, including homeowners, shareowners, workers, and low and moderate income community residents dedicated to making sure that the 

‘‘main street’’ voice is heard in the debate on financial regulatory reform. 5 A New Way Forward is a movement of citizens, started in March 2009. It harnesses the 

voice of citizens to stop the excessive and dangerous partnership between Government and the 

largest institutions of the financial sector in order to reinvigorate the public sphere. ANWF organizers are letting the world know that the way Congress is handling the financial crisis rewards the wrong people, is likely to fail, and doesn’t get at the core structural problems in our 

economy. ANWF helped organize 60 protests ad 25 educational forums in the past 4 months. 6 ACORN, the Association of Community Organizations for Reform Now, is the Nation’s largest community organization of low- and moderate-income families, working together for social 

justice and stronger communities. 7The Center for Responsible Lending (CRL) is a not-for-profit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is an affiliate of Self-Help, which consists of a credit union 

and a nonprofit loan fund focused on creating ownership opportunities for low-wealth families, 

primarily through financing home loans to low-income and minority families who otherwise 

might not have been able to purchase homes. Self-Help has provided over $5 billion in financing 

to more than 60,000 low-wealth families, small businesses and nonprofit organizations in North 

Carolina and across the United States. Another affiliate, Self-Help Credit Union, offers a full 

range of retail products, and services over 3,500 checking accounts and approximately 20,000 

other deposit accounts, and recently inaugurated a credit card program. 8The Community Reinvestment Association of North Carolina’s mission is to promote and 

protect community wealth through advocacy, research, financial literacy and community development. 9 Consumer Action is a national nonprofit education and advocacy organization serving more 

than 9,000 community based organizations with training, educational modules, and multilingual 

consumer publications since 1971. Consumer Action’s advocacy work centers on credit, banking, 

and housing issues. 10 Consumers Union is a nonprofit membership organization chartered in 1936 under the laws 

of the State of New York to provide consumers with information, education and counsel about 

good, services, health and personal finance, and to initiate and cooperate with individual and 

group efforts to maintain and enhance the quality of life for consumers. Consumers Union’s income is solely derived from the sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees. In addition to reports on Consumers Union’s own 

product testing, Consumer Reports with more than 5 million paid circulation, regularly, carries 

articles on health, product safety, marketplace economics and legislative, judicial, and regulatory actions which affect consumer welfare. Consumers Union’s publications carry no advertising and receive no commercial support. 12Demos is a New York City-based nonpartisan public policy research and advocacy organization founded in 2000. A multi-issue national organization, Demos combines research, policy development, and advocacy to influence public debates and catalyze change. 13Florida PIRG takes on powerful interests on behalf of Florida’s citizens, working to win concrete results for our health and our well-being. With a strong network of researchers, advocates, 

organizers and students across the State, we stand up to powerful special interests on issues 

to stop identity theft, fight political corruption, provide safe and affordable prescription drugs, 

and strengthen voting rights. 14The Teamsters union represents more than 1.4 million workers in North America. Teamsters work from ports to airlines, from road to rail, from food processing to waste and recycling, 

from manufacturing to public services. The Union fights to improve the lives of workers, their 

families and their communities across the global supply chain. 15The National Association of Consumer Advocates, Inc., is a nonprofit 501(c)(3) organization 

founded in 1994. NACA’s mission is to provide legal assistance and education to victims of consumer abuse. NACA, through educational programs and outreach initiatives protects consumers, 

particularly low income consumers, from fraudulent, abusive and predatory business practices. 

NACA also trains and mentors a national network of over 1400 attorneys in representing consumers’ rights. 

leading consumer, community, and civil rights groups 2 in support of the establishment of a Consumer Financial Protection Agency, as proposed first by Senators Durbin, Schumer, and Kennedy and most recently by President Obama. In addition to 

CFA, I am testifying on behalf of, Americans for Fairness in Lending, 3 Americans 

for Financial Reform, 4 A New Way Forward, 5 the Association of Community Organizations for Reform Now (ACORN), 6 Center for Responsible Lending, 7 Community 

Reinvestment Association of North Carolina, 8 Consumer Action, 9 Consumers 

Union, 10 Demos, 12 Florida PIRG, 13 The International Brotherhood of Teamsters, 14

National Association of Consumer Advocates, 15 National Community Reinvestment 
81 

16 National Community Reinvestment Coalition is an association of more than 600 community-based organizations that promotes access to basic banking services, including credit and 

savings, to create and sustain affordable housing, job development, and vibrant communities for 

America’s working families. 17The National Consumer Law Center, Inc. is a nonprofit corporation, founded in 1969, specializing in low-income consumer issues, with an emphasis on consumer credit. On a daily basis, 

NCLC provides legal and technical consulting and assistance on consumer law issues to legal 

services, Government, and private attorneys representing low-income consumers across the 

country. NCLC publishes and regularly updates a series of 16 practice treatises and annual supplements on consumer credit laws, including Truth In Lending, Cost of Credit, Consumer Banking and Payments Law, Foreclosures, and Consumer Bankruptcy Law and Practice, as well as 

bimonthly newsletters on a range of topics related to consumer credit issues and low-income consumers. NCLC attorneys have written and advocated extensively on all aspects of consumer law 

affecting low income people, conducted training for tens of thousands of legal services and private attorneys on the law and litigation strategies to deal predatory lending and other consumer 

law problems, and provided extensive oral and written testimony to numerous Congressional 

committees on these topics. NCLC’s attorneys have been closely involved with the enactment 

of the all Federal laws affecting consumer credit since the 1970s, and regularly provide comprehensive comments to the Federal agencies on the regulations under these laws. 18The National Consumers League has been fighting for the rights of consumers and workers 

since its founding in 1899. The League was instrumental in seeking a safety net for Americans 

during the Great Depression and in the New Deal years, writing legislation to gain passage of 

minimum wage laws, unemployment insurance, workers compensation, social security and 

health care programs like medicare and medicaid. The League continues to champion the fair 

treatment and protections for all consumers in today’s marketplace. 19Founded in 1988, the National Fair Housing Alliance is a consortium of more than 220 private, nonprofit fair housing organizations, State and local civil rights agencies, and individuals 

from throughout the United States. Headquartered in Washington, DC, the National Fair Housing Alliance, through comprehensive education, advocacy and enforcement programs, provides 

equal access to apartments, houses, mortgage loans and insurance policies for all residents of 

the Nation. 21 Neighborhood Economic Development Advocacy Project (NEDAP) is a resource and advocacy center for community groups in New York City. Their mission is to promote community 

economic justice and to eliminate discriminatory economic practices that harm communities and 

perpetuate inequality and poverty. 22Public Citizen is a national nonprofit membership organization that has advanced consumer rights in administrative agencies, the courts, and the Congress, for 38 years. 23Founded by Sargent Shriver in 1967, the mission of the Sargent Shriver National Center 

on Poverty Law is to provide national leadership in identifying, developing, and supporting creative and collaborative approaches to achieve social and economic justice for low-income people. 

The Community Investment Unit of the Shriver Center advances the mission of the organization 

through innovative and collaborative public policy advocacy to enable low-income people and 

communities to move from poverty to prosperity. 24The Service Employees International Union is North America’s largest union with more 

than 2 million members. SEIU has taken a lead in holding financial institutions, including private equity and big banks, accountable for their impact on working families. 25 USAction builds power by uniting people locally and nationally, on the ground and online, 

to win a more just and progressive America. We create and participate the Nation’s leading progressive coalitions making democracy work by organizing issue campaigns to improve people’s 

lives. Our 28 State affiliates and partners, and our True Majority online members, bring the 

voices and concerns of the grassroots inside the Beltway. 26The U.S. Public Interest Research Group serves as the federation of and Federal advocacy 

office for the State PIROs, which are nonprofit, nonpartisan public interest advocacy groups that 

take on powerful interests on behalf of their members. 

Coalition, 16 National Consumer Law Center (on behalf of its low-income clients), 17

National Consumers League, 18 National Fair Housing Alliance, 19 Neighborhood 

Economic Development Advocacy Project, 21 Public Citizen, 22 Sargent Shriver National Center on Poverty Law, 23 Service Employees International Union, 24

USAction, 25 and U.S. PIRG. 26

In this testimony, we outline the case for establishment of a robust, independent 

Federal Consumer Financial Protection Agency to protect consumers from unfair 

credit, payment and debt management products, no matter what company or bank 

sells them and no matter what agency may serve as the prudential regulator for 

that company or bank. We describe the many failures of the current Federal financial regulators. We discuss the need for a return to a system where Federal financial 

protection law serves as a floor not as a ceiling, and consumers are again protected 

by the three-legged stool of Federal protection, State enforcement and private enforcement. We rebut anticipated opposition to the proposal, which we expect will 

come from the companies and regulators that are part of the system that has failed 

to protect us. We offer detailed suggestions to shape the development of the agency 

in the legislative process. We believe that, properly implemented, a Consumer Financial Protection Agency will encourage innovation by financial actors, increase 

competition in the marketplace, and lead to better choices for consumers. 
82 

27 ‘‘Foreclosures Could Top 8 million: Credit Suisse,’’ 9 December 2008, MarketWatch, available at http://www.marketwatch.com/story/more-than-8-million-homes-face-foreclosure-in-next4-years (last visited 21 June 2009). 28See the Federal Reserve statistical release G19, Consumer Credit, available at http:// 

www.federalreserve.gov/releases/g19/ 29 ‘‘Fitch Inc. said it continues to see signs that the credit crunch will escalate into next year, 

and it said card chargeoffs may approach 10 percent by this time next year.’’ ‘‘Fitch Sees 

Chargeoffs Nearing 10 percent,’’ Dow Jones, May 5, 2009. 30Paige Marta Skiba and Jeremy Tobacman, ‘‘Payday Loans, Uncertainty, and Discounting: 

Explaining Patterns of Borrowing, Repayment, and Default,’’ August 21, 2008. http:// 

www.law.vanderbilt.edu/faculty/faculty-personal-sites/paige-skiba/publication/ 

download.aspx?id=1636 and Paige Marta Skiba and Jeremy Tobacman, ‘‘Do Payday Loans 

Cause Bankruptcy?’’ October 10, 2008 http://www.law.vanderbilt.edu/faculty/faculty-personalsites/paige-skiba/publication/download.aspx?id=2221 (last visited 21 June 2009). 31 ‘‘Bankruptcy Filings Continue to Rise’’ Administrative Office of the U.S. Courts, news release, 8 June 2009, available at http://www.uscourts.gov/PresslReleases/2009/ 

BankruptcyFilingsMar2009.cfm (last visited 21 June 2009). 

We look forward to working with you and Committee Members to enact a strong 

Consumer Financial Protection Agency bill through the Senate and into law. We 

also look forward to working with you on other necessary aspects of financial regulatory reform to restore the faith and confidence of American families that the financial system will protect their homes and their economic security. 

SECTION 1. LEARNING FROM EXPERIENCE TO CREATE A FEDERAL 

CONSUMER FINANCIAL PROTECTION AGENCY 

It has become clear that a major cause of the most calamitous worldwide recession 

since the Great Depression was the simple failure of Federal regulators to stop abusive lending, particularly unsustainable home mortgage lending. Such action would 

not only have protected many families from serious financial harm but would likely 

have stopped or slowed the chain of events that has led to the current economic crisis. 

The idea of a Federal consumer protection agency focused on credit and payment 

products has gained broad and high-profile support because it targets the most significant underlying causes of the massive regulatory failures that occurred. First, 

Federal agencies did not make protecting consumers their top priority and, in fact, 

seemed to compete against each other to keep standards low, ignoring many festering problems that grew worse over time. If agencies did act to protect consumers 

(and they often did not), the process was cumbersome and time-consuming. As a result, agencies did not act to stop some abusive lending practices until it was too late. 

Finally, regulators were not truly independent of the influence of the financial institutions they regulated. 

Meanwhile, despite an unprecedented Government intervention in the financial 

sector, the passage of mortgage reform legislation in the House of Representatives 

and the enactment of a landmark law to prevent abusive credit card lending, problems with the sustainability of home mortgage and consumer loans keep getting 

worse. With an estimated 2 million households having already lost their homes to 

foreclosure because of the inability to repay unsound loans, Credit Suisse now predicts that foreclosures will exceed 8 million through 2012. 27 The amount of revolving debt, most of which is credit card debt, is approaching $1 trillion. 28 Based on 

the losses that credit card issuers are now reporting, delinquencies and defaults are 

expected to peak at their highest levels ever within the next year. 29 One in two consumers who get payday loans default within the first year, and consumers who receive these loans are twice as likely to enter bankruptcy within 2 years as those 

who seek and are denied them. 30 Overall, personal bankruptcies have increased 

sharply, up by one-third in the last year. 31

The failure of Federal banking agencies to stem subprime mortgage lending 

abuses is fairly well known. They did not use the regulatory authority granted to 

them to stop unfair and deceptive lending practices before the mortgage foreclosure 

crisis spun out of control. In fact, it wasn’t until July of 2008 that these rules were 

finalized, close to a decade after analysts and experts started warning that predatory subprime mortgage lending would lead to a foreclosure epidemic. 

Less well known are Federal regulatory failures that have contributed to the extension of unsustainable consumer loans, such as credit card, overdraft and payday 

loans, which are now imposing a crushing financial burden on many families. As 

with problems in the mortgage lending market, failures to rein in abusive types of 

consumer loans were in areas where Federal regulators had existing authority to 

act, and either chose not to do so or acted too late to stem serious problems in the 

credit markets. 
83 

32The Office of the Comptroller of the Currency (OCC) and Office of Thrift Supervision (OTC) 

charter and supervise national banks, and thrifts, respectively. State chartered banks can 

choose whether to join and be examined and supervised by either the Federal Reserve System 

or the Federal Deposit Insurance Corporation (FDIC). The FTC is charged with regulating some 

financial practices (but not safely and soundness) in the nonbank sector, such as credit cards 

offered by department stores and other retailer. 33Occasionally, safety and soundness concerns have led regulators to propose consumer protections, as in the eventually successful efforts by Federal banking agencies to prohibit ‘‘renta-charter’’ payday lending, in which payday loan companies partnered with national or out-ofState banks in an effort to skirt restrictive State laws. However, from a consumer protection 

point-of-view, this multiyear process took far too long. Moreover, the outcome would have been 

different if the agencies had concluded that payday lending would be profitable for banks and 

thus contribute to their soundness. 

Combining safety and soundness supervision—with its focus on bank profitability—in the same institution as consumer protection magnified an ideological predisposition or antiregulatory bias by Federal officials that led to unwillingness to 

rein in abusive lending before it triggered the housing and economic crises. Though 

we now know that consumer protection leads to effective safety and soundness, 

structural flaws in the Federal regulatory system compromised the independence of 

banking regulators, encouraged them to overlook, ignore, and minimize their mission to protect consumers. This created a dynamic in which regulatory agencies competed against each other to weaken standards and ultimately led to an oversight 

process that was cumbersome and ineffectual. These structural weaknesses threatened to undermine even the most diligent policies and intentions. They complicated 

enforcement and vitiated regulatory responsibility to the ultimate detriment of consumers. These structural flaws include: a narrow focus on ‘‘safety and soundness’’ regulation to the exclusion of consumer protection; the huge conflict-of-interest that some 

agencies have because they rely heavily on financial assessments on regulated institutions that can choose to pay another agency to regulate them; the balkanization 

of regulatory authority between agencies that often results in either very weak or 

extraordinarily sluggish regulation (or both); and a regulatory process that lacks 

transparency and accountability. Taken together, these flaws severely compromised 

the regulatory process and made it far less likely that agency leaders would either 

act to protect consumers or succeed in doing so. 

SECTION 2. CORRECTING REGULATORY SHORTCOMINGS BY CREATING A CONSUMER FINANCIAL PROTECTION AGENCY 

Although a Consumer Financial Protection Agency (CFPA) would not be a panacea for all current regulatory ills, it would correct many of the most significant 

structural flaws that exist, realigning the regulatory architecture to reflect the unfortunate lessons that have been learned in the current financial crisis and sharply 

increasing the chances that regulators will succeed in protecting consumers in the 

future. A CFPA would be designed to achieve the regulatory goals of elevating the 

importance of consumer protection, prompting action to prevent harm, ending regulatory arbitrage, and guaranteeing regulatory independence. 

A. Put consumer protection at the center of financial regulation. 

Right now, four Federal regulatory agencies are required both to ensure the solvency of the financial institutions they regulate and to protect consumers from lending abuses. 32 Jurisdiction over consumer protection statutes is scattered over several more agencies, with rules like RESPA and TILA, which both regulate mortgage 

disclosures, in different agencies. 

Within agencies in which these functions are combined, regulators have often 

treated consumer protection as less important than their safety and soundness mission or even in conflict with that mission. 33 For example, after more than 6 years 

of effort by consumer organizations, Federal regulators are just now contemplating 

incomplete rules to protect consumers from high-cost ‘‘overdraft’’ loans that financial 

institutions often extend without the knowledge of or permission from consumers. 

Given the longstanding inaction on this issue, it is reasonable to assume that regulators were either uninterested in consumer protection or viewed restrictions on 

overdraft loans as an unnecessary financial burden on banks that extend this form 

of credit, even if it is deceptively offered and financially harmful to consumers. In 

other words, because regulators apparently decided that their overriding mission 

was to ensure that the short-term balance sheets of the institutions they regulated 

were strong, they were less likely to perceive that questionable products or practices 

(like overdraft loans or mortgage prepayment penalties) were harmful to consumers. 

As mentioned above, recent history has demonstrated that this shortsighted view 

of consumer protection and bank solvency as competing objectives is fatally flawed. 
84 

34For example, in 2007 the OTS cited consumer protection as part of its ‘‘mission statement’’ 

and ‘‘strategic goals and vision.’’ However, in identifying its eight ‘‘strategic priorities’’ for how 

it would spend its budget in Fiscal Year 2007, only part of one of these priorities appears to 

be directly related to consumer protection (‘‘data breaches’’). On the other hand, OTS identified 

both ‘‘Regulatory Burden Reduction’’ and ‘‘Promotion of the Thrift Charter’’ as major strategic 

budget priorities. Office of Thrift Supervision, ‘‘OMB FY2007 Budget and Performance Plan,’’ 

January 2007. 35Testimony of Travis Plunkett, Legislative Director, Consumer Federation of America and 

Edmund Mierzwinski, Consumer Program Director, U.S. PIRG, Before the Subcommittee on Financial Institutions and Consumer Credit of the U.S. House of Representatives, Committee of 

Financial Services, March 19, 2009. 36 ‘‘Findings made during compliance examinations are strictly confidential and are not made 

available to the public except at the OCC’s discretion. Similarly, the OCC is not required to publish the results of its safety-and-soundness orders . . . . Thus, the OCC’s procedures for compliance examinations and safety-and-soundness orders do not appear to provide any public notice 

or other recourse to consumers who have been injured by violations identified by the OCC.’’ Testimony of Arthur E. Wilmarth, Jr., Professor of Law, George Washington University Law School, 

before the Subcommittee on Financial Institutions and Consumer Credit of the House Financial 

Services Committee, April 26, 2007. 37 ‘‘ . . . ours is not an ‘enforcement-only’ compliance regime—far better to describe our approach as ‘supervision first, enforcement if necessary,’ with supervision addressing so many 

early problems that enforcement is not necessary,’’ Testimony of John C. Dugan, Comptroller 

of the Currency, before the Committee on Financial Services of the U.S. House of Representatives, June 13, 2007. 38See Bocian, D.G., K.S. Ernst, and W. Li, ‘‘Unfair Lending: The Effect of Race and Ethnicity 

on the Price of Subprime Mortgages,’’ Center for Responsible Lending, May 2006. 39 ‘‘Unequal Burden: Income and Racial Disparities in Subprime Lending in America’’ (Washington, DC: HUD, 2000). 

If regulatory agencies had acted to prevent loan terms or practices that harmed consumers, they would also have vastly improved the financial solidity of the institutions they regulated. Nonetheless, the disparity in agencies’ focus on consumer protection versus ‘‘safety and soundness’’ has been obvious, both in the relative resources that agencies devoted to the two goals and in the priorities they articulated. 

These priorities frequently minimized consumer protection and included reducing 

regulatory restrictions on the institutions they oversaw. 34

Though the link between consumer protection and safety and soundness is now 

obvious, the two functions are not the same, and do conflict at times. In some circumstances, such as with overdraft loans, a financial product might well be profitable, even though it is deceptively offered and has a financially devastating effect 

on a significant number of consumers. 35

Until recently, regulatory agencies have also focused almost exclusively on bank 

examination and supervision to protect consumers, which lacks transparency. This 

process gives bank regulators a high degree of discretion to decide what types of 

lending are harmful to consumers, a process that involves negotiating behind-thescenes with bank officials. 36 Given that multiple regulators oversee similar institutions, the process has also resulted in different standards for products like credit 

cards offered by different types of financial institutions. In fact, widespread abusive 

lending in the credit markets has discredited claims by bank regulators like the 

Comptroller of the Currency that a regulatory process consisting primarily of supervision and examination results in a superior level of consumer protection compared 

to taking public enforcement action against institutions that violate laws or rules. 37

Financial regulatory enforcement actions are a matter of public record which has 

a positive impact on other providers who might be engaged in the same practices 

and provides information to consumers on financial practices sanctioned by regulators. 

Additionally, the debate about the financial and foreclosure crisis often overlooks 

the fact that predatory lending practices and the ensuing crisis have had a particularly harsh impact on communities of color. African Americans and Latinos suffered 

the brunt of the predatory and abusive practices found in the subprime market. 

While predatory and abusive lending practices were not exclusive to the subprime 

market, because of lax regulation in that sector, most abuses were concentrated 

there. Several studies have documented pervasive racial discrimination in the distribution of subprime loans. One such study found that borrowers of color were more 

than 30 percent more likely to receive a higher-rate loan than White borrowers even 

after accounting for differences in creditworthiness. 38 Another study found that 

high-income African Americans in predominantly Black neighborhoods were three 

times more likely to receive a subprime purchase loan than low-income White borrowers. 39

African Americans and Latinos receive a disproportionate level of high cost loans, 

even when they quality for a lower rate and/or prime mortgage. Fannie Mae and 
85 

40See the Center for Responsible Lending’s ‘‘Fact Sheet on Predatory Mortgage Lending’’, at 

http://www.responsiblelending.org/pdfs/2b003-mortgage2005.pdf, and ‘‘The Impending Rate 

Shock: A Study of Home Mortgages in 130 American Cities’’, ACORN, August 15, 2006, available at www.acorn.org. 41See ‘‘Subprime Debacle Traps Even Very Creditworthy’’, Wall Street Journal, December 3, 

2007. 42Squires, Gregory D., Derek S. Hyra, and Robert N. Renner, ‘‘Segregation and the Subprime 

Lending Crisis’’, Paper presented at the 2009 Federal Reserve System Community Affairs Research Conference, Washington, DC (April 16, 2009). 43Of course, following their stunning collapses, Countrywide was acquired by Bank of America and Washington Mutual by Chase, both in regulator-ordered winding-downs. 44 In fact, several other large national banks have chosen in recent years to convert their 

State charter to a national charter. Charter switches by JPMorgan Chase, HSBC, and Bank of 

Montreal (Harris Trust) alone in 2004–05 moved over $1 trillion of banking assets from the 

State to the national banking system, increasing the share of assets held by national banks to 

67 percent from 56 percent, and decreasing the State share to 33 percent from 44 percent. Arthur E. Wilmarth, Jr., ‘‘The OCC’s Preemption Rules Threaten to Undermine the Dual Banking 

System, Consumer Protection and the Federal Reserve Board’s role in Bank Supervision’’, Proceedings of the 42nd Annual Conference on Bank Structure and Competition (Fed. Res. Bank 

of Chicago, 2006) at 102, 105–106. 

Freddie Mac estimated that up to 50 percent of those who ended up with a sub 

prime loan would have qualified for a mainstream, ‘‘prime-rate’’ conventional loan 

in the first place. 40 According to a study conducted by the Wall Street Journal, as 

much as 61 percent of those receiving subprime loans would ‘‘qualify for conventional loans with far better terms.’’ 41 Moreover, racial segregation is linked with the 

proportion of subprime loans originated at the metropolitan level, even after controlling for percent minority, low credit scores, poverty, and median home value. 42 The 

resulting flood of high cost and abusive loans in communities of color has artificially 

elevated the costs of homeownership, caused unprecedented high rates of foreclosures, and contributed to the blight and deterioration of these neighborhoods. It 

is estimated that communities of color will realize the greatest loss of wealth as a 

result of this crisis, since Reconstruction. 

A CFPA, by contrast, would have as its sole mission the development and effective 

implementation of standards that ensure that all credit products offered to borrowers are safe and not discriminatory. The agency would then enforce these standards for the same types of products in a transparent, uniform manner. Ensuring the 

safety and fairness of credit products would mean that the CFPA would not allow 

loans with terms that are discriminatory, deceptive or fraudulent. The agency 

should also be designed to ensure that credit products are offered in a fair and sustainable manner. In fact, a core mission of the CFPA would be to ensure the suitability of classes of borrowers for various credit products, based on borrowers’ ability 

to repay the loans they are offered—especially if the cost of loans suddenly or sharply increase, and that the terms of loans do not impose financial penalties on borrowers who try to pay them off. As we’ve learned in the current crisis, focusing exclusively on consumer and civil rights protection would often be positive for lenders’ 

stability and soundness over the long term. However, the agency would be compelled to act in the best interest of consumers even if measures to restrict certain 

types of loans would have a negative short-term financial impact on financial institutions. 

B. Prevent regulatory arbitrage. Act quickly to prevent unsafe forms of credit. 

The present regulatory system is institution centered, rather than consumer centered. It is structured according to increasingly irrelevant distinctions between the 

type of financial services company that is lending money, rather than the type of 

product being offered to consumers. Right now, financial institutions are allowed 

(and have frequently exercised their right) to choose the regulatory body that oversees them and to switch freely between regulatory charters at the Federal level and 

between State and Federal charters. Many financial institutions have switched 

charters in recent years seeking regulation that is less stringent. Two of the most 

notorious examples are Washington Mutual and Countrywide, 43 which became infamous for promoting dangerous sub-prime mortgage loans on a massive scale. 44 Both 

switched their charters to become thrifts regulated by the Office of Thrift Supervision (OTS). At the Federal level, where major agencies are funded by the institutions they oversee, this ability to ‘‘charter shop,’’ has undeniably led regulators like 

the OTS to compete to attract financial institutions by keeping regulatory standards 

weak. It has also encouraged the OTS and OCC to expand their preemptive authority and stymie efforts by the States to curb predatory and high-cost lending. The 

OCC in particular appears to have used its broad preemptive authority over State 
86 

45For a detailed analysis, see brief amicus curiae of Center for Responsible Lending et al. in 

the case currently before the Supreme Court, Cuomo v. Clearinghouse and OCC (08-453) available at http://www.abanet.org/publiced/preview/briefs/pdfs/07-08/08- 

453lPetitionerAmCu10ConsumerProtectionOrgs.pdf (last visited 21 June 2009) at pp. 20–39. 46Testimony of Arthur E. Wilmarth. Jr., Professor of Law, George Washington University 

Law School, before the Subcommittee on Financial Institutions and Consumer Credit of the 

House Financial Services Committee, April 26, 2007. 

consumer protections and its aggressive legal defense of that authority as a marketing tool to attract depository institutions to its charter. 45

When agencies do collaborate to apply consumer protections consistently to the institutions they regulate, the process has been staggeringly slow. As cited in several 

places in this testimony, Federal regulators dithered for years in implementing regulations to stop unfair and deceptive mortgage and credit card lending practices. 

One of the reasons for these delays has often been that regulators disagree among 

themselves regarding what regulatory measures must be taken. The course of least 

resistance in such cases is to do nothing, or to drag out the process. Although the 

credit card rule adopted late last year by Federal regulators was finalized over protests from the OCC, these objections were likely one of the reasons that Federal regulators delayed even beginning the process of curbing abusive credit card lending 

practices until mid-2008. 

The ‘‘charter shopping’’ problem would be directly addressed through the creation 

of a single CFPA with regulatory authority over all forms of credit. Federal agencies 

would no longer compete to attract institutions based on weak consumer protection 

standards or anemic enforcement of consumer rules. The CFPA would be required 

to focus on the safety of credit products, features and practices, no matter what kind 

of lender offered them. As for regulatory competition with States, it would only exist 

to improve the quality of consumer protection. Therefore, the CFPA should be allowed to set minimum national credit standards, which States could then enforce 

(as well as victimized consumers). States would be allowed to exceed these standards if local conditions require them to do so. If the CFPA sets ‘‘minimum’’ standards that are sufficiently strong, a high degree of regulatory uniformity is likely to 

result. With strong national minimum standards in place, States are most likely to 

act only when new problems develop first in one region or submarket. States would 

then serve as an early warning system, identifying problems as they develop and 

testing policy solutions, which could then be adopted nationwide by the CFPA if 

merited. Moreover, the agency would have a clear incentive to stay abreast of market developments and to act in a timely fashion to rein in abusive lending because 

it will be held responsible for developments in the credit market that harm consumers. 

C. Create an independent regulatory process. 

The ability of regulated institutions to ‘‘charter shop’’ combined with aggressive 

efforts by Federal regulators to preempt State oversight of these institutions has 

clearly undermined the independence of the OTS and OCC. This situation is made 

worse by the fact that large financial institutions like Countrywide were able to increase their leverage over regulators by taking a significant chunk of the agency’s 

budget away when it changed charters and regulators. The OTS and OCC are almost entirely funded through assessments on the institutions they regulate (see Appendix 4). The ability to charter shop combined with industry funding has created 

a significant conflict-of-interest that has contributed to the agencies’ disinclination 

to consider upfront regulation of the mortgage and consumer credit markets. 

Given that it supervises the largest financial institutions in the country, the 

OCC’s funding situation is the most troublesome. 

More than 95 percent of the OCC’s budget is financed by assessments paid 

by national banks, and the twenty biggest national banks account for nearly three-fifths of those assessments. Large, multistate banks were among 

the most outspoken supporters of the OCC’s preemption regulations and 

were widely viewed as the primary beneficiaries of those rules. In addition 

to its preemption regulations, the OCC has frequently filed amicus briefs 

in Federal court cases to support the efforts of national banks to obtain 

court decisions preempting State laws. The OCC’s effort to attract large, 

multistate banks to the national system have already paid handsome dividends to the agency . . . . Thus, the OCC has a powerful financial interest 

in pleasing its largest regulated constituents, and the OCC therefore faces 

a clear conflict of interest whenever it considers the possibility of taking an 

enforcement action against a major national bank. 46
87 

47 73 FR 147, p. 44522, Final HOEPA Rule, 30 July 2008. 48 ‘‘Role of the Office of Thrift Supervision and Office of the Comptroller of the Currency in 

the Preemption of State Law’’, USGAO, prepared for Financial Services Committee Chairman 

James Leach, 7 February 2000, available at http://www.gao.gov/corresp/ggd-00-51r.pdf (last 

visited 21 June 2009). 49Statement of managers filed with the conference report on H.R. 3841, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, Congressional Record Page S10532, 3 August 1994. 

The leadership sofa CFPA would be held to account based on its ability to inform 

consumers and help protect them from unsafe products. In order to function effectively, the leadership would need to show expertise in and commitment to consumer 

protection. Crucial to the success of the agency would be to ensure that its funding 

is adequate, consistent and does not compromise this mission. Congress could also 

ensure that the method of agency funding that is used does not compromise the 

CFPA’s mission by building accountability mechanisms into the authorizing statute 

and exercising effective oversight of the agency’s operations. (See Section 4 below.) 

Recent history has demonstrated that even an agency with an undiluted mission 

to protect consumers can be undermined by hostile or negligent leadership or by 

Congressional meddling on behalf of special interests. However, unless the structure 

of financial services regulation is realigned to change not just the focus of regulation 

but its underlying philosophy, it is very unlikely that consumers will be adequately 

protected from unwise or unfair credit products in the future. The creation of a 

CFPA is necessary because it ensures that the paramount priority of Federal regulation is to protect consumers, that the agency decision making is truly independent, 

and that agencies do not have financial or regulatory incentives to keep standards 

weaker than necessary. 

SECTION 3: ERRORS OF OMISSION AND COMMISSION BY THE FEDERAL BANK REGULATORS 

Current regulators may already have some of the powers that the new agency 

would be given, but they haven’t used them. Conflicts of interest and a lack of will 

work against consumer enforcement. In this section, we detail numerous actions and 

inactions by the Federal banking regulators that have led to or encouraged unfair 

practices, higher prices for consumers, and less competition. 

A. The Federal Reserve Board ignored the growing mortgage crisis for years after receiving Congressional authority to enact antipredatory mortgage lending rules in 

1994. 

The Federal Reserve Board was granted sweeping antipredatory mortgage regulatory authority by the 1994 Home Ownership and Equity Protection Act (HOEPA). 

Final regulations were issued on 30 July 2008 only after the world economy had 

collapsed due to the collapse of the U.S. housing market triggered by predatory 

lending. 47

B. At the same time, the Office of the Comptroller of the Currency engaged in an escalating pattern of preemption of State laws designed to protect consumers from 

a variety of unfair bank practices and to quell the growing predatory mortgage 

crisis, culminating in its 2004 rules preempting both State laws and State enforcement of laws over national banks and their subsidiaries. 

In interpretation letters, amicus briefs and other filings, the OCC preempted 

State laws and local ordinances requiring lifeline banking (NJ 1992, NY, 1994), prohibiting fees to cash ‘‘on-us’’ checks (par value requirements) (TX, 1995), banning 

ATM surcharges (San Francisco, Santa Monica and Ohio and Connecticut, 1998- 

2000), requiring credit card disclosures (CA, 2003) and opposing predatory lending 

and ordinances (numerous States and cities). 48 Throughout, OCC ignored Congressional requirements accompanying the 1994 Riegle-Neal Act not to preempt without 

going through a detailed preemption notice and comment procedure, as the Congress 

had found many OCC actions ‘‘inappropriately aggressive.’’ 49

In 2000–2004, the OCC worked with increasing aggressiveness to prevent the 

States from enforcing State laws and stronger State consumer protection standards 

against national banks and their operating subsidiaries, from investigating or monitoring national banks and their operating subsidiaries, and from seeking relief for 

consumers from national banks and subsidiaries. 

These efforts began with interpretative letters stopping State enforcement and 

State standards in the period up to 2004, followed by OCC’s wide-ranging preemption regulations in 2004 purporting to interpret the National Bank Act, plus briefs 

in court cases supporting national banks’ efforts to block State consumer protections. 
88 

50Testimony of Professor Arthur Wilmarth, 26 April 2007, before the Subcommittee on Financial Institutions and Consumer Credit, hearing on Credit Card Practices: Current Consumer and 

Regulatory Issues at http://www.house.gov/financialservices/hearing110/ 

htwilmarth042607.pdf. 51 H.R. 627 was signed into law by President Obama as Pub. L. No. 111-24 on 22 May 2009. 52The final rule was published in the Federal Register a month later. 74 FR 18, page 5498 

Thursday, January 29, 2009. 53Testimony of Linda Sherry of Consumer Action, House Subcommittee on Financial Institutions and Consumer Credit, April 26, 2007. 54Testimony of Arthur E. Wilmarth, Jr., Professor of Law, George Washington University 

Law School, April 26, 2007. 

We discuss these matters in greater detail below, in Section 5, rebutting industry 

arguments against the CFPA. 

C. The agencies took little action except to propose greater disclosures, as unfair credit card practices increased over the years, until Congress stepped in. 

Further, between 1995 and 2007, the Office of the Comptroller of Currency issued 

only one public enforcement action against a Top Ten credit card bank (and then 

only after the San Francisco District Attorney had brought an enforcement action). 

In that period, ‘‘the OCC has not issued a public enforcement order against any of 

the eight largest national banks for violating consumer lending laws.’’ 50 The OCC’s 

failure to act on rising credit card complaints at the largest national banks triggered 

Congress to investigate, resulting in passage of the 2009 Credit Card Accountability, 

Responsibility and Disclosure Act (CARD Act). 51 While this Committee was considering that law, other Federal regulators finally used their authority under the Federal Trade Commission Act to propose and finalize a similar rule. 52 By contrast, the 

OCC requested the addition of two significant loopholes to a key protection of the 

proposed rule. 

Meanwhile, this Committee and its Subcommittee on Financial Institutions and 

Consumer Credit had conducted numerous hearings on the impact of current credit 

card issuer practices on consumers. The Committee heard testimony from academics 

and consumer representatives regarding abusive lending practices that are widespread in the credit card industry, including: 

• The unfair application of penalty and ‘‘default’’ interest rates that can rise 

above 30 percent; 

• Applying these interest rate hikes retroactively on existing credit card debt, 

which can lead to sharp increases in monthly payments and force consumers 

on tight budgets into credit counseling and bankruptcy; 

• High and increasing ‘‘penalty’’ fees for paying late or exceeding the credit limit. 

Sometimes issuers use tricks or traps to illegitimately bring in fee income, such 

as requiring that payments be received in the late morning of the due date or 

approving purchases above the credit limit; 

• Aggressive credit card marketing directed at college students and other young 

people; 

• Requiring consumers to waive their right to pursue legal violations in the court 

system and forcing them to participate in arbitration proceedings if there is a 

dispute, often before an arbitrator with a conflict of interest; and 

• Sharply raising consumers’ interest rates because of a supposed problem a consumer is having paying another creditor. Even though few credit card issuers 

now admit to the discredited practice of ‘‘universal default,’’ eight of the ten 

largest credit card issuers continue to permit this practice under sections in 

cardholder agreements that allow issuers to change contract terms at ‘‘any time 

for any reason.’’ 53

In contrast to this absence of public enforcement action by the OCC against major 

national banks, State officials and other Federal agencies have issued numerous enforcement orders against leading national banks or their affiliates, including Bank 

of America, Bank One, Citigroup, Fleet, JPMorgan Chase, and USBancorp—for a 

wide variety of abusive practices over the past decade. 54

The OCC and PRB were largely silent while credit card issuers expanded efforts 

to market and extend credit at a much faster speed than the rate at which Americans have taken on credit card debt. This credit expansion had a disproportionately 

negative effect on the least sophisticated, highest risk and lowest income households. It has also resulted in both relatively high losses for the industry and record 

profits. That is because, as mentioned above, the industry has been very aggressive 
89 

55Testimony of Travis B. Plunkett of the Consumer Federation of America, Senate Banking 

Committee, January 25, 2007. 56 Joint press release of Board of Governors of the Federal Reserve System, Federal Deposit 

Insurance Corporation, Office of the Comptroller of the Currency and Office of Thrift Supervision, ‘‘FFIEC Agencies Issue Guidance on Credit Card Account Management and Loss Allowance Practices,’’ January 8, 2003, see attached ‘‘Account Management and Loss Allowance Guidance’’ at 3. 57The rule is at 12 C.F.R. §7.4001(a). The case is Smiley v. Citibank, 517 U.S. 735. 58 National Consumer Law Center and Consumer Federation of America, Comments to the 

Federal Reserve Board, Docket No. R-1136, January 27, 2003. Appendix ‘‘Bounce Protection: 

How Banks Turn Rubber Into Gold by Enticing Consumers To Write Bad Checks.’’ Also, CFA, 

Consumers Union, and U.S. Public Interest Research Group, Supplemental Comments relating 

to Docket R-1136, May 2, 2003. CFA, et al. Comments to the Federal Reserve System, 12 CFR 

Part 230, Docket No. R-1197, Proposed Amendments to Regulation DD, August 6, 2004. Letter 

from CFA and national groups to the Chairman of the Federal Reserve Board and Federal Bank 

Regulators, urging Truth in Lending for overdraft loans, June 8, 2005. CFA, et al., Comments, 

Federal Reserve System, OTS, and NCUA, FRB Docket No. R-1314, OTS-2008-0004, NCUA RIN 

3133-AD47, August 4, 2008. CFA Comments, Federal Reserve System, FRB Docket No. R-1343, 

March 30, 2009. 59FDIC Study of Bank Overdraft Programs, Federal Deposit Insurance Corporation, November 2008 at v. 

in implementing a number of new—and extremely costly—fees and interest rates. 55

Although the agencies did issue significant guidance in 2003 to require issuers to 

increase the size of minimum monthly payments that issuers require consumers to 

pay, 56 neither agency has proposed any actions (or asked for the legal authority to 

do so) to rein in aggressive lending or unjustifiable fees and interest rates. 

In addition, in 1995 the OCC amended a rule, with its action later upheld by the 

Supreme Court, 57 that allowed credit card banks to export fees nationwide, as if 

they were interest, resulting in massive increases in the size of penalty late and 

overdraft fees. 

D. The Federal Reserve has allowed debit card cash advances (overdraft loans) without consent, contract, cost disclosure, or fair repayment terms. 

The FRB has refused to require banks to comply with the Truth in Lending Act 

(TILA) when they loan money to customers who are permitted to overdraw their accounts. While the FRB issued a staff commentary clarifying that TILA applied to 

payday loans, the Board has refused in several proceedings to apply the same rules 

to banks that make nearly identical loans. 58 As a result, American consumers spend 

at least $17.5 billion per year on cash advances from their banks without signing 

up for the credit and without getting cost-of-credit disclosures or a contract stating 

that the bank would in fact pay overdrafts. Consumers are induced to withdraw 

more cash at ATMs than they have in their account and spend more than they have 

with debit card purchases at point of sale. In both cases, the bank could simply deny 

the transaction, saving consumers average fees of $35 each time. 

The FRB has permitted banks to avoid TILA requirements because bankers claim 

that systematically charging unsuspecting consumers very high fees for overdraft 

loans they did not request is the equivalent to occasionally covering a paper check 

that would otherwise bounce. Instead of treating short term bank loans in the same 

manner as all other loans covered under TILA, as consumer organizations recommended, the FRB issued and updated regulations under the Truth in Savings 

Act, pretending that finance charges for these loans were bank ‘‘service fees.’’ In several dockets, national consumer organizations provided well-researched comments, 

urging the Federal Reserve to place consumer protection ahead of bank profits, to 

no avail. 

As a result, consumers unknowingly borrow billions of dollars at astronomical interest rates. A $100 overdraft loan with a $35 fee that is repaid in 2 weeks costs 

910 percent APR. The use of debit cards for small purchases often results in consumers paying more in overdraft fees than the amount of credit extended. The FDIC 

found last year that the average debit card point of purchase overdraft is just $20, 

while the sample of State banks surveyed by the FDIC charged a $27 fee. If that 

$20 overdraft loan were repaid in two weeks, the FDIC noted that the APR came 

to 3,520 percent. 59

As the Federal Reserve has failed to protect bank account customers from unauthorized overdraft loans, banks are raising fees and adding new ones. In the CFA 

survey of the 16 largest banks updated in July 2009, we found that 14 of the 16 

largest banks charge $35 or more for initial or repeat overdrafts and nine of the 

largest banks use a tiered fee structure to escalate fees over the year. For example, 

USBank charges $19 for the first overdraft in a year, $35 for the second to fourth 

overdraft, and $37.50 thereafter. Ten of the largest banks charge a sustained over-
90 

60 Bank of America, ‘‘Important Information Regarding Changes to Your Account’’ p. 2. 

Accessed online June 15, 2009. ‘‘Extended Overdrawn Balance Charge, June 5, 2009: For each 

time we determine your account is overdrawn by any amount and continues to be overdrawn 

for 5 or more consecutive business days, we will charge one fee of $35. This fee is in addition 

to applicable Overdraft Item Fees and NSF Returned Item Fees.’’ 61Federal Reserve Board, Docket No. R-1343, comments were due March 30, 2009. 

draft fee, imposing additional fees if the overdraft and fees are not repaid within 

days. Bank of America began in June to impose a second $35 fee if an overdraft 

is not repaid within 5 days. As a result, a Bank of America customer who is permitted by her bank to overdraw by $20 with a debit card purchase can easily be 

charged $70 for a 5 day extension of credit. 60 (For more detail, please see CFA Survey: Sixteen Largest Bank Overdraft Fees and Terms, Appendix 5.) 

Cash advances on debit cards are not protected by the Truth in Lending Act prohibition on banks using set off rights to collect payment out of deposits into their 

customers’ accounts. If the purchase involved a credit card, on the other hand, it 

would violate Federal law for a bank to pay the balance owed from a checking account at the same bank. Banks routinely pay back debit card cash advances to 

themselves by taking payment directly out of consumers’ checking accounts, even if 

those accounts contain entirely exempt funds such as Social Security. 

The Federal Reserve is considering comments filed in yet another overdraft loan 

docket, this time considering whether to require banks to permit consumers to optout of fee-based overdraft programs, or, alternatively, to require banks to get consumers to opt in for overdrafts. This proposal would change Reg E which implements the Electronic Fund Transfer Act and would only apply to overdrafts created 

by point of sale debit card transactions and to ATM withdrawals, leaving all other 

types of transactions that are permitted to overdraw for a fee unaddressed. Consumer organizations urged the Federal Reserve to require banks to get their customers’ affirmative consent, the same policy included in the recently enacted credit 

card bill which requires affirmative selection for creditors to permit over-the-limit 

transactions for a fee. 61

E. The Fed is allowing a shadow banking system (prepaid cards) outside of consumer 

protection laws to develop and target the unbanked and immigrants; The OTS 

is allowing bank payday loans (which preempt State laws) on prepaid cards. 

The Electronic Funds Transfer Act requires key disclosures of fees and other practices, protects consumer bank accounts from unauthorized transfers, requires resolution of billing errors, gives consumers the right to stop electronic payments, and requires Statements showing transaction information, among other protections. The 

EFTA is also the statute that will hold the new protections against overdraft fee 

practices that the Fed is writing. 

Yet the Fed has failed to include most prepaid cards in the EFTA’s protections, 

even while the prepaid industry is growing and is developing into a shadow banking 

system. In 2006, the Fed issued rules including payroll cards—prepaid cards that 

are used to pay wages instead of a paper check for those who do not have direct 

deposit to a bank account—within the definition of the ‘‘accounts’’ subject to the 

EFTA. But the Fed permitted payroll card accounts to avoid the Statement requirements for bank accounts, relying instead on the availability of account information 

on the Internet. Forcing consumers to monitor their accounts online to check for unauthorized transfers and fees and charges is particularly inappropriate for the population targeted for these cards: consumers without bank accounts, who likely do not 

have or use regular Internet access. 

Even worse, the Fed refused to adopt the recommendations of consumer groups 

that self-selected payroll cards—prepaid cards that consumers shop for and choose 

on their own as the destination for direct deposit of their wages—should receive the 

same EFTA protections that employer designated payroll cards receive. The Fed 

continues to take the position that general prepaid cards are not protected by the 

EFTA. 

This development has become all the more glaring as Federal and State government agencies have moved to prepaid cards to pay many Government benefits, from 

Social Security and Indian Trust Funds to unemployment insurance and State-collected child support. Some agencies, such as the Treasury Department when it created the Social Security Direct Express Card, have included in their contract requirements that the issuer must comply with the EFTA. But not all have, and compliance is uneven, despite the fact that the EFTA itself clearly references and anticipates coverage of electronic systems for paying unemployment insurance and other 

non-needs-tested Government benefits. 
91 

62Payday lending is so egregious that even the Office of the Comptroller of the Currency refused to let storefront lenders hide behind their partner banks’ charters to export usury. 63Press Release, ‘‘Massive Telemarketing Scheme Affected Nearly One Million Consumers Nationwide; Wachovia Bank To Provide an Additional $33 Million to Suntasia Victims,’’ Federal 

Trade Commission, January 13, 2009, viewed at http://www.ftc.gov/opa/2009/01/ 

suntasia.shtm. 

The Fed’s failure to protect this shadow banking system is also disturbing as prepaid cards are becoming a popular product offered by many predatory lenders, like 

payday lenders. 

Indeed, the Fed is not the only one that has recently dropped the ball on consumer protection on prepaid cards. One positive effort by the banking agencies in 

the past decade was the successful effort to end rent-a-bank partnerships that allowed payday lenders to partner with depositories to use their preemptive powers 

to preempt State payday loan laws. 62 But more recently, one prepaid card issuer, 

Meta Bank, has developed a predatory, payday loan feature—iAdvance—on its prepaid cards that receive direct deposit of wages and Government benefits. At a recent 

conference, an iAdvance official boasted that Meta Bank’s regulator—the OTS—has 

been very ‘‘flexible’’ with them and ‘‘understands’’ this product. 

F. Despite advances in technology, the Federal Reserve has refused to speed up availability of deposits to consumers. 

Despite rapid technological changes in the movement of money electronically, the 

adoption of the Check 21 law to speed check processing, and electronic check conversion at the cash register, the Federal Reserve has failed to shorten the amount of 

time that banks are allowed to hold deposits before they are cleared. Money flies 

out of bank accounts at warp speed. Deposits crawl in. Even cash that is deposited 

over the counter to a bank teller can be held for 24 hours before becoming available 

to cover a transaction. The second business day rule for local checks means that a 

low-income worker who deposits a pay check on Friday afternoon will not get access 

to funds until the following Tuesday. If the paycheck is not local, it can be held for 

five business days. This long time period applies even when the check is written 

on the same bank where it is deposited. Consumers who deposit more than $5,000 

in one day face an added wait of about 5 to 6 more business days. Banks refuse 

to cash checks for consumers who do not have equivalent funds already on deposit. 

The combination of unjustifiably long deposit holds and banks’ refusal to cash account holders’ checks pushes low income consumers towards check cashing outlets, 

where they must pay 2 to 4 percent of the value of the check to get immediate access to cash. 

Consumer groups have called on the Federal Reserve to speed up deposit availability and to prohibit banks from imposing overdraft or insufficient fund (NSF) fees 

on transactions that would not have overdrawn if deposits had been available. The 

Federal Reserve vigorously supported Check 21, which has speeded up withdrawals 

but has refused to reduce the time period for local and nonlocal check hold periods 

for consumers. 

G. The Federal Reserve has supported the position of payday lenders and telemarketing fraud artists by permitting remotely created checks (demand drafts) 

to subvert consumer rights under the electronic funds transfer act. 

In 2005, the National Association of Attorneys General, the National Consumer 

Law Center, Consumer Federation of America, Consumers Union, the National Association of Consumer Advocates, and U.S. Public Interest Research Group filed 

comments with the Federal Reserve in Docket No. R-1226, regarding proposed 

changes to Regulation CC with respect to demand drafts. Demand drafts are unsigned checks created by a third party to withdraw money from consumer bank accounts. State officials told the FRB that demand drafts are frequently used to perpetrate fraud on consumers and that the drafts should be eliminated in favor of 

electronic funds transfers that serve the same purpose and are covered by protections in the Electronic Funds Transfer Act. Since automated clearinghouse transactions are easily traced, fraud artists prefer to use demand drafts. Fraudulent telemarketers increasingly rely on bank debits to get money from their victims. The 

Federal Trade Commission earlier this year settled a series of cases against telemarketers who used demand drafts to fraudulently deplete consumers’ bank accounts. Fourteen defendants agreed to pay a total of more than $16 million to settle 

FTC charges while Wachovia Bank paid $33 million in a settlement with the Comptroller of the Currency. 63

Remotely created checks are also used by high cost lenders to remove funds from 

checking accounts even when consumers exercise their right to revoke authorization 

to collect payment through electronic funds transfer. CFA first issued a report on 
92 

64Loan Supplement (ZipCash LLC) Form #2B, on file with CFA. 65 Reg E, 12 C.F.R. §205.10(e). 15 U.S.C. §1693k states that ‘‘no person’’ may condition extension of credit to a consumer on the consumer’s repayment by means of a preauthorized electronic 

fund transfer. 

Internet payday lending in 2004 and documented that some high-cost lenders converted debts to demand drafts when consumers exercised their EFTA right to revoke 

authorization to electronically withdraw money from their bank accounts. CFA 

brought this to the attention of the Federal Reserve in 2005, 2006, and 2007. No 

action has been taken to safeguard consumers’ bank accounts from unauthorized unsigned checks used by telemarketers or conversion of a loan payment from an electronic funds transfer to a demand draft to thwart EFTA protections or exploit a 

loophole in EFTA coverage. 

The structure of online payday loans facilitates the use of demand drafts. Every 

application for a payday loan requires consumers to provide their bank account routing number and other information necessary to create a demand draft as well as 

boiler plate contract language to authorize the device. The account information is 

initially used by online lenders to deliver the proceeds of the loan into the borrower’s bank account using the ACH system. Once the lender has the checking account information, however, it can use it to collect loan payments via remotely created checks per boilerplate contract language even after the consumer revokes authorization for the lender to electronically withdraw payments. 

The use of remotely created checks is common in online payday loan contracts. 

ZipCash LLC ‘‘Promise to Pay’’ section of a contract included the disclosure that the 

borrower may revoke authorization to electronically access the bank account as provided by the Electronic Fund Transfer Act. However, revoking that authorization 

will not stop the lender from unilaterally withdrawing funds from the borrower’s 

bank account. The contract authorizes creation of a demand draft which cannot be 

terminated. ‘‘While you may revoke the authorization to effect ACH debit entries at 

any time up to 3 business days prior to the due date, you may not revoke the authorization to prepare and submit checks on your behalf until such time as the loan is 

paid in full.’’ (Emphasis added.) 64

H. The Federal Reserve has taken no action to safeguard bank accounts from Internet 

payday lenders. 

In 2006, consumer groups met with Federal Reserve staff to urge them to take 

regulatory action to protect consumers whose accounts were being electronically 

accessed by Internet payday lenders. We joined with other groups in a follow up letter in 2007, urging the Federal Reserve to make the following changes to Regulation 

E: 

• Clarify that remotely created checks are covered by the Electronic Funds Transfer Act. 

• Ensure that the debiting of consumers’ accounts by Internet payday lenders is 

subject to all the restrictions applicable to preauthorized electronic funds transfers. 

• Prohibit multiple attempts to ‘‘present’’ an electronic debit. 

• Prohibit the practice of charging consumers a fee to revoke authorization for 

preauthorized electronic funds transfers. 

• Amend the Official Staff Interpretations to clarify that consumers need not be 

required to inform the payee in order to stop payment on preauthorized electronic transfers. 

While FRB staff was willing to discuss these issues, the FRB took no action to 

safeguard consumers when Internet payday lenders and other questionable creditors 

evade consumer protections or exploit gaps in the Electronic Fund Transfer Act to 

mount electronic assaults on consumers’ bank accounts. 

As a result of inaction by the Federal Reserve, payday loans secured by repeat 

debit transactions undermine the protections of the Electronic Fund Transfer Act, 

which prohibits basing the extension of credit with periodic payments on a requirement to repay the loan electronically. 65 Payday loans secured by debit access to the 

borrower’s bank account which cannot be cancelled also functions as the modern 

banking equivalent of a wage assignment—a practice which is prohibited when done 

directly. The payday lender has first claim on the direct deposit of the borrower’s 

next paycheck or exempt Federal funds, such as Social Security, SSI, or Veterans 

Benefit payments. Consumers need control of their accounts to decide which bills 

get paid first and to manage scarce family resources. Instead of using its authority 
93 

66 12 C.F.R. 7.4002(b). 67Office of Thrift Supervision, Guidance on Overdraft Protection Programs, February 14, 

2005, p. 15. 68Department of Treasury, Joint Guidance on Overdraft Protection Programs, February 15, 

2005, p. 13. 69 Consumer Federation of America, Comments to Federal Reserve Board, Docket No. R-1343, 

Reg. E, submitted March 30, 2009. 

to safeguard electronic access to consumers’ bank accounts, the Federal Reserve has 

stood idly by as the online payday loan industry has expanded. 

I. The banking agencies have failed to stop banks from imposing unlawful freezes 

on accounts containing social security and other funds exempt from garnishment. 

Federal benefits including Social Security and Veteran’s benefits (as well as State 

equivalents) are taxpayer dollars targeted to relieve poverty and ensure minimum 

subsistence income to the Nation’s workers. Despite the purposes of these benefits, 

banks routinely freeze bank accounts containing these benefits pursuant to garnishment or attachment orders, and assess expensive fees—especially insufficient fund 

(NSF) fees—against these accounts. 

The number of people who are being harmed by these practices has escalated in 

recent years, largely due to the increase in the number of recipients whose benefits 

are electronically deposited into bank accounts. This is the result of the strong Federal policy to encourage this in the Electronic Funds Transfer Act. And yet, the 

banking agencies have failed to issue appropriate guidance to ensure that the millions of Federal benefit recipients receive the protections they are entitled to under 

Federal law. 

J. The Comptroller of the Currency permits banks to manipulate payment order to 

extract maximum bounced check and overdraft fees, even when overdrafts are 

permitted. 

The Comptroller of the Currency permits national banks to rig the order in which 

debits are processed. This practice increases the number of transactions that trigger 

an overdrawn account, resulting in higher fee income for banks. When banks began 

to face challenges in court to the practice of clearing debits according to the size 

of the debit—from the largest to the smallest—rather than when the debit occurred 

or from smallest to largest check, the OCC issued guidelines that allow banks to 

use this dubious practice. 

The OCC issued an Interpretive Letter allowing high-to-low check clearing when 

banks follow the OCC’s considerations in adopting this policy. Those considerations 

include: the cost incurred by the bank in providing the service; the deterrence of 

misuse by customers of banking services; the enhancement of the competitive position of the bank in accordance with the bank’s business plan and marketing strategy; and the maintenance of the safety and soundness of the institution. 66 None of 

the OCC’s considerations relate to consumer protection. 

The Office of Thrift Supervision (OTS) addressed manipulation of transactionclearing rules in the Final Guidance on Thrift Overdraft Programs issued in 2005. 

The OTS, by contrast, advised thrifts that transaction-clearing rules (including 

check-clearing and batch debit processing) should not be administered unfairly or 

manipulated to inflate fees. 67 The Guidelines issued by the other Federal regulatory 

agencies merely urged banks and credit unions to explain the impact of their transaction clearing policies. The Interagency ‘‘Best Practices’’ State: ‘‘Clearly explain to 

consumers that transactions may not be processed in the order in which they occurred, and that the order in which transactions are received by the institution and 

processed can affect the total amount of overdraft fees incurred by the consumers.’’ 68

CFA and other national consumer groups wrote to the Comptroller and other Federal bank regulators in 2005 regarding the unfair trade practice of banks ordering 

withdrawals from high-to-low, while at the same time unilaterally permitting overdrafts for a fee. One of the OCC’s ‘‘considerations’’ is that the overdraft policy should 

‘‘deter misuse of bank services.’’ Since banks deliberately program their computers 

to process withdrawals high-to-low and to permit customers to overdraw at the ATM 

and Point of Sale, there is no ‘‘misuse’’ to be deterred. 

No Federal bank regulator took steps to direct banks to change withdrawal order 

to benefit low-balance consumers or to stop the unfair practice of deliberately causing more transactions to bounce in order to charge high fees. CFA’s survey of the 

16 largest banks earlier this year found that all of them either clear transactions 

largest first or reserve the right to do so. 69 Since ordering withdrawals largest first 

is likely to deplete scarce resources and trigger more overdraft and insufficient 
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70 ‘‘Federal Banking Regulators Could Better Ensure That Consumers Have Required Disclosure Documents Prior to Opening Checking or Savings Accounts’’, GAO-08-28I, January 2008, 

available at http://www.gao.gov/new.items/d08281.pdf (last visited 21 June 2009). 71The 1 November 2001 letter from Edmund Mierzwinski, U.S. PIRG, to Greenspan is available at http://static.uspirg.org/reports/bigbanks2001/greenspanltr.pdf (last visited 21 June 

2009). In that letter, we also urged the regulators to extend Truth In Savings disclosure requirements to the Internet. No action was taken. 72The final 2003 report to Congress is available here http://www.federalreserve.gov/ 

boarddocs/rptcongress/2003fees.pdf (last visited 21 June 2009). The 1997–2003 reports can all 

be accessed from this page, http://www.federalreserve.gov/pubs/reportslother.htm (last visited 

21 June 2009). 73Senators Durbin, Schumer, Kennedy and Dodd offered the first legislative proposal to create a consumer financial agency (S. 566), known as the Financial Product Safety Commission. 

The bill was originally introduced in the last Congress. 74 ‘‘Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and 

Regulation,’’ Department of the Treasury, June 17, 2009, pp. 55–70. The White House has since 

proposed legislation to effectuate the proposal in this ‘‘White Paper.’’ 

funds fees for many Americans, banks have no incentive to change this practice absent strong oversight by bank regulators. 

K. The regulators have failed to enforce the Truth In Savings Act requirement that 

banks provide account disclosures to prospective customers. 

According to a 2008 GAO report 70 to Rep. Carolyn Maloney, then-chair of the Financial Institutions and Consumer Credit Subcommittee, based on a secret shopper 

investigation, banks don’t give consumers access to the detailed schedule of account 

fee disclosures as required by the 1991 Truth In Savings Act. From GAO: 

Regulation DD, which implements the Truth in Savings Act (TISA), requires depository institutions to disclose (among other things) the amount 

of any fee that may be imposed in connection with an account and the conditions under which such fees are imposed. [ . . . ] GAO employees posed 

as consumers shopping for checking and savings accounts [ . . . ] Our visits 

to 185 branches of depository institutions nationwide suggest that consumers shopping for accounts may find it difficult to obtain account terms 

and conditions and disclosures of fees upon request prior to opening an account. Similarly, our review of the Web sites of the banks, thrifts, and credit unions we visited suggests that this information may also not be readily 

available on the Internet We were unable to obtain, upon request, a comprehensive list of all checking and savings account foes at 40 of the 

branches (22 percent) that we visited. [ . . . ] The results are consistent 

with those reported by a consumer group [U.S. PIRG] that conducted a 

similar exercise in 2001. 

This, of course, keeps consumers from being able to shop around and compare 

prices. As cited by GAO, U.S. PIRG then complained of these concerns in a 2001 

letter to then Federal Reserve Board Chairman Alan Greenspan. 71 No action was 

taken. The problem is exacerbated by a 2001 Congressional decision to eliminate 

consumers’ private rights olfaction for Truth In Savings violations. 

L. The Federal Reserve actively campaigned to eliminate a Congressional requirement that it publish an annual survey of bank account fees. 

One of the consumer protections included in the 1989 savings and loan bailout 

law known as the Financial Institutions Reform, Recovery and Enforcement Act was 

Section 1002, which required the Federal Reserve to publish an annual report to 

Congress on fees and services of depository institutions. The Fed actively campaigned in opposition to the requirement and succeeded in convincing Congress to 

sunset the survey in 2003. 72 Most likely, the Fed was unhappy with the report’s 

continued findings that each year bank fees increased, and that each year, bigger 

banks imposed the biggest fees. 

SECTION 4. STRUCTURE AND JURISDICTION OF A CONSUMER FINANCIAL PROTECTION AGENCY 

If the CFPA is to be effective in its mission, it must be structured so that it is 

strong and independent with full authority to protect consumers. Our organizations 

have strongly endorsed President Obama’s proposal regarding what should be the 

agency’s jurisdiction, responsibilities, rule-writing authority, enforcement powers 

and methods of funding. 73 His proposal would create a Consumer Financial Protection Agency (CFPA) with a broad jurisdiction over credit, savings and payment products, as well as fair lending and community reinvestment laws. 74 (Recommendations for improvement to the Administration bill are flagged below.) The legislation 
95 

has been introduced (without providing the agency jurisdiction over the Community 

Reinvestment Act) by House Financial Services Chairman Barney Frank as H.R. 

3126. 

In its work to protect consumers and the marketplace from abuses, the CFPA as 

envisioned by the Administration would have a full set of enforcement and analytical tools. The first tool would be that the CFPA could gather information about the 

marketplace so that the agency itself could understand the impact of emerging practices in the marketplace. The agency could use this information to improve the information that financial services companies must offer to customers about products, 

features or practices or to offer advice to consumers directly about the risk of a variety of products on the market. For some of these products, features or practices, the 

agency might determine that no regulatory intervention is warranted. For others, 

this information about the market will inform what tools are used. A second tool 

would be to address and rein in deceptive marketing practices or require improved 

disclosure of terms. The third tool would be the identification and regulatory facilitation of ‘‘plain-vanilla,’’ low risk products that should be widely offered. The fourth 

tool would be to restrict or ban specific product features or terms that are harmful 

or not suitable in some circumstances, or that don’t meet ordinary consumer expectations. Finally, the CFPA would also have the ability to prohibit dangerous financial products. We can only wonder how much less pain would have been caused for 

our economy if a regulatory agency had been actively exercising the latter two powers during the run up to the mortgage crisis. 

A. Agency structure and jurisdiction. 

Under the Administration’s proposal, the agency would be governed by a fivemember board. Four of these members would be appointed by the President and 

confirmed by the Senate. The final member would be the director of the consolidated 

bank supervisory agency proposed by the President. We strongly recommend that 

the stipulated qualifications for board membership be improved to require that 

board members have actual experience and expertise with consumer protection in 

the financial services arena. An agency focused solely on protecting consumers must 

be governed by leaders who have expertise not just in the financial services marketplace, but with protecting consumers in that marketplace. 

The Administration proposes to have the agency oversee the sale and marketing 

of credit, deposit and payment products and services and related products and services, and will ensure that they are being offered in a fair, sustainable and transparent manner. This should include debit, prepaid debit, and stored value cards; 

loan servicing, collection, credit reporting and debt-related services (such as credit 

counseling, mortgage rescue plans and debt settlement) offered to consumers and 

small businesses. Our organizations support this jurisdiction because credit products 

can have different names and be offered by different types of entities, yet still compete for the same customers in the same marketplace. Putting the oversight of competing products under one set of minimum Federal rules regardless of who is offering that product will protect consumers, promote innovation, provide consumers 

with valuable options, and spur vigorous competition. 

As with the Administration, we recommend against granting this agency jurisdiction over investment products that are marketed to retail investors, such as mutual 

funds. While there is a surface logic to this idea, we believe it is impractical and 

could inadvertently undermine investor protections. Giving the agency responsibility 

for investment products that is comparable to the proposed authority it would have 

over credit products would require the agency to add extensive additional staff with 

expertise that differs greatly from that required for oversight of credit products. Apparently simple matters, such as determining whether a mutual fund risk disclosure 

is appropriate or a fee is fair, are actually potentially quite complex and would require the new agency to duplicate expertise that already exists within the SEC. 

Moreover, it would not be possible simply to transfer the staff with that expertise 

to the new agency, since the SEC would continue to need that expertise on its own 

staff in order to fulfill its responsibilities for oversight of investment advisers and 

mutual fund operations. In addition, unless the new agency was given responsibility 

for all investment products and services a broker might recommend, brokers would 

be able to work around the new protections with potentially adverse consequences 

for investors. A broker who wanted to avoid the enhanced disclosures and restrictions required when selling a mutual fund, for example, could get around them by 

recommending a separately managed account. The investor would likely pay higher 

fees and receive fewer protections as a result. For these reasons, we believe the 

costs and risks of this proposal outweigh the potential benefits. 

The Administration’s plan wisely provides the agency with jurisdiction over a 

number of insurance products that are central or ancillary to credit transactions, in-
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75The agency should also be given explicit authority over ‘‘forced-place’’ homeowner’s insurance, which banks can require borrowers to purchase if they cannot procure their own coverage. 76Testimony of J. Robert Hunter, Director of Insurance, Consumer Federation of America, before the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises 

of the U.S. House Financial Services Committee, October 30, 2007, pp. 8–9. 77See http://ourfinancialsecurity.org/issues/leveling-the-playing-field/ 

cluding credit, title, and mortgage insurance. 75 This principal behind this approach 

is to provide the agency with holistic jurisdiction over the entire credit transaction, 

including ancillary services often sold with or in connection with the credit. Additionally, there is ample evidence of significant consumer abuses in many of these 

lines of insurance, including low loss ratios, high mark ups, and ‘‘reverse competition’’ where the insurer competes for the business of the lender, rather than of the 

insurance consumer. 76 This Federal jurisdiction could apply without interfering 

with the licensing and rate oversight role of the States. 

The United States has never sufficiently addressed the problems and challenges 

of lending discrimination and red lining practices, the vestiges of which include the 

present day unequal, two-tiered financial system that forces minority and low-income borrowers to pay more for financial services, get less value for their money, 

and exposes them to greater risk. It is therefore, imperative that the Consumer Financial Protection Agency also focus in a concentrated way on fair lending issues. 

To that end, the Agency must have a comprehensive Office of Civil Rights, which 

would ensure that no Federal agency perpetuated unfair practices and that no member of the financial industry practices business in a way that perpetuates discrimination. Compliance with civil rights statutes and regulations must be a priority at 

each Federal agency that has financial oversight or that enforces a civil rights statute. There must be effective civil rights enforcement of all segments of the financial 

industry. Moreover, each regulatory and enforcement agency must undertake sufficient reporting and monitoring activities to ensure transparency and hold the agencies accountable. A more detailed description of the civil rights functions that must 

be undertaken at the CFPA and at other regulatory and enforcement agencies can 

be found in the Civil Rights Policy Paper available at 

www.ourfinancialsecurity.org. 77

B. Rule writing. 

Under the Administration proposal, the agency will have broad rule-making authority to effectuate its purposes, including the flexibility to set standards that are 

adequate to address rapid evolution and changes in the marketplace. Such authority 

is not a threat to innovation, but rather levels the playing field and protects honest 

competition, as well as consumers and the economy. 

The Administration’s plan also provides that the rule-making authority for the existing consumer protection laws related to the provision of credit would be transferred to this agency, including the Truth in Lending Act (TILA), Truth in Savings 

Act (TISA), Home Ownership and Equity Protection Act (HOEPA), Real Estate Protection Act (RESPA), Fair Credit Reporting Act (FCRA), Electronic Fund Transfer 

Act (EFTA), and Fair Debt Collection Practices Act (FDCPA). Current rule-writing 

authority for nearly 20 existing laws is spread out among at least seven agencies. 

Some authority is exclusive, some joint, and some is concurrent. However, this 

hodgepodge of statutory authority has led to fractured and often ineffectual enforcement of these laws. It has also led to a situation where Federal rule-writing agencies may be looking at just part of a credit transaction when writing a rule, without 

considering how the various rules for different parts of the transaction affect the 

marketplace and the whole transaction. The CFPA with expertise, jurisdiction, and 

oversight that cuts across all segments of the financial products marketplace, will 

be better able to see inconsistencies, unnecessary redundancies, and ineffective regulations. As a marketwide regulator, it would also ensure that critical rules and regulations are not evaded or weakened as agencies compete for advantage for the entities they regulate. 

Additionally the agency would have exclusive ‘‘organic’’ Federal rule-writing authority within its general jurisdiction to deem products, features, or practices unfair, 

deceptive, abusive or unsustainable, and otherwise to fulfill its mission and mandate. The rules may range from placing prohibitions, restrictions, or conditions on 

practices, products, or features to creating standards, and requiring special monitoring, reporting, and impact review of certain products, features, or practices. 

C. Enforcement. 

A critical element of a new consumer protection framework is ensuring that consumer protection laws are consistently and effectively enforced. As mentioned above, 

the current crisis occurred not only because of gaps and weaknesses in the law, but 
97 

primarily because the consumer protection laws that we do have were not always 

enforced. For regulatory reform to be successful, it must encourage compliance by 

ensuring that wrongdoers are held accountable. 

A new CFPA will achieve accountability by relying on a three-legged stool: enforcement by the agency, by States, and by consumers themselves. 

First, the CFPA itself will have the tools, the mission and the focus necessary to 

enforce its mandate. The CFPA will have a range of enforcement tools under the 

Administration proposal. The Administration, for example, would give the agency 

examination and primary compliance authority over consumer protection matters. 

This will allow the CFPA to look out for problems and address them in its supervisory capacity. But unlike the banking agencies, whose mission of looking out for 

safety and soundness led to an exclusive reliance on supervision, the CFPA will 

have no conflict of interest that prevents it from using its enforcement authority 

when appropriate. Under the Administration proposal, the agency will have the full 

range of enforcement powers, including subpoena authority; independent authority 

to enforce violations of the statues it administers; and civil penalty authority. 

Second, both proposals allow States to enforce Federal consumer protection laws 

and the CFPA’s rules. As Stated in detail in Section 5, States are often closer to 

emerging threats to consumers and the marketplace. They routinely receive consumer complaints and monitor local practices, which will permit State financial regulators to see violations first, spot local trends, and augment the CFPA’s resources. 

The CFPA will have the authority to intervene in actions brought by States, but 

it can conserve its resources when appropriate. As we have seen in this crisis, States 

were often the first to act. 

Finally, consumers themselves are an essential, in some ways the most essential, 

element of an enforcement regime. Recourse for individual consumers must, of 

course, be a key goal of a new consumer protection system. The Administration’s 

plan appropriately States that the private enforcement provisions of existing statutes will not be disturbed. 

A significant oversight of the Administration’s plan is that it does not allow private enforcement of new CFPA rules. It is critical that the consumers who are 

harmed by violations of these rules be able to take action to protect themselves. 

Consumers must have the ability to hold those who harm them accountable for numerous reasons: 

• No matter how vigorous and how fully funded a new CFPA is, it will not be 

able to directly redress the vast majority of violations against individuals. The 

CFPA will likely have thousands of institutions within its jurisdiction. It cannot 

possibly examine, supervise or enforce compliance by all of them. 

• Individuals have much more complete information about the affect of products 

and practices, and are in the best position to identify violations of laws, take 

action, and redress the harm they suffer. An agency on the outside looking in 

often will not have sufficient details to detect abusive behavior or to bring an 

enforcement action. 

• Individuals are an early warning system that can alert States and the CFPA 

of problems when they first arise, before they become a national problem requiring the attention of a Federal agency. The CFPA can monitor individual actions 

and determine when it is necessary to step in. 

• Bolstering public enforcement with private enforcement conserves public resources. A Federal agency cannot and should not go after every individual violation. 

• Consumer enforcement is a safety net that ensures compliance and accountability after this crisis has passed, when good times return, and when it becomes more tempting for regulators to think that all is well and to take a lighter approach. 

• The Administration’s plan rightly identifies mandatory arbitration clauses as a 

barrier to fair adjudication and effective redress. We strongly agree—but it is 

also critically important regarding access to justice that consumers have the 

right to enforce a rule. 

Private enforcement is the norm and has worked well as a complement to public 

enforcement in the vast majority of the consumer protection statutes that will be 

consolidated under the CFPA, including TILA, HOEPA, FDCPA, FCRA, EFTA and 

others. 

Conversely, the statutes that lack private enforcement mechanisms are notable 

for the lack of compliance. The most obvious example is the prohibition against unfair and deceptive practices in Section 5 of the FTC Act. Though the banking agencies eventually identified unfair and deceptive mortgage and credit card practices 
98 

that should be prohibited (after vigorous congressional prodding), individuals were 

subject to those practices for years with no redress because they could not enforce 

the FTC Act. Not only consumers, but the entire economy and even financial institutions would have been much better off if consumers had been able to take action 

earlier on, when the abusive practices were just beginning. 

D. Product evaluation, oversight, and monitoring. 

Under the Administration’s proposal, the agency would have significant enforcement and data collection authority to evaluate and to remove, restrict, or prevent 

unfair, deceptive, abusive, discriminatory, or unsustainable products, features or 

practices. The agency could also evaluate and promote practices, products, and features that facilitate responsible and affordable credit, payment devices, asset-building, and savings. Finally, the agency could assess the risks of both specific products 

and practices and overall market developments for the purpose of identifying, reducing and preventing excessive risk (e.g., monitoring longitudinal performance of mortgages with certain features for excessive failure rates; and monitoring the market 

share of products and practices that present greater risks, such as weakening underwriting). 

Specifically, we would recommend that the agency take the following approach to 

product evaluation, approval and monitoring under the proposal: 

• Providers of covered products and services in some cases could be required to 

file adequate data and information to allow the agency to make a determination 

regarding the fairness, sustainability, and transparency of products, features, 

and practices. This could include data on product testing, risk modeling, credit 

performance over time, customer knowledge and behavior, target demographic 

populations, etc. Providers of products and services that are determined in advance to represent low risk would have to provide de minimus or no information 

to the agency. 

• ‘‘Plain-vanilla’’ products, features or practices that are determined to be fair, 

transparent and sustainable would be determined to be presumptively in compliance and face less regulatory scrutiny and fewer restrictions. 

• Products, features or practices that are determined to be potentially unfair, 

unsustainable, discriminatory, deceptive or too complex for its target population 

might be required to meet increased regulatory requirements and face increased 

enforcement and remedies. 

• In limited cases, products, features or practices that are deemed to be particularly risky could face increased filing and data disclosure requirements, limited 

roll-out mandates, post-market evaluation requirements and, possibly, a stipulation of preapproval before they are allowed to enter or be used in the marketplace. 

• The long-term performance of various types of products and features would be 

evaluated, and results made transparent and available broadly to the public, as 

well as to providers, Congress, and the media to facilitate informed choice. 

• The Agency should hold periodic public hearings to examine products, practices 

and market developments to facilitate the above duties, including the adequacy 

of existing regulation and legislation, and the identification of both promising 

and risky market developments. These hearings would be especially important 

in examination of new market developments, such as, for example, where credit 

applications will soon be submitted via a mobile phone, for example, and consumer dependence on the Internet for conducting financial transactions is expected to grow dramatically. In such hearings, in rule-makings, and in other appropriate circumstances, the Agency should ensure that there is both opportunity and means for meaningful public input, including consideration of existing models such as funded public interveners. 

E. Funding. 

The Administration’s proposal would authorize Congressional appropriations as 

needed for the agency. It also allows the agency to recover the amount of funds it 

spends through annual fees or assessments on financial services providers it oversees. Our view is that the agency should have a stable (not volatile) funding base that 

is sufficient to support robust enforcement and is not subject to political manipulation by regulated entities. Funding from a variety of sources, as well as a mix of 

these sources, should be considered, including Congressional appropriations, user 

fees or industry assessments, filing fees, priced services (such as for compliance examinations) and transaction-based fees. See Appendix 4 for a comparison of current 

agency funding and fee structures. 
99 

78The CFPA should have responsibility for collecting and tracking complaints about consumer 

financial services and facilitating complaint resolution with respect to federally supervised institutions. Other Federal supervisory agencies should refer any complaints they receive on consumer issues to the CFPA; complaint data should be shared across agencies . . . , ‘‘A New Foundation’’, pp. 59–60, The Obama Administration, June 2009. 79Travis Plunkett testimony, July 2007 ‘‘Improving Federal Consumer Protections in Financial Services’’, p. 10. 

None of these funding sources is without serious weaknesses. Industry assessments or user fees can provide the regulated entity with considerable leverage over 

the budget of the agency and facilitate regulatory capture of the agency, especially 

if the regulated party is granted any discretion over the amount of the assessment 

(or is allowed to decide who regulates them and shift its assessment to another 

agency.) Transaction-based fees can be volatile and unpredictable, especially during 

economic downturns. Filing fees can also decline significantly if economic activity 

falls. Congressional appropriations, as we have seen with other Federal consumer 

protection agencies over the last half-century, can be fairly easily targeted for reduction or restriction by well’ funded special interests if these interests perceive that 

the agency has been too effective or aggressive in pursing its mission. 

If an industry-based funding method is used, it should ensure that all providers 

of covered products and services are contributing equally based on their size and 

the nature of the products they offer. A primary consideration in designing any industry-based funding structure is that certain elements of these sectors should not 

be able to evade the full funding requirement, through charter shopping or other 

means. If such requirements can be met, we would recommend a blended funding 

structure from multiple sources that requires regulated entities to fund the baseline 

budget of the agency and Congressional appropriations to supplement this budget 

if the agency demonstrates an unexpected or unusual demand for its services. 

F. Consumer complaints. 

The Administration proposal would require the agency to collect and track federally directed complaints rewarding credit or payment products, features, or practices 

under the agency’s jurisdiction. 78 This is a very important function but it should 

be improved in two significant respects. First, the agency should also be charged 

with resolving consumer complaints. Existing agencies, particularly the OCC, have 

generally not performed this function well. 79 Secondly, the agency should be designated as the sole repository of consumer complaints on products, features, or practices within its jurisdiction, and should ensure that this is a role that is readily visible to consumers, simple to access and responsive. The agency should also be required to conduct real-time analysis of consumer complaints regarding patterns and 

practices in the credit and payment systems industries and to apply these analyses 

when writing rules and enforcing rules and laws. 

G. Federal preemption of State laws. 

As the Administration proposal States, the agency should establish minimum 

standards within its jurisdictions. CFPA rules would preempt weaker State laws, 

but States that choose to exceed the standards established by the CFPA could do 

so. The agency’s rules would preempt statutory State law only when it is impossible 

to comply with both State and Federal law. 

We also strongly agree with the Administration’s recommendation that federally 

chartered institutions be subject to nondiscriminatory State consumer protection 

and civil rights laws to the same extent as other financial institutions. A clear lesson of the financial crisis, which pervades the Administration’s plan, is that protections should apply consistently across the board, based on the product or service 

that is being offered, not who is offering it. 

Restoring the viability of our background State consumer protection laws is also 

essential to the flexibility and accountability of the system in the long run. The specific rules issued by the CFPA and the specific statutes enacted by Congress will 

never be able to anticipate every innovative abuse designed to avoid those rules and 

statutes. The fundamental State consumer protection laws, both statutory and common law, against unfair and deceptive practices, fraud, good faith and fair dealing, 

and other basic, longstanding legal rules are the ones that spring up to protect consumers when a new abuse surfaces that falls within the cracks of more specific 

laws. We discuss preemption in greater detail in the next section. 

H. Other aspects of the Administration proposal. 

As discussed briefly above, the CFPA should also have the authority to grant intervener funding to consumer organizations to fund expert participation in its stakeholder activities. The model has been used successfully to fund consumer group par-
100 

80 As his last legislative activity, in October 2002, Senator Paul Wellstone proposed establishment of such an organization, the Consumer and Shareholder Protection Association, S 3143. 

ticipation in State utility rate making. Second, a Government chartered consumer 

organization should be created by Congress to represent consumers’ financial services interests before regulatory, legislative, and judicial bodies, including before the 

CFPA. This organization could be financed through voluntary user fees such as a 

consumer check-off included in the monthly Statements financial firms send to their 

customers. It would be charged with giving consumers, depositors, small investors 

and taxpayers their own financial reform organization to counter the power of the 

financial sector, and to participate fully in rulemakings, adjudications, and lobbying 

and other activities now dominated by the financial lobby. 80

Moreover, we recommend that the Administration’s proposal deal more explicitly 

with incentives that are paid to and whistleblower protections that are provided to 

employees working in the credit sector. An incentive system similar to one at the 

top is at work at the street level of the biggest banks. In the tens of thousands of 

bank branches and call centers of our biggest banks, employees-including bank tellers earning an average of $11.32 an hour-are forced to meet sales goals to keep their 

jobs and earn bonuses. Many goals for employees selling high-fee and high-interest 

products like credit cards and checking accounts have actually gone up as the economy has gone down. 

Risk-taking in the industry will quickly outpace regulatory coverage unless financial sector employees can challenge bad practices as they develop and direct regulators to problems. Whistleblowers are critical to combating fraud and other institutional misconduct. The Federal Government needs to hear from and protect finance 

sector employees who object to bad practices that they believe violate the law, are 

unfair or deceptive, or threaten the public welfare. If we previously had more protections for whistleblowers, we would have had more warning of the eventual collapse 

of Wall Street. 

Since 2000, Congress has enacted or strengthened whistleblower protections in six 

laws. They include consumer product manufacturing and retail commerce, railroads, 

the trucking industry, metropolitan transit systems, defense contractors, and all entities receiving stimulus funds. All of these laws provide more incentives and protections for disclosure of wrongdoing than does the current proposal from the Administration. For example, it does not protect disclosures made to an employer, which is 

often the first action taken by loyal, concerned employees, and the impetus for retaliation. Also conspicuously absent are administrative procedures and remedies that 

include best practices for fair and adequate consideration of claims by employees. 

We recommend the following improvements in any reform legislation before the 

Committee. 

Whistleblower protections. Innovation in the industry will quickly outpace regulatory coverage unless bank branch, call-center, and other financial sector employees 

can challenge bad practices as they develop and direct regulators to problems. The 

Federal Government needs to hear from and provide best practice whistleblower 

rights consistent with those in the stimulus and five laws passed or strengthened 

last Congress to protect finance sector employees who object to bad practices that 

they believe violate the law, are unfair or deceptive, or threaten the public welfare. 

Fair compensation. New rules need to restructure pay and incentives for front-line 

finance sector employees away from the current ‘‘sell-anything’’ culture. The hundreds of thousands of front-line workers who work under pressure of sales goals 

need to be able to negotiate sensible compensation policies that reward service and 

sound banking over short-term sales. 

SECTION 5. REBUTTAL TO ARGUMENTS AGAINST THE CFPA 

Proactive, affirmative consumer protection is essential to modernizing financial 

system oversight and to reducing risk. The current crisis illustrates the high costs 

of a failure to provide effective consumer protection. The complex financial instruments that sparked the financial crisis were based on home loans that were poorly 

underwritten; unsuitable to the borrower; arranged by persons not bound to act in 

the best interest of the borrower; or contained terms so complex that many individual homeowners had little opportunity to fully understand the nature or magnitude of the risks of these loans. The crisis was magnified by highly leveraged, 

largely unregulated financial instruments and inadequate risk management. 

Opponents of reform of the financial system have made several arguments against 

the establishment of a strong independent Consumer Financial Protection Agency. 

Indeed, the new CFPA appears to be among their main targets for criticism, compared with other elements of the reform plan. They have basically made six arguments. They have argued that regulators already have the powers it would be given, 
101 

81 73 FR 147, Page 44522, Final HOEPA Rule, 30 July 2008. 82Testimony of Professor Arthur Wilmarth, 26 April 2007, before the Subcommittee on Financial Institutions and Consumer Credit, hearing on Credit Card Practices: Current Consumer and 

Regulatory Issues http://www.house.gov/financialservices/hearing110/htwilmarth042607.pdf. 83 H.R. 627 was signed into law by President Obama as Pub. L. No. 111-24 on 22 May 2009. 84The final rule was published in the Federal Register a month later. 74 FR 18, p. 5498 

Thursday, January 29, 2009. 

that it would be a redundant layer of bureaucracy, that consumer protection cannot 

be separated from supervision, that it will stifle innovation, that it would be unfair 

to small institutions and that its anti-preemption provision would lead to balkanization. Each of these arguments is fatally flawed: 

A. Opponents argue that regulators already have the powers that the CFPA would 

be given. 

This argument is effectively a defense of the status quo, which has led to disastrous results. Current regulators already have between them some of the powers 

that the new agency would be given, but they haven’t used them. Conflicts of interest and missions and a lack of will have worked against consumer enforcement. 

While our section above goes into greater detail on the failures of the regulators, 

two examples will illustrate: 

• No HOEPA Rules Until 2008: The Federal Reserve Board was granted sweeping 

antipredatory mortgage regulatory authority by the 1994 Home Ownership and 

Equity Protection Act (HOEPA). Final regulations were issued on 30 July 2008 

only after the world economy had collapsed due to the collapse of the U.S. housing market triggered by predatory lending. 81

• No Action on Abusive Credit Card Practices Until Late 2008: Further, between 

1995 and 2007, the Office of the Comptroller of Currency issued only one public 

enforcement action against a Top Ten credit card bank (and then only after the 

San Francisco District Attorney had brought an enforcement action) and only 

one other public enforcement order against a mortgage subsidiary of a large national bank (only after HUD initiated action). In that period, ‘‘the OCC has not 

issued a public enforcement order against any of the eight largest national 

banks for violating consumer lending laws.’’ 82 The OCC’s failure to act on rising 

credit card complaints at the largest national banks triggered Congress to investigate, resulting in passage of the 2009 Credit Card Accountability, Responsibility and Disclosure Act (CARD Act). 83 While that law was under consideration, other Federal regulators used their authority under the Federal Trade 

Commission Act to propose and finalize a similar rule. 84 By contrast, the OCC 

requested the addition of two significant loopholes to a key protection of the 

proposed rule. 

Federal bank regulators currently face at least two conflicts. First, their primary 

mission is prudential supervision, with enforcement of consumer laws taking a back 

seat. Second, charter shopping in combination with agency funding by regulated entities encourages a regulatory race to the bottom as banks choose the regulator of 

least resistance. In particular, the Office of the Comptroller of the Currency and the 

Office of Thrift Supervision have failed utterly to protect consumers, let alone the 

safety and soundness of regulated entities. Instead, they competed with each other 

to minimize consumer protection standards as a way of attracting institutions to 

their charters, which meant that they tied their own hands and failed to fulfill their 

missions. (Note: they weren’t trying to fail, but that was a critical side effect of the 

charter competition.) 

Establishing a new consumer agency that has consumer protection as its only mission and that regulated firms cannot hide from by charter-shopping is the best way 

to guarantee that consumer laws will receive sustained, thoughtful, proactive attention from a Federal regulator. 

B. Opponents argue that the CFPA would be a redundant layer of bureaucracy. 

We do not propose a new regulatory agency because we seek more regulation, but because we seek better regulation. The very existence of an agency 

devoted to consumer protection in financial services will be a strong incentive for institutions to develop strong cultures of consumer protection. (The 

Obama Administration, Financial Regulatory Reform: A New Foundation, p. 

57) 

The new CFPA would not be a redundant layer of bureaucracy. To the contrary, 

the new agency would consolidate and streamline Federal consumer protection for 

credit, savings and payment products that is now required in almost 20 different 
102 

85The Obama Administration, ‘‘Financial Regulatory Reform: A New Foundation’’, p. 57. 86Letter of 28 May 2009 from the American Bankers Association to Treasury Secretary Tim 

Geithner, available at http://www.aba.com/NR/rdonlyres/4640E4F1-4BC9-4187-B9A6- 

E3705DD9B307/60161/GeithnerMay282009.pdf (last viewed 21 June 2009). 87The Obama Administration, Financial Regulatory Reform: A New Foundation, p. 59. 88 ‘‘As we note in our report, efforts by regulators to respond to the increased risks associated 

with the new mortgage products were sometimes slowed in part because of the need for five 

Federal regulators to coordinate their response.’’ ‘‘Financial Regulation: A Framework for 

Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System’’, Testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 

February 4, 2009, pp. 15–16. 89See Christopher L. Peterson, ‘‘Federalism and Predatory Lending: Unmasking the Deregulatory Agenda’’, 78 Temp. L. Rev. 1, 73 (2005). 

statutes and divided between seven different agencies. As the New Foundation document continues: 

The core of such an agency can be assembled reasonably quickly from discrete operations of other agencies. Most rule-writing authority is concentrated in a single division of the Federal Reserve, and three of the four 

Federal banking agencies have mostly or entirely separated consumer compliance supervision from prudential supervision. Combining staff from different agencies is not simple, to be sure, but it will bring significant benefits for responsible consumers and institutions, as well as for the market 

for consumer financial services and products. 85

And today, a single transaction such as a mortgage loan is subject to regulations 

promulgated by several agencies and may be made or arranged by an entity supervised by any of several other agencies. Under the CFPA, one Federal agency will 

write the rules and see that they are followed. 

C. Opponents argue that consumer protection cannot be separated from supervision. 

The current regulatory consolidation of both of these functions has led to the subjugation of consumer protection in most cases, to the great harm of Americans and 

the economy. Nevertheless, trade associations for many of the financial institutions 

that have inflicted this harm claim that a new approach that puts consumer protection at the center of financial regulatory efforts will not work. The American Bankers Association, for example, States that while the length of time banks hold checks 

under Regulation CC may be a consumer issue, ‘‘fraud and payments systems operational issues’’ are not. 86

Again, as the Administration points out in its carefully thought-out blueprint for 

the new agency: 

The CFPA would be required to consult with other Federal regulators to 

promote consistency with prudential, market, and systemic objectives. Our 

proposal to allocate one of the CFPA’s five board seats to a prudential regulator would facilitate appropriate coordination. 87

We concur that the new agency should have full rulemaking authority over all 

consumer statutes. The checks and balances proposed by the Administration, including the consultative requirement and the placement of a prudential regulator on its 

board and its requirement to share confidential examination reports with the prudential regulators will address these concerns. In addition, the Administration’s 

plan provides the CFPA with full compliance authority to examine and evaluate the 

impact of any proposed consumer protection measure on the bottom line of affected 

financial institutions. While collaboration between regulators will be very important, 

it should not be used as an excuse by either the CFPA or other regulators to unnecessarily delay needed action. The GAO, for example, has identified time delays in 

interagency processes as a contributor to the mortgage crisis. 88 This is why it is important that the CFPA retain final rulemaking authority, as proposed under the Administration’s plan. Such authority, along with the above mentioned mandates, will 

ensure that both the CFPA and the Federal prudential regulator collaborate on a 

timely basis. 

For most of the last 20 years, bank regulators have shown little understanding 

of consumer protection and have not used powers they have long held. OCC’s traditional focus and experience has been on safety and soundness, rather than consumer 

protection. 89 Its record on consumer protection enforcement is one of little experience and little evidence of expertise. In contrast, as already noted, the States have 

long experience in enforcement of non-preempted State consumer protection laws. 

OCC admits that it was not until 2000 that it invoked long-dormant consumer pro-
103 

90See Julie L. Williams and Michael L. Bylsma, ‘‘On the Same Page: Federal Banking Agency 

Enforcement of the FTC Act To Address Unfair and Deceptive Practices by Banks’’, 58 Bus. 

Law. 1243, 1244, 1246 and n. 25, 1253 (2003) (citing authority from the early 1970s indicating 

that OCC had the authority to bring such an action under Section 8 of the Federal Deposit Insurance Act, noting that OCC brought its first such case in 2000, and conceding that ‘‘[a]n obvious question is why it took the Federal banking agencies more than 25 years to reach consensus 

on their authority to enforce the FTC Act’’). 91 ‘‘Too Big to Fail or Too Big to Save? Examining the Systemic Threats of Large Financial 

Institutions’’, Joseph E. Stiglitz, April 21, 2009, p. 10. 

tection authority provided by the 1975 amendments to the Federal Trade Commission Act. 90

D. Opponents argue that a single agency focused on consumer protection will ‘‘stifle 

innovation’’ in the financial services marketplace. 

To the contrary, protecting consumers from traps and tricks when they purchase 

credit, savings or payment products should encourage confidence in the financial 

services marketplace and spur innovation. As Nobel Laureate Joseph Stiglitz has 

said: 

There will be those who argue that this regulatory regime will stifle innovation. However, a disproportionate part of the innovations in our financial 

system have been aimed at tax, regulatory, and accounting arbitrage. They 

did not produce innovations which would have helped our economy manage 

some critical risks better-like the risk of home ownership. In fact, their innovations made things worse. I believe that a well-designed regulatory system, along the lines I’ve mentioned, will be more competitive and more innovative-with more of the innovative effort directed at innovations which 

will enhance the productivity of our firms and the well-being, including the 

economic security, of our citizens. 91

E. Opponents argue that the CFPA would place an unfair regulatory burden on 

small banks and thrifts. 

Small banks and thrifts that offer responsible credit and payment products should 

face a lower regulatory burden under regulation by a CFPA. Members of Congress, 

the media and consumer organizations have properly focused on the role of large, 

national banks and thrifts in using unsustainable, unfair and deceptive mortgage 

and credit card lending practices. In contrast, many smaller banks and thrifts have 

justifiably been praised for their more responsible lending practices in theses areas. 

In such situations, the CFPA would promote fewer restrictions and less oversight 

for ‘‘plain-vanilla’’ products that are simple, straightforward and fair. 

However, it is also important to note that some smaller hanks and thrifts have, 

unfortunately, been on the cutting edge of a number of other abusive lending practices that are harmful to consumers and that must be addressed by a CFPA. More 

than 75 percent of State chartered banks surveyed by the FDIC, for example, automatically enrolled customers in high-cost overdraft loan programs without consumers’ consent. Some of these banks deny consumers the ability to even opt out 

of being charged high fees for overdraft transactions that the banks chose to permit. 

Smaller banks have also been leaders in facilitating high-cost refund anticipation 

loans, in helping payday lenders to evade State loan restrictions and in offering deceptive and extraordinarily expensive ‘‘fee harvester’’ credit cards. (See Appendix 1 

for more information.) 

F. Opponents argue that the agency’s authority to establish only a Federal floor of 

consumer protection would lead to regulatory inefficiency and balkanization. 

The loudest opposition to the new agency will likely be aimed at the Administration’s sensible proposal that CFPA’s rules be a Federal floor and that the States be 

allowed to enact stronger consumer laws that are not inconsistent, as well as to enforce both Federal and State laws. This proposed return to common sense protections is strongly endorsed by consumer advocates and State attorneys general. 

We expect the banks and other opponents to claim that the result will be 51 balkanized laws that place undue costs on financial institutions that are then passed 

onto consumers in the form of higher priced or less available loans. In fact, this approach is likely to lead to a high degree of regulatory uniformity (if the CFPA sets 

high minimum standards,) greater protections for consumers without a significant 

impact on cost or availability, increased public confidence in the credit markets and 

financial institutions, and less economic volatility. For example, comprehensive research by the Center for Responsible Lending found that subprime mortgage loans 

in States that acted vigorously to rein in predatory mortgage lending before they 

were preempted by the OCC had fewer abusive terms. In States with stronger pro-
104 

92Wei Li and Keith S. Ernst, Center for Responsible Lending, ‘‘The Best Value in the 

Subprime Market: State Predatory Lending Reforms’’, February, 23, 2006, p. 6. 93 ‘‘Some worry about the cost of duplication. But when we compare the cost of duplication 

to the cost of damage from inadequate regulation—not just the cost to the taxpayer of the bailouts but also the costs to the economy from the fact that we will be performing well below our 

potential—it is clear that there is not comparison,’’ Testimony of Dr. Joseph E. Stiglitz, Professor, Columbia University, before the House Financial Services Committee, October 21, 2008, 

p. 16. 94Office of the Comptroller of the Currency, Interpretive Letter No. 957 n.2 (Jan. 27, 2003) 

(citing OCC Advisory Letter 2002-9 (Nov. 25, 2002)) (viewed Jun. 19, 2009, at http:// 

www.occ.treas.gov/interp/mar03/int957.doc, and available at 2003 OCC Ltr. LEXIS 11). 95 E.g., Office of the Comptroller of the Currency, Interpretive Letter No. 971 (Jan. 16, 2003) 

(letter to Pennsylvania Department of Banking, that it does not have the authority to supervise 

an unnamed national bank’s unnamed operating subsidiary which engages in subprime mortgage lending (unnamed because the interpretive letter is unpublished) (viewed Jun. 19, 2009, 

at http://comptrollerofthecurrency.gov/interp/sep03/int971.doc, and available at 2003 OCC QJ 

LEXIS 107). 96Office of the Comptroller of the Currency, Interpretive Letter No. 958 (Jan. 27, 2003) 

(viewed Jun. 19, 2009, at http://www.occ.treas.gov/interp/mar03/int958.pdf, and available at 

2003 OCC Ltr. LEXIS 10). 97The OCC’s exclusive visitorial powers preclude States from asserting supervisory authority 

or enforcement jurisdiction over the Subsidiaries (Jan. 27, 2003) (viewed Jun. 19, 2009, at 

http://www.occ.treas.gov/interp/mar03/int957.doc), and available at 2003 OCC Ltr. LEXIS 11). 98Office of the Comptroller of the Currency, Interpretive Letter No. 971 (unpublished) (Jan. 

16, 2003) (viewed Jun. 19, 2009, at http://comptrollerofthecurrency.gov/interp/sep03/ 

int971.doc, and available at 2003 OCC QJ LEXIS 107). 

tections, interest rates on subprime mortgages did not increase, and instead, sometimes decreased, without reducing the availability of these loans. 92 Additionally, as 

Nobel Laureate Joseph Stiglitz has pointed out, the cost of regulatory duplication 

is miniscule to the cost of the regulatory failure that has occurred. 93

It is also clear that the long campaign of preemption by the OTS and OCC, culminating in the 2004 OCC rules, contributed greatly to the current predatory lending 

crisis. After a discussion of the OCC’s action eliminating State authority, we will 

discuss more generally why Federal consumer law should always be a floor. 

F.1. The OCC’s Preemption of State Laws Exacerbated The Crisis. In 2000–2004, 

the OCC worked with increasing aggressiveness to prevent the States from enforcing State laws and stronger State consumer protection standards against national 

banks and their operating subsidiaries, from investigating or monitoring national 

banks and their operating subsidiaries, and from seeking relief for consumers from 

national banks and subsidiaries. 

These efforts began with interpretative letters stopping State enforcement and 

State standards in the period up to 2004, followed by OCC’s wide-ranging preemption regulations in 2004 purporting to interpret the National Bank Act, plus briefs 

in court cases supporting national banks’ efforts to block State consumer protections. 

In a letter to banks on November 25, 2002, the OCC openly instructed banks that 

they ‘‘should contact the OCC in situations where a State official seeks to assert supervisory authority or enforcement jurisdiction over the bank . . . . 94 The banks 

apparently accepted this invitation, notifying the OCC of State efforts to investigate 

or enforce State laws. The OCC responded with letters to banks and to State banking agencies asserting that the States had no authority to enforce State laws against 

national banks and subsidiaries, and that the banks need not comply with the State 

laws. 95

For example, the OCC responded to National City Bank of Indiana, and its operating subsidiaries, National City Mortgage Company, First Franklin Financial Corporation, and Altegra Credit Company, regarding Ohio’s authority to monitor their 

mortgage banking and servicing businesses. That opinion concluded that ‘‘the OCC’s 

exclusive visitorial powers preclude States from asserting supervisory authority or 

enforcement jurisdiction over the Subsidiaries.’’ 96

The OCC responded to Bank of America, N.A., and its operating subsidiary, BA 

Mortgage LLC, regarding California’s authority to examine the operating subsidiary’s mortgage banking and servicing businesses and whether the operating subsidiary was required to maintain a license under the California Residential Mortgage Lending Act. That opinion concluded that ‘‘the Operating Subsidiary also is not 

subject to State or local licensing requirements and is not required to obtain a license from the State of California in order to conduct business in that State.’’ 97

The OCC wrote the Pennsylvania Department of Banking, stating that Pennsylvania does not have the authority to supervise an unnamed national bank’s 

unnamed operating subsidiary which engages in subprime mortgage lending. 98 (The 
105 

99Office of the Comptroller of the Currency, Preemption Determination and Order, 68 Fed. 

Reg. 46,264, 46,264 (Aug. 5, 2003). 100 Robert Berner and Brian Grow, ‘‘They Warned Us About the Mortgage Crisis’’, Business 

Week, 9 October 2008, available at http://www.businessweek.com/magazine/content/08l42/ 

b4104036827981.htm, (last visited 21 June 2009). 101See H. Comm. on Financial Services, 108th Cong., Views and Estimates on Matters To 

Be Set Forth in the Concurrent Resolution on the Budget for Fiscal Year 2005, at 16 (Comm. 

Print 2004). ‘‘In the area of abusive mortgage lending practices alone, State bank supervisory 

agencies initiated 20,332 investigations in 2003 in response to consumer complaints, which resulted in 4,035 enforcement actions.’’ 102Testimony of Illinois Attorney General Lisa Madigan Before the Committee on Financial 

Services, Hearing on Federal and State Enforcement of Financial Consumer and Investor Protection Laws, 20 March 2009, available at http://www.house.gov/apps/list/hearing/ 

financialsvcsldem/ill-lmadigan.pdf (last visited 22 June 2009). 103Letter of 15 June 2009, from the chief legal enforcement officers of eight States (California, 

Connecticut, Illinois, Iowa, Maryland, Massachusetts, North Carolina, and Ohio) to President 

Obama, on file with the authors. 

national bank and operating subsidiary were not named because this interpretive 

letter was unpublished.) 

The OCC even issued a formal preemption determination and order, stating that 

‘‘the provisions of the GFLA [Georgia Fair Lending Act] affecting national banks’ 

real estate lending are preempted by Federal law’’ and ‘‘issuing an order providing 

that the GFLA does not apply to National City or to any other national bank or 

national bank operating subsidiary that engages in real estate lending activities in 

Georgia.’’ 99

As Business Week pointed out in 2003, not only did States attempt to pass laws 

to stop predatory lending, they also attempted to warn Federal regulators that the 

problem was getting worse. 100

A number of factors contributed to the mortgage disaster and credit crunch. Interest rate cuts and unprecedented foreign capital infusion fueled thoughtless lending 

on Main Street and arrogant gambling on Wall Street. The trading of esoteric derivatives amplified risks it was supposed to mute. One cause, though, has been 

largely overlooked: the stifling of prescient State enforcers and legislators who tried 

to contain the greed and foolishness. They were thwarted in many cases by Washington officials hostile to regulation and a financial industry adept at exploiting this 

ideology. 

Under the proposal, critical authority will be returned to those attorneys general, 

who have demonstrated both the capacity and the will to enforce consumer laws. 

In addition to losing the States’ experience in enforcing such matters, depriving the 

States of the right to enforce their non-preempted consumer protection laws raises 

serious concerns of capacity. According to a recent congressional report, State banking agencies and State attorneys general offices employ nearly 700 full time staff 

to monitor compliance with consumer laws, more than 17 times the number of OCC 

personnel then allocated to investigate consumer complaints. 101

Earlier this year, Illinois Attorney General Lisa Madigan testified before this 

Committee and outlined the numerous major, multistate cases against predatory 

lending that have been brought by her office and other State offices of attorneys 

general. However, she included this caveat: 

State enforcement actions have been hamstrung by the dual forces of preemption of State authority and lack of Federal oversight. The authority of 

State attorneys general to enforce consumer protection laws of general applicability was challenged at precisely the time it was most needed—when 

the amount of sub prime lending exploded and riskier and riskier mortgage 

products came into the marketplace. 102

This month, General Madigan and seven colleagues sent President Obama a letter 

supporting a Consumer Financial Protection Agency preserving State enforcement 

authority: 

[W]e believe that any reform must (1) preserve State enforcement authority, (2) place Federal consumer protection powers with an agency that is focused primarily on consumer protection, and (3) place primary oversight 

with Government agencies and not depend on industry selfregulation. 103

F.2. Why Federal Law Should Always Be a Floor. Consumers need State laws to 

prevent and solve consumer problems. State legislators generally have smaller districts than members of Congress do. State legislators are closer to the needs of their 

constituents than members of Congress. States often act sooner than Congress on 

new consumer problems. Unlike Congress, a State legislature may act before a 

harmful practice becomes entrenched nationwide. In a September 22, 2003, speech 
106 

104See California Civil Code §§1785.11.1, 1785.11.2, 1785,16.1; Conn. SB 688 §9(d), (e), Conn. 

Gen. Stats. §36a-699; IL Re. Stat. Ch. 505 §2MM; LA Rev. Stat. §§9:3568B.1, 9:3568C, 9:3568D, 

9:3571.1 (H)-(L); Tex. Bus. & Comm. Code §§20.01(7), 20.031, 20.034-039, 20.04; VA Code 

§§18.2-186.31 :E. 

105See 2000 Cal. Legis. Serv. 978 (West). This session law was authored by State Senator 

Liz Figueroa. ‘‘An act to amend Sections 1785.10, 1785.15, and 1785.16 of, and to add Sections 

1785.15.1, 1785.15.2, and 1785.20.2 to the Civil Code, relating to consumer credit.’’ 106 Consumers Union, U.S. PIRG and AARP cooperated on a model State security freeze proposal that helped ensure that the State laws were not balkanized, but converged toward a comto the American Bankers Association in Hawaii, Comptroller John D. Hawke admitted that consumer protection activities ‘‘are virtually always responsive to real 

abuses.’’ He continued by pointing out that Congress moves slowly. Comptroller 

Hawke said, ‘‘It is generally quite unusual for Congress to move quickly on regulatory legislation—the Gramm-Leach-Bliley privacy provisions being a major exception. Most often they respond only when there is evidence of some persistent abuse 

in the marketplace over a long period of time.’’ U.S. consumers should not have to 

wait for a persistent, nationwide abuse by banks before a remedy or a preventative 

law can be passed and enforced by a State to protect them. 

States can and do act more quickly than Congress, and States can and do respond 

to emerging practices that can harm consumers while those practices are still regional, before they spread nationwide. These examples extend far beyond the financial services marketplace. 

States and even local jurisdictions have long been the laboratories for innovative 

public policy, particularly in the realm of environmental and consumer protection. 

The Federal Clean Air Act grew out of a growing State and municipal movement 

to enact air pollution control measures. The national organic labeling law, enacted 

in October 2002, was passed only after several States, including Oregon, Washington, Texas, Idaho, California, and Colorado, passed their own laws. In 1982, Arizona enacted the first ‘‘Motor Voter’’ law to allow citizens to register to vote when 

applying for or renewing drivers’ licenses; Colorado placed the issue on the ballot, 

passing its Motor Voter law in 1984. National legislation followed suit in 1993. Cities and counties have long led the smoke-free indoor air movement, prompting 

States to begin acting, while Congress, until this month, proved itself virtually incapable of adequately regulating the tobacco industry. A recent and highly successful FTC program—the National Do Not Call Registry to which 58 million consumers 

have added their names in 1 year—had already been enacted in 40 States. 

But in the area of financial services, where State preemption has arguably been 

the harshest and most sweeping, examples of innovative State activity are still numerous. In the past 5 years, since the OCC’s preemption regulations have blocked 

most State consumer protections from application to national banks, one area illustrating the power of State innovation has been in identity theft, where the States 

have developed important new consumer protections that are not directed primarily 

at banking. In the area of identity theft, States are taking actions based on a nonpreemptive section of the Fair Credit Reporting Act, where they still have the authority to act against other actors than national banks or their subsidiaries. 

There are 7 to 10 million victims of identity theft in the U.S. every year, yet Congress did not enact modest protections such as a security alert and a consumer block 

on credit report information generated by a thief until passage of the Fair and Accurate Credit Transactions Act (FACT Act or FACTA) in 2003. That law adopted just 

some of the identity theft protections that had already been enacted in States such 

as California, Connecticut, Louisiana, Texas, and Virginia. 104

Additionally FACTA’s centerpiece protection against both inaccuracies and identity theft, access to a free credit report annually on request, had already been adopted by seven States: Colorado, Georgia, Maine, Maryland, Massachusetts, New Jersey, and Vermont. Further, California in 2000, following a joint campaign by consumer groups and realtors, became the first State to prohibit contractual restrictions on realtors showing consumers their credit scores, ending a decade of stalling 

by Congress and the FTC. 105 The FACT act extended this provision nationwide. 

Yet, despite these provisions, advocates knew that the 2003 Federal FACTA law 

would not solve all identity theft problems. Following strenuous opposition by consumer advocates to the blanket preemption routinely sought by industry as a condition of all remedial Federal financial legislation, the final 2003 FACT Act continued 

to allow States to take additional actions to prevent identity theft. The results have 

been significant. 

Since its passage, fully 47 States and the District of Columbia have granted consumers the right to prevent access to their credit reports by identity thieves through 

a security freeze. Indeed, even the credit bureaus, longtime opponents of the freeze, 

then adopted the freeze nationwide. 106
107 

mon standard. More information on the State security freeze laws is available at http:// 

www.consumersunion.org/campaigns/learnlmore/003484indiv.html (last visited 21 June 

2009). 107 New State Ice Co. v. Leibman, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting). 108 1986 Cal. Stats., Ch. 1397, codified at California Civil Code §1748.11. 109Pub. L. 100-583, 102 Stat. 2960 (Nov. 1, 1988), codified in part at 15 U.S.C. §§1637(c) and 

1610(e). 110 54 Fed. Reg. 13855 (April 6, 1989, Appendix G, form G-10(B)). 111 1983 Cal. Stat. Ch. 1011, §2, codified at Cal. Fin. Code §866.5. 112Pub. L. 100-86, Aug. 10, 1987, 101 Stat. 552, 635, codified at 12 U.S.C. §4001. 113More information on State security breach notice laws is available at http:// 

www.consumersunion.org/campaigns/financialprivacynow/002215indiv.html (last visited 21 

June 2009). 114Military Lending Act, 10 U.S.C. §987. Credit Repair Organizations Act, 15 U.S.C. §1679h 

(giving State Attorneys General and FTC concurrent enforcement authority). 

A key principle of federalism is the role of the States as laboratories for the development of law. 107 State and Federal consumer protection laws can develop in tandem. After one or a few States legislate in an area, the record and the solutions 

developed in those States provide important information for Congress to use in deciding whether to adopt a national law, how to craft such a law, and whether or 

not any new national law should displace State law. 

A few more examples from California illustrate the important role of the States 

as a laboratory and a catalyst for Federal consumer protections for bank customers. 

In 1986, California required that specific information be included in credit card solicitations with enactment of the then-titled Areias-Robbins Credit Card Full Disclosure Act of 1986. That statute required every credit card solicitation to contain a 

chart showing the interest rate, grace period, and annual fee. 108 Two years later, 

Congress chose to adopt the same concept in the Federal Fair Credit and Charge 

Card Disclosure Act (FCCCDA), setting standards for credit card solicitations, applications and renewals. 109 The 1989 Federal disclosure box 110 (know as the ‘‘Schumer 

Box’’) is strikingly similar to the disclosure form required under the 1986 California 

law. 

States also led the way in protecting financial services consumers from long holds 

on deposited checks. California enacted restrictions on the length of time a bank 

could hold funds deposited by a consumer in 1983; Congress followed in 1986. California’s 1983 funds availability statute required the California Superintendent of 

Banks, Savings and Loan Commissioner, and Commissioner of Corporations to issue 

regulations to define a reasonable time after which a consumer must be able to 

withdraw funds from an item deposited in the consumer’s account. 111 Similar laws 

were passed in Massachusetts, New York, New Jersey, and other States. Congress 

followed a few years later with the Federal Expedited Funds Availability Act of 

1986. 112 California led the way on security breach notice legislation. Its law and 

those of other States have functioned as a de facto national security breach law, 

while Congress has failed to act. 113

It is certainly not the case that States always provide effective consumer protection. The States have also been the scene of some notable regulatory breakdowns 

in recent years, such as the failure of some States to properly regulate mortgage 

brokers and nonbank lenders operating in the subprime lending market, and the inability or unwillingness of many States to rein in lenders that offer extraordinarily 

high-cost, short term loans and trap consumers in an unsustainable cycle of debt, 

such as payday lenders and auto title loan companies. Conversely, Federal lawmakers have had some notable successes in providing a high level of financial services consumer protections in the last decade, such as the Credit Repair Organizations Act and the recently enacted Military Lending Act. 114 This is why it is necessary for this new Federal agency to ensure that a minimum level of consumer protection is established in all States. 

Nonetheless, as these examples show, State law is an important source of ideas 

for future Federal consumer protections. As Justice Brandeis said in his dissent in 

New State Ice Co., ‘‘Denial of the right [of States] to experiment may be fraught 

with serious consequences to the Nation’’ (285 U.S. at 311). A State law will not 

serve this purpose if States cannot apply their laws to national banks, who are big 

players in the marketplace for credit and banking services. State lawmakers simply 

won’t pass new consumer protection laws that do not apply to the largest players 

in the banking marketplace. 

Efficient Federal public policy is one that is balanced at the point where even 

though the States have the authority to act, they feel no need to do so. Since we 

cannot guarantee that we are ever at that optimum, setting Federal law as a floor 

of protection as the default—without also preempting the States—allows us to re-
108 

115For further discussion, see Edmund Mierzwinski, ‘‘Preemption of State Consumer Laws: 

Federal Interference Is a Market Failure,’’ Government, Law, and Policy Journal of the New 

York State Bar Association, Spring 2004 (Vol. 6, No. 1, pp. 6–12). 

tain the safety net of State–Federal competition to guarantee the best public policy. 115

Conclusion 

As detailed above, a strong Federal commitment to robust consumer protection is 

central to restoring and maintaining a sound economy. The Nation’s financial crisis 

grew out of the proliferation of inappropriate and unsustainable lending practices 

that could have and should have been prevented. That failure harmed millions of 

American families, undermined the safety and soundness of the lending institutions 

themselves, and imperiled the economy as a whole. In Congress, a climate of deregulation and undue deference to industry blocked essential reforms. In the agencies, the regulators’ failure to act, despite abundant evidence of the need, highlights 

the inadequacies of the current regulatory regime, in which none of the many financial regulators regard consumer protection as a priority. 

As outlined in the testimony above, establishment of a single Consumer Financial 

Protection Agency is a critical part of financial reform. As detailed above, its funding must be robust, independent and stable. Its board and governance must be 

structured to ensure strong and effective consumer input, and a Consumer Advocate 

should be appointed to report semi-annually to Congress on agency effectiveness. 

Our organizations, along with many other consumer, community, civil rights, 

labor and progressive financial institutions, believe that restoring consumer protection should be a cornerstone of financial reform. It will reduce risk and make the 

system more accountable to American families. We recognize, however, that other 

reforms are needed to restore confidence to the financial system. Our coalition ideas 

on these and other matters can be found at the Web site of Americans For Financial 

Reform, available at ourfinancialsecurity.org. 

Thank you for the opportunity to testify. Our organizations look forward to working with you to move the strongest possible Consumer Financial Protection Agency 

through the Senate and into law. 

Appendices: 

Appendix 1: Abusive Lending Practices by Smaller Banks and Thrifts 

Appendix 2: Private Student Loan Regulatory Failures and Reform Recommendations 

Appendix 3: Rent-A-Bank Payday Lending 

Appendix 4: Information on Income (Primarily User and Transaction Fees Depending on Agency) of Major Financial Regulatory Agencies 

Appendix 5: CFA Survey: Sixteen Largest Bank Overdraft Fees and Terms 
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1 Consumer Financial Protection Agency Act of 2009, §1018, as proposed by the U.S. Department of the Treasury, June 30, 2009, available at www.financialstability.gov/docs/CFPAAct.pdf (accessed July 6, 2009). 2 U.S. Department of the Treasury, ‘‘Financial Regulatory Reform: A New Foundation’’ (June 

30, 2009), 55–56, available at www.financialstability.gov/docs/regs/FinalReportlweb.pdf 

(accessed July 6, 2009). 3 Ibid., 15. 

PREPARED STATEMENT OF PETER WALLISON 

ARTHUR F. BURNS FELLOW, 

AMERICAN ENTERPRISE INSTITUTE

JULY 14, 2009 

The Consumer Financial Protection Agency (CFPA), as proposed by the Obama 

Administration, is intended to be an independent agency with sole rule-making and 

enforcement authority for all Federal consumer financial protection laws (with the 

exception of those covered by the SEC and the CFTC). The draft legislation 1 submitted by the Administration gives the agency jurisdiction over all companies, regardless of size, that are engaged generally in providing credit, savings, collection, 

or payment services. This is accomplished by transferring to the CFPA most or all 

of the authorities in 16 Federal statutes—ranging from the CRA to the Truth in 

Savings Act—that cover lending, mortgage financing, fair housing, credit repair, 

debt collection practices, fair credit reporting, and a multitude of other consumer financial products and services. The agency will be funded by fees imposed on the 

thousands of companies—from banks and credit card companies to local finance 

companies and department stores—that are subject to the legislation. In many 

cases, the agency’s jurisdiction will be concurrent with the jurisdiction of State 

agencies, but the CFPA will not preempt State law. 

Prior to submitting the legislation, the Administration circulated a white paper 2

that contains clear Statements of the policies and intentions underlying the legislation. In this testimony, I will refer to the white paper as well as the legislation 

itself. 

As might be expected, the new agency will have jurisdiction over disclosure to consumers. This is the customary way that consumer protection has proceeded at the 

Federal level. In the past, consumers were generally expected to have the ability 

to make decisions for themselves if they were given the necessary information. The 

securities laws, for example, are largely consumer protection laws, developed during 

the New Deal period. In selling a security, an issuing company and any underwriter 

or dealer must supply investors with all material facts, including any additional 

facts needed to ensure that the information disclosed is not misleading. This approach has worked well for 75 years. 

The material facts standard of the SEC is of course subject to interpretation, but 

it is possible to give it some content by imagining what an investor would want to 

know about the risks a company faces and its financial and business prospects. The 

white paper States that the CFPA will use a ‘‘reasonableness’’ standard, which it 

defines as ‘‘balance in the presentation of risks and benefits, as well as clarity and 

conspicuousness in the description of significant product costs and risks.’’ The draft 

legislation follows this pattern, so that disclosure to consumers must—perhaps like 

a drug label or a securities prospectus—include both the benefits and the risks of 

a product or service. These will be difficult guidelines for the regulated industry to 

follow, especially because enforcement actions and lawsuits may result from violations. Despite substantial disclosure on drug labels and in securities prospectuses— 

in some cases ordered by the regulatory agency—successful law-suits in both areas 

have claimed that the disclosure was not sufficient. 

The Suitability Problem 

The real trouble begins, however, when the Administration’s plan gets beyond the 

relatively simple issue of disclosure and proposes that the CFPA define standards 

for what the white paper calls ‘‘plain-vanilla’’ products and services. The draft legislation describes them as ‘‘standard consumer financial products or services’’ that will 

be both ‘‘transparent’’ and ‘‘lower risk.’’ According to the white paper, the CFPA will 

have authority ‘‘to require all providers and intermediaries to offer these products 

prominently, alongside whatever other lawful products they choose to offer.’’ 3 This 

idea, seemingly quite simple, raises a host of significant questions. If there is a 

plain-vanilla product, who is going to be eligible for the product that has strawberry 

sauce? In other words, once the baseline is established for a product that can or 

must be offered to everyone, who is going to be eligible for the product that, because 

of its additional but more complex features, offers financial advantages? This is the 
133 

4 Ibid., 68. 5 Ibid., 66. 6 Ibid., 67. 7Michael Barr, et al., ‘‘Behaviorally Informed Financial Services Regulation’’, New America 

Foundation, October 2008. 8 Ibid., 9. 9White paper, 66. 

suitability problem—requiring providers to decide whether a particular product or 

service is suitable for a particular customer—and the Administration’s plan is 

caught in its web. 

As an example, consider a mortgage with a prepayment penalty. The white paper 

notes that the ‘‘CFPA could determine that prepayment penalties should be banned 

for certain types of products, because penalties make loans too complex for the least 

sophisticated consumers or those least able to shop effectively.’’ 4 This seems logical 

if one assumes—as the Administration seems prepared to do—that some consumers 

can be denied access to products they want. As the white paper notes, ‘‘[t]he CFPA 

should be authorized to use a variety of measures to help ensure alternative mortgages were obtained only by consumers who understood the risks and could manage 

them.’’ 5

So, what about the husband and wife who intend to keep their home until their 

children are grown and are willing, for this reason, to accept a prepayment penalty 

in order to get a lower rate on their fixed-rate mortgage? The Administration is suggesting that this option might not be available to them if the mortgage provider 

(and ultimately the CFPA) does not consider them ‘‘sophisticated’’ consumers. This 

kind of discrimination between and among Americans is something new and troubling. The Administration’s plan clearly intends for some consumers to be denied 

access to certain products and services. ‘‘As mortgages and credit cards illustrate,’’ 

the white paper declares, ‘‘even seemingly ‘simple’ financial products remain complicated to large numbers of Americans. As a result, in addition to meaningful disclosure, there must also be standards of appropriate business conduct and regulations that help ensure providers do not have undue incentives to undermine those 

standards.’’ 6 In other words, by requiring that all providers offer plain-vanilla products and services in addition to other products, the Administration is creating a regime in which providers must keep ‘‘complicated’’ products out of the hands of 

Americans who may not be able to understand them. 

This approach bears a strong resemblance to a paper published in October 2008 

by the New America Foundation. 7 One of the authors of the piece, Michael Barr, 

is now an assistant secretary of the Treasury. The underlying theory of the Barr 

paper is that consumers should be offered a baseline, simple and low risk version 

of every product offered by credit and other financial providers. This simple product 

is called a ‘‘plain-vanilla’’ product in the New America Foundation paper, just as it 

is in the Administration’s white paper. Referring to mortgages, the Barr paper describes this sequence of events: ‘‘Borrowers . . . would get the standard mortgage 

offered, unless they chose to opt out in favor of a nonstandard [i.e., more complex 

and risky] option offered by the lender, after honest and comprehensible disclosures 

from brokers and lenders about the terms and risks of the alternative mortgages. 

An opt-out mortgage system would mean borrowers would be more likely to get 

straightforward loans they could understand.’’ 8

What the Barr paper fails to understand is the risks that are faced by the provider in offering to customers anything more complex than the plain-vanilla product. 

Although providers will be free to do so, the possibility of enforcement actions by 

the CFPA or the Federal Trade Commission, suits by State attorneys general (specifically authorized to enforce the CFPA’s regulations), and the inevitable class action lawsuits will make the offering of the more complex product very risky. Although the Barr paper suggests that the provider can protect itself by making a full 

and fair disclosure, even the white paper recognizes that this is unlikely to be effective. The white paper notes: ‘‘Even if disclosures are fully tested and all communications are properly balanced, product complexity itself can lead consumers to make 

costly errors.’’ 9 When these costly errors are made, they will be prima facie evidence 

that the product was too complex for the consumer, and the provider will be faced 

with a fine, an expensive enforcement action, or worse. Thus, we are not talking 

about a question of disclosure—making the risks and costs plain. Instead, what the 

Administration is setting up is a mechanism that will ultimately deny some people 

access to some products because of their deficiencies in experience, sophistication, 

and perhaps even intelligence. 

This approach seems to be an unprecedented departure by the U.S. Government 

from some of the fundamental ideas of individual equality that have underpinned 
134 

10Olmstead v. United States, 277 U.S. 479 (1928). 11White paper, 66. 

U.S. society since its inception. Conservatives have long argued that liberalism reflects a paternalistic desire on the part of elites to control and limit others’ choices 

while leaving themselves unaffected. The white paper seems to validate exactly that 

critique. Providers will be at risk if they offer some products to ordinary consumers 

but could feel safe in offering the same products to those who are well educated and 

sophisticated. In important ways, the Administration’s approach raises the issues in 

the famous Louis Brandeis Statement, quoted by Milton and Rose Friedman at the 

beginning of their book, Free to Choose: ‘‘Experience should teach us to be most on 

our guard to protect liberty when the Government’s purposes are beneficial. Men 

born to freedom are naturally alert to repel invasion of their liberty by evil-minded 

rulers. The greater dangers to liberty lurk in insidious encroachment by men of zeal, 

well-meaning but without understanding.’’ 10

In addition, there are troubling questions about how determinations of sophistication or even mental capacity are going to be made, who is going to make them, and 

what standards will be followed. It appears that the provider must make this decision, but what kinds of guidelines will the CFPA provide to protect the provider 

against the inevitable legal attacks? Vague language in the legislation suggests the 

consumer can opt out of the plain-vanilla alternative, but as noted above this simply 

changes the nature of the provider’s risk from the qualities of the product to the 

qualities of the disclosures that were made to the consumer about what such an opt 

out would mean. Finally, the elements of a plain-vanilla mortgage can be quite arbitrary, forcing people into structures that are financially disadvantageous. How can 

anyone know, for example, whether a 30-year fixed-rate mortgage is better than a 

30-year adjustable-rate loan with a reasonable cap on interest costs? If interest 

rates rise in the future, the fixed-rate mortgage is best, but if they fall, a variable 

rate should be preferred. Should a Government agency have the power to determine 

whether a homebuyer is allowed to make this choice? 

In contrast, the disclosure system has always seemed appropriate in our society 

because it does not require invidious or arbitrary discrimination between one person 

and another. As long as the disclosure is fair and honest, why should anyone be prohibited from buying a product or service? While it is apparent that everyone is not 

equal in understanding or sophistication, our national sensibility has been that 

these differences should be ignored in favor of the higher ideal of equality. Where 

consumers of limited understanding are protected by this system is through consumer protection actions that charge providers with fraud and deception while taking into account the limited capacities of the consumer. Under this approach, fraud 

and deception are punished, but the Government is not involved ex ante in deciding 

whether one person or another is eligible to receive what our economy has to offer. 

Yet the white paper says: ‘‘The CFPA should be authorized to use a variety of measures to help ensure that alternative mortgages were obtained only by consumers 

who understood the risks and could manage them. For example, the CFPA could 

. . . require providers to have applicants fill out financial experience questionnaires.’’ 11 If this sounds a bit like a literacy or property test for voting—ideas long 

ago discredited—it is not surprising. Both impulses spring from the same source: 

a sense that some people are not as capable as others to make important choices. 

To be sure, the securities laws contemplate that some distinctions will be made 

among customers on the basis of suitability. A broker-dealer may not sell a securities product to a customer if the customer does not have the resources to bear the 

risk or the ability to understand its nature. This is the closest analogy to what the 

Administration is contemplating for all consumers, but as a precedent it is inapposite. Owning a security is not a necessity for living in our economically developed 

society, but obtaining credit certainly is. Whether through a credit card, an account 

at a food or department store, a car loan, or a lay-away savings plan at a local furniture dealer, credit is a benefit that enables every person and every family to live 

better in our economy. Denying a credit product suitable to one’s needs but deemed 

to be beyond one’s capacity to understand has a far greater immediate adverse effect 

on a family’s standard of living than telling an investor that a collateralized debt 

obligation is not a suitable product for his 401(k). 

Moreover, investors tend to be customers of broker-dealers over extended periods, 

so their financial and other capacities are well known to the brokers who handle 

their accounts. This is unlikely to be true for various credit products, which are likely to be established in single transactions and with little follow-up. Any attempt to 

determine a customer’s ability to handle the risks associated with, say, a credit card 

could also involve investigation into matters that the customer considers private. 

Neither the draft legislation nor the white paper suggests how the provider of a fi-
135 

nancial service is to determine suitability while still protecting the customer’s privacy. As discussed below, simply determining what other credit products and obligations particular applicants might have—and thus whether they are able to meet 

their obligations—will be difficult and costly. These problems do not normally arise 

in the suitability inquiry that broker-dealers must undertake. 

Other Effects 

Several other serious problems arise out of the structure that the Administration 

seems to have in mind. The decision on a particular consumer’s eligibility for a product will not be made by the CFPA but by the provider of the product or service. 

Apart from consumers themselves, providers are the first victims of this legislation. 

They will have to decide—at the risk of a CFPA enforcement action or a likely lawsuit—whether a particular customer is suitable for a particular product. This will 

place them in a difficult, if not impossible, position. If they accede to a customer’s 

demand, and the customer later complains, the provider may face a costly enforcement proceeding or worse, but if the provider denies the customer the desired product, the provider will be blamed, not the Government agency. In not a few cases, 

the provider may be sued for denial of credit to someone later deemed suitable, rather than for granting credit to a person later deemed unsuitable. The white paper 

points out that the Administration does not intend to disturb private rights of action 

and in some cases ‘‘may seek legislation to increase statutory damages.’’ As noted 

above, State attorneys general are specifically authorized to enforce the CFPA’s regulations. Although the white paper offers the possibility that a provider might get 

a ‘‘no action letter’’ or approval of its product and its disclosure, the personal financial condition and other capacities of the customer are what will count, not the simplicity of the product. 

The second victim will be innovation. Why should anyone take the risk to create 

a new product? Even if the CFPA will review it to determine whether it is accurately and fairly described—a process that may require the services of a lawyer and 

the usual expenses of completing applications and answering questions from a Government agency—the developer will still have to decide whether the people who 

want it are suitable to have it. The suitability decision can be expensive; a provider’s better choice might be to stay with plain-vanilla products and give up the 

idea of developing new products to attract new customers. 

The third victim will be low-cost credit. The tasks of getting approval for a product and investigating the suitability of every person who wants something more 

than a plain-vanilla product—whatever that may be—will substantially increase the 

cost of credit and reduce its availability. Leaving aside the effect on economic 

growth generally, higher credit costs and the denial of credit facilities that are 

deemed to be unsuitable for particular consumers will seriously impair the quality 

of life for many people of modest means or limited education. Credit provided by 

stores to regular customers may become too costly to administer. As a result, small 

neighborhood establishments may simply abandon the idea of providing credit and 

small finance companies and other small enterprises engaged in consumer financial 

services may well go out of business or merge with larger competitors. Even large 

credit providers may find that the additional business they attract with this service 

does not compensate for the risk and expense. Withdrawal of these competitors from 

the market will not only mean that many customers will be deprived of any credit 

sources and other services, but also that the reduced competition will allow credit 

fees to rise. 

Litigation will also be a factor in the decision of credit sources about whether to 

develop new products or offer the complex products and services that might lead to 

disputes with customers or the CFPA. Investor complaints about suitability in the 

securities field are handled through an arbitration process, so that an investor who 

claims that he was sold a product for which he was unsuitable must make his case 

to an arbitrator rather than a court. The current costs of a mistake in the suitability 

judgment are thus much smaller for the broker-dealer. The legislation would give 

the CFPA the authority to ban mandatory arbitration clauses in credit arrangements, and the white paper recommends that the SEC consider ending the arbitration process for securities. If the SEC decides to do this, litigation in the securities 

field will substantially increase the costs of broker-dealers and investment advisers. 

Finally, inherent conflicts between consumer protection and prudential regulation 

will arise when consumer protection responsibility is moved from the bank supervisors to the CFPA. How these might be resolved has not been described in the legislation and, perhaps was not considered. For example, as noted above, the white 

paper suggests that prepayment penalties should be banned for certain types of 

products because they make loans too complex for the least sophisticated consumers. 

A prudential supervisor, however, might want prepayment penalties to be included 
136 

in a prudently underwritten mortgage, since the ability of the borrower to prepay 

at any time without penalty raises the lender’s interest rate risk. It is likely that 

the bank supervisors and the CFPA will have different policies on this and many 

other issues, and the banks will be caught in the middle. 

Conclusion 

The Consumer Financial Protection Agency Act of 2009 is one of the most farreaching and intrusive Federal laws ever proposed by an Administration. Not only 

does it reach down to regulate the most local levels of commercial activity, but the 

act would also set up procedures and incentives that will inevitably deny some consumers an opportunity to obtain products and services that are readily available to 

others. This legislation should be rejected. 

PREPARED STATEMENT OF SENDHIL MULLAINATHAN 

PROFESSOR OF ECONOMICS, 

HARVARD UNIVERSITY

JULY 14, 2009 

Chairman Dodd, Ranking Member Shelby, and Members of the Committee, thank 

you for providing me with an opportunity to testify. By way of background, I am 

a Professor of Economics at Harvard who specializes in behavioral economics, a 

topic that combines two areas—economics and psychology. Any discussion of financial regulation must incorporate both areas—economists have a healthy respect for 

market forces while psychologists have a healthy respect for both people’s immense 

capacities and limitations; they recognize that people are not financial engines 

churning out optimal choices in all environments. Understanding the current crisis—with its combination of competing lenders and sometimes-confused borrowers— 

requires behavioral economics. 

In my comments I will make four points: 

• First, some decision environments allow consumers to choose well while others 

result in poor choices. 

• Second, when customers choose well there is healthy competition: firms clamor 

to provide better products at lower prices. When customers choose badly, there 

can be a race to the bottom. Even a few unprincipled firms offering products 

that exploit human fallibility can put pressure on the entire market. 

• Third, a two-part approach to financial regulation can promote consumers capacity to choose well. Safe products would be lightly regulated while less safe 

ones—where low road firms could potentially exploit customers—would be more 

heavily regulated. A fence around the safer products creates a more level playing field between safe and less safe but superficially attractive products. It provides an additional tool that is less intrusive than bans, mandates or selective 

bans for some customers. It allows all customers to access products but simply 

ensures that those who access less safe ones would be doing so with greater 

safeguards. 

Though the scope of the proposed regulation is broad, I will use the choice between 

mortgages—at the heart of the current financial crisis—to illustrate my points. 

Choosing Well and Badly 

First, let me describe the psychology of choice. Over the decades much research 

has helped us understand how people choose. I will illustrate the insights from this 

research using two familiar examples. 

Most of you have painted a room in your house. You probably remember choosing 

from thousands of colors; Benjamin Moore alone proudly offers 140 shades of white. 

How do you tackle this ocean of choice? You pick a general color—blue, yellow, 

whatever. You pick a few shades within that color. You try them out in small 

swatches on one wall, see if you like them and repeat until you have a color you 

like. The bottom line: despite the explosion of choice people are largely happy with 

the end outcome. And certainly we don’t think the Government could step in and 

improve this market through regulation. 

I am also sure most of you have bought a digital camera. Going into the electronics store, you have some sense of what you want—do you need a small camera 

or a big one, do you prefer one brand over another? But once there the problem gets 

tougher. One camera has 8 megapixels and is smaller and cheaper; another has 12 

megapixels and is bigger and more expensive. How do you choose? What is a 
137 

1 Brian Bucks and Karen Pence (2006) ‘‘Do Homeowners Know Their House Values and Mortgage Terms?’’ Federal Reserve Board of Governors. FEDS Working Paper No. 2006-03. Available 

at SSRN: http://ssrn.com/abstract=899152. 

megapixel? How many is enough? Are 8 megapixels 50 percent better than 12? You 

can ask the camera salesman but are his incentives to give you the best advice? If 

the bigger camera is the cheaper per megapixel it may draw you to buy that one 

even without knowing fully understanding what megapixels are. Though there are 

far fewer cameras than paint colors the choice is far more difficult. At the end of 

the process, you hope you have bought the best camera but you’re never really sure. 

Part of choosing a mortgage is like choosing a paint color. Choosing a 30-year 

fixed rate mortgage means deciding on what is an affordable monthly payment. How 

much do you earn? What are your other expenses? The consumer can intuit much 

of this—in fact they may know it better than any outsider. 

But sometimes when choosing a mortgage you encounter features all too similar 

to megapixels. Suppose one mortgage costs $1,000 a month for the first 2 years and 

then the payment is 3 points above 1 month LIBOR, while another says it is $900 

a month and then the payment is 4 points about the 1 year constant Treasury bills 

rate. How do you make this choice? What is the difference between the LIBOR and 

the T-Bill rate? How much do they vary? Are 3 and 4 points about the right number? If the provider says you can refinance in 2 years, should you worry about being 

able to get another loan? Notice that in this morass, the $900 mortgage has some 

appeal; whatever else, it is cheaper now and allows you afford a bigger house. Few 

know the answers to these questions and those who do are the kind of people you 

avoid at a dinner party. This is worse than megapixels. 

Choices such as these are at the heart of why choosing mortgages and other financial products pose so many difficulties for customers. With paint, you can try different colors; you can’t really try on many mortgages. With paint, you get feedback; 

with mortgages feedback comes rarely and far too late—when the payments explode. 

With paint, a mistake is, well, easily painted over; with mortgages mistakes have 

lifetime consequences. And most importantly, we understand the colors we like 

whereas few of us understand the financial technicalities that can have large consequences. 

Under such conditions, errors abound. For example, as Bucks and Pence show in 

their recent study ‘‘40 percent of borrowers with income less than $50,000—corresponding roughly to the bottom half of the income distribution of ARM borrowers—do not know the per-period caps on their interest rate changes.’’ 1 To cite 

another example, nearly 50 percent of ARM borrowers think their mortgages can 

be converted to fixed rate ones whereas only 9 percent actually appear to be convertible. 

Put simply, confusing choices do not represent real choices. Rather than empowering consumers it can frustrate them. To promote effective free choice one must ensure the choices can be made sense of. 

Competition 

This leads to my second point: how markets operate depends on how people 

choose. It is useful to separate the world between high road and low road lenders. 

High road lenders are in the game for the long run and trying to do what is best 

for their customers. They recognize that a bad mortgage is bad for business in the 

long run. Low road lenders have shorter time horizons; their management is focusing on the bottom line now. These firms would give out a bad mortgage—one that 

hurts consumers—if it makes them money today, even if it costs them in the long 

term. 

The fortunes of high and low road firms depend on how people choose. When people choose well, low road firms can do no better than offer better products or lower 

prices. Here markets work well and innovation helps consumers. 

Things change when consumers are choosing badly. High road firms now suffer 

from the actions of low road ones. Suppose a consumer is offered a reasonable 30- 

year fixed rate mortgage by one firm and offered a balloon ARM with an appealing 

teaser rate. Unless they understand the arcane financial details of the adjustable 

rate jump and amortization clauses, the balloon ARM will look deceptively attractive. The better product can look like the worse product. One lender offers a reasonable debt-to-income; another a much less safe debt-to-income. One lender offers 

standard principal payments while another offers a payment option ARM and advertises the minimum payments that do not even cover interest and lead to negative 

amortization. In all these cases, customers could easily be misled as to which is the 

good safe product and which is the bad unsafe one. Good firms suffer again when 
138 

2See http://johncbogle.com/wordpress/wp-content/uploads/2009/03/iacompliance2.pdf. 3See http://www.marketintelligencereports.com. 4Michael Barr, Sendhil Mullainathan, and Eldar Shafir, ‘‘Behaviorally Informed Home Mortgage Regulation’’, In Borrowing To Live: Consumer and Mortgage Credit Revisited, eds. N. 

Retsinas and E. Belsky, 170–202. Washington, DC: Brookings Institution Press, 2008. Also see 

‘‘Behaviorally Informed Financial Services Regulation.’’ New America Foundation, 2008. 5See http://www.federalreserve.gov/newsevents/press/bcreg/20070531b.htm. 

they start losing staff to bad firms who can pay more. And so on. This can lead all 

firms to begrudgingly adopt low road strategies. 

John Bogle, founder of Vanguard, has personal insight into this process. Vanguard 

faced it directly in marketing a no-load minimum-fee index fund. He points out that 

competition from (what I refer to as) low-road funds has shifted the ‘‘industry’s focus 

from management to marketing.’’ He further notes, ‘‘Small wonder that in all the 

rush to salesmanship in the fund industry, stewardship seems to have been left in 

the dust.’’ 2

The experience of credit unions provides another interesting window in to the race 

to the bottom. Because of their structure—they are not for profit cooperatives—they 

may be better equipped to resist low road approaches. According to a recent 

Experian-Oliver Wyman study, credit unions are experiencing as little as one-fifth 

the delinquency rate on mortgages and half the delinquency rate on credit cards as 

banks, even within the same credit score band. 3 This does not mean credit unions 

are necessarily a panacea to the mortgage problem; it merely illustrates the possibility of a high-road strategy. 

When consumers choose badly innovation—one of the greatest benefits of markets—is also perverted. What did mortgage markets innovate in the beginning of 

this decade? Teaser rates, negatively amortizing loans, exploding subprime interest 

rates, prepayment penalties and low- or no-doc lending are hardly shining examples 

of how financial innovation helps consumers. Instead these products, while surely 

useful for a few customers, have been abused because they have a superficial appeal 

to confused customers. They likely contributed heavily to the defaults we must now 

deal with. In short, when borrowers choose badly innovation can be geared towards 

exploiting mistakes rather than producing products that help customers. 

The Challenge of Regulation 

I believe the financial crisis we have faced illustrates the importance of how market forces combine with how people choose. When the worst of these collide—bad 

banks introducing mortgages that exploit confused customers—the result is a toxic 

combination that leaves not just consumers but the entire financial system at risk. 

Successful financial regulation must pay attention to both of these. 

The challenge of regulation is to ensure a system where customers can choose well 

according to their needs. In such a system, high road lenders will face a level playing field; competition and innovation will benefit customers. This is much like the 

need for a referee in any sport. If there are no referees, dirty players cheat and good 

players lose or must follow suit. It’s not a foul unless a referee calls it. A good referee applying sensible rules can ensure that all players—honest and dishonest— 

play by the same rules. At the same time, the referee must let players play the 

game and not interfere too often. I believe appropriately implemented the Consumer 

Financial Products Agency (CFPA) can be like a good referee for the financial sector. 

It can ensure that firms compete on a level playing field. It can allow players to 

play the game as long as they are within the bounds of the rules. 

As Michael Barr, Eldar Shafir, and I have proposed, a two-part approach to regulation is particularly important to accomplishing this goal. 4 Some financial products—call them first choice products—are easily understood and easy to choose between. First choice products are regulated minimally: ensure disclosure, prevent 

fraud; we know how to do this, do much of it already and know how to do more 

of it. But notice this is not enough. 

This is because other products—option ARMs, subprime ARMs with interest rates 

set to increase substantially—can pose significant risks for the typical consumer. 

They allow bad choices and for low road lenders to enter. These exotic products may 

make sense for some sophisticated consumers of course. But unchecked they are 

dangerous because their superficial appeal—with hidden risks—makes them unfair 

competition for the first choice products. These products would need to be regulated 

far more stringently. The Federal Reserve, for example, has put forward fact sheets 

that might serve as disclosure for more exotic mortgages. 5 While a good start to 

what can be done this is not enough. New products appear all the time, and marketing can be endlessly inventive in sidestepping disclosure. As a result, an agency 

like the CFPA would need to constantly update as the product mix changes. Done 

correctly, it would assure that customers could access exotic products. But they 
139 

6See http://www.freddiemac.com/news/finance/refi-armlarchives.htm. 7See http://www.federalreserve.gov/newsevents/press/bcreg/20080714a.htm. 8 ‘‘Schwab’s Income Select List was developed and is managed by the Schwab Center for Financial Research (SCFR) experts and includes mutual funds that have met their rigorous criteria, including both quantitative and qualitative factors. All are no-load and no-transaction fee 

and are selected based on their ability to generate income in their respective asset classes. The 

list is designed to help you achieve income and growth.’’ http://www.schwab.wallst.com/retail/ 

public/research/mutualfunds/oneSource.asp. 

would do so with a greater understanding that their superficial attractiveness comes 

laden with hidden risks. 

This is analogous to how we regulate drugs. Those with minimal risks that consumers understand—ibuprofen, cold medicine—are regulated only to prevent fraud 

and malfeasance. More complicated drugs—powerful antibiotics—are more stringently regulated. Testing mechanisms ensure efficacy. Independent advisors—a prescriber—ensure those who receive them understand their purposes and risks. In 

short, we create a fence around a set of products within which firms can compete 

freely. Outside of this fence, for the more exotic products, there is greater regulation. Individuals taking a door through the fence would know they are moving to 

a less safe suite of products. 

A few points are worth noting about this two-part approach. 

• The vast majority of the market is already inside the fence. For example, 

Freddie Mac reports that fixed rate mortgages made up 67–75 percent of applications in 2006. 6 First choice products of course would include more than just 

fixed rate mortgages and not all fixed rates (because we do not know the LTV 

or DTI of these mortgages) would be first choice. Still this number gives us the 

sense that most products offered would likely fall into the first rate category. 

So such regulation would in fact help most lenders; it would insulate them from 

competition by low road products, which would now sit outside the fence facing 

higher scrutiny. 

• It is not necessary to mandate the offer of first choice or vanilla products. Done 

correctly, the ring-fenced area will be made attractive enough that firms will— 

as they do now—want to offer products there. The challenge here is to ensure 

sufficient safeguards for the nonfirst choice products. Otherwise high road firms 

wanting to offer good products will once again face unfair competition from bad 

products. 

• There are several precedents for this type of two-part approach. Individuals 

wishing to trade options or other sophisticated products must initially complete 

more paperwork and are given greater warnings of their dangers. In July 2008, 

the Federal Reserve placed higher-priced mortgages (which include all loans in 

the subprime market but excludes nearly all prime market loans) under far 

greater scrutiny such as a greater requirement for income verification, an explicit affordability requirement, ad higher-than-normal penalties for violation of 

these requirements. I understand that the authority for this regulation would 

permit the Federal Reserve, or the CFPA, to place other mortgages, such as option ARMs, in this category of mortgages that receive greater scrutiny and higher penalties. 7

• For credit cards, Rep. Hensarling (R-Texas) has proposed a close cousin in the 

form of an amendment to the bill that eventually became the Credit Card Act 

in 2009. For potentially harmful features, as long as all of a lender’s customers 

are offered a card without the feature, allow customers to opt-in to one with 

the feature. By ensuring the opt-in includes sufficient warnings, the CFPA 

could allow exactly this type of door in the fence between first choice and more 

exotic products. In this particular case, Congress’ judgment was that the ‘‘first 

choice’’ approach would not work to protect consumers, and that a ban of these 

features was necessary. I believe, however, that it is important for the CFPA 

to have the first choice tool as an alternative to outright bans even if in some 

cases the ban is used. 

• Private firms already realize the value of clarifying and simplifying choice. 

Charles Schwab for example has created a category of ‘‘Select Funds’’ which are 

prescreened for loads, fees and other qualitative criteria. 8 Of course, no firm 

can control the choice set offered by the entire market; however well structured 

one firms’ choice set is, it sits and competes with other firms’ offerings. 

For such an approach to be successful there must be a transparent, predictable 

process by which products become first choice. First choice is not a one-size fits all 

solution. Since it aims to facilitate choice by customers, first choice products must 
140 

include a suite of products. Who decides what is in this suite? On what basis? This 

is especially important as we look forward to the financial innovations that are surely on the horizon. A transparent, predictable will give lenders who create a good 

product comfort that they can reap rewards from it. I believe such a process can 

be put in place. At the very least this ought to be one of the injunctions to the CFPA 

to develop and codify this process. 

Conclusion 

The financial crisis has lain bare the dangers of bad financial products and generated a strong and understandable impetus for consumer protection. I believe that 

the research on behavioral economics gives guidance on how best to express this 

urge. The challenge is to provide protection while promoting healthy market competition. The two-part approach in the proposed legislation accomplishes this by providing an attractive tool that is an alternative to bans and mandates. 

On the one hand, the proposed CFPA would regulate strongly the most exotic 

products. On the other hand, vanilla or first choice products—the ones consumers 

really can choose well between—would be given far greater freedom. This promotes 

competition and helps high-road firms who operate in the part of the market that 

the typical consumer operates in. The result I feel will be a financial sector that 

benefits consumers by allowing them to choose better; that benefits firms by allowing good firms to not be undercut by bad firms offering bad products and that benefits sophisticated consumers by still letting them access more exotic products on the 

other side of the fence. 
141 

1See http://www.financialstability.gov/docs/regs/FinalReportlweb.pdf, p. 30. 2See http://www.financialstability.gov/docs/regs/FinalReportlweb.pdf, pp. 15 and 72. 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD 

FROM MICHAEL S. BARR 

Q.1. Correcting Incentives—We have heard a number of reports of 

how financial sector employees are incentivized to push harmful financial products on to customers—sometimes to keep their jobs. 

For example, one Bank of America call-center worker claimed, ‘‘the 

more money [she] sold [a customer] and the higher the rate, the 

more money [she] made. That’s what the bank rewards—sales, not 

service.’’ These products harmed not just customers but the entire 

U.S. economy. The President’s plan recognizes that ‘‘an important 

component of risk management involves properly aligning incentives, and that properly designed compensation practices for both 

executives and employees are a necessary part of ensuring safety 

and soundness in the financial sector.’’ 1 Secondly, it suggests the 

creation of a whistleblower fund, saying that ‘‘financial firms and 

public companies should be accountable to their clients and investors by expanding protections for whistleblowers.’’ 2 This raises two 

questions: 

How could a Consumer Financial Protection Agency ensure that 

employees are not provided with these incentives to push negative 

financial products onto customers? 

A.1. The Consumer Financial Protection Agency (CFPA) will have 

the authority and tools to address practices that harm consumers 

in the marketplace for consumer financial products and services. 

This authority would extend to business practices, including compensation practices that push consumers to purchase inappropriate 

products and services. 

The authority the CFPA would have to address harmful employee incentive practices includes, for example, the following: 

Under Section 1031, the CFPA could issue rules to restrict unfair, 

deceptive or abusive acts and practices. The CFPA will also have 

the authority, under Section 1033, to promulgate rules regarding 

sales practices, to ensure that consumer financial products and 

services are provided in a manner, setting and circumstances which 

ensure that the risks, costs, and benefits of the products or services 

are fully and accurately represented to consumers. In addition, 

under Section 1037, the CFPA will have the authority to prescribe 

rules imposing duties on a covered person, or an employee of a covered person, who deals directly with consumers in providing financial products and services, as the CFPA deems appropriate to ensure fair dealing with consumers. With this authority, the CFPA 

will be able to impose duties on salespeople and mortgage brokers 

to offer appropriate loans, take care with the financial advice they 

offer, and meet the duty of best execution. The CFPA also would 

be able to prevent lenders from paying higher commissions to brokers or salespeople (yield spread premiums) for selling loans to consumers with higher rates than consumers qualify for. 

Q.2. Would the Consumer Financial Protection Agency play any 

role in protecting whistleblowers who call attention to abuses 

against consumers, much like the whistleblower protections given 
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3 American Recovery & Reinvestment Act of 2009, Pub. L. No. 111–5, §1553. 

to employees of contractors and State and local governments in this 

year’s stimulus bill? 3

A.2. Yes, the CFPA will play a role in protecting whistleblowers 

who call attention to abuses against consumers. Section 1057 provides protections for employees who, among other things, provide 

information to the Agency or testify in any proceeding resulting 

from the enforcement of the CFPA Act. Employees who believe they 

have been terminated or otherwise discriminated against because 

of the information they have provided have a right to review by the 

Agency of such action, including a right to a public hearing as part 

of the required investigation by the Agency. After investigation, the 

Agency has the authority to issue an order which provides for reinstating or rehiring the employee. 

Q.3. Senators Wyden and Whitehouse’s Amendments From the 

Credit Card Bill—Earlier this year when the Credit Card Accountability, Responsibility and Disclosure Act was on the Senate floor, 

Senator Wyden and Senator Whitehouse each had an amendment 

that ultimately did not get incorporated into the final legislation. 

Senator Wyden’s amendment would have established a five-star 

rating system for credit cards, and Senator Whitehouse’s amendment would have overturned the Supreme Court’s Marquette decision that allowed interest rates to be exported across State lines. 

How would your proposal deal with the issues that these two 

amendments sought to address? Would the proposal allow the Consumer Financial Protection Agency to set up some type of rating 

system for credit cards to the extent it determines necessary to protect cardholders? 

And what effects would your proposal have on the Marquette decision? 

A.3. The CFPA would have the authority to achieve the same ends 

as the proposed credit card rating system—fairness and transparency. It is given the mandate to ensure that consumers have 

the clear and accurate information they need to make responsible 

financial decisions. Ensuring that consumers have, reasonably can 

understand, and can use the information they need to make responsible decisions is the first of the CFPA’s four objectives under 

Section 1021(b)(1). 

We do not propose to alter existing law under Marquette, which 

allows banks to charge the interest rate permitted by their chartering State. 

Q.4. In his testimony, Mr. Yingling cites the Treasury’s plan as 

saying ‘‘that 94 percent of high cost mortgages were made outside 

the traditional banking system,’’ (p. 4). On the other hand, you testify that ‘‘about one-half of the subprime originations in 2005 and 

2006—the shoddy originations that set off the wave of foreclosures—were by banks and thrifts and their affiliates.’’ Please explain the discrepancy. 

A.4. Mr. Yingling’s assertion is incorrect. Here is the relevant paragraph from our white paper, Financial Regulatory Reform: A New 

Foundation (pp. 68–69). http://10.75.16.79:8080/docs/regs/ 

FinalReportlweb.pdf. See in particular the last sentence. 
143 

Rigorous application of the Community Reinvestment Act (CRA) should be a 

core function of the CFPA. Some have attempted to blame the subprime meltdown and financial crisis on the CRA and have argued that the CRA must be 

weakened in order to restore financial stability. These claims and arguments 

are without any logical or evidentiary basis. It is not tenable that the CRA 

could suddenly have caused an explosion in bad subprime loans more than 25 

years after its enactment. In fact, enforcement of CRA was weakened during the 

boom and the worst abuses were made by firms not covered by CRA. Moreover, 

the Federal Reserve has reported that only 6 percent of all the higher-priced 

loans were extended by the CRA-covered lenders to lower income borrowers or 

neighborhoods in the local areas that are the focus of CRA evaluations. 

The information from the last sentence is from an article by Federal Reserve economists and refers just to subprime loans made by 

a bank or thrift (a) to lower-income people or neighborhoods and 

(b) in a bank or thrift’s CRA assessment area. See http:// 

www.minneapolisfed.org/publicationslpapers/ 

publdisplay.cfm?id=4136. This statistic does not refer to the 

whole population of subprime loan originations. Of that population, 

banks and thrifts held a significant share. 

That fact is evident in Table 1 below (http:// 

www.minneapolisfed.org/pubs/cd/09-2/table1.pdf.) from the same 

article. It shows that, in 2005, 36 percent of higher-priced loans 

were by depositories or their subsidiaries; in 2006 the figure rose 

to 41 percent. If you add in bank affiliates, in 2005, banks, their 

subsidiaries and affiliates made 48 percent of all higher-cost loans, 

and 54 percent in 2006. 

Q.5. Mr. Yingling claims that the creation of the CFPA will result 

in a ‘‘potentially massive new regulatory burden.’’ He then goes on 

to assert ‘‘community banks will have greatly increased fees to fund 

a system that falls disproportionately on them.’’ How do you respond? 

A.5. We believe that the Federal regulatory structure for consumer 

protection needs fundamental reform. We have proposed to consolidate rule-writing, supervision, and enforcement authority under 

one agency, with marketwide coverage over both nonbanks and 

banks that provide consumer financial products and services. With 
144 

this consolidated authority and marketwide coverage, the CFPA 

will be able to regulate in a manner that is more streamlined and 

effective, not more burdensome. 

The authorities for rulemaking, supervision, and enforcement for 

consumer financial products and services are presently scattered 

among seven different Federal agencies, sometimes with overlapping authority. For example, the Federal Reserve Board (FRB) has 

jurisdiction over required mortgage disclosures under the Truth in 

Lending Act (TILA), while the Department of Housing and Urban 

Development has authority to require mortgage disclosure under 

the Real Estate and Settlement Protection Act (RESPA). As another example, the Federal Trade Commission (FTC) has authority 

to issue rules relating to mortgage loans in the nonbank sector, 

while the Federal Reserve has similar authority under the Home 

Ownership and Equity Protection Act to issue rules regarding the 

entire mortgage market. Such balkanization and overlap of regulatory authority does not make sense. With consolidated authority, 

the CFPA will, for example, be able to integrate the mortgage disclosures required under TILA and RESPA into one, integrated 

form. This simplification—and others like it—would decrease, not 

increase, the compliance burden, while improving protections for 

consumers. 

Moreover, with respect to regulations, the CFPA will be statutorily required to consider the potential costs and benefits to consumers and institutions, including the potential reduction in consumer access to financial products and services. The CFPA will be 

required to consult with safety and soundness regulators before 

issuing rules. As a result, the CFPA’s rules and supervisory approach will be balanced and effective. 

It is simply not true under our proposal that community banks 

will pay higher fees to fund the CFPA. The Administration proposes to provide by statute that community banks will pay no more 

for Federal consumer protection supervision after the CFPA is created than they do today. Moreover, we believe that community 

banks will benefit from the CFPA in several ways. 

First, today, community banks have to compete against nonbank 

entities like mortgage brokers and mortgage companies, which, unlike banks, are not subject to Federal oversight. In recent years, 

nonbank firms won market share by lowering lending standards 

and offering irresponsible—and often deceptive—loans. Community 

banks were forced either to lower their own standards or to become 

uncompetitive. The CFPA will provide a level playing field, extending the reach of Federal oversight to all providers of consumer financial products and services, banks and nonbanks alike, for the 

first time. The CFPA will put an end to community banks’ competitive disadvantage. 

Second, CFPA’s marketwide coverage and consolidated authority 

for rule writing, supervision, and enforcement will enable it to 

choose the least-cost, most-effective tools. For example, it will be 

able to use ‘‘supervisory guidance’’ in place of new regulations. Supervisory guidance is less burdensome for financial institutions, 

but is not an effective consumer protection tool today because it requires coordination between numerous Federal and State agencies. 
145 

With one Federal agency in charge, supervisory guidance can more 

often be used in place of new regulations. 

Finally, the CFPA will have a mandate to allocate more resources to those companies that pose more risks to consumers 

when providing consumer financial products and services. Community banks are close to their customers and have often provided 

simpler, easier-to-understand products with greater care and transparency than other segments of the market. Such banks will receive proportionally less oversight from the CFPA. 

Q.6. Mr. Yingling asserts that the CFPA is ‘‘instructed to create its 

own products and mandate that banks offer them. . . . Community 

banks whether it fits their business model or not, would be required to offer Government-designed products, which would be 

given preference over their own products.’’ This raises two questions: 

Would the Administration’s proposal require the CFPA to create 

its own products? 

In the area of mortgages, for example, are the kinds of ‘‘plainvanilla’’ mortgages that the plan would encourage similar to products that community banks currently offer, or do community banks 

tend to offer more exotic mortgages that might attract the additional scrutiny contemplated by the proposal? What about nonmortgage products such as credit cards, auto loans, and the like? 

A.6. The Administration’s proposal would not require the CFPA to 

design products. The proposal would permit the CFPA only to identify a standard product that is commonly provided in the marketplace already, and that is proven, simple, and poses less risk to 

consumers. In the mortgage context, such standard products would 

likely include both 30-year, fixed rate mortgages and adjustable 

rate mortgage (ARM) products. 

Most community banks that offer residential mortgages, offer 30- 

year fixed rate and conventional ARM mortgage products. These 

loans would generally meet the definition of standard products. 

Some community banks certainly offered more exotic mortgages 

such as payment option ARMs or subprime loans with nontraditional features, but those institutions likely offered conventional 

loans too. 

The mortgage market has known standard products for years. 

The Agency would have the authority to determine if the concept 

would also apply in other contexts, such as credit cards and auto 

loans. Recently at least one major card issuer has offered a ‘‘plainvanilla’’ credit card and it is possible that this practice would 

spread. 

Q.7. Had lenders been required to offer ‘‘plain-vanilla’’ mortgage 

products such as fixed-rate mortgages or traditional ARMs during 

the significant growth in subprime lending starting in 2003, what 

impact do you think it might have had on the crisis? 

A.7. Subprime mortgages grew extremely rapidly, reaching $600 

billion in originations and 20 percent of the market by 2005. It is 

clear today that the rapid development of this segment of the market was disastrous; a Federal Reserve economist has projected that 

approximately 45 percent of subprime loans originated in 2006 and 

2007 will end in foreclosure. A substantial proportion of subprime 
146 

borrowers qualified for much safer conventional, standard mortgages, which had lower interest rates, stable payments, escrows for 

taxes and insurance, no barriers to exit such as prepayment penalties, and substantially lower default rates. The financial incentives for originators, however, were to steer borrowers into 

subprime loans even if borrowers qualified for conventional loans. 

A requirement to provide the consumer a comparison between 

these more complex products and simpler products might have 

made a difference. The banking agencies ultimately required lenders to disclose these comparisons, but the agencies took so long to 

agree on the disclosures that they made little difference. 

Q.8. Chairman Bernanke appeared before the Committee on July 

23 to discuss monetary policy. At that hearing, he was asked about 

the requirement that consumers be offered ‘‘plain-vanilla’’ choices. 

Bernanke said ‘‘there is some economic analysis which suggests 

that there might be benefits in some cases of having a basic product available, so-called ‘vanilla product’.’’ He goes on to say, however, that the regulators would have to take care not to ‘‘roll back 

all of the innovation in financial markets that has taken place over 

the past three decades or so.’’ Do you have any observations to 

make regarding these comments by Chairman Bernanke? 

A.8. Chairman Bernanke’s comments are well taken. Our specific 

proposal on ‘‘plain vanilla’’ is lighter touch regulation. A vanilla 

product would serve to provide a standard of comparison for borrowers, so they can make more informed choices about what loan 

product would be best for them. It is another tool besides disclosure, but less intrusive than outright banning contract terms that 

harm consumers (as Congress just did on credit cards). Our proposal would not dictate business plans or decide for consumers 

what products are right for them. The goal is to make it easier for 

consumers who want to choose simple products to make that 

choice, and to make sure consumers who choose more complicated 

products understand the risks they are taking. 

Here’s an example. When the regulators put out a model disclosure on subprime mortgages in 2008, it required mortgage lenders 

to compare the payment schedule of a subprime mortgage—with a 

big jump in interest rates in the third or fourth year—to the payment schedule on a fixed-rate, 30-year mortgage. That’s the sort of 

action this agency would take. Only, it would be able to act much 

faster—the regulators’ disclosure came out after the subprime 

mortgage market had imploded. 

I also agree with Chairman Bernanke on innovation. Our proposals are designed to preserve the incentives and opportunities for 

innovation. Many of the consumer lending practices that led to this 

crisis gave innovation a bad name and served simply to hide costs 

in a deceptive manner. We need to create an agency that restores 

confidence of consumers in innovation. We also need to restore confidence of the financial investors who would fund innovation but 

have become wary of it. This is why preserving innovation and promoting access are key objectives of the agency. The agency will be 

required to measure every proposal against these objectives. 

Innovation has to be sustainable and respond to consumer preferences. That requires transparency and fairness. We are equip-
147 

ping the agency with the authority to ensure transparency and 

fairness so that sustainable innovations can thrive. 

Q.9. Mr. Wallison argued at the hearing that the Administration’s 

proposal would require lenders to determine the ability of a potential customer to understand various products, which, he goes on to 

assert will lead to limitations on what they offer. How do you respond? 

A.9. The intent of the standard products provision is to provide a 

standard of comparison for borrowers, so they can make more informed choices about what loan product would be best for them. 

The Agency will also improve disclosures so that it will be easier 

for consumers to understand the loan products they are getting. It 

will remain the consumer’s right and responsibility to make the 

choice. 

Q.10. Mr. Wallison said during the hearing that the liability faced 

by lenders for offering more complex products would effectively 

eliminate those options for consumers. How do you respond? 

A.10. A standard product would serve to provide a standard of comparison for borrowers, so they can make more informed choices 

about what loan product would be best for them. It’s another tool 

besides disclosure, but less intrusive than outright banning complex contract terms (as Congress just did on credit cards). Since 

borrowers would be entirely free to select alternative, more complex 

products and many would do so, lenders would have substantial incentives to offer them. 

Q.11. Title X, section 1022(b)(2)(A) of the Administration’s proposal 

describes special rulemaking requirements applicable to the Consumer Financial Products Agency (CFPA). These requirements 

state that when engaged in a rulemaking, the CFPA must ‘‘consider the potential benefits and costs to consumers and covered 

persons, including the potential reduction of consumers’ access to 

consumer financial products or services, resulting from such rule.’’ 

Please explain the rationale for requiring the CFPA to conduct 

additional analysis beyond the typical notice and comment procedures required of agencies engaged in a rulemaking under the Administrative Procedures Act. 

A.11. The goal of the CFPA is not more regulation, but smarter 

regulation. There is no question that existing consumer protection 

statutes and rules were not protective enough of consumers, and 

we are all paying a price for that failure. Better rules are needed. 

An essential part of the solution is one agency, with marketwide 

reach, and consolidated authorities of rule writing, supervision, and 

enforcement. 

These rules must be balanced. Supervising and, when necessary, 

enforcing against banks and nonbanks will provide the new agency 

with essential information about which problems to address, as 

well as market realities in banks and credit unions that need to be 

respected. CFPA will consult with prudential supervisors before 

writing rules, and the national bank supervisor will be on the 

CFPA board. 

The CFPA proposal requires that the Agency weigh costs in addition to benefits, and consider impact on businesses as well as ac-
148 

cess to credit, in order to ensure that it is a balanced agency that 

acts in the most effective, prudent way possible. This requirement 

is consistent with the Agency’s mission of not removing all risk 

from consumer financial products and services, but rather providing consumers with clear and unbiased information that permits 

them to make their own decisions and weigh their own costs and 

benefits in a reasoned manner. It is also the practice the Federal 

Reserve has followed in implementing the consumer financial protection statutes. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHNSON 

FROM MICHAEL S. BARR 

Q.1. The Treasury’s ‘‘white paper’’ on financial regulation notes 

that one of the key goals of the consumer protection agency is to 

establish consistent regulation of financial products. In fact, the 

paper notes that ‘‘[State insurance regulation] has led to a lack of 

uniformity and reduced competition across State and international 

boundaries, resulting in inefficiency, reduced product innovation, 

and higher costs for consumers.’’ However, the bill forwarded to 

Congress permits States to add additional and different consumer 

protection standards for financial products. Does this undercut the 

goal of consistent regulation? Should not all consumers have the 

same protection regardless of where they reside? Why not simply 

direct the new agency to write strong rules in the first place? This 

ensures consumer protection, yet avoids potential for conflict, confusion, and cost. 

A.1. Since the adoption of the first major Federal financial consumer protection law in 1969, the Truth in Lending Act, Congress 

has with limited exceptions explicitly allowed the States to adopt 

laws to protect financial consumers so long as these laws do not 

conflict with Federal statutes or regulations. Federal law thus establishes a floor, not a ceiling. We propose to preserve that arrangement. It reflects a decades-long judgment of Congress, which 

we share, that States should retain authority to protect the welfare 

of their citizens with respect to consumer financial services. Federal law ensures all citizens a minimum standard of protection 

wherever they reside. Citizens of a State, however, should be able 

to provide themselves—through their legislators and governors— 

more protection. 

The continued ability of citizens to protect themselves through 

their States is crucial to ensuring a strong Federal standard. State 

initiatives can be an important signal to Congress and Federal regulators of a need for action at the Federal level. Even with the best 

of intentions and the best of staff, it is impossible to simply mandate that Federal laws or rules remain updated, since practices 

change so quickly. States are much closer to abuses as they develop 

and they are able to move more quickly when necessary. For example, a number of States were far ahead of the Federal Government 

in regulating subprime mortgages. If States were not permitted to 

take the initiative to enact laws providing greater protection for 

consumers, the Federal Government would lose a critical source of 

information and incentive to adjust standards over time to address 

emerging issues. 
149 

If the Consumer Financial Protection Agency (CFPA) is created 

and endowed with the authorities we have proposed, we expect the 

standards adopted by the Agency will promote regulatory consistency, even while it respects the role of the States. 

We believe a strong and independent CFPA that is assigned a 

clear mission to keep protections up-to-date with changes in the 

marketplace will reduce the incentives for State action and increase legal uniformity. If States retain the ability to protect their 

citizens as new consumer protection problems appear and the 

CFPA has the authority it needs to follow the market and keep 

Federal protections up-to-date, then the CFPA will be more likely 

to set a high standard that will satisfy a substantial majority of 

States. 

To be sure, federally chartered institutions have recently enjoyed 

immunity from certain State consumer protection laws. We propose 

to change that to ensure a level playing field. National banks must 

already comply with a host of State laws, such as those dealing 

with foreclosures, debt collection, and discrimination. Under our 

proposal, federally chartered depository institutions and their 

State-incorporated subsidiaries would be subject to nondiscriminatory State consumer protection to the same extent as other financial institutions. 

We would preserve preemption where it is critical to the Federal 

charter. Our proposal explicitly does not permit the States to discriminate against federally chartered institutions. Discriminatory 

State laws would continue to be preempted. Moreover, we do not 

seek to overturn preemption of State laws limiting interest rates 

and fees (the Smiley and Marquette decisions). Nor do we seek to 

disturb the exclusive authority of the national bank prudential supervisor over national banks with respect to prudential regulation 

and supervision. Thus, we would preserve the value of the national 

bank charter. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM MICHAEL S. BARR 

Q.1. Mr. Barr, do you agree with Sheila Bair, Chair of the Federal 

Deposit Insurance Corporation, that safety and soundness cannot 

be separated from consumer protection? 

A.1. I agree with Ms. Bair and other regulators who have testified 

that safety and soundness and consumer protection need not conflict. Following all applicable laws, including consumer protection 

laws, is a requirement of a safe and sound institution. And as 

we’ve seen in the mortgage and credit card markets, poor treatment of consumers actually undermines the safety and soundness 

of financial institutions. I think, however, that these 

complementarities can be preserved with separate agencies. Two 

banking agencies today, including the FDIC, typically conduct their 

consumer compliance and safety and soundness examinations with 

separate teams of examiners. It is a further step to separate the 

examiners into different agencies, but we would propose to require 

the CFPA and the prudential agencies to communicate and coordinate closely, and to share examination reports. Ultimately, we believe the complementarities will be strengthened if the CFPA is 
150 

given the mandate and authority, as we propose, to identify questionable practices and provide the market and institutions clear 

rules of the road. The CFPA can help the prudential regulator 

identify practices that exploit consumer confusion for short-term 

profits but undermine bank earnings and reputations in the long 

run. 

Q.2. Appearing before the House Energy and Commerce Committee, you said that this new agency would not set prices, dictate 

what products could be offered, or regulate a firm’s advertising 

practices. Section 1039 of the President’s proposals states that, ‘‘It 

shall be unlawful for any person to advertise, market, offer, sell, 

enforce, or attempt to enforce, any term, agreement, change in 

terms, fee or charge in connection with a consumer financial product or service that is not in conformity with this title or applicable 

rule or order issued by the Agency.’’ How do you explain this discrepancy? 

A.2. In my testimony before the House Energy and Commerce 

Committee on July 8, I did state that the CFPA would not set 

prices. Section 1022(g) of the legislation specifically forbids the 

CFPA from establishing usury limits. I also stated correctly that 

the CFPA could not dictate what products firms could offer. With 

respect, however, I did not testify that the CFPA would not regulate the advertising practices of those offering financial products 

and services to consumers. Advertising regulations have long been 

a core element of Federal consumer protection statutes such as the 

Truth in Lending Act. Regrettably these regulations were not kept 

up-to-date. Indeed, before the mortgage market collapsed, the marketplace was awash with misleading advertising about low-rate 

mortgage loans, credit cards, or financial products. Accordingly, the 

CFPA would have authority, as you note, to regulate advertising 

practices of persons that provide consumer financial products and 

services to prevent incomplete or misleading information from undermining competition. 

Q.3. In the past, Mr. Barr, you’ve argued that derivation from a 

standard, plain-vanilla product ‘‘would require heightened disclosures and additional legal exposure for lenders.’’ Please explain 

why this would, or would not, discourage lenders from offering any 

products that are deemed unstandard or outside of the agency’s 

safe harbor? 

A.3. A standard product would serve to provide a standard of comparison for borrowers, so they can make more informed choices 

about what loan product would be best for them. It’s another tool 

besides disclosure, but less intrusive than outright banning complex contract terms (as Congress just did on credit cards). Since 

borrowers would be entirely free to select alternative, more complex 

products and many would do so, lenders would have substantial incentives to offer them. 

Q.4. How much latitude would this new agency have over determining what is a ‘‘consumer financial product or service?’’ The 

President’s proposal says ‘‘any financial product or service to be 

used by a consumer primarily for personal, family, or household 
151 

purposes.’’ Could agency have authority over small business loans 

or commercial real estate? 

A.4. As you note, the definition of ‘‘consumer financial product or 

service’’ in the CFPA Act is limited to any ‘‘financial product or 

service to be used by a consumer primarily for personal, family or 

household purposes.’’ In applying that language, the CFPA would 

need to determine whether the product or service is used ‘‘primarily’’ for personal, family or household purposes as a factual 

matter. 

Similar language appears in the definitions of several other consumer protection statutes, including the Truth in Lending Act (15 

U.S.C. 1602(h)), the Electronic Funds Transfer Act (15 U.S.C. 

1693a(2)), the Fair Debt Collection Practices Act (15 U.S.C. 

1692a(5)), the Fair Credit Reporting Act (15 U.S.C. 1681a(d)(1)(A)), 

and the Equal Credit Opportunity Act (12 CFR 202.2(h)), which implements 15 U.S.C. 1691, et seq.). The use of such language is generally understood as meaning to exclude business credit. 

As a general matter, under the new authority granted to the 

CFPA under the CFPA Act, the CFPA would not have authority 

over small business loans or commercial real estate loans. However, the Equal Credit Opportunity Act (ECOA) prohibits discrimination against certain protected classes in lending for business as 

well as personal and household purposes, and the proposal would 

grant the CFPA rulemaking and enforcement authority under the 

ECOA. To that extent, the CFPA would have authority over business loans under the ECOA. 

Q.5. How did the Treasury determine that the Securities and Exchange Commission has done an adequate job protecting consumers? For example, many of Allan Stanford’s victims were everyday people, not large, sophisticated institutional investors. 

A.5. In establishing a regulatory framework for the protection of 

consumers and investors, the Administration’s goal was for there 

to be a Federal agency with the mission of consumer protection. In 

the consumer financial products and services area, this agency is 

lacking; in the nonbank sector, no Federal agency has supervision 

and examination authority, regardless of the mission, and in the 

banking sector, five different agencies share this responsibility but 

each has safety and soundness as its primary mission. The Securities and Exchange Commission (SEC), on the other hand, does 

have as its mission the protection of retail investors, so there was 

no need to duplicate this responsibility within the CFPA. As the 

SEC has acknowledged with respect to the Stanford and Madoff 

cases, existing authority should have been sufficient to address 

these frauds much earlier. The SEC needs additional authorities, 

however, to provide the broader and more effective oversight that 

is needed, and that is why the Administration proposes strengthening the agency’s authority in several important ways. 

Q.6. Should one of the goals of the CFPA be to ‘‘optimize household 

behavior’’? What do you think optimal savings means? 

A.6. The CFPA will not optimize household behavior. It is for every 

family to make its own financial decisions. In order to help families 

make responsible decisions, the CFPA will work to ensure that 

markets are transparent, people have the information they need 
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about their financial decisions, and bank and nonbank firms alike 

follow clear rules of the road. 

For many years, until the current recession, the personal saving 

rate in the United States has been exceedingly low. In addition, 

tens of millions of U.S. households have not placed themselves on 

a path to become financially prepared for retirement. In order to 

address this problem, the President has proposed two innovative 

initiatives in his 2010 Budget: (1) introducing an ‘‘Automatic IRA’’ 

(with opt-out) for employees whose employers do not offer a plan; 

and (2) increasing tax incentives for retirement savings for families 

that earn less than $65,000 by modifying the ‘‘saver’s credit’’ and 

making it refundable. The proposals would offer a meaningful saving incentive to tens of millions of additional households while simplifying the current complex structure of the credit and raising the 

eligibility income threshold to cover millions of additional moderate-income taxpayers. 

Q.7. Mr. Barr, do you believe that the Government should steer 

people’s choices in directions that will ‘‘improve their lives’’ or 

should the Government allow consumers to make their own choices 

free of interference or direction? 

A.7. We believe that it is the responsibility of consumers to make 

their own decisions on financial matters. There must be clear rules 

of the road so that firms do not deceive consumers by hiding the 

true costs of products. The CFPA will create a level playing field 

with high standards for all firms, bank and nonbank alike, which 

means that the marketplace will provide a broader array of high 

quality products from which consumers can freely choose. 

Q.8. Do you believe that it is more profitable for a bank to issue 

a mortgage or credit card loan to a customer who defaults or to one 

who makes their payments? 

A.8. If incentives are properly aligned, banks should make as much 

or more money when a mortgage or credit card borrower pays their 

loan as when they default. Problems arise, however, when markets 

are structured so that the bank is indifferent to future loan performance, as when the lender immediately sells the loan into an investment conduit without retaining any of the risk of default. This 

‘‘originate to distribute’’ model caused incentives to deviate. The 

lenders—the parties in the best position to determine the creditworthiness of the borrowers—had no incentive to carefully underwrite; they were paid up front when the loan was made regardless 

of future performance. That is why the Administration proposes 

that originators of loans or the securitizer must retain 5 percent of 

the credit risk associated with loans sold into a conduit. 

Q.9. Will you please define what an ‘‘objective reasonableness 

standard’’ means? 

A.9. Disclosure mandates for consumer credit and other financial 

products are typically very technical and detailed, and it takes time 

for regulators to update them because of the need for consumer 

testing and public input. The growth in the types of risks stemming 

from new and complex credit card plans and mortgages that preceded the credit crisis far outpaced the ability of disclosure regulations to keep up. We propose a regime strict enough to keep disclo-
153 

sures standard throughout the marketplace, yet flexible enough to 

adapt to new products. Our proposed legislation authorizes the 

CFPA to prescribe rules that require disclosures and communications to be reasonable, not merely technically compliant. The proposal is based in part on the banking agencies’ supervisory guidance on subprime and nontraditional mortgages. This guidance requires originators to make balanced disclosures. 

Q.10. If a financial institution developed a new product today, 

under the CFPA would that product be able to be brought to the 

marketplace tomorrow? What will financial institutions be required 

to do before introducing a new product? 

A.10. If a financial institution developed a new product today, 

under the CFPA Act that product could be offered in the market 

tomorrow—the CFPA will not be approving financial products. Of 

course, all products must comply with existing laws. For example, 

credit cards may not contain terms, such as retroactive rate increases, that would violate the Credit CARD Act of 2009. It is the 

institution’s responsibility to determine that a new product complies with applicable laws before the institution brings the product 

to the market. It is CFPA’s role to help ensure that products offered in the market comply with applicable laws, and to take appropriate steps if a product does not. 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD 

FROM EDWARD L. YINGLING 

Q.1. In assessing the need for and scope of a new Consumer Financial Protection Agency (CFPA), the Committee must conduct an objective evaluation regarding the responsibility of various types of financial services providers for the lending problems that have occurred in recent years. In your written testimony, you identify 

nonbank lenders as the source for the vast majority of abusive 

mortgage lending in recent years. Specifically you write that ‘‘ . . . 

the Treasury’s plan noted that 94 percent of high cost mortgages 

were made outside the traditional banking system.’’ Your testimony 

also says that ‘‘ . . . it is likely that an even higher percent of the 

most abusive loans were made outside our sector.’’ 

On the other hand, the Committee heard testimony from Professor McCoy of the University of Connecticut on March 3, 2009, 

that such an assertion, ‘‘fails to mention that national banks moved 

aggressively into Alt-A low-documentation and no-documentation 

loans during the housing boom.’’ Professor McCoy cites data indicating that national banks and thrifts issued mortgage loans from 

2006–2008 with higher default rates than State-chartered thrifts 

and banks. Moreover, Assistant Secretary Barr testified on the 

panel prior to you that ‘‘about one-half of the subprime originations 

in 2005 and 2006—the shoddy that set off the wave of foreclosures—were by banks and thrifts and their affiliates.’’ 

Is it your view that national banks and thrifts did not play a significant role, either directly or through their subsidiaries, in offering abusive or unsustainable mortgage loans? 

A.1. Thank you for your question, Mr. Chairman. Certainly, some 

banks—both national and State chartered—were involved in 
154 

subprime lending, but the fundamental fact remains that the vast 

majority of banks in the country never made a toxic subprime loan. 

These regulated banks did not cause the problem; rather, they are 

the solution to the economic problem we face. 

The comment by Professor McCoy you cite in your question is not 

directed at the Treasury’s statistic we referenced, i.e., that a very 

high percentage of high cost loans were made outside the banking 

industry. In fact, Professor McCoy refers to a study by the OCC 

which finds that national banks only accounted for 10 percent of 

subprime lending in 2006—thus confirming the evidence that the 

heart of the problem is with nonbanks. 

Even though attempts have been made to increase Federal regulation of the nonbank sector, the fact remains that in the key areas 

of examination and enforcement, nonbanks still are not regulated 

as strictly or robustly as banks. In fact, the GAO recently released 

a study on Fair Lending (July 2009) which found that the independent mortgage lenders represented ‘‘higher fair lending risks 

than depository institutions’’ yet ‘‘Federal reviews of their activities 

are limited.’’ Furthermore, GAO found that ‘‘[d]epository institution 

regulators also have established varying policies to help ensure 

that many lenders not identified through HMDA screening routinely undergo compliance examinations, which may include fair 

lending components.’’ This increased focus on insured depository institutions occurs because the banking agencies ‘‘have large examination staffs and other personnel to carry out fair lending oversight.’’ 

Traditional banks are the survivors of this financial crisis, not 

the cause. The fly-by-night nonbank mortgage lenders have disappeared as fast as they appeared. As I mentioned in detail in my 

written statement, the focus of policymaking should be on the core 

cause of the problem—the unregulated nonbank financial sector— 

and not end up punishing the very institutions that are most likely 

to restart our economy. 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD 

FROM TRAVIS B. PLUNKETT 

Q.1. Both Mr. Yingling and Mr. Wallison testified repeatedly that 

the Administration’s plan would result in credit being rationed to 

consumers, particularly consumers who need the credit the most. 

They also argued that the requirement that additional disclosures 

or warnings accompany products that are not ‘‘plain-vanilla’’ products would result in only those standard products being offered. 

Specifically, Mr. Wallison testified that ‘‘ . . . when a provider is 

confronted with the choice of whether to offer only the plain-vanilla 

product or the more complex product, he has to decide whether this 

particular consumer is going to be able to understand the product.’’ 

Because lenders will be reluctant to make such judgments, they 

will, by default, offer the plain-vanilla product only, thereby constraining consumer choices. How do you respond to these arguments? 

A.1. Poor regulation of abusive credit products by Federal regulators over many years has led to exactly the result that Mr. 

Yingling and Mr. Wallison are concerned about: credit rationing. 
155 

Deceptive and unsustainable lending practices by credit card companies and mortgage lenders led to record defaults and foreclosures 

by consumers, record losses by lenders, a crisis in the housing markets and the recession. These developments, in turn, have led to a 

‘‘credit crunch’’ where credit card lenders, for example, have significantly reduced credit lines and sharply increase interest rates, even 

for borrowers with stellar credit scores. Had a Consumer Financial 

Protection Agency existed to prevent the excesses that occurred in 

the lending markets, there is a very good chance that this country 

could have avoided the worst aspects of the housing and economic 

crisis, and of the somewhat indiscriminate reduction in credit availability that has occurred. In other words, proper regulation will 

create the kind of stability in the credit markets that encourages 

lenders to offer credit to consumers, especially those who do not 

have perfect credit ratings. 

Similarly, the ‘‘plain-vanilla’’ requirement is designed to create 

choices in the credit marketplace that don’t exist now, and certainly did not exist during the credit boom. ‘‘Choices,’’ such as prepayment penalties that lock consumers into unaffordable loans and 

‘‘exploding ARM’’ loans that lenders knew many of their borrowers 

could not afford, crowded out less abusive options from the marketplace and ultimately harmed consumers and the economy. Lenders 

are quite capable of designing simple, understandable financial 

products that are profitable for them and useful for consumers, if 

they chose to do so.