0:45:17 … especially when you mix safety-and-soundness with consumer protection, consumer protection becomes the subordinated mission. – Adam Levitin
Doom Transcripts: Index & Guide
Housing Doom is pleased to present complete unauthorized annotated transcript VI.E for the American Enterprise Institute’s November 18, 2009 event "Will There Be a Consumer Financial Protection Agency?".1 The event site has some resources including both an audio and a video of the proceedings. There is as yet no official transcript.
Table of Contents
[link navigation works best when full article displayed]
- 0:00:00 – Peter Wallison intro
- 0:10:39 – Eric Stein presentation
- 0:26:46 – Julie Williams presentation
- 0:42:17 – Adam Levitin presentation (preview post)
- 1:03:00 – Wayne Abernathy presentation
- 1:15:29 – Panel discussion
- 1:15:37 – Wallison / Stein dialog
- 1:20:08 – Levitin response (with Wallison)
- 1:22:13 – Williams response
- 1:23:18 – Stein response
- 1:23:52 – Abernathy response
- 1:25:27 – Levitin response (with Wallison and Abernathy)
- 1:27:24 – Williams response (with Levitin)
- 1:29:50 – Levitin question
- 1:30:44 – Stein response
- 1:30:58 – Q&A
- 1:31:10 – Indra Klein question
- 1:34:46 – Bethany Lowe question
- 1:49:03 – Renuka Rayasam question
- 1:52:11 – Indra Klein question
- 1:55:27 – Wallison brief wrap-up
- 1:55:37 (end)
Peter Wallison: [0:00:00] OK, I think we’ll get started. I want to thank all of you for coming this morning. It’s a little early but this was a good breakfast, good breakfast opportunity. And I hope we’ll have some food for thought, as well as for digestion.
I want to say that we have one change in the program. Josh Wright, who was supposed to be part of our panel has a medical emergency, and was unable to do this, but at the very, very, very last minute (about 6:30 this morning) Wayne Abernathy from the ABA agreed to do it, so Wayne will go last in our panel, but I’m sure we’ll have an excellent explication of the Bill that we’re going to be talking about today. And I want to thank him for doing this on such short notice.
Apart, perhaps, from the Health Care legislation, this Bill would create a Consumer Financial Protection Agency [CFPA] that is probably the most complex piece of legislation that Congress will take up this year.
The definitions section in the House version, which is H.R. 3126, is 20 pages long, with 8 pages just to define "financial activity." The list of included services is enormous, ranging from deposit-taking to servicing loans to debt collection, leasing and financing and financial data processing. And then, of course, at the end there is authority for the agency to add any other business it thinks should be covered if that business is incidental or complementary to a financial activity.
It’s interesting to see which groups got themselves exempted from the Bill that was reported out by the House committee: lawyers, accountants, real estate brokers, auto dealers (including, I suppose, used car salesmen, the only group ranked lower in public esteem than Congress itself — must have been professional courtesy [laughter]). The exemption for real estate brokers is particularly interesting, in my view. That, apparently is not a financial activity against which consumers need protection, although leasing real property is.
Mortgage brokerage is covered, of course, since some people, like the President of the United States, think it is the cause of the entire financial crisis. So, if I understand it correctly, consumers need protection if they rent a home, if they finance it, but not when they buy it — a peculiarity, I think.
These conclusions and exclusions are symptomatic, I think, of the problem presented by the CFPA. Where does its jurisdiction and its politics actually end?
It’s relatively easy to come up with activities that might or might not be included in the law that is eventually enacted, and the litigation over this issue could be endless.
Let’s take insurance brokerage as an example. Acting as a broker for personal property is a financial activity under the bill. Is an insurance policy personal property? If so (and actually it usually is considered property) if so then brokering insurance would be a financial activity. However, the business of insurance itself is not a financial activity, and the Bill defines that point this way …
The term "business of insurance" means the writing of insurance or the reinsurance of risks by an insurer, including all acts necessary to such writing or reinsuring, and the activities relating to the writing of insurance or the reinsurance [laughs] … reinsuring of risks conducted by persons who act as, or are, officers, directors, agents or employees of insurers, or who are other persons authorized to act on behalf of such persons.
Simple enough, right? Now, does the phrase "all acts necessary to such writing" include brokerage? If so, then insurance brokerage is excluded from the act. But, then there’s section 125 D(1), which says …
Nothing in this Bill shall be construed as limiting the authority of the Director and the Agency from exercising powers under this Act with respect to the provision by a covered person of a product or service not otherwise subject to this act for or on behalf of a person regulated by a State insurance regulator in connection with a financial activity.
Now you all understood that.
So, if you read that the way it sounds, insurance brokers (because they are regulated by State insurance regulators) are covered. But then there’s Section 142 D(3), and that says …
No provision of this [0:05:00] title shall be construed as altering, limiting or affecting the authority of the State insurance commission or State insurance regulator under State law to adopt rules initiating enforcement proceedings or take any action with respect to a person regulated by such commission or regulator.
So you might conclude insurance brokers are subject to both the CFPA and to State insurance regulators.
This then raises the thorny issue of preemption. The question whether the law will ultimately include a provision to the effect that the national rule will preempt State rules on consumer protection is probably the most controversial element of this very controversial legislation. Like the rest of the Bill, it’s also immensely complicated, and we haven’t even begun to plumb the confusions that can arise here.
The Bill that emerged from the House Financial Services Committee has a complicated provision on preemption, but it applies only to the preemption of State law as … State laws as they apply to national banks. That’s the easy part, I think.
As controversial as it is, preemption is relatively easy to understand when we are talking about a national bank regulator having authority that preempt State laws applicable to national banks. But if preemption is written into this law, it would have far more unsettling and far-reaching effects than traditional preemption.
For example, it’s one thing to say that national bank regulations preempt State consumer protection laws for nationally chartered banks. But the CFPA has authority over deposit-taking and lending generally. So that if there is preemption in this law, it could mean that States cannot apply their own consumer protection rules to their own State-chartered banks. This would be national rules preempting State regulation applicable to State-chartered banks.
It also has peculiar effects elsewhere. If there is preemption, an ordinary corporation engaged in, say, check-cashing, could operate under a national rule in every State, but national retailers, which were excluded from CFPA’s coverage under H.R. 3126, would be subject to State-by-State regulation.
Under some circumstances, it would be better for a company to be covered by the CFPA than to be exempt. On the other hand, if there is no preemption, many small companies that are today subject to few or no consumer protection laws in many of the States in which they operate would suddenly become subject to a new and costly regulatory regime. The effect would be to drive smaller companies out of business, or to force them to consolidate.
The Bill also contains significant new powers for the SEC. In an attempt to reverse a Supreme Court decision last year in the Stoneridge case that limited the scope of so-called "scheme liability" in securities class actions.
The statute’s complexity is such that there are bound to be many questions about its language raised in the House. The Senate is likely to be even more hostile. The powerful banking industry opposes the Bill, and the powerful consumer groups favor it. The new powers for the SEC and the reversal of the Stoneridge case will bring the entire business community on one side and trial lawyers on the other. Needless to say, the bank regulators do not favor the loss of their consumer protection role.
Although our expert panel today will be discussing the Bill’s details, the real question is whether the Bill is so complex and far-reaching, with potential anti-competitive effects across our entire economy, that can make … that it might not be able to make it through the legislative process this year, or even in 2010.
None of the experts on our panel is a specialist in the arcane business of predicting what Congress will do, but the issues that will arise in the discussion today will show you, I think, what is at stake in this legislation, and how difficult it will be to get through Congress this year, or even next.
I’ll now introduce each of our speakers just before they talk, and the first presentation will be made by Eric Stein from the Treasury Department. Eric is deputy assistant secretary for consumer protection at the Treasury. He was formerly the President of the Center for Community Self-Help, a nonprofit community development lender whose mission is to create ownership and economic opportunity for peoples … people of color, women, rural residents, and low-wealth families and communities. He was also a Senior Vice President of [0:10:00] Self-… of Self-Help’s affiliate, which is the Center for Responsible Lending, a non-profit, non-partisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. He’s worked in the past for Fannie Mae’s Office of Low and Moderate Income Housing, and for Congressman David Price, a Democrat of North Carolina, and for Judge Sam J. Ervin of the 4th Circuit Court of Appeals.
Eric, the floor is yours.
Eric Stein: Thank-you very much, Peter. Thanks for having me. Thanks for coming so early to hear this panel.
Senator [sic] Obama has repeatedly said that the consumer protection is one of the major causes of the current financial crisis, and Secretary Geitner as well has said the same, and I certainly agree with them. There were millions of people who received mortgage loans who had very little idea of what they were getting into and as a consequence weren’t able to pay those loans back, and the losses from these mortgage loans have rippled through our financial system by causing losses at financial institutions. There were bets on those loans that went sour which caused further losses and the government had to intervene, as everybody knows, in a very major way.
There were a lot of problems that led to this financial crisis, but one key one in our book is our belief there was a failure of consumer protection across the entire financial system.
We believe that this affects everybody. 78 percent of people use credit cards, 44 percent hold a balance. When there are deceptive terms with credit cards, everybody’s harmed.
More than half of high cost loans for middle class loans, or loans to middle class families in communities. This is something that affects everybody. When somebody down the street loses their house to a foreclosure, everybody on that block feels the impact with the reduced property values. And so it ends up affecting everybody.
What our belief is that the problems were so severe that this demonstrates to us the status quo, the current structure of our financial regulatory system, needs to change in a major and fundamental way.
There are three different lessons that we drew from this crisis, in terms of how to deal with consumer protection going forward.
The first is that we need an agency that has the focus on protecting consumers. That we lack that in the current system. We don’t have a single regulator whose job every day is to think, "How are the American People going to be protected? How are clear rules going to be made? How are they going to be enforced? How can we further that goal?"
When something is everybody’s job, in some sense it’s no one’s job. There’s no accountability for it. And it’s our belief that we need an agency. One of the lessons to draw is that we need an agency that has this focus.
When you have, for example the Federal Reserve has 4 very important jobs for the economy: monetary policy, financial stability, lender-of-last-resort, they regulate financial institutions and they also have consumer protection as an important goal. But there’s only so much that a human brain, that a human institution can accomplish, and we feel as though you need an agency where that’s its focus.
It’s not a knock on any of the people who work at any of the regulatory agencies who are very smart and capable and caring people, it’s just that it’s only … you have to prioritize your actions. You have to prioritize your organization and institution, and if safety and soundness is your primary goal, it should be your primary goal, and we feel that when people have jobs and accountability, they can focus on that and go about their business. And so we think there needs to be a structural change in that respect.
The second lesson that we drew is that this agency with the single mission needs market-wide jurisdiction. And instead what we saw in the current situation that has very fragmented … there’s very fragmented jurisdiction with respect to consumer protection.
There’s arbitrage between non-banks and banks. You could choose, if you did not want a federal regulator, doing the same activities. You have very large non-bank entities making mortgage loans that did not turn out very well, and it was their choice, they could have chartered themselves as a bank and had a federal regulator, or they could charter themselves as a non-bank and there was less supervision, there was less oversight in the non-bank arena. And that … it’s our belief that that choice should not be available to them, that there should be the same consistent standards across the whole market, and they shouldn’t be able to choose the area, because if there’s a choice, there’s naturally going to be a selection [0:15:00] of areas where there’s less supervision.
We also don’t think there should be arbitrage opportunities or the ability to choose the regulator within the banking sector, because that drives standards down as well.
Clearly the … continuing on the theme of mortgages, that started in the non-bank sector, but when standards are reduced in one part of the economy, there is the choice that responsible providers have, "Do I follow the standards down, or do I lose market? Do I keep more pure, but then I lose all my customers?" And that’s the choice that we don’t think people should be faced with. That’s why we think there should be market-wide coverage.
While the subprime mortgages started in the non-bank sector, they definitely migrated to the banking sector, where 40 percent of subpri–… of higher cost loans, by 2005 / 2006 were made by banks or their affiliates. Banks and their operating subsidiaries. If you add affiliates it gets up to 50 percent. And we know that the problems that higher cost loans gave, … We don’t know how they performed by institution, but we know as a whole they have not performed well. A Federal Reserve economist has projected that 45 percent of them are going to result in the person losing their home to foreclosure, ones originated in 2007, and I think 2006.
And so this … We can’t have the standards be lower in some places, which drags everybody else’s down. They need to be high and level across the entire structure, we believe.
Third, we feel as though … The third lesson that we drew from this is that this one entity that has the focus, that covers the whole market, needs to have consolidated authorities. It can’t just have … There are three real authorities that are important:
- there’s the abliity to write rules to say what’s permitted;
- there’s the ability to supervise institutions to make sure that they’re doing the right thing; and,
- third there’s the need to enforce, when they’re not doing the right thing, you need to be able to make sure that they do, either by taking some action against them.
And we think that the same agency should have all three authorities, that they’re inter-related, and if you don’t, then inaction can be the structural result of this.
One example … For example, on the rule-writing, there are 20 different or so, 15 to 20 enumerated statutes, consumer statutes, that are in the Bill, and they’re … and 7 different agencies had a hand in writing the rules on them. That can just be combersome, by the nature of it, by the structure of it.
TILA and RESPA is one example, where you have the Truth In Lending Act [TILA], which the Federal Reserve is responsible for implementing, and you have the Real Estate Settlement Practices Act [RESPA], which HUD is responsible for. These are both things that, at a mortgage closing, which is important to understand the costs of the loan, but two different statutes, two different agencies. They’re not harmonized, and they don’t really speak the same language. They’re making progress on putting them together, but it’s been a long time.
So if you had one agency with the ability and the mandate to put those together, that would not only reduce regulatory burden, but it would make things much clearer for consumers to understand what they’re getting into.
Another example would be the Fair and Accurate Credit Transactions Act, which required 6 agencies to come together to write rules on a very important matter, making sure credit reports are accurate. It took 6 years to do that, because it’s so hard to coordinate.
We don’t … and if you divorce enforcement and supervision, we think that that causes problems as well. If one agency sees the problems in a particular area such as credit cards, then they’re much more apt to write rules to make sure that those … that problems that they see with their eyes are dealt with. And if they don’t have the ability to do both, than they might not do either, because two agencies getting each other to act could be difficult.
Because, … and then the States, to mention the issue of federal preemption, we also think it’s important that States have the ability to protect their citizens as well, particularly with respect to the State chartered entities, as Peter mentioned. But also as well with respect to federally chartered entities.
Since the structure is the problem, we believe, you’d think changing the structure must be the solution, so it kind of follows from our diagnosis of the problem we want this Consumer Financial Protection Agency with the mission of protecting consumers, covering the home market with the consolidated authorities that I mentioned.
Just a little bit about the way that the Agency is set up. It has … As Peter mentioned, it has a broad delegation of authority, but it’s actually less so than the banking agencies. It’s modeled on the banking agencies, because it’s going to have to cover the banks as well as the non-banks, and it needs the same powers and authorities. For example[ph], the banking agencies, under their safety-and-soundness requirements, which is a very broad mandated power, and an appropriate one, were able to write this rules on the [0:20:00] clear and balanced disclosures for subprime loans. The authority for doing that was the safety-and-soundness requirement, as well as the guidelines on predatory lending.
We have the … CFPA has more specific requirements rather than that broad general, but the idea is that it needs to have the same coverage of what a financial product is. The definition of financial product is just as wide as what banks can offer. So that the banking agencies would be the ones to enforce that. CFPA needs the same ability.
The authority, however, is quite cabined. First, the mission is to … The very first objective in the Mission Statement is to provide people with the information that they need to make responsible decisions, and promoting efficient markets is important, as well, as an objective. That’s what this agency’s set up to do.
It needs to consider the impact before it writes rules on access to credit for people, and it needs to balance benefits and costs that’s built into the statute, which it oftentimes is not in consumer protection statutes.
It needs to look at the cost to providers when it implements rules, … when it writes rules, what the impact would be.
It needs to consult with the safety-and-soundness regulators.
It can’t ignore the enumerated statutes, … the consumer statutes that Congress has passed aleady. There’s significant restrictions on what agencies can be able to do because of what Congress has already said. There’s Congressional oversight.
Because it has broad authorities, we think that that actually will allow it to … As opposed, if it were just a rule rule-writing agency, the only thing it could do is write rules. If it is also a supervisor and an enforcer, it can go into institutions, it can do supervisory guidance, not having to have all the agencies together, which made it cumbersome to issue guidance like dealing with subprime loans and non-traditional mortgages. Getting all the agencies together delayed things significantly. It would be the only one doing it, so it could move more quickly, and it could try that rather than doing rules.
That’s on the authorities side. I also … Adam Levitin wrote a good paper2 that the last part, which I fully agree with, by having one agency with the focus on consumer protection across the whole financial services market, you would have an agency that really has the incentive to understand it fully. So there’s a … Research is built into the statute that’s a very empirically based institution that would be acting on the basis of data, and would have the incentive and the resources to try to really understand what’s going on, because now, the Federal Reserve is the closest, but they … as I mentioned they have so many different jobs, we’ll have an agency that really has the incentive to understand, to put a real focus and a real empirical bent on this work, on what’s happening.
If someone were really looking at subprime mortgages, not just on the institutions that they’re responsible for, but across the whole market, then I think we could have much earlier discovered the problems that we’re now facing.
I think I’ll leave it at that.
Peter Wallison: Thank-you, Eric. Eric, I have a question, …
Eric Stein: Sure.
Peter Wallison: … and that is, … If the problem, as it is seen by the Administration, is a lending problem, as you described it; that is, in mortgages in particular, but maybe perhaps lending in general — Why cover check cashing, trasmissions services, financial data processing all with a national rule that is applicable nationally. What’s the theory for that?
Eric Stein: The theory is that we want to learn from the past crisis and deal with issues in this agency that perhaps have systemic implications, but that problems for American consumers go well beyond that. And by not having a federal regulator who’s responsible for making sure that consumers are treated fairly, that there are clear rules that are enforced across all financial products and practices, that we’re really missing an opportunity to improve people’s livelihoods.
That mortgage is the one that blew up, that caused this big problem. That’s not the only thing that we want to deal with. It’s the impetus and the largest mortgage or financial activity that people will take that will occur to them, but the other ones that hit them on an everyday basis are important as well.
Peter Wallison: There’s evidence for consumer abuse in transmission services and financial data processing? Things like that? … You’ve seen that? … And the States couldn’t handle it?
Eric Stein: Yeah, I think that having the ideas that the agency will be working closely with the States, it will try to supplement where there are problems. Where there are problems today there may be problems elsewhere in the future, so if you gather it all in one agency, you have the ability to focus on the problems that you see now, and you have the ability to deal with the ones that come tomorrow, or the ones that are there today that you don’t see yet.
Adam Levitin: Peter?
Peter Wallison: OK, …
Adam Levitin: May I just respond, a very specific thing. Now with [0:25:00] transmission services, that’s things like Western Union, right? So actually there are problems there.
And this is an area where the Fed has responded by … The Fed is starting to, itself, do basically wire transfers to non-banks overseas, because of a perception that Western Union and other transmission services are pretty much price-gouging people who are sending remissions overseas, mainly immigrant groups that are sending remissions — remittances, I’m sorry.
Peter Wallison: OK, Julie Williams is our next speaker. Julie joined the Office of the Comptroller of the Currency [OCC] in 1993, became acting comptroller of the currency in 2004. She was initially appointed Chief Council of OCC in 1994, with responsibility for the Licensing and Community Affairs departments, and for all of the agency’s legal activities. As the agency’s statutory 1st deputy, she also served as Acting Comptroller for the majority of 1998.
Before joining OCC, Julie served in a variety of positions at the Office of Thrift Supervision [OTS], and its predecessor agency the Federal Home Loan Bank Board, culminating in a position as Senior Deputy Chief Council at OTS from 1991 to 1993. She has many publications and a background as a lawyer at Fried, Frank here in Washington from 1975 to 1983, but probably no one more familiar with federal bank regulation today than our next speaker, Julie Williams.
Julie Williams: Peter thank-you very much in that sort-of geneology. [laughs] He’s captured having experienced one major multi-agency reorganization in 1989, so we were just talking before the panel started just as to whether I’m going to get an opportunity to experience another one with the restructuring proposals that are on the table.
Let me start out by saying that the OCC has supported the basic proposal for the creation of the CFPA. We are supportive of implementing a concept for a centralization, certainly of rule-writing functions at the federal level and the federal consumer protection, … or the federal consumer protection statutes. And we are supportive of the fundamental approach of having a set of sets of standards that apply not just to depository institutions, but that would apply to all types of entities that engage in the particular activity or provide the particular product that is the subject of the federal consumer protection standard.
We have raised, though, several what we think are significant issues about the structure of the CFPA and how it would go about accomplishing its mission as described, and I want to go over those with you this morning.
First is the stepping back and asking the question, "Does the whole CFPA proposal really get to the heart of the … what caused the recent financial crisis — the mortgage [system]?"
There is, in our view, an absence of detail of how the CFPA is going to actually cause there to be a system of oversight, examination, supervision, review of the quality of conduct of the non-depository institution, providers of financial products and services. The CFPA proposal as developed is very robust on the standard-setting role, and very clear that, to the extent that the CFPA sets regulations under any of the enumerated federal consumer protection statutes, that it would assume responsibility for, or under new authorities [0:30:00] that the CFPA is granted, it’s very clear that those standards and those rules would apply across the board.
The issue is how do you assure that in the non-regulated bank space that those rules are actually being followed. And if you look at a lending fuction being conducted by, say, a community bank, versus a non-bank lender, subject to a State regulatory regime, how, … what assurance do you have that the non-bank lender is subject to the same type of and quality of examination and oversight to ensure the standards that are being implemented in practice by the non-depository institution / financial service provider.
The … Also stepping back, one of the … We think that the fundamental issue with the mortgage crisis was really a failure of sound credit underwriting practices. There were too many people that got loans at terms that they could not reasonably repay. And there’s a whole set of issues that Comptroller Dugan has spoken about, and is speaking about, actually today, on the issue of credit underwriting standards in mortgages and the importance of that.
And the CFPA is a consumer protection oriented agency. It doesn’t get to the fundamental safety-and-soundness credit underwriting issues that, in our mind, were at the heart of the recent mortgage crisis.
Second issue is we and, I think, the other banking agencies have concerns about divorcing consumer protection supervision, examination, supervision and enforcement activities from the overall supervision of depository institutions. In other words, divorcing prudential and safety-and-soundness supervision from consumer protection supervision.
We conduct those activities at the OCC in a very integrated way. From small to the largest banks, we do it differently, but in the different ways it is still a very coordinated and intergrated approach to safety-and-soundness in consumer protection supervision. And in connection with some of the hearings that were held this past summer, we provided some real-life examples of situations where our examiners, working in one area, found an issue in another area, working in a coordinated exam were able to deal with a safety-and-soundness issue in tandem with a consumer protection type issue and take care of those issues at the same time in a very efficient and coordinated way.
So we do not believe that it is an effective, or improves either consumer protection or safety-and-soundness supervision to split them apart. This is what we would generally say is that effective supervision, overall, incorporates a comprehensive understanding of the nature of the business being conducted, understanding of the capacities that management, markets, operations, policies and procedures of the institution, and the technology that they use to conduct the activity.
So, for example, in our larger institutions we may have an IT component to … a retail credit type exam, which also includes the consumer protection and safety-and-soundness elements to it.
Thirdly, [0:35:00] and this is a perhaps OCC-centric point, the CFPA proposal embodies in it a virtually total roll-back of national bank preemption in connection with retail banking activities. This is a drastic change in the nature of the national bank charter. It’s a drastic change in the relative characteristics of the national bank charter compared to State banks, and really a big change in the elements that make up the dual banking system, in the sense of — What are some of the differences that make the dual banking system dual?
There maybe is a bit of an irony here, that at the time that a lot of the rest of the world is seeking to try to eliminate and break down geographically anchored sets of standards (whether you’re talking about developments in the EU or broader, in order to increase efficiency and competitiveness of their companies and their financial institutions) this particular measure in the CFPA package is dramatically going in quite the opposite direction. Our view is that, and our concern is that the elimination of the preemptive characteristics of the national bank charter eliminate the option of being able to conduct a retail banking business pursuant to strong federal standards, uniformly applicable, applied in a vigorous way, regardless of the jurisdiction in which the bank is conducting business.
I think that, to the extent there are issues, which Eric has mentioned, about timeliness or strength of the federal standards, the creation of the CFPA and the role that it would assume in administering the current federal consumer protection statutes, as well as new authorities, should be a development and a new mechanism that will assure that federal consumer protection standards are strong. So that’s our third concern, relates to the repeal basically of national bank preemption relative to conducting a retail banking business.
Finally, there are aspects of the CFPA proposal that fairly dramatically increase the authorities of State regulators, State enforcers relative to national banks. And this is another facet of increased and very dramatically increased application of State controls to federally chartered institutions, and national banks in the case I’m talking about.
The issue here is probably two-fold. One goes back to the fundamental characteristics of the national charter, being an institution that operates pursuant to federal standards and under a federal scheme of supervision as well as enforcement. But the other issue that is important in the bigger picture is when you look at the scope of jurisdiction of the CFPA.
And getting to some of the questions that Peter has mentioned, there are a … it is very challenging. There are probably hundreds of thousands of types of firms that are subject to the jurisdiction of the CFPA, as described. And our basic point here is with respect to enforcement activities, to keep the federal banking agencies (and this point here is not unique to the OCC) keep the federal banking agencies in their role, not just as examiners and supervisors, but as [0:40:00] the primary means of enforcement with respect to banking institutions, and to thereby encourage the resources of the States, in both the oversight and the enforcement roles, to focus on the lesser-regulated segments of the financial services industry where, at least in the mortgage space, there is a broad consensus that the source and predominant source of the problem was with those non-bank lenders.
So those are the points that we have emphasized in terms of some of the basic structural elements of the CFPA proposal, but I go back to my first point: We see some very helpful and beneficial features to the initiative, and we have supported it as a way to accomplish a centralization of standard-setting in the federal consumer protection arena, the expansion of those federal standards over all types of providers and hopefully as a means of having more assurance of actual effective application of those standards with respect to non-depository institutions at the State level. … Thank-you.
Peter Wallison: Julie, thanks very much. Next speaker will be Adam Levitin. Adam is an Associate Professor of Law at Georgetown University Law Center and the Robert Zinman Resident Scholar at the American Bankruptcy Institute. He also serves as Special Counsel for mortgage affairs for the Congressional Oversight Panel. Before joining Georgetown faculty, Adam practiced in the business finance and restructuring department of Weil, Gotshal & Manges in New York, and served as a law clerk to the Honorable Jane Richards Roth on the United States Court of Appeals for the Third Circuit. … Adam?
Adam Levitin: Good morning. If there’s one thing that I want you to leave this room remembering, it’s that the CFPA proposal itself does not have any substantive product regulation within it. It sets up … the proposal itself is a regulatory restructuring proposal.
Now the ultimate goal of this is to get better product regulation, consumer financial product regulation, but there is no actual product regulation in the Bill. So I think it’s important that we have our debate … that the debate be confined to, "Is this the right structure for producing good consumer financial protection regulation?" Not what, you know, "How should we regulate mortgages, or credit cards?" That’s a secondary question, and we had … there are good debates to have on all of those issues, but that’s not what the CFPA debate is. And I think it’s important that we keep those separate.
So Eric, I think, laid out the case for the CFPA very nicely, that we have a problem where in our regulatory structure, responsibility for consumer protection in financial services is splintered among over a dozen agencies. This includes, these agencies include the VA, and as Julie told me a couple of weeks ago, the Department of Defense. This is … it’s not a structure that anyone designing, sort of thinking about consumer protection regime, would design sort of from scratch.
So this splintered structure creates a number of problems. First, as Eric said, there’s an accountability problem. When consumer protection is everyone’s responsibility, it becomes no one’s responsibility, it becomes an orphan mission.
Now you might think the FTC has … is an agency that’s dedicated to consumer protection. The only problem there is that the FTC has no authority over banks, and I mean banks broadly. That their jurisdiction is explicitly limited. So we don’t have any … we really don’t have any agency that they can regulate market-wide for consumer protection.
This has a number of follow-on effects. First, agencies have limited incentive to develop deep benches of expertise. That the agencies have a lot of other responsibilities, and consumer protection is only one of them and, frankly, for many of them it’s not at the top of the list, nor should it be. That I want the OCC looking out bank safety-and-soundness first and foremost. [0:45:00] If the OCC doesn’t do bank safety-and-soundness, we’re in trouble. Fortunately, they do.
But the problem is that when you have mixed agencies that have multiple missions, there becomes a heirarchy of missions. Missions get prioritized. And inevitably, when you … especially when you mix safety-and-soundness with consumer protection, consumer protection becomes the subordinated mission. And here’s how to see it …
Safety-and-soundness is ultimately about profitability. A financial institution that is not profitable cannot be safe and sound. Now abusive lending practices, abusive transactions? The only reason an institution undertakes those is because they are profitable. It’s not because they’re fun. These are profitable trans–… It’s profitable to make … or at least these institutions[ph] thought it was profitable to make subprime loans.
When, therefore, when you have a regulator who’s faced with a choice between ensuring that they … you see the institution’s saying, "Wait! We have to stay in this business line. This is our margin of profit. If you don’t let us stay in this business line, we’re not going to be profitable." That’s a very tough choice. That’s a very tough position for a regulator.
So, for example, right now we have a … we have a Bill coming up on overdraft protection that banks offer. So if you overdraw on your checking account (we’ll say you use a debit card and you overdraw) that you might be offered, or may have a "complimentary" service of overdraft protection. It’s a line of credit, and it’s an expensive one. It’s an extremely expensive one. That we’re talking about rates, … If you were to figure out the APRs [annual percentage rates] on overdraft (and there’s a nice FDIC study) we’re talking about rates of of interest that would make payday lenders blush. Four figures. That’s how high. And that’s if you annualize it, of course, and usually it’s for a week or two. But there are a sizeable number of small institutions, credit unions and community banks in particular, for whom overdraft fees, that’s their margin of profit. If they don’t have overdraft fees, these institutions are out of business.
Well, if you’re their regulator, they’ve got the … that’s a tough position. And I mean, imagine if we had a special small bank regulator. Maybe that’s kind of the FDIC, that you might see a lot of your regulatory charges disappear if they can’t … if they have no overdrafting. That’s a very difficult position to put a regulator in, to ask a regulator to put itself out of business.
We also have a problem of regulatory arbitrage, that when you have multiple regulators, that especially, … and this is really the case on the bank regulating side, we have regulators competing. And they’re competing for regulatory business. That the OCC and the OTS have to, or are in competition for who can, you know, signing up banks or for getting a bank charter. And comp–… And we tend to like competition, I think especially here at the AEI, but competition can also, it can lead to a race to the top, or it can lead to a race to the bottom. And I think that there’s been pretty good evidence that competition between OCC and OTS has allowed banks to really get to game the system. That whichever regulator will offer the better terms, and by that I mean the more lenient regulation, is where banks will go to.
Now OCC and OTS know this, right? We have to sort of put on our game theory act, play this out. OCC and OTS know that there’s going to be, that there’s this competition. And they don’t want to lose banks. Therefore, they … When you get to a situation and the banks don’t actually have to switch charters very often. Instead, it’s OCC and OTS know that this game goes on, and they’re going to be more cooperative with their regulatory charges.
That’s a bad situation to put a regulator in; where again, where a regulator is in a situation where in order to protect its regula–… sort of its line of business, as it were, it has to maybe compromise somewhat on its regulatory role.
So the splintered authority is a major problem, and that’s … and regardless of what you think should be done in terms of regulating mortgages or regulating credit cards or bank overdraft or what have you, there’s, I think, a very strong case that we should have some consolidation on the regulatory front. Whether that speaks to having a new independent agency, or putting a consolidating authority in an existing agency, I’m frankly rather agnostic on that. But I think there’s a very strong case for consolidation.
Now Julie raised the issue of preemption, and there’s quite a bit to say there. So first, I think it’s important to remember that the national bank charter goes back to 1863. A lot of what Julie described about the national bank charter is not in the actual language of the bank charter, it’s in OCC interpretation of the bank charter. And some Supreme Court, often in deference to the OCC, but you won’t find it in the national … the national bank charter doesn’t say a lot. The National Bank Act. [0:50:00]
Most of the activities that banks engage in you won’t–… and they get in there under this incidental powers provision of the National Bank Act.
So most … moreover, until a couple of years ago, not really a couple, a few years ago, actually there was pretty robust ability for States to regulate national banks on consumer protection. It’s only been in the last, I can’t remember, you’re going to know much far better … when your preemption regulations … 2004, that we had OCC preemption regulations that really started to push, … to significantly scale back the [scope of State] regulation. That means that we’re not talking about a roll-back to prehistoric times, we’re talking about a roll-back to where we were in 2004, if we have more State authority.
Now the situtation with preemption is — here’s the nightmare situation, right? We have 50 different States plus the District of Columbia, Guam, the Northern Marianas Islands, Puerto Rico and US minor outlying islands all issuing their own different regulations, and this would be terrible. If you have a bank that’s trying to operate across State lines, it’s going to deal with all these different types of regulations, huge regulatory burdens. That would really be a nightmare if that happened.
But there are two problems with this. First of all, this is actually already the case. National banks are still subject to an awful lot of State laws. State contract law still applies. State criminal law still applies. State tort law still applies. State real estate law, including foreclosure law still applies.
So if we really want to argue about preemption, it should be that national banks aren’t subject to any State law whatsoever. That’s the logical conclusion. And maybe there’s an argument for that, but that’s a very different situa–… world than we’re in today. Moreover, we have … The 50 different States doing 50 different things in consumer protection? This just isn’t actually how the world works. That instead, in consumer protection you have a bunch, you have a number of States, say Alabama and Mississippi, Louisianna, that are never going to take the lead in consumer protection. They’re probably not going to do anything there.
Then you have a number of States on the other extreme of the spectrum. You have California, you have New York, you have Massachusetts, North Carolina, Illinois, New Jersey, Connecticut that are going to take the lead and be very aggressive with consumer protection.
But they don’t go in different paths. They tend to operate as a wolf pack, or cartel you might call them. It’s a regulatory cartel, where their actions tend to be coordinated. And so what we’re much more likely to see is not instead of 50 different standards, maybe two or three different standards.
And this starts to look like the situation in … with auto emissions. California, by federal law, is allowed to have stricter vehicle emissions standards than the rest of the country. So California does set these standards higher. And if you recall, there was … it’s under what is it? EPA approval, and at the end of the Bush Administration there was … the EPA approval was withheld, it became a little brouhaha there. But we’ve had for quite a while California having higher vehicle emission standards than the rest of the nation. So, well, how has Detroit reacted to this? It’s only produced one type of car, a California car. You buy your car anywhere in the country and you’re getting California emission standards.
So we have, actually, this becomes a race to the top. It’s highest common denominator, not lowest common denominator.
Now there’s still a question. OK, do we want California telling the rest of us what to do? Maybe not. If you’re worried about that, here’s the thing to remember. The States aren’t going to jump in and start regulating willy-nilly on consumer protection unless they feel that there is a regulatory void on the federal side. If the federal government has … is vigorous with consumer protection, you won’t see the States acting. The States are overtaxed as it is. They don’t, the last thing they need is to add bank regulation to their plate. That they have enough to do.
And let’s take this a step futher. If federal regulators know, or rather if Wayne Abernathy here from the American Bankers Association, if he knows that there’s a chance of 50 different State regulators acting, maybe not on the same way, or having uniform federal regulation, if he really thinks the States are going to act, Wayne’s going to go and say, "Julie, come on! Let’s do this as a uniform federal regulation." And that actually is a great situation, because then Julie can say, "Heh, Wayne, I’m going to do at least what the States are doing here," that we don’t have this downward pressure, so we have upward pressure if we have the States as a fall-back line of defense.
Now the real question when we look at any kind of legislation is, there’s a cost / benefit question, right? [0:55:00] … And we have to think of this not just in terms of monetary costs, but what’s the total social welfare? Is CFPA going to make us better off or worse off in net? That should be one of our primary questions.
This is very hard to say. And just looking at this just as a structural reform, I think it’s probably impossible to say. That on some level structural reform is shifting deck chairs around on the Titanic, that there’s plus or minus necessarily there. What’s … the welfare calculus is going to come out of what the CFPA actually does substantively. And we don’t know what that will be, and it’s not that the CFPA is going to be able to have … just ride roughshod over ever–… over all rights, it will still be subject to things like the Administrative Procedures Act, and there will be Congress making sure that CFPA doesn’t get out of control.
But let me suggest that there are a few ways where we might expect to see the CFPA actually improve efficiency of markets. … Markets rely on information. That’s what, … Without information, markets don’t work. And the way … we ensure there’s information in consumer financial markets, … consumer financial services markets, is through disclosure.
Now I think the evidence … There’s actually suprisingly little empirical evidence testing the efficacy of disclosure with consumer financial products. And what there is is not real encouraging. A lot of consumers don’t understand things as simple as unit pricing in grocery stores. You know, where you can do the apples-to-apples comparison, or actually more likely the Keebler to Chips Ahoy comparison, and see what each one costs.
But that’s the idea of what we want to do. We want consumers to be able to compare a credit card from Chase with a credit card from Bank of America, look at the terms and decide which is the better card for them. Now when you get to something like, … especially with credit products, these are ultimately commodity products. Whether you get a credit card from Chase or a credit card from Bank of America, the core function is credit. And it doesn’t … dollars are the ultimate fungible thing. I don’t care who’s giving me my line of credit, as long as I have … as long as that line of credit is there.
And when you get commodity products, you should have commodity pricing. So you look at pricing soy beans or gold, prices go out to 4 or 5 decimal points. I mean these are razor-thin profit margins. That doesn’t describe financial services at all.
So you have to ask, "Why do you have these products that look pretty much like commodity products, but don’t have commodity pricing?" What’s going on there? And the answer is that the financial … kind of the major move in financial services, consumer financial services, has been to try and make pricing harder to understand for consumers. So you cannot do the easy apples-to-apples comparison.
And there are two moves with which the industry does, that are very effective with this. First of all, have complexity. So have lots of different components to price. So you see this with credit cards. You have a bunch of different interest rates, a bunch of different fees. And those are just the fees to consumers, there are also interchange fees that consumers end up paying part of the cost of. You can’t see the total cost.
Finally, … I need to stop? [crosstalk] … oh, OK. You can also see this with auto dealers. So you go and buy a car. Well, you … It’s pretty easy to shop around these days for car prices. There are all kinds of web sites where you can compare dealer prices. But that’s not the total transaction you do, usually, when you buy a car. There’s also, … You’re looking … You see the price for one component, the new car, but you’re not seeing, you know, … What are you going to get on the trade-in? And what’s the cost of the financing? And what’s the extended warranty? And the rust-proofing? And whatever, and that these factors often depend on each other. So if you go into a dealer and they’ll quote you a price, but often that price is dependent on you getting dealer financing. So these prices all get bund–… these different products get bundled.
We have this with mortgages, where if you’re doing a mortgage that’s going to be sold to Fannie Mae or Freddie Mac, and it’s over 80 percent loan-to-value, it’s bundled with private mortgage insurance which is, frankly, a rather over-priced product. [crosstalk] … Sorry? … Oh, it’s got to be, because there’s the kickback to the captive mortgage insurers of the originators. The only way you can do that is if you have enough pricing juice to do it.
But we will have that debate separately.
The whole point of this is that consumer financial products have been … are often designed to frustrate, and they’re designed like this for other reasons too, but part of the design is to frustrate disclosure.
So we have disclosure, but if you can’t figure out the total cost from disclosure, you can’t do an easy comparison.
Hopefully, CFPA would be able to make some headway there. So one example (and this is not just an industry thing, [1:00:00] it’s also a regulatory thing) is you’re closing on a mortgage. You get a huge stack of documents at the end, and you only find … you may only find out the total cost when you’re at closing. At that point it’s kind of too late to bargain.
So Alex Pollock here, I believe, has a one-page mortgage proposal. And if you got that one-page, tells you the costs before closing, that’s a much, much better deal for consumers than the current system. And the current system is in part because we have things like TILA and RESPA not lining up, we have too many cooks trying to make our soup.
So let me … The last sentence I’ll say here is, "Innovation."
Right? We love innovation. This is the American Enterprise Institute. It’s all about innovation. Will the CFPA kill innovation? That’s a reasonable concern to voice.
I would suggest that, first of all, we need to be careful when we talk about innovation, that innovation in financial products is not the same as innovation in pharmaceuticals. That if it takes Chase a year longer to get a financial product to market, no one’s going to die. This is not the cure for cancer we’re talking about. And innovation in financial products is often innovation for the benefit of financial institutions, not for the benefit of consumers. If you’re innovating with a financial product, it’s often, "How can we find a financial product that gives the financial institution a larger margin?"
So … innovation is something we want to be careful about. There are benefits, [but] innovation is not necessarily a mitigating good.
Peter Wallison: Thank-you very much, Adam. I just want to say that … trying to leave as much time as I can for cross-talk on the panel, so that we’ll have an opportunity for each of the parties to answer some of the things that were said by others, and then questions from the audience. So if you can make some notes of some of the things that are of interest here, and you’d like to ask questions about, please have them ready when we get to that part. We should have plenty of time for that. Wayne? Your turn …
Wayne Abernathy: Thank-you very much, Peter, and I …
Peter Wallison: … I’m sorry, I should have introducted you. Let me do that properly before … because you deserve it, especially for coming …
Wayne Abernathy: OK … take as long as you like. [laughter]
Peter Wallison: Yeah, your mom sent me this wonderful note, …
Wayne is an extraordinarily skilled and knowledgeable person in banking policy. He was … has been, for the last 5 years, an Executive Vice President at the American Bankers Association. Before that, for two years, he was an Assistant Secretary of the Treasury in charge of financial institutions, and before that he was 20 years at the Senate Banking Committee, ending up as the Staff Director under Phil Gramm. So Wayne’s background here is nonpareille and we’re delighted to have him here on such short notice. Thank-you, Wayne.
Wayne Abernathy: Thank-you, Peter. I appreciate the opportunity to visit with each of you this morning. It would be hard to find an issue that is of more importance to the consumers of financial products than this proposal to create a new consumer financial product regulatory agency, or, … in short-hand I call it the new consumer regulator.
Because I believe a close analysis of the proposal recognizes that it controls and will regulate consumers as much as it will regulate the providers of consumer benefits, of consumer products. If you look at the theories behind those who advocate the CFPA, it’s their general view that consumers really can’t handle financial products well enough on their own, they need some help from people in Washington. So we should understand this is a consumer regulator, and not at consumer product regulator alone.
I always enjoy following Adam in speaking because he puts so many good things to talk about out on the table. And so the first one I would really want to address is — Senator Dodd is going to be extremely disappointed and surprised. Because he really does believe that this new regulator will have authority to regulate products and services. In fact, the first time I heard him say this, I thought he was making a mistake.
He said a couple of weeks ago when he introduced his proposal, he said, "If this becomes enacted, we won’t have to keep coming back to Congress any time we want to and enact a new consumer control or regulation. This guy, this new agency will just go and do it themselves. We don’t have to keep coming back for new laws to Congress.
I thought, "Is he really trying to say that he wants to create an agency that is going to replace Congress and take over Congress’ responsibility for consumer laws?" So I thought he’d misspoken. But he said it again yesterday during the further discussions of this regulator. He really believes that this agency can do what Congress does now [1:05:00] with regard to setting new standards of consumer regulation. So he’ll be very disappointed if his draft doesn’t do that, and probably some of his staff will be in hot water if his … if the current draft doesn’t accomplish that.
I believe it does. I believe that this proposal, this new CFPA, gives unparalleled authority to a new regulator with no track record and no checks and balances. And in a system of limited government in which we live, that’s intolerable. It’s intolerable with an American system of government, where people are responsible and accountable and there are checks and balances on the things that they do.
Now I also want to touch on a couple of other points here, and I won’t be able to cover everything, but maybe it will come out in the Q&A. I think it strains credulity to say that if we’d had a consumer regulator we would not have had the recent financial disaster that we’ve been facing. Is it true that if there’d been a consumer regulator, even the extremely accommodative monetary policy of the Federal Reserve over several years would not have found an outlet in some kind of a bubble that would have later burst? I think it strains credulity to make that assertion.
Moreover, and let’s take an example. Let’s go back to the recent bubble and burst before that, the Dot Com bubble and burst. The SEC has very extensive authorities for investor protection. So extensive, so complete, so thorough that the Administration does not believe the CFPA should not have any jurisdiction there. And their official public argument for not including the SEC and anybody regulated by the SEC under the new CFPA is, the SEC has enormous authority. They already cover that ground.
Well, if that’s the case, how come so many investors lost so much money during the Dot Com bubble and burst? How come we didn’t avoid that bubble?
Now I’m not saying that there shouldn’t be better consumer protection, because I agree with Mr. Stein, I think one of the real problems we have is that we have uneven consumer protection standards. And if you look at the consumer problems that we’ve had in recent years in the mortgage space, a lot of those took place because you had an origination program that took place without the kinds of consumer protections that you had, and effectively enforced, in the banking world.
And so you had over a number of years, banks losing market share to their non-bank competitors who could offer their products much more quickly (and that’s an important element of cost) as well as in a less expensive way.
And a lot of what became a problem in the recent years in the mortgage space took place outside of the area of supervision of the banking regulators. And we think that one of the changes that is really necessary, and we agree strongly with the Administration on this, is that we need to bring the effective level of consumer protection amongst all financial services providers up to the same standards.
But I will make the case, and I think the case can be strongly supported by the evidence, that the level of standards that you find enforced in the banking industry is significantly higher than you’ll find it elsewhere. And what you need to do is bring the actual effective enforcement in place of the non-bank regulators up to that same standard. And you’ve got to do more than just promise it. You have to actually create it. And that is what we think is one of the most serious problems with the proposal. It promises, but does not deliver.
It promises that there will be standards that will apply to everybody, but it doesn’t create the mechanism for delivering those standards. It relies basically upon the States to enforce the standards for the non-banking sphere. It gives, officially, the authority to the CFPA to do that, but without the resources or the means or the skills to be able to go and enforce.
And I’ll give you an example where that doesn’t work — anti-moneylaundering rules. Today anti-moneylaundering rules apply to any financial firm: bank, securities firm, payday lender, you name it. They all have to follow … auto dealers, gem sales merchants. They all have to apply the anti-moneylaundering rules. They’re not enforced very effectively, though, outside the banking sphere.
When was the last time you heard of a non-banking entity having a significant enforcement action in the anti-moneylaundering sphere? It always happens in the banking world. In fact I keep a little running list. The amount of fines paid by banks over the many years in the anti-moneylaundering [1:10:00] area competes with the total amount of money that the government ever seized for anti-moneylaundering purposes.
That’s where the enforcement is, and that’s our fear of what you’ll end up having with the dynamic that will occur with this new proposal is you will significantly increase the regulatory burden, and consumer protection burden costs on the banking sphere. You will create the impression that it exists outside of that sphere, which those other non-bank providers say, "We’re regulated by the CFPA, come on and be our customer. We’ve got federal supervision over what we do," … in name but not in practice. And you’ll see a further migration of business into less well supervised areas. And that’s a serious problem.
Equally serious, though, and perhaps even more serious is the violence that this, the creation of this agency would do to bank supervision. And this is one … I was again, I always listen very carefully to what Adam says, because many times I agree with it, what he says, and many times I don’t, but it’s always stimulating.
He was arguing here, and I’ll quote [from after 0:48:58] here, "A very strong case for consolidation can be made for bank regulation." And then makes a case for why we ought to balkanize consumer regulation. Why we ought to rip consumer regulation out of the hands of the bank regulators and the other folks that might have regulatory authority, like the FTC and others, put it into a brand new agency that will spend several years getting up and running. At the same time, as well, saying to the States, "And you guys go ahead. Not only do you get to enforce your own standards," but one of these elements of preemption, the undermining of preemption as it is in this proposal, is equiping all the State authorities with authorities to enforce consumer protection standards as they see fit, and as they interpret them.
There are federal standards, there are State standards, there are local standards. It’s not just the new rules, but it’s the rules as we often see in the consumer space, that it created through the enforcement practice. And that’s opened wide up as well in the various proposals.
Now let me ask the question. Where is the line? How do you cleanly divide consumer protection from safety-and-soundness. I really do defy anybody to find that line effectively in practice, because I can’t find it. When you’re asking the question of ability to pay. Is ability to repay a loan a safety-and-soundness issue or is it a consumer protection issue? The answer is, "Yes." It’s both. And to give you an example of the kinds of things that can happen if you pull consumer protection away from safety and soundness? The Federal Reserve has a Consumer Advisory Committee. They recently had a meeting. In that meeting, consumer advocates were complaining, because banks were cutting their home equity lines of credit, because the value of the houses had gone down.
And the consumer advocates were saying, "You have to give people notice before you cut their line of credit." Why? so they can go and borrow up to the limit that they had before, that’s no longer supported by the price and value of the house that is the security. That’s what happens if you look at consumer stuff in isolation.
I have great confidence that the Federal Reserve won’t get … won’t take that advice. Because they’ll recognize that ability to repay and to service that loan is just as important to that consumer, who may get in over his head, as it is to the bank that will have to take that loss and spread the cost of that loss onto the rest of its consumers, onto the rest of its folks.
And we just had your one example, and then, let me end with that, I think.
We have here the suggestion that, you know, one of the problems that the bank regulators is, they worry about bank earnings. I think everybody ought to worry about bank earnings, because if you don’t worry about bank earnings, the bank–… I’ll tell you, there are a lot of folks who’ve lost their business with certain banks that have gone, about a hundred or so that have gone out of business in the past year. And why do they go out of business? Because their earnings weren’t adequate to keep them going.
Earnings are what allow a business to continue to offer its services year in and year out. Banks are examined on a variety of things, and earnings is one of them. And it’s an essential part of them. And the last thing you need is a separate bank regulator that really doesn’t care much about earnings, but has enormous power to be able to tell banks how you talk to your customers, how you design your products, what you charge for your products, what you can get back for the products, how you can advertise the products and how you shape them. [1:15:00] And many more authorities that this new CFPA would have.
That’s why you need to have it all together, you need to have the complete package. Yes, let’s improve consumer protection. Let’s bring the standards up, in fact, so that they’re the same or comparable all across the board. But let’s not destroy in the process what is as very effective and successful bank supervisory program, and in the process I think would also hurt consumer protection.
Peter Wallison: Thank-you, Wayne. Well, now we’ve come to the part where people can respond to one another, which is always a very interesting one.
I’d like to just take the perogative of asking the first question, because so many people have (on the panel here) have mentioned this idea of lending at the mortgage level, and whether it was regulated and so forth, and some of the bad loans that were made.
There are 25 million subprime or Alt-A loans in our system today. Alt-A being another kind of subprime, or non-prime loan. 17 million of those are on the balance sheets of Fannie Mae and Freddie Mac, the FHA (and this was an the end of 2008, before the Administration began using Fannie Mae for policy purposes, but …) 17 million of those are on the balance sheets either of Fannie Mae & Freddie Mac, the FHA, or the very large banks that made these loans under CRA.
That’s about 2/3rds of all [the] bad loans.
Now if the problem is bad lending by mortgage brokers who are unregulated, why did government agencies, or government requirements, cause those loans to be bought by agencies backed by the government? If it’s a regulatory problem … and the loans are so bad, why does the government own them? Does anyone want to answer that question?
Eric Stein: I would challenge the assertion that the government required those loans to be made. Only, I think, the OCC has found that only 6 percent of subprime loans were qualified as CRA loans. They were made by depositories in their assessment areas [unintelligible] below 80 percent for areas below 80 percent. And CRA does not require lending. CRA’s tied to safety-and-soundness, it doesn’t require lending to occur. In a small portion of the subprime loans were actually CRA loans.
Peter Wallison: All right. Let’s leave CRA aside, and I’ll tell you that most of the lendng that we’re talking about was by 5 large banks who made CRA loans (that are not high-interest loans incidentally, they are normal rate loans) but they are, they have low down payments, they are to people who provided no documentation, blemished credit. And they made it in order to get approvals from the government agencies, mostly the Fed, for expansions. Which is what they had to do under CRA.
But let’s leave that aside, that’s about 2.7 million. The remaining ones on the balance sheets of Fannie and Freddie and FHA are about 15 million loans. That’s more than half of the bad loans. Why did these government agencies buy these bad loans?
Eric Stein: I mean, Fannie Mae invested in subprime securities. And this is for … those loans were made and then they were an investor in it. They also purchased Alt-A loans, which were not to meet low income goals, but those … because those loans were not targeted to those, but they haven’t performed well, and they’ve suffered losses. Those weren’t good loans, they weren’t required to be made. I’m not defending those loans.
Peter Wallison: Well, Fannie Mae … Those loans were, in fact, Goldrich from the standpoint of Fannie Mae’s affordable housing loans.
Eric Stein: The Alt-A loans?
Peter Wallison: Yeah, because they were mostly for rental properties. And rental properties counted toward their affordable housing requirements. So in fact Fannie Mae was required to do this and counted those loans, and HUD approved that. So, I mean, all I’m saying here is that the regulation at the mortgage introduction level, the origination level, is not the only question we’re talking about when we have an economy, or a market filled with very bad loans.
Apparently there was demand at the top level for these loans, and so [1:20:00] we are, … in effect we’re blaming the mortgage brokers and others who are unregulated for simply responding to this demand.
Adam Levitin: Peter, you’ve put your finger on a very important problem, which is there is a tension between what has been a long-standing government policy (and, regardless of the Administration, in the housing sphere, of encouraging homeownership and trying to expand homeownership) and consumer protection. There are tensions. There is no question.
I think that my sense is that we are probably, as a country, going to back off a bit on the housing side, that I think that we may have learned a bit of a lesson now. How long that will last, I don’t know. But there’s no question. There’s a tension here, and … GSE reform is very much linked with consumer protection, because the secondary market drives the primary market.
Now … but’s let’s remember that CFPA is not just mortgages, it’s much broader. I mean, as you laid out in your introduction. I got the sense that you and Wayne actually wanted to see it broader, to cover all the insurance and to cover all the securities, and then you’d be happy, because we wouldn’t have the inconsistency.
The … CRA in general has some tension, and this is why when CFPA was introduced in the House, the Administration’s proposal for CFPA originally, had CRA under the same umbrella with CFPA, that CRA, Community Reinvestment Act, was going to be moved to CFPA jurisdiction. That was something that got dropped like a hot-cake, at least in the House version of the Bill, but yeah, there’s a tension there. I mean that’s a policy question that needs be worked out, …
Peter Wallison: … but …
Adam Levitin: … that needs to be worked out.
Peter Wallison: But remember that Consumer Financial Protection Agency’s being justified because of the bad lending on mortgages at the unregulated mortgage broker level, and yet it turns out there is more to the story than simply unregulated lending at that level. The government wanted those mortgages to be made.
Julie Williams: I’m not sure this is where you were headed, but I would make the observation that folks have pointed out that the situation with the GSEs and their, sort of, affordable lending goals and what that might have encouraged is a situation that reflects a split between mission and safety-and-soundness, or prudential oversight of the GSEs in the sense that that role, the safety-and-soundness, more safety-and-soundness oriented role was in a different place.
And so you didn’t have an integrated view of how the mission goals of the GSEs interplayed with the safety-and-soundness implications to the GSEs of aggressively[ph,tape-skip] pursuing those goals.
[undecipherable cross-talk]
Eric Stein: The difference, I think, with that separation, the problem with the safety-and-soundness regulator was that it needed more strength. And the affordable housing goals are not something that CFPA has. It doesn’t have goals that a certain percentage of lending goes to a certain percentage of people, its goal is to make financial products understandable to people so that they know what it is that they’re buying, what … kinds of loans they’re taking out. And they’re going to have a much better chance of paying that back if they understand what they’re getting into. That’s what CFPA is trying to accomplish.
Wayne Abernathy: Well I want to echo, I think, the point that Julie’s making, that you have, really, in the regulation we had of GSEs, you had a separation of the regulatory responsibilities. And you had in essence the consumer protector was HUD, and they setting these goals and they were forcing Fannie and Freddie to go in and buy a lot of stuff. And the reason why they’re buying that, and I what think this, … why that goal was there and what’s it’s reflective of — consumer protection, if you look over the history of it in recent decades, it follows fads. And it isn’t very constant.
What we had in the early part of this decade was a tremendous push from consumer advocates to focus on housing affordability. And again, going back to that Federal Reserve’s Consumer Advisory Council, you had consumer advocates in those meetings saying, "Banks are having unreasonable demands with regards to documentation and down payments."
And that kind of thinking is what you have in the consumer world. And I’m not saying that’s bad, that is part of what needs to go into the mix of … when you’re trying to think of what the overall regulatory picture ought to be, and you ought to bring all of those different things together. [1:25:00]
In the GSE supervision world they were separate. And so you had a real bifurcated regulatory program, and we have now a $100 billion problem in the GSE world. And it’s getting worse, because you still have that. Look what’s happening in FHA today. FHA is making the loans that people were criticizing banks of making: low documentation, low down payment loans, and FHA is nearly broke. And they’re headed toward another Congressional bailout, which is probably going to happen sooner than we all would like.
Adam Levitin: I don’t disagree with anything Wayne said about the situation with FHA, it concerns me a lot too. But let’s remember. The GSEs, they were buying … they can only buy the products that are available. And that we … If a product isn’t available, they can’t buy it, can they?
Peter Wallison: If you offer to buy something, it will be available. Don’t we understand that?
Adam Levitin: … well … [laughter] … The GSEs, subprime loans were not created because of GSE demand, …
Wayne Abernathy: Oh? Come on, how do you know that?
Adam Levitin: … because subprime loans preexisted the GSE demand that you’re talking about.
Peter Wallison: The numbers that we’re talking about?
Adam Levitin: Oh, no, there’s definitely a … there’s no question the GSEs fueled this. They did not create it, though. There’s a difference there. …
Peter Wallison: … yes …
Adam Levitin: … that if you don’t allow the … that if you don’t get creation you never get to fuel.
Peter Wallison: … right …
Adam Levitin: Now the larger point [crosstalk] … there’s a larger point here. That a point that I think you and Julie and Wayne are making is that there’s a difficulty in separating safety-and-soundness from consumer protection. And yes, they are linked. But there’s also the problem that when you put them together, one ends up on the bottom, and one ends up on the top.
And let me just take Wayne’s example with the home equity lines of credit. Yeah, there’s a prob–… there’s definitely a problem there, that if … that if you have an at-will line of credit, you should be able to pull that when … if you think it’s too risky. I would actually go so far as to say that with credit cards, too. I don’t think … There wouldn’t be a lot of points with my friends on the consumer side, but that’s the nature of an at-will line of credit.
The problem there is actually a safety-and-soundness problem. Banks shouldn’t be allowed to make home equity lines of credit. Because, you know why? They can’t move fast enough. They don’t have enough information, it’s not safe-and-sound. Banks don’t know when your property … a particular home’s property values drop. They don’t have that kind of information. And guess what? Texas doesn’t allow it.
Peter Wallison: Julie …
Julie Williams: Well, banks certainly do know what is happening with the property values of the homes that secure the mortgages and their extensions to credit. That is, the thing the …
Adam Levitin: … Are they doing appraisals on a weekly basis?
Julie Williams: They’re doing appraisals and reappraisals on a periodic basis. Yes they are.
Adam Levitin: … But if my home burns down then I draw down …
Julie Williams: Let me tell you of a bank supervisor view of the mix of issues that Adam has thrown out on the home equity line. There are factors, consumer protection, and safety-and-soundness factors and how they interplay.
One would be when the institution becomes aware of deterioration in the valuation of the collateral. You would have questions about, "Are you going to reduce the line? Are you going to freeze the line as is, temporarily? What sort of period of notice are you going to provide to the consumer?" so that it’s not too long, not too short.
And those are the sorts of factors that as a supervisor, considering both the consumer protection implications of a change in the sort of credit access associated with the home equity line as well as the safety-and-soundness issue about, yes, the bank’s collateral has gone down in value. You know, how far has it gone down? What’s the appropriate reaction.
And as a supervisor we would be thinking in terms of how all of those interplay. And absolutely we expect banks to be monitoring the values of the collateral of the loans that they have. It’s not done weekly, but it’s done periodically. Absolutely. And if the collateral is in areas where there are known to be market developments affecting the value of collatoral, that would affect our expectations about how frequently that’s done.
Now that’s a supervisor perspective on integrating all of those different factors.
Adam Levitin: Julie I think that’s right, but the … property value … you’re saying that the frequency of inspection should depend on kind of [1:30:00] larger market trends so that, you know, my property values in my Zip Code are falling, then maybe more recent inspections, more frequent inspections, but my property value, yes it relates to my Zip Code, but it also is very idiosyncratic, that when you have a … banks aren’t sending appraisers into the house. That’s a huge component, what’s going on inside my house?
If, I mean if I’ve got a huge water damage in mf house property value just fell drastically. There’s no way a bank’s going to catch that. That this … it’s really a matter of the revolving line of credit. That’s the danger, not that this is making asset-based lending, but when you have asset-based lending with a revolving line of credit and you can’t do good monitoring, you’re going to … there’s a real safety-and-soundness risk.
Eric Stein: I think just on that point, I do think that banks that have the … they price for risk, and if there’s an individual problem with an individual house, and that’s just built into the pricing. … [crosstalk] … and I think banks can handle that.
Peter Wallison: All right, we’ve had a little bit of a debate here. We’ll probably have more, but do you have any questions?
And we can start with that, there’s a microphone. Please identify yourself and then ask your question.
Indra Klein: Hi. My name is Indra Klein, I’m with the Thurgood Marshall Center Trust. I have a question with regard to the CFPA. In its establishment, is the government going to consider taking and creating a Board of Governors like the Federal Reserve Bank, where if we have all these different entities within government that has some type of arm in their organization that is related to consumer protection, I’m sure you all have your different best-practices, and taking all of those and consolidating it into its development?
Eric Stein: Sure. There … Just talk first about the Treasury proposal. The Treasury proposal is to have a 5-member board that governs it. The prudential regulator would be on the board, it would be a non-partisan board. It would be Presidentially appointed, … staggered terms. And it would have an advisory council that would have experts in the field of consumer finance, both consumer-side and the lender-side, coming together to provide advice to the board in terms of what it should do. Just very similar, modeled on the Federal Reserve’s Consumer Advisory Board.
There are different Congressional proposals, that House has an oversight board that has … it has a single director and it has the regulators … it has State regulators and also has consumer advocates on it to provide advice, as well as having the advisory board.
Wayne Abernathy: I think that’s a very important question, with how you’re going to govern this organization. And there is a wide variety of opinions right now, just in Congress. And we’re not sure how it’s going to turn out. The House proposal, frankly, in one committee is that the agency be run by one director. The Administration proposal is to have 5 people. I think the Dodd proposal is to have 5 people. Even at that, there is a real issue of checks and balances with regard to that agency.
And that’s really one of the benefits, frankly, we see having multiple regulators. They all challenge one another and nobody has enough of the pie to become arbitrary and capricious in the way they exercise their authorities.
With regard to even the idea of having 5 people on a panel, which is the Administration plan, they avoid a lot of the protections that are built into the agencies that do have 5 member panels. For example, you have the SEC, the FDIC, the FTC, they have multiple members in their panels. There’s a requirement to avoid politicizing those agencies, that you can’t have more than a majority of any of those panels (where there are 5 you can’t have more than 3) of any one party. And I think that’s an important provision.
That is not part of the Administration’s proposal. Their proposal is — of the 5, one of them would be the national bank regulator, and the other 4 would be consumer advocates. It seems to me you don’t have really a kind of a variety of different viewpoints that are required to be in there, and that you can be assured that they are going to be in there to make sure that you don’t end up with group-think, which many regulatory agencies get stuck with. The Federal Reserve is often accused of that, and they’ve got 7. And there’s a proposal actually to make it worse by politicizing the District Governors.
But you’re pointing out an issue that needs to be looked at very, very carefully. If you’re going to give this amount of power to an agency, how do we make sure that, in fact, you’re going to … that those powers aren’t going to be abused.
Peter Wallison: Over here? And let me see where else we have. Just put up hands … one, two, … OK we have two over there on the other side.
Bethany Lowe My name is Bethany Lowe and I’m with the National Center for Policy Analysis. My question is, I was hoping that the panel could address this strong argument that’s out there right now that the CFPA would have a detrimental impact on small businesses, [1:35:00] and Mr. Abernathy, you had talked about the regulatory burden that would be placed on banks.
And argument is that because of this regulatory burden, banks will be less likely to lend to small businesses, and that this just doesn’t bode well for our economy right now — small businesses are the backbone of our economy. What do you make of that argument?
Wayne Abernathy: Well I think it’s a very strong argument. I think the paper3 that was published by the Chamber of Commerce talks to that point significantly, and I think there’s a lot of merit in that argument.
It is undeniable that regulation carries costs. I think it’s undeniable that this agency’s going to result in more regulation. They don’t mix any bones about that. I think it is undeniable (in fact we know the facts shows) that very small businesses actually rely upon consumer credit to fund their businesses.
Most stand-up businesses, the entrepeneur pulls out his credit card, and that’s how he gets his business going, because he can’t find anybody else to lend to him because, face it, he’s pretty risky. He doesn’t have an established record for his business yet. It’s hard to evaluate and price his particular risk, so he uses his credit card, or he uses a home equity line of credit on his home.
To the extent you are increasing the regulation on those, you’re decreasing access to capital. And I think it isn’t a long term … isn’t just a long term hit, I think there’s an immediate term hit.
As soon as this becomes enacted, … because you’ve … this law creates some new standards. For example, right now the regulators have authority to have all sorts of regulations for unfair practices, unfair and abusive, unfair and deceptive, yeah, unfair and deceptive acts and practices. This proposal will add a new one, which is abusive. So now you can have banks and lenders liable to significant, major regulatory penalties for products that are not unfair, they’re not deceptive, but this new regulator considers them to be abusive.
What are the standards for abusive? Whatever … if you go with the 5-member board, whatever 3 people in Washington decide are going to be abusive. What does that mean? That … and they can go and be retroactive in the way they enforce these. Lenders immediately will have to start saying, "I’m on the hook for anything new I lend out there, and I don’t know what the new standards are going to be. I’m going to have to pull in my horns and make sure that whatever I do is free from whatever I can imagine this new regulator’s going to call abusive."
And so you’re going to have a credit contraction.
Adam Levitin Well first, it’s important to note that the legislation does not … it covers consumer financial products, not small business products. Small business products … Products that are not consumer products are not covered.
So we still have the question that … Wayne, that there may … regulation may not touch a lot of areas of small business credit. But Wayne rightly notes, and as Tom Dirken’s paper for the Chamber observes, a lot … very small businesses, especially when they’re just starting up, often do rely on consumer credit. Guess what? I’m a small business. It’s a little strange to think, but I’m a sole proprietor, I’m actually registered with the small business association. And I have a small business credit card. How did I get that? What was the underwriting on that. It was exactly the same as the underwriting on my non-business credit card.
That it’s pretty easy, if you want … if you can get a credit card normally you can probably get a small … you can probably get a business credit card. So if you’re worried about regulatory costs on consumer products, you can … it should be pretty easy to substitute to a small business product.
Eric Stein: I guess I would add to that that the assumption that any regulation is bad regulation that drives up costs, I think if anything the current crisis has shown that it’s a consensus that an agenda that would allow for no regulation has resulted in significant problems.
You just cannot make the assumption that because there is going to be some regulations, there are going to be increased costs, or be harmful. Lack of it can cause … standards can have … people at the margins of the regulatory system who don’t have competition, who don’t have standards applying them, and then as I mentioned before, all the others who are regulated more, they have the choice of either following down to the … to that level and chasing business, or not getting the business and potentially going out of … this problem that you’ve identified — going out of the business because they don’t have any customers.
And that’s just not a price that … not a choice that we should be giving responsible lenders, or responsible providers of financial services.
And so the idea is to raise standards and level the playing field, in that there’s just no way a priori to say that’s [1:40:00] inherently going to raise costs and contract credit … as I mentioned, this agency has a balanced mission, it has to balance many factors including cost to providers.
That’s something it has to consider in making a rule, and people who get small business credit cards, if they get it through their business, it wouldn’t be covered by the agency. If they get a personal one, then protections such as the Federal Reserve asked for, implemented for credit cards, and then Congress passed. That would apply to them. This agency would ensure that everybody’s protected when they get a credit card, a personal credit card. And I don’t think that’s a bad thing.
Peter Wallison: I don’t think that the fact that … just to take issue, a moment, with your point. I thought the fact that the government had bought all these mortgages did not demonstrate that the financial crisis was caused by lack of regulation of mortgage making, or originating. It seems to me that what caused it was the government’s interest in having these mortgages made. But that’s that’s a debate for another day.
I want to address this "abusive" word, because really, that’s an interesting word. "Deceptive" goes to what we have always considered, in this country, important for consumer protection, that is, adequate disclosure — deceptive: not adequate disclosure.
And so one of the things that a CFPA could do would be to assure adequate disclosure, but when you get to a word like "abusive," what does that mean? Adam, you made a … you made an argument at the beginning that this was really only a regulatory restructuring proposal, it really didn’t change anything substantive. But doesn’t the word "abusive" change it? Doesn’t that mean that you’re making a value judgment about the quality of the product that is being offered?
Adam Levitin: I’m not sure that it’s any different a value judgment than what’s "unfair," that what you think is unfair may very well differ than what I think is unfair. I think that this is more descriptive, probably more descriptive than anything else, but I think Eric may have some different thoughts on this.
Eric Stein: Actually the word [is] in the federal lexicon. "Abuse," you see issued regs that shouldn’t do abusive mortgages. The telemarketing act talks about not doing abusive things, the word is in there. The SEC, dealing with credit rating agencies, the word "abusive" is in there. HOEPA, the mortgage for refinancing, the word is in there. The sky hasn’t fallen with it being in those different parts of the federal Congre–… the code. I think it’s not just that a product is inherently bad, it can be how it’s provided.
Some of the credit … the unfairness doctrine as it’s developed … One of the prongs is the product has to be reasonably avoidable, and there’s debate as to what that means. And some of the things that the Federal Reserve found in its HOEP–… in its credit card rule as unfair could … I think that they are unfair, but they’re also abusive. And that would buttress the ability to protect against, for example, double-cycle bill–… double-cycle billing.
Peter Wallison: … um hmm … Yeah, go ahead.
Julie Williams: A couple of observations on this. And Eric made reference to guidance that the OCC had put out on avoiding abusive mortgage lending practices and also abusive practices in connection with products that were originated by third parties.
In our guidance, though, we really centered on the unfair and deceptive practice standards. So I think there is a … It’s not that this is completely chartered ground in the federal space of using the word "abusive," but the question would be, "What is that going to mean in this context?" in the implementation of the authorities, though, that are granted to the CFPA. Because it obviously does mean something more than "unfair" or "deceptive."
There are other sort of new or modified types of authorities that are also granted to the CFPA. The "unfair" standard has … is actually a little different than what has been … what is recognized in the federal law today, because there’s more flexibility in the standard in the way that it’s set out in the CFPA to make a determination on unfairness based predominantly on public policy considerations. Under the law today that cannot be the predominant ground for an unfairness determination.
There also [1:45:00] are separate new standard-setting authorities with respect to setting and circumstances of sales of financial products and services to consumers — the manner of communication in connection with the provision of financial products to consumers, and the ability to specify both duties and compensation standards for employees of firms providing financial products and services to consumers.
So in addition to the transference of the existing federal consumer protection tool kit, statutes and existing regulations and the ablitily to adopt new regulations under those existing federal statutes, there are several new authorities that are providing under … in the CFPA package that don’t have a grounding, or an extensive grounding in precedent in the federal arena today.
Peter Wallison: Wayne …
Wayne Abernathy: I think the context is the important thing here. You’re giving to an agency whose context is very little checks and balances on what they do a term that can really be interpreted however you want to, and this is important. It gets back to the preemption issue, not just by the CFPA. You’re now creating the opportunity for States Attorneys General, local District Attorneys, other prosecuters at the State and local levels to decide what they think might be abusive, and to run with that kind of broad authority as they interpret, whatever the federal rule or statute might be, or establish their own precedent, and use "abusive" to basically do whatever they want to do.
And we have to understand, this isn’t accidental. This is intentional. Chris Dodd made it very clear. He expects this CFPA to avoid the need of going back to Congress. This is one of the important elements of legislative authority that would be given to this new agency — to define what is abusive and to use that authority to make sure that you never have to go back to Congress again when you want to deal with the consumer problem.
Adam Levitin: But Wayne, does the FDA have to go back to Congress every time it wants to regulate a new drug? I mean, that’s clearly not the problem, that agencies … I mean agency authority is, you know, a central feature of our government. That can’t be the issue there. That’s a fight that we had decades ago. That one’s been resolved, and we know who won there.
The problem has to be not that there’s agency authority, it’s that you’re worried that the agency’s going to abuse its authority. And we have a court system still. This is not like a question of whether you can get Habeas review for Gitmo detainees. I mean, we know that these … that these cases get reviewed by courts. And do you know what happens? After a couple of court decisions, everyone knows … will know what the term "abusive" means.
And that we don’t … we won’t keep having this litigating in every jurisdiction. We get … this stuff gets settled pretty fast.
Wayne Abernathy: Can I respond to that real briefly?
Peter Wallison: Very quickly, because we’ve got two more question that we want to get in.
Wayne Abernathy: Much of these issues have been settled. This new proposal reopens them all over again, and takes away the kinds of controls and protections that are placed on all of these other agencies to keep them from abusing their authority. This agency’s given exclusive jurisdiction, and if the only solution you have is to have to take them to court, think how expensive, and what the consequences that will be for the rest of the economy while we’re trying to figure out what the standards are, while agencies … while financial firms have to be trying to do business to get the ecomony going again.
Adam Levitin: It doesn’t, I mean … Even if you see a few dozen litigations at a few million dollars per litigation, that’s just not that big of a cost, and it’s not even going to be that.
Peter Wallison: OK, let’s … we have two more questions over here … right there first …
Renuka Rayasam Hi. I’m Renu Rayasam at the Kiplinger Letter and my question goes to the funding of this new agency. I think this agency, along with the systemic risk regulator in the proposals that have been floated, they’d be self-funded agencies. So to me that seems like banks, especially large banks, are going to face a few new assessments. And I’m wondering if there is a sense of how different agencies might coordinate, how they might levy these assessments, that they’d be along the lines of the FDIC; and has there been much thought given to those kinds of considerations?
Wayne Abernathy: Well that’s an enormous issue. It’s a very big issue. It’s part of the problem, again, with this agency.
If you begin with the Administration’s proposal (there are now three different versions of how you fund it, in three different bills) but the Administration’s proposal is — this agency funds itself however it wants to. This agency decides what its own budget is, doesn’t have to go to anybody else for "Mother, may I?" it just says, [1:50:00] "This is my budget."
And very interestingly, I saw a provision in the Administration bill I have only seen in one other place in federal law. The Bill itself says, "they are hereby authorized and appropriated." It says in the bill — authorized and appropriated … "such sums as are necessary to carry out the provisions." So they’re hereby appropriated from the taxpayer, whatever the agency wants.
The next section is — now go back and recoup those costs by assessing fees on the regulated entities in whichever way you want to do that as well.
And so there is no limit on the size of the budget, the House and the Senate are wrestling with that issue and they have not solved it. The House approach is, "Well let’s have the Federal Reserve pay part of it," and some other folks will pay part of it, and it’s not really quite figured out. And the Senate is even more kind of confused with wrestling with that problem.
But that is a problem, a real serious problem.
Julie Williams: I’ll just note a little piece of that. Part of the premis, I think, in both the House and the Senate versions is that there will be assessments on the entities that are subject to the jurisdiction of the CFPA, and from the perspective of a bank regulator, one of the concerns is that there would be a disproportionate assessment burden on the regulated depository institutions, because they’re easy to find, you know. You know where they are, you know how big they are and you know what they do.
There are as I said tens, even hundreds of other entities that would be subject to CFPA jurisdiction. and figuring out a way to have an equitable scheme for assessments of those firms, that is in … takes into account both their risk and their comparability to other, say, banks, that are subject to different types of assessments is a major challenge.
Peter Wallison: … oh, is there? We have time for one more question? … oh yes … OK? You’re second bit at the apple. You don’t have to introduce yourself again.
Indra Klein: I just have a question from the consumer’s standpoint. What are you all going to do with regards to educating the consumer. That’s my biggest concern.
There’s this notion that we’re entitled to have … to have a home, to have all these credit cards, and yada yada yada. I come from Europe and the notion is, you know, you budget, X percent is put into savings, and you live as you can. What are we going to do to re-educate us as mega-consumers?
Adam Levitin: Well, I’m actually … I’m actually a huge skeptic of consumer financial literacy education. That there just isn’t very good evidence that it works. And, I mean, there’s some evidence that it’s … If you educate a consumer about a particular transaction right before the transaction that it’s effective. But just sort of general, you know, improved financial literacy? It doesn’t seem to work.
I mean it’s a very convenient political move, right? That instead of actually regulating a product, let’s do education. And who’s … who would possibly oppose education? We all love education.
But if it could work that would be great, but then … if you actually want to educate consumers about a particular product, right before the transaction, that’s incredibly difficult and expensive. And we can use … and having regulation, including disclosure regulation, can be a proxy for the benefits that the consumer gets out of that … out of education.
Eric Stein: So one more thing. We believe that it has to be a combination. There’s an office … The House bill has … which we support an office of financial literacy within it that would coordinate federal literacy efforts to improve that. We think there’s a combination between educating consumers and also establishing clear rules-of-the-road that people who provide financial services need to comply with. And it’s a combination of both that are needed.
Peter Wallison: Wayne?
Wayne Abernathy: One of the responsibilities that I had when I was at the Treasury Department was, we had an office of financial education, we had a Deputy Assistant Secretary there that I worked with, and I spent a lot of my time, about a third of my time, working on financial education and financial literacy programs.
I saw, in practice, it does work. I’ve seen many programs that worked. The key is, you can’t have one program. You really have to have variety, because there is a wide variety of needs. You’ve got people that are approaching retirement, they need their approach. You have people that are in school — school kids. You need to present it in a different way to them. College kids — they need to have it presented in a different way to them. Young professionals — different way you want to present that.
There is no one standard, and that’s why we’re a little bit worried. For one, we believe it works. We believe a lot more needs to be done, and we need to encourage as much as can be done.
But secondly, one of the concerns that we have with the Administration proposal is one of the odd [1:55:00] regulatory authorities given to the CFPA is they would have regulatory authority over any financial education program in the country. In the Administration’s proposal. I can’t figure out why they would want to do that, because I think centralization of consumer education is a very bad idea. I believe encouragement from federal, State, local levels is a very good idea.
Peter Wallison: Everyone had his piece, said his piece? OK. Thank-you very much. I want to thank the panel for a wonderful, really enlightening discussion, and thank all of you for coming. [applause] [1:55:37] (end)
[1]: "Will There Be a Consumer Financial Protection Agency?", AEI event homepage, November 18, 2009.
[2]: "The Consumer Financial Protection Agency" (summary of task force report with link to PDF full report), by Adam J. Levitin, PEW Financial Reform Project, August 6, 2009. [a version of this report is also available on this event site's homepage]
[3]: "The Impact of the Consumer Financial Protection Agency on Small Business", by Thomas A. Durkin, U.S. Chamber of Commerce, September 23, 2009.
Merry Christmas John and Twist!