Testimony of Travis Plunkett, Consumer Federation of America and Edmund Mierzwinski, U.S. PIRG

Testimony of
Travis Plunkett, Consumer Federation of America
And Edmund Mierzwinski, U.S. PIRG
On Behalf of
Americans for Fairness in Lending
Center for Digital Democracy
Consumer Action
Consumer Federation of America
Consumers Union
National Association of Consumer Advocates
National Consumer Law Center (on behalf of its low-income clients)
National Fair Housing Alliance
National People’s Action
Public Citizen
Before the Committee on Financial Services
U.S. House of Representatives
The Honorable Barney Frank, Chairman
Hearing on
Regulatory Restructuring:
Enhancing Consumer Financial Products Regulation
24 June 2009
Thank you, Chairman Frank, Rep. Bachus and members of the committee. We are pleased to be
able to offer the views of leading consumer groups1 in support of the establishment of a
Consumer Financial Protection Agency, as proposed first by Reps. Delahunt and Brad Miller and
later by President Obama. The testimony is being delivered by Travis Plunkett, Legislative
Director of the Consumer Federation of America,2 and Edmund Mierzwinski, Consumer
Program Director of U.S. PIRG,3 also on behalf of ACORN,4 Americans for Fairness in
Lending,5 Consumer Action,6 Center for Digital Democracy,7 Consumers Union,8 Demos,9
National Association of Consumer Advocates,10 National Consumer Law Center (on behalf of its
low-income clients),11 National Fair Housing Alliance,12 National People’s Action,13 and Public
1 The testimony was drafted by Travis Plunkett and Jean Ann Fox of the Consumer Federation of America, Gail
Hillebrand of Consumers Union, Lauren Saunders of the National Consumer Law Center and Ed Mierzwinski of
2 The Consumer Federation of America is a nonprofit association of over 280 pro-consumer groups, with a
combined membership of 50 million people. CFA was founded in 1968 to advance consumers’ interests through
advocacy and education.
3 The U.S. Public Interest Research Group serves as the federation of and federal advocacy office for the state
PIRGs, which are non-profit, non-partisan public interest advocacy groups that take on powerful interests on behalf
of their members.
4 ACORN, the Association of Community Organizations for Reform Now, is the nation’s largest community
organization of low- and moderate-income families, working together for social justice and stronger communities.
5 Americans for Fairness in Lending works to reform the lending industry to protect Americans’
financial assets. AFFIL works with its national Partner organizations, local ally organizations, and individual
members to advocate for reform of the lending industry.
6 Consumer Action, founded in 1971, is a San Francisco based nonprofit education and advocacy organization with
offices in Los Angeles and Washington, DC. For more than two decades, Consumer Action has conducted a survey
of credit card rates and charges to track trends in the industry and assist consumers in comparing cards.
7 The Center for Digital Democracy is dedicated to ensuring that the public interest is a fundamental part of the
new digital communications landscape. CDD is especially concerning with the growing role of the Internet, online
media and mobile platforms such as cell phones in the provision of consumer financial services.
8 Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of the state of New
York to provide consumers with information, education and counsel about good, services, health and personal
finance, and to initiate and cooperate with individual and group efforts to maintain and enhance the quality of life
for consumers. Consumers Union’s income is solely derived from the sale of Consumer Reports, its other
publications and from noncommercial contributions, grants and fees. In addition to reports on Consumers Union’s
own product testing, Consumer Reports with more than 5 million paid circulation, regularly, carries articles on
health, product safety, marketplace economics and legislative, judicial and regulatory actions which affect consumer
welfare. Consumers Union’s publications carry no advertising and receive no commercial support.
9 Demos is a New York City-based non-partisan public policy research and advocacy organization founded in
2000.A multi-issue national organization, Demos combines research, policy development, and advocacy to influence
public debates and catalyze change.
10 The National Association of Consumer Advocates, Inc. is a nonprofit 501(c) (3) organization founded
in 1994. NACA’s mission is to provide legal assistance and education to victims of consumer abuse. NACA,
through educational programs and outreach initiatives protects consumers, particularly low income consumers, from
fraudulent, abusive and predatory business practices. NACA also trains and mentors a national network of over 1400
attorneys in representing consumers’ rights.
11 The National Consumer Law Center, Inc. is a non-profit corporation, founded in 1969, specializing in
low-income consumer issues, with an emphasis on consumer credit. On a daily basis, NCLC provides legal and
technical consulting and assistance on consumer law issues to legal services, government, and private attorneys
In the testimony we present today, we outline the case for establishment of a robust, independent
federal Consumer Financial Protection Agency to protect consumers from unfair credit, payment
and debt management products, no matter what company or bank sells them and no matter what
agency may serve as the prudential regulator for that company or bank. We describe the many
failures of the current federal financial regulators. We discuss the need for a return to a system
where federal financial protection law serves as a floor not as a ceiling, and consumers are again
protected by the three-legged stool of federal protection, state enforcement and private
enforcement. We rebut anticipated opposition to the proposal, which we expect will come from
the companies and regulators that are part of the system that has failed to protect us. We offer
detailed suggestions to shape the development of the agency in the legislative process. We
believe that, properly implemented, a Consumer Financial Protection Agency will encourage
innovation by financial actors, increase competition in the marketplace and lead to better choices
for consumers.
We look forward to working with you and committee members to enact a strong Consumer
Financial Protection Agency bill through the House and into law. We also look forward to
working with you on other necessary aspects of financial regulatory reform to restore the faith
and confidence of American families that the financial system will protect their homes and their
economic security
It has become clear that a major cause of the most calamitous worldwide recession since the
Great Depression was the result of the simple failure of federal regulators to stop abusive
lending, particularly unsustainable home mortgage lending. Such action would not only have
representing low-income consumers across the country. NCLC publishes and regularly updates a series of sixteen
practice treatises and annual supplements on consumer credit laws, including Truth In Lending, Cost of Credit,
Consumer Banking and Payments Law, Foreclosures, and Consumer Bankruptcy Law and Practice, as well as
bimonthly newsletters on a range of topics related to consumer credit issues and low-income consumers. NCLC
attorneys have written and advocated extensively on all aspects of consumer law affecting low income people,
conducted training for tens of thousands of legal services and private attorneys on the law and litigation strategies to
deal predatory lending and other consumer law problems, and provided extensive oral and written testimony to
numerous Congressional committees on these topics. NCLC’s attorneys have been closely involved with the
enactment of the all federal laws affecting consumer credit since the 1970s, and regularly provide comprehensive
comments to the federal agencies on the regulations under these laws.
12 Founded in 1988, the National Fair Housing Alliance is a consortium of more than 220 private, non-profit fair
housing organizations, state and local civil rights agencies, and individuals from throughout the United States.
Headquartered in Washington, D.C., the National Fair Housing Alliance, through comprehensive education,
advocacy and enforcement programs, provides equal access to apartments, houses, mortgage loans and insurance
policies for all residents of the nation.
13 National People’s Action is a national network of metro and statewide organizations that builds grassroots power
to create a society in which racial and economic justice are realized.
14 Public Citizen is a national nonprofit membership organization that has advanced consumer rights in
administrative agencies, the courts, and the Congress, for thirty-eight years.
protected many families from serious financial harm but would likely have stopped or slowed the
chain of events that has led to the current economic crisis.
The idea of a federal consumer protection agency focused on credit and payment products has
gained broad and high-profile support because it targets the most significant underlying causes of
the massive regulatory failures that occurred. First, federal agencies did not make protecting
consumers their top priority and, in fact, seemed to compete against each other to keep standards
low, ignoring many festering problems that grew worse over time. If agencies did act to protect
consumers (and they often did not), the process was cumbersome and time-consuming. As a
result, agencies did not act to stop some abusive lending practices until it was too late. Finally,
regulators were not truly independent of the influence of the financial institutions they regulated.
Meanwhile, despite an unprecedented government intervention in the financial sector, the
passage of mortgage reform legislation in the House of Representatives and the enactment of a
landmark law to prevent abusive credit card lending, problems with the sustainability of home
mortgage and consumer loans keep getting worse. With an estimated two million households
having already lost their homes to foreclosure because of the inability to repay unsound loans,
Credit Suisse now predicts that foreclosures will exceed eight million through 2012.15 The
amount of revolving debt, most of which is credit card debt, is approaching $1 trillion.16 Based
on the losses that credit card issuers are now reporting, delinquencies and defaults are expected
to peak at their highest levels ever within the next year.17 One in two consumers who get payday
loans default within the first year, and consumers who receive these loans are twice as likely to
enter bankruptcy within two years as those who seek and are denied them.18 Overall, personal
bankruptcies have increased sharply, up by one-third in the last year.19
The failure of federal banking agencies to stem sub-prime mortgage lending abuses is fairly well
known. They did not use the regulatory authority granted to them to stop unfair and deceptive
lending practices before the mortgage foreclosure crisis spun out of control. In fact, it wasn’t
until July of 2008 that these rules were finalized, close to a decade after analysts and experts
started warning that predatory sub-prime mortgage lending would lead to a foreclosure epidemic.
15 “Foreclosures could top 8 million: Credit Suisse,” 9 December 2008, MarketWatch, available at
http://www.marketwatch.com/story/more-than-8-million-homes-face-foreclosure-in-next-4-years (last visited 21
June 2009).
16 See the Federal Reserve statistical release G-19, Consumer Credit, available at
17 “Fitch Inc. said it continues to see signs that the credit crunch will escalate into next year, and it said card
chargeoffs may approach 10% by this time next year.” “Fitch Sees Chargeoffs Nearing 10%,” Dow Jones, May 5,
18 Paige Marta Skiba and Jeremy Tobacman, “Payday Loans, Uncertainty, and Discounting: Explaining Patterns of
Borrowing, Repayment, and Default,” August 21, 2008. http://www.law.vanderbilt.edu/faculty/faculty-personalsites/
paige-skiba/publication/download.aspx?id=1636 and Paige Marta Skiba and Jeremy Tobacman, “Do Payday
Loans Cause Bankruptcy?” October 10, 2008 http://www.law.vanderbilt.edu/faculty/faculty-personal-sites/paigeskiba/
publication/download.aspx?id=2221 (last visited 21 June 2009).
19 “Bankruptcy Filings Continue to Rise” Administrative Office of the U.S. Courts, news release, 8 June 2009,
available at http://www.uscourts.gov/Press_Releases/2009/BankruptcyFilingsMar2009.cfm (last visited 21 June
Less well known are federal regulatory failures that have contributed to the extension of
unsustainable consumer loans, such as credit card, overdraft and payday loans, which are now
imposing a crushing financial burden on many families. As with problems in the mortgage
lending market, failures to rein in abusive types of consumer loans were in areas where federal
regulators had existing authority to act, and either chose not to do so or acted too late to stem
serious problems in the credit markets.
Combining safety and soundness supervision – with its focus on bank profitability – in the same
institution as consumer protection magnified an ideological predisposition or anti-regulatory bias
by federal officials that led to unwillingness to rein in abusive lending before it triggered the
housing and economic crises. Though we now know that consumer protection leads to effective
safety and soundness, structural flaws in the federal regulatory system compromised the
independence of banking regulators, encouraged them to overlook, ignore and minimize their
mission to protect consumers. This created a dynamic in which regulatory agencies competed
against each other to weaken standards and ultimately led to an oversight process that was
cumbersome and ineffectual. These structural weaknesses threatened to undermine even the most
diligent policies and intentions. They complicated enforcement and vitiated regulatory
responsibility to the ultimate detriment of consumers.
These structural flaws include: a narrow focus on “safety and soundness” regulation to the
exclusion of consumer protection; the huge conflict-of-interest that some agencies have because
they rely heavily on financial assessments on regulated institutions that can choose to pay
another agency to regulate them; the balkanization of regulatory authority between agencies that
often results in either very weak or extraordinarily sluggish regulation (or both); and a regulatory
process that lacks transparency and accountability. Taken together, these flaws severely
compromised the regulatory process and made it far less likely that agency leaders would either
act to protect consumers or succeed in doing so.
Although a Consumer Financial Protection Agency (CFPA) would not be a panacea for all
current regulatory ills, it would correct many of the most significant structural flaws that exist,
realigning the regulatory architecture to reflect the unfortunate lessons that have been learned in
the current financial crisis and sharply increasing the chances that regulators will succeed in
protecting consumers in the future. A CFPA would be designed to achieve the regulatory goals
of elevating the importance of consumer protection, prompting action to prevent harm, ending
regulatory arbitrage, and guaranteeing regulatory independence.
A. Put Consumer Protection at the Center of Financial Regulation.
Right now, four federal regulatory agencies are required both to ensure the solvency of the
financial institutions they regulate and to protect consumers from lending abuses.20 Jurisdiction
20 The Office of the Comptroller of the Currency (OCC) and Office of Thrift Supervision (OTC) charter and
supervise national banks, and thrifts, respectively. State chartered banks can choose whether to join and be
examined and supervised by either the Federal Reserve System or the Federal Deposit Insurance Corporation
over consumer protection statutes is scattered over several more agencies, with rules like RESPA
and TILA, which both regulate mortgage disclosures, in different agencies.
Within agencies in which these functions are combined, regulators have often treated consumer
protection as less important than their safety and soundness mission or even in conflict with that
mission.21 For example, after more than 6 years of effort by consumer organizations, federal
regulators are just now contemplating incomplete rules to protect consumers from high-cost
“overdraft” loans that financial institutions often extend without the knowledge of or permission
from consumers. Given the longstanding inaction on this issue, it is reasonable to assume that
regulators were either uninterested in consumer protection or viewed restrictions on overdraft
loans as an unnecessary financial burden on banks that extend this form of credit, even if it is
deceptively offered and financially harmful to consumers. In other words, because regulators
apparently decided that their overriding mission was to ensure that the short-term balance sheets
of the institutions they regulated were strong, they were less likely to perceive that questionable
products or practices (like overdraft loans or mortgage pre-payment penalties) were harmful to
As mentioned above, recent history has demonstrated that this shortsighted view of consumer
protection and bank solvency as competing objectives is fatally flawed. If regulatory agencies
had acted to prevent loan terms or practices that harmed consumers, they would also have vastly
improved the financial solidity of the institutions they regulated. Nonetheless, the disparity in
agencies’ focus on consumer protection versus “safety and soundness” has been obvious, both in
the relative resources that agencies devoted to the two goals and in the priorities they articulated.
These priorities frequently minimized consumer protection and included reducing regulatory
restrictions on the institutions they oversaw.22
Though the link between consumer protection and safety and soundness is now obvious, the two
functions are not the same, and do conflict at times. In some circumstances, such as with
overdraft loans, a financial product might well be profitable, even though it is deceptively
offered and has a financially devastating effect on a significant number of consumers.23
(FDIC). The FTC is charged with regulating some financial practices (but not safety and soundness) in the nonbank
sector, such as credit cards offered by department stores and other retailer.
21 Occasionally, safety and soundness concerns have led regulators to propose consumer protections, as in the
eventually successful efforts by federal banking agencies to prohibit “rent-a-charter” payday lending, in which
payday loan companies partnered with national or out-of-state banks in an effort to skirt restrictive state laws.
However, from a consumer protection point-of-view, this multi-year process took far too long. Moreover, the
outcome could have been different if the agencies had concluded that payday lending would be profitable for banks
and thus contribute to their soundness.
22 For example, in 2007 the OTS cited consumer protection as part of its “mission statement” and “strategic goals
and vision.” However, in identifying its eight “strategic priorities” for how it would spend its budget in Fiscal Year
2007, only part of one of these priorities appears to be directly related to consumer protection (“data breaches”). On
the other hand, OTS identified both “Regulatory Burden Reduction” and “Promotion of the Thrift Charter” as major
strategic budget priorities. Office of Thrift Supervision, “OMB FY2007 Budget and Performance Plan,” January
23 Testimony of Travis Plunkett, Legislative Director, Consumer Federation of America and Edmund Mierzwinski,
Consumer Program Director, U.S. PIRG, Before the Subcommittee on Financial Institutions and Consumer Credit of
the U.S. House of Representatives, Committee of Financial Services, March 19, 2009.
Until recently, regulatory agencies have also focused almost exclusively on bank examination
and supervision to protect consumers, which lacks transparency. This process gives bank
regulators a high degree of discretion to decide what types of lending are harmful to consumers,
a process that involves negotiating behind-the-scenes with bank officials.24 Given that multiple
regulators oversee similar institutions, the process has also resulted in different standards for
products like credit cards offered by different types of financial institutions. In fact, widespread
abusive lending in the credit markets has discredited claims by bank regulators like the
Comptroller of the Currency that a regulatory process consisting primarily of supervision and
examination results in a superior level of consumer protection compared to taking public
enforcement action against institutions that violate laws or rules.25 Financial regulatory
enforcement actions are a matter of public record which has a positive impact on other providers
who might be engaged in the same practices and provides information to consumers on financial
practices sanctioned by regulators.
Additionally, the debate about the financial and foreclosure crisis often overlooks the fact that
predatory lending practices and the ensuing crisis have had a particularly harsh impact on
communities of color. African Americans and Latinos suffered the brunt of the predatory and
abusive practices found in the subprime market. While predatory and abusive lending practices
were not exclusive to the subprime market, because of lax regulation in that sector, most abuses
were concentrated there. Several studies have documented pervasive racial discrimination in the
distribution of subprime loans. One such study found that borrowers of color were more than 30
percent more likely to receive a higher-rate loan than White borrowers even after accounting for
differences in creditworthiness.26 Another study found that high-income African-Americans in
predominantly Black neighborhoods were three times more likely to receive a subprime purchase
loan than low-income White borrowers.27
African-Americans and Latinos receive a disproportionate level of high cost loans, even when
they qualify for a lower rate and/or prime mortgage. Fannie Mae and Freddie Mac estimated that
up to 50 percent of those who ended up with a subprime loan would have qualified for a
mainstream, “prime-rate” conventional loan in the first place.28 According to a study conducted
24 “Findings made during compliance examinations are strictly confidential and are not made available to the public
except at the OCC’s discretion. Similarly, the OCC is not required to publish the results of its safety-and-soundness
orders….Thus, the OCC’s procedures for compliance examinations and safety-and-soundness orders do not appear
to provide any public notice or other recourse to consumers who have been injured by violations identified by the
OCC.” Testimony of Arthur E. Wilmarth, Jr., Professor of Law, George Washington University Law School, before
the Subcommittee on Financial Institutions and Consumer Credit of the House Financial Services Committee, April
26, 2007.
25 “…ours is not an ‘enforcement-only’ compliance regime – far better to describe our approach as ‘supervision first,
enforcement if necessary,’ with supervision addressing so many early problems that enforcement is not necessary.”
Testimony of John C. Dugan, Comptroller of the Currency, Before the Committee on Financial Services of the U.S.
House of Representatives, June 13, 2007.
26 See Bocian, D. G., K. S. Ernst, and W. Li, Unfair Lending: The Effect of Race and Ethnicity on the Price of
Subprime Mortgages, Center for Responsible Lending, May 2006.
27 Unequal Burden: Income and Racial Disparities in Subprime Lending in America (Washington, D.C.: HUD,
28 See the Center for Responsible Lending’s Fact Sheet on Predatory Mortgage Lending at
http://www.responsiblelending.org/pdfs/2b003-mortgage2005.pdf, and The Impending Rate Shock: A Study of
Home Mortgages in 130 American Cities, ACORN, August 15, 2006, available at www.acorn.org.
by the Wall Street Journal, as much as 61% of those receiving subprime loans would “qualify for
conventional loans with far better terms.”29 Moreover, racial segregation is linked with the
proportion of subprime loans originated at the metropolitan level, even after controlling for
percent minority, low credit scores, poverty, and median home value.30 The resulting flood of
high cost and abusive loans in communities of color has artificially elevated the costs of
homeownership, caused unprecedented high rates of foreclosures, and contributed to the blight
and deterioration of these neighborhoods. It is estimated that communities of color will realize
the greatest loss of wealth as a result of this crisis, since Reconstruction.
A CFPA, by contrast, would have as its sole mission the development and effective
implementation of standards that ensure that all credit products offered to borrowers are safe and
not discriminatory. The agency would then enforce these standards for the same types of
products in a transparent, uniform manner. Ensuring the safety and fairness of credit products
would mean that the CFPA would not allow loans with terms that are discriminatory, deceptive
or fraudulent. The agency should also be designed to ensure that credit products are offered in a
fair and sustainable manner. In fact, a core mission of the CFPA would be to ensure the
suitability of classes of borrowers for various credit products, based on borrowers’ ability to
repay the loans they are offered – especially if the cost of loans suddenly or sharply increase, and
that the terms of loans do not impose financial penalties on borrowers who try to pay them off.
As we’ve learned in the current crisis, focusing exclusively on consumer and civil rights
protection would often be positive for lenders’ stability and soundness over the long term.
However, the agency would be compelled to act in the best interest of consumers even if
measures to restrict certain types of loans would have a negative short-term financial impact on
financial institutions.
B. Prevent Regulatory Arbitrage. Act Quickly to Prevent Unsafe Forms of Credit.
The present regulatory system is institution-centered, rather than consumer-centered. It is
structured according to increasingly irrelevant distinctions between the type of financial services
company that is lending money, rather than the type of product being offered to consumers.
Right now, financial institutions are allowed (and have frequently exercised their right) to choose
the regulatory body that oversees them and to switch freely between regulatory charters at the
federal level and between state and federal charters. Many financial institutions have switched
charters in recent years seeking regulation that is less stringent. Two of the most notorious
examples are Washington Mutual and Countrywide,31 which became infamous for promoting
dangerous sub-prime mortgage loans on a massive scale. 32 Both switched their charters to
29 See “Subprime Debacle Traps Even Very Creditworthy,” Wall Street Journal, December 3, 2007.
30 Squires, Gregory D., Derek S. Hyra, and Robert N. Renner, “Segregation and the Subprime Lending Crisis,”
Paper presented at the 2009 Federal Reserve System Community Affairs Research Conference, Washington, DC
(April 16, 2009).
31 Of course, following their stunning collapses, Countrywide was acquired by Bank of America and Washington
Mutual by Chase, both in regulator-ordered winding-downs.
32 In fact, several other large national banks have chosen in recent years to convert their state charter to a national
charter. Charter switches by JP Morgan Chase, HSBC and Bank of Montreal (Harris Trust) alone in 2004-05 moved
over $1 trillion of banking assets from the state to the national banking system, increasing the share of assets held by
national banks to 67 percent from 56 percent, and decreasing the state share to 33 percent from 44 percent. Arthur
E. Wilmarth, Jr., “The OCC’s Preemption Rules Threaten to Undermine the Dual Banking System, Consumer
become thrifts regulated by the Office of Thrift Supervision (OTS). At the federal level, where
major agencies are funded by the institutions they oversee, this ability to “charter shop,” has
undeniably led regulators like the OTS to compete to attract financial institutions by keeping
regulatory standards weak. It has also encouraged the OTS and OCC to expand their preemptive
authority and stymie efforts by the states to curb predatory and high-cost lending. The OCC in
particular appears to have used its broad preemptive authority over state consumer protections
and its aggressive legal defense of that authority as a marketing tool to attract depository
institutions to its charter.33
When agencies do collaborate to apply consumer protections consistently to the institutions they
regulate, the process has been staggeringly slow. As cited in several places in this testimony,
federal regulators dithered for years in implementing regulations to stop unfair and deceptive
mortgage and credit card lending practices. One of the reasons for these delays has often been
that regulators disagree among themselves regarding what regulatory measures must be taken.
The course of least resistance in such cases is to do nothing, or to drag out the process. Although
the credit card rule adopted late last year by federal regulators was ultimately finalized over
protests from the OCC, these objections were likely one of the reasons that federal regulators
delayed even beginning the process of curbing abusive credit card lending practices until mid-
The “charter shopping” problem would be directly addressed through the creation of a single
CFPA with regulatory authority over all forms of credit. Federal agencies would no longer
compete to attract institutions based on weak consumer protection standards or anemic
enforcement of consumer rules. The CFPA would be required to focus on the safety of credit
products, features and practices, no matter what kind of lender offered them. As for regulatory
competition with states, it would only exist to improve the quality of consumer protection.
Therefore, the CFPA should be allowed to set minimum national credit standards, which states
could then enforce (as well as victimized consumers). States would be allowed to exceed these
standards if local conditions require them to do so. If the CFPA sets “minimum” standards that
are sufficiently strong, a high degree of regulatory uniformity is likely to result. With strong
national minimum standards in place, states are most likely to act only when new problems
develop first in one region or submarket. States would then serve as an early warning system,
identifying problems as they develop and testing policy solutions, which could then be adopted
nationwide by the CFPA if merited. Moreover, the agency would have a clear incentive to stay
abreast of market developments and to act in a timely fashion to rein in abusive lending because
it will be held responsible for developments in the credit market that harm consumers.
Protection and the Federal Reserve Board’s role in Bank Supervision,” Proceedings of the 42nd Annual Conference
on Bank Structure and Competition (Fed. Res. Bank of Chicago, 2006) at 102, 105-106.
33 For a detailed analysis, see brief amicus curiae of Center for Responsible Lending et al in the case currently before
the Supreme Court, Cuomo v. Clearinghouse and OCC (08-453) available at
(last visited 21 June 2009) at pages 20-39.
C. Create an Independent Regulatory Process.
The ability of regulated institutions to “charter shop” combined with aggressive efforts by
federal regulators to preempt state oversight of these institutions has clearly undermined the
independence of the OTS and OCC. This situation is made worse by the fact that large financial
institutions like Countrywide were able to increase their leverage over regulators by taking a
significant chunk of the agency’s budget away when it changed charters and regulators. The
OTS and OCC are almost entirely funded through assessments on the institutions they regulate
(see Appendix 4). The ability to charter shop combined with industry funding has created a
significant conflict-of-interest that has contributed to the agencies’ disinclination to consider
upfront regulation of the mortgage and consumer credit markets.
Given that it supervises the largest financial institutions in the country, the OCC’s funding
situation is the most troublesome.
More than 95% of the OCC’s budget is financed by assessments paid by national
banks, and the twenty biggest national banks account for nearly three-fifths of those
assessments. Large, multi-state banks were among the most outspoken supporters of
the OCC’s preemption regulations and were widely viewed as the primary
beneficiaries of those rules. In addition to its preemption regulations, the OCC has
frequently filed amicus briefs in federal court cases to support the efforts of national
banks to obtain court decisions preempting state laws. The OCC’s effort to attract
large, multi-state banks to the national system have already paid handsome dividends
to the agency….Thus, the OCC has a powerful financial interest in pleasing its
largest regulated constituents, and the OCC therefore faces a clear conflict of interest
whenever it considers the possibility of taking an enforcement action against a major
national bank.34
The leadership of a CFPA would be held to account based on its ability to inform consumers and
help protect them from unsafe products. In order to function effectively, the leadership would
need to show expertise in and commitment to consumer protection. Crucial to the success of the
agency would be to ensure that its funding is adequate, consistent and does not compromise this
mission. Congress could also ensure that the method of agency funding that is used does not
compromise the CFPA’s mission by building accountability mechanisms into the authorizing
statute and exercising effective oversight of the agency’s operations. (See section 4 below.)
Recent history has demonstrated that even an agency with an undiluted mission to protect
consumers can be undermined by hostile or negligent leadership or by Congressional meddling
on behalf of special interests. However, unless the structure of financial services regulation is
realigned to change not just the focus of regulation but its underlying philosophy, it is very
unlikely that consumers will be adequately protected from unwise or unfair credit products in the
future. The creation of a CFPA is necessary because it ensures that the paramount priority of
34 Testimony of Arthur E. Wilmarth, Jr., Professor of Law, George Washington University Law School, before the
Subcommittee on Financial Institutions and Consumer Credit of the House Financial Services Committee, April 26,
federal regulation is to protect consumers, that the agency decision-making is truly independent,
and that agencies do not have financial or regulatory incentives to keep standards weaker than
Current regulators may already have some of the powers that the new agency would be given,
but they haven’t used them. Conflicts of interest and a lack of will work against consumer
enforcement. In this section, we detail numerous actions and inactions by the federal banking
regulators that have led to or encouraged unfair practices, higher prices for consumers, and less
A. The Federal Reserve Board ignored the growing mortgage crisis for years after
receiving Congressional authority to enact anti-predatory mortgage lending rules in 1994.
The Federal Reserve Board was granted sweeping anti-predatory mortgage regulatory authority
by the 1994 Home Ownership and Equity Protection Act (HOEPA). Final regulations were
issued on 30 July 2008 only after the world economy had collapsed due to the collapse of the
U.S. housing market triggered by predatory lending.35
B. At the same time, the Office of the Comptroller of the Currency engaged in an escalating
pattern of preemption of state laws designed to protect consumers from a variety of unfair
bank practices and to quell the growing predatory mortgage crisis, culminating in its 2004
rules preempting both state laws and state enforcement of laws over national banks and
their subsidiaries.
In interpretation letters, amicus briefs and other filings, the OCC preempted state laws and local
ordinances requiring lifeline banking (NJ 1992, NY, 1994), prohibiting fees to cash “on-us”
checks (par value requirements) (TX, 1995), banning ATM surcharges (San Francisco, Santa
Monica and Ohio and Connecticut, 1998-2000), requiring credit card disclosures (CA, 2003) and
opposing predatory lending and ordinances (numerous states and cities).36 Throughout, OCC
ignored Congressional requirements accompanying the 1994 Riegle-Neal Act not to preempt
without going through a detailed preemption notice and comment procedure, as the Congress had
found many OCC actions “inappropriately aggressive.”37
In 2000-2004, the OCC worked with increasing aggressiveness to prevent the states from
enforcing state laws and stronger state consumer protection standards against national banks and
their operating subsidiaries, from investigating or monitoring national banks and their operating
subsidiaries, and from seeking relief for consumers from national banks and subsidiaries.
35 73 FR 147, Page 44522, Final HOEPA Rule, 30 July 2008
36 “Role of the Office of Thrift Supervision and Office of the Comptroller of the Currency in the Preemption of State
Law,” USGAO, prepared for Financial Services Committee Chairman James Leach, 7 February 2000, available at
http://www.gao.gov/corresp/ggd-00-51r.pdf (last visited 21 June 2009).
37 [Statement of managers filed with the conference report on H.R. 3841, the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, Congressional Record Page S10532, 3 August 1994
These efforts began with interpretative letters stopping state enforcement and state standards in
the period up to 2004, followed by OCC’s wide-ranging preemption regulations in 2004
purporting to interpret the National Bank Act, plus briefs in court cases supporting national
banks’ efforts to block state consumer protections.
We discuss these matters in greater detail below, in Section 5, rebutting industry arguments
against the CFPA.
C. The agencies took little action except to propose greater disclosures, as unfair credit
card practices increased over the years, until Congress stepped in.
Further, between 1995 and 2007, the Office of the Comptroller of Currency issued only one
public enforcement action against a Top Ten credit card bank (and then only after the San
Francisco District Attorney had brought an enforcement action). In that period, “the OCC has not
issued a public enforcement order against any of the eight largest national banks for violating
consumer lending laws.”38 The OCC’s failure to act on rising credit card complaints at the largest
national banks triggered Congress to investigate, resulting in passage of the 2009 Credit Card
Accountability, Responsibility and Disclosure Act (CARD Act).39 While this committee was
considering that law, other federal regulators finally used their authority under the Federal Trade
Commission Act to propose and finalize a similar rule.40 By contrast, the OCC requested the
addition of two significant loopholes to a key protection of the proposed rule.
Meanwhile, this committee and its Subcommittee on Financial Institutions and Consumer Credit
had conducted numerous hearings on the impact of current credit card issuer practices on
consumers. The Committee heard testimony from academics and consumer representatives
regarding abusive lending practices that are widespread in the credit card industry, including:
• The unfair application of penalty and “default” interest rates that can rise above 30
• Applying these interest rate hikes retroactively on existing credit card debt, which can
lead to sharp increases in monthly payments and force consumers on tight budgets
into credit counseling and bankruptcy;
• High and increasing “penalty” fees for paying late or exceeding the credit limit.
Sometimes issuers use tricks or traps to illegitimately bring in fee income, such as
requiring that payments be received in the late morning of the due date or approving
purchases above the credit limit;
• Aggressive credit card marketing directed at college students and other young people;
38 Testimony of Professor Arthur Wilmarth, 26 April 2007, before the Subcommittee on Financial Institutions and
Consumer Credit, hearing on Credit Card Practices: Current Consumer And Regulatory Issues
39 HR 627 was signed into law by President Obama as Public Law No: 111-24 on 22 May 2009.
40 The final rule was published in the Federal Register a month later. 74 FR 18, page 5498 Thursday, January 29,
• Requiring consumers to waive their right to pursue legal violations in the court
system and forcing them to participate in arbitration proceedings if there is a dispute,
often before an arbitrator with a conflict of interest; and
• Sharply raising consumers’ interest rates because of a supposed problem a consumer
is having paying another creditor. Even though few credit card issuers now admit to
the discredited practice of “universal default,” eight of the ten largest credit card
issuers continue to permit this practice under sections in cardholder agreements that
allow issuers to change contract terms at “any time for any reason.”41
In contrast to this absence of public enforcement action by the OCC against major
national banks, state officials and other federal agencies have issued numerous
enforcement orders against leading national banks or their affiliates, including Bank of
America, Bank One, Citigroup, Fleet, JP Morgan Chase, and US Bancorp – for a wide
variety of abusive practices over the past decade…42
The OCC and FRB were largely silent while credit card issuers expanded efforts to market and
extend credit at a much faster speed than the rate at which Americans have taken on credit card
debt. This credit expansion had a disproportionately negative effect on the least sophisticated,
highest risk and lowest income households. It has also resulted in both relatively high losses for
the industry and record profits. That is because, as mentioned above, the industry has been very
aggressive in implementing a number of new – and extremely costly – fees and interest rates.43
Although the agencies did issue significant guidance in 2003 to require issuers to increase the
size of minimum monthly payments that issuers require consumers to pay,44 neither agency has
proposed any actions (or asked for the legal authority to do so) to rein in aggressive lending or
unjustifiable fees and interest rates.
In addition, in 1995 the OCC amended a rule, with its action later upheld by the Supreme
Court,45 that allowed credit card banks to export fees nationwide, as if they were interest,
resulting in massive increases in the size of penalty late and overdraft fees.
D. The Federal Reserve has Allowed Debit Card Cash Advances (“Overdraft Loans”)
without Consent, Contract, Cost Disclosure or Fair Repayment Terms
The FRB has refused to require banks to comply with the Truth in Lending Act (TILA) when
they loan money to customers who are permitted to overdraw their accounts. While the FRB
issued a staff commentary clarifying that TILA applied to payday loans, the Board refused to
41 Testimony of Linda Sherry of Consumer Action, House Subcommittee on Financial Institutions and Consumer
Credit, April 26, 2007.
42 Testimony of Arthur E. Wilmarth, Jr., Professor of Law, George Washington University Law School, April 26,
43 Testimony of Travis B. Plunkett of the Consumer Federation of America, Senate Banking Committee, January 25,
44 Joint Press release of Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation,
Office of the Comptroller of the Currency and Office of Thrift Supervision, “FFIEC Agencies Issue Guidance on
Credit Card Account Management and Loss Allowance Practices,” January 8, 2003, see attached “account
Management and Loss Allowance Guidance” at 3.
45 The rule is at 12 C.F.R. § 7.4001(a)). The case is Smiley v. Citibank, 517 U.S. 735.
apply the same rules to banks that make nearly identical loans. As a result, American consumers
spend at least $17.5 billion per year on cash advances from their banks without signing up for the
credit and without getting cost-of-credit disclosures or a contract that the bank would in fact pay
overdrafts. Consumers are induced to withdraw more cash than they have in their account at
ATMs and spend more than they have with debit card purchases at point of sale. In both cases,
the bank could simply deny the transaction, saving consumers average fees of $35 each time.
The FRB has permitted banks to avoid TILA requirements because bankers claim that
systematically charging unsuspecting consumers very high fees for overdraft loans they did not
request is the equivalent to occasionally covering the cost of a paper check that would otherwise
bounce. Instead of treating short term bank loans in the same manner as all other loans covered
under TILA, as consumer organizations recommended, the FRB issued and updated regulations
under the Truth in Savings Act, pretending that finance charges for these loans were bank
“service fees.” In several dockets, national consumer organizations provided well-researched
comments, urging the Federal Reserve to place consumer protection ahead of bank profits, to no
As a result, consumers unknowingly borrow billions of dollars at astronomical interest rates. A
$100 overdraft loan with a $35 fee that is repaid in two weeks costs 910 percent APR. The use
of debit cards for small purchases often results in consumers paying more in overdraft fees than
the amount of credit extended. The FDIC found last year that the average debit card point of
purchase overdraft is just $20, while the sample of state banks surveyed by the FDIC charged a
$27 fee. If that $20 overdraft loan were repaid in two weeks, the FDIC noted that the APR came
to 3,520 percent.46
As the Federal Reserve has failed to protect bank account customers from unauthorized overdraft
loans, banks are raising fees and adding new ones. In the most recent survey of the sixteen
largest banks included in comments to the Federal Reserve and testimony before this Committee,
CFA found that nine of the sixteen largest banks charge $35 for repeat overdrafts and half of the
largest banks use a tiered fee structure to escalate fees over the year. For example, US Bank
charges $19 for the first overdraft in a year, $35 for the second to fourth overdraft, and $37.50
thereafter. Ten of the largest banks charge a sustained overdraft fee, imposing additional fees if
the overdraft and fees are not repaid within days. Bank of America began in June to impose a
second $35 fee if an overdraft is not repaid within five days. As a result, a consumer who is
permitted by her bank to overdraw by $20 with a debit card purchase can easily be charged $70
for a five day extension of credit.47
Cash advances on debit cards are not protected by the Truth in Lending Act prohibition on banks
using set off rights to collect payment out of deposits into their customers’ accounts. If the
purchase involved a credit card, on the other hand, it would violate federal law for a bank to pay
46 FDIC Study of Bank Overdraft Programs, Federal Deposit Insurance Corporation, November 2008 at v.
47 Testimony of Travis B. Plunkett and Edmund Mierzwinski, Subcommittee on Financial Institutions and Consumer
Credit, Legislative Hearing Regarding H. R. 627 and H. R. 1456, Appendix C. See also, Bank of America,
“Important Information Regarding Changes to Your Account, page 2. Accessed online June 15, 2009. “Extended
Overdrawn Balance Charge, June 5, 2009: For each time we determine your account is overdrawn by any amount
and continues to be overdrawn for five or more consecutive business days, we will chage one fee of $35. This fee is
in addition to applicable Overdraft Item Fees and NSF Returned Item Fees.”
the balance owed from a checking account at the same bank. Banks routinely pay back debit
card cash advances to themselves by taking payment directly out of consumers’ checking
accounts, even if those accounts contain entirely exempt funds such as Social Security.
The Federal Reserve is considering comments filed in yet another overdraft loan docket, this
time considering whether to require banks to permit consumers to opt-out of fee-based overdraft
programs, or, alternatively, to require banks to get consumers to opt in for overdrafts. This
proposal would change Reg E which implements the Electronic Fund Transfer Act and would
only apply to overdrafts created by point of sale debit card transactions and to ATM withdrawals,
leaving all other types of transactions that are permitted to overdraw for a fee unaddressed.
Consumer organizations urged the Federal Reserve to require banks to get their customers’
affirmative consent, the same policy included in the recently-enacted credit card bill which
requires affirmative selection for creditors to permit over-the-limit transactions for a fee.48
E. The Fed is Allowing A Shadow Banking System (Prepaid Cards), Outside of Consumer
Protection Laws To Develop and Target the Unbanked and Immigrants; The OTS is
Allowing Bank Payday Loans (Which Preempt State Laws) on Prepaid Cards.
The Electronic Funds Transfer Act requires key disclosures of fees and other practices, protects
consumer bank accounts from unauthorized transfers, requires resolution of billing errors, gives
consumers the right to stop electronic payments, and requires statements showing transaction
information, among other protections. The EFTA is also the statute that will hold the new
protections against overdraft fee practices that the Fed is writing.
Yet the Fed has failed to include most prepaid cards in the EFTA’s protections, even while the
prepaid industry is growing and is developing into a shadow banking system. In 2006, the Fed
issued rules including payroll cards – prepaid cards that are used to pay wages instead of a paper
check for those who do not have direct deposit to a bank account — within the definition of the
“accounts” subject to the EFTA. But the Fed permitted payroll card accounts to avoid the
statement requirements for bank accounts, relying instead on the availability of account
information on the internet. Forcing consumers to monitor their accounts online to check for
unauthorized transfers and fees and charges is particularly inappropriate for the population
targeted for these cards: consumers without bank accounts, who likely do not have or use regular
internet access.
Even worse, the Fed refused to adopt the recommendations of consumer groups that self-selected
payroll cards – prepaid cards that consumers shop for and choose on their own as the destination
for direct deposit of their wages – should receive the same EFTA protections that employer
designated payroll cards receive. The Fed continues to take the position that general prepaid
cards are not protected by the EFTA.
This development has become all the more glaring as federal and state government agencies have
moved to prepaid cards to pay many government benefits, from Social Security and Indian Trust
Funds to unemployment insurance and state-collected child support. Some agencies, such as the
Treasury Department when it created the Social Security Direct Express Card, have included in
48 Federal Reserve Board, Docket No. R-1343, comments were due March 30, 2009.
their contract requirements that the issuer must comply with the EFTA. But not all have, and
compliance is uneven, despite the fact that the EFTA itself clearly references and anticipates
coverage of electronic systems for paying unemployment insurance and other non-needs tested
government benefits.
The Fed’s failure to protect this shadow banking system is also disturbing as prepaid cards are
becoming a popular product offered by many predatory lenders, like payday lenders.
Indeed, the Fed is not the only one that has recently dropped the ball on consumer protection on
prepaid cards. One positive effort by the banking agencies in the past decade was the successful
effort to end rent-a-bank partnerships that allowed payday lenders to partner with depositories to
use their preemptive powers to preempt state payday loan laws.49 But more recently, one prepaid
card issuer, Meta Bank, has developed a predatory, payday loan feature – iAdvance — on its
prepaid cards that receive direct deposit of wages and government benefits. At a recent
conference, an iAdvance official boasted that Meta Bank’s regulator – the OTS – has been very
“flexible” with them and “understands” this product.
F. Despite Advances in Technology, the Federal Reserve has Refused to Speed up
Availability of Deposits to Consumers.
Despite rapid technological changes in the movement of money electronically, the adoption of
Check 21 to speed check processing, and electronic check conversion at the cash register, the
Federal Reserve has failed to shorten the amount of time that banks are allowed to hold deposits
before they are cleared. Money flies out of bank accounts at warp speed. Deposits crawl in.
Even cash that is deposited over the counter to a bank teller can be held for 24 hours before
becoming available to cover a transaction. The second business day rule for local checks means
that a low-income worker who deposits a pay check on Friday afternoon will not get access to
funds until the following Tuesday. If the paycheck is not local, it can be held for five business
days. This long time period applies even when the check is written on the same bank where it is
deposited. Consumers who deposit more than $5,000 in one day face an added wait of about five
to six more business days. Banks refuse to cash checks for consumers who do not have
equivalent funds already on deposit. The combination of unjustifiably long deposit holds and
banks’ refusal to cash account holders’ checks pushes low income consumers towards check
cashing outlets, where they must pay 2 to 4 percent of the value of the check to get immediate
access to cash.
Consumer groups have called on the Federal Reserve to speed up deposit availability and to
prohibit banks from imposing overdraft or NSF fees on transactions that would not have
overdrawn if deposits had been available. The Federal Reserve vigorously supported Check 21
which has speeded up withdrawals but has refused to reduce the time period for local and
nonlocal check hold periods for consumers.
49 Payday lending is so egregious that even the Office of the Comptroller of the Currency refused to let storefront
lenders hide behind their partner banks’ charters to export usury.
G. The Federal Reserve Has Supported the Position of Payday Lenders and Telemarketing
Fraud Artists by Permitting Remotely Created Checks (Demand Drafts) to Subvert
Consumer Rights Under the Electronic Funds Transfer Act.
In 2005, the National Association of Attorneys General, the National Consumer Law Center,
Consumer Federation of America, Consumers Union, the National Association of Consumer
Advocates, and U. S. Public Interest Research Group filed comments with the Federal Reserve in
Docket No. R-1226, regarding proposed changes to Regulation CC with respect to demand
drafts. Demand drafts are unsigned checks created by a third party to withdraw money from
consumer bank accounts. State officials told the FRB that demand drafts are frequently used to
perpetrate fraud on consumers and that the drafts should be eliminated in favor of electronic
funds transfers that serve the same purpose and are covered by protections in the Electronic
Funds Transfer Act. Since automated clearinghouse transactions are easily traced, fraud artists
prefer to use demand drafts. Fraudulent telemarketers increasingly rely on bank debits to get
money from their victims. The Federal Trade Commission earlier this year settled a series of
cases against telemarketers who used demand drafts to fraudulently deplete consumers’ bank
accounts. Fourteen defendants agreed to pay a total of more than $16 million to settle FTC
charges while Wachovia Bank paid $33 million in a settlement with the Comptroller of the
Remotely created checks are also used by high cost lenders to remove funds from checking
accounts even when consumers exercise their right to revoke authorization to collect payment
through electronic funds transfer. CFA first issued a report on Internet payday lending in 2004
and documented that some high-cost lenders converted debts to demand drafts when consumers
exercised their EFTA right to revoke authorization to electronically withdraw money from their
bank accounts. CFA brought this to the attention of the Federal Reserve in 2005, 2006 and 2007.
No action has been taken to safeguard consumers’ bank accounts from unauthorized unsigned
checks used by telemarketers or conversion of a loan payment from an electronic funds transfer
to a demand draft to thwart EFTA protections or exploit a loophole in EFTA coverage.
The structure of online payday loans facilitates the use of demand drafts. Every application for a
payday loan requires consumers to provide their bank account routing number and other
information necessary to create a demand draft as well as boiler plate contract language to
authorize the device. The account information is initially used by online lenders to deliver the
proceeds of the loan into the borrower’s bank account using the ACH system. Once the lender
has the checking account information, however, it can use it to collect loan payments via
remotely created checks per boilerplate contract language even after the consumer revokes
authorization for the lender to electronically withdraw payments.
The use of remotely created checks is common in online payday loan contracts. ZipCash LLC
“Promise to Pay” section of a contract included the disclosure that the borrower may revoke
authorization to electronically access the bank account as provided by the Electronic Fund
Transfer Act. However, revoking that authorization will not stop the lender from unilaterally
50 Press Release, “Massive Telemarketing Scheme Affected Nearly One Million Consumers Nationwide; Wachovia
Bank to Provide an Additional $33 Million to Suntasia Victims,” Federal Trade Commission, January 13, 2009,
viewed at http://www.ftc.gov/opa/2009/01/suntasia.shtm.
withdrawing funds from the borrower’s bank account. The contract authorizes creation of a
demand draft which cannot be terminated. “While you may revoke the authorization to effect
ACH debit entries at any time up to 3 business days prior to the due date, you may not revoke the
authorization to prepare and submit checks on your behalf until such time as the loan is paid in
full.” (Emphasis added.)51
H. The Federal Reserve Has Taken No Action to Safeguard Bank Accounts from Internet
Payday Lenders.
In 2006, consumer groups met with Federal Reserve staff to urge them to take regulatory action
to protect consumers whose accounts were being electronically accessed by Internet payday
lenders. We joined with other groups in a follow up letter in 2007, urging the Federal Reserve to
make the following changes to Regulation E:
• Clarify that remotely created checks are covered by the Electronic Funds Transfer Act.
• Ensure that the debiting of consumers’ accounts by internet payday lenders is subject to
all the restrictions applicable to preauthorized electronic funds transfers.
• Prohibit multiple attempts to “present” an electronic debit.
• Prohibit the practice of charging consumers a fee to revoke authorization for
preauthorized electronic funds transfers.
• Amend the Official Staff Interpretations to clarify that consumers need not be required to
inform the payee in order to stop payment on preauthorized electronic transfers.
While FRB staff was willing to discuss these issues, the FRB took no action to safeguard
consumers when Internet payday lenders and other questionable creditors evade consumer
protections or exploit gaps in the Electronic Fund Transfer Act to mount electronic assaults on
consumers’ bank accounts.
As a result of inaction by the Federal Reserve, payday loans secured by repeat debit transactions
undermine the protections of the Electronic Fund Transfer Act, which prohibits basing the
extension of credit with periodic payments on a requirement to repay the loan electronically.52
Payday loans secured by debit access to the borrower’s bank account which cannot be cancelled
also functions as the modern banking equivalent of a wage assignment – a practice which is
prohibited when done directly. The payday lender has first claim on the direct deposit of the
borrower’s next paycheck or exempt federal funds, such as Social Security, SSI, or Veterans
Benefit payments. Consumers need control of their accounts to decide which bills get paid first
and to manage scarce family resources. Instead of using its authority to safeguard electronic
access to consumers’ bank accounts, the Federal Reserve has stood idly by as the online payday
loan industry has expanded.
51 Loan Supplement (ZipCash LLC) Form #2B, on file with CFA.
52 Reg E, 12 C.F.R. § 205.10(e). 15 U.S.C. § 1693k states that “no person” may condition extension of credit to a
consumer on the consumer’s repayment by means of a preauthorized electronic fund transfer.
I. The Banking Agencies Have Failed to Stop Banks from Imposing Unlawful Freezes on
Accounts Containing Social Security and Other Funds Exempt from Garnishment.
Federal benefits including Social Security and Veteran’s benefits (as well as state equivalents)
are taxpayer dollars targeted to relieve poverty and ensure minimum subsistence income to the
nation’s workers. Despite the purposes of these benefits, banks routinely freeze bank accounts
containing these benefits pursuant to garnishment or attachment orders, and assess expensive
fees – especially insufficient fund (NSF) fees – against these accounts.
The number of people who are being harmed by these practices has escalated in recent years,
largely due to the increase in the number of recipients whose benefits are electronically deposited
into bank accounts. This is the result of the strong federal policy to encourage this in the
Electronic Funds Transfer Act. And yet, the banking agencies have failed to issue appropriate
guidance to ensure that the millions of federal benefit recipients receive the protections they are
entitled to under federal law.
J. The Comptroller of the Currency Permits Banks to Manipulate Payment Order to
Extract Maximum Bounced Check and Overdraft Fees, Even When Overdrafts are
The Comptroller of the Currency permits national banks to rig the order in which debits are
processed. This practice increases the number of transactions that trigger an overdrawn account,
resulting in higher fee income for banks. When banks began to face challenges in court to the
practice of clearing debits according to the size of the debit — from the largest to the smallest —
rather than when the debit occurred or from smallest to largest check, the OCC issued guidelines
that allow banks to use this dubious practice.
The OCC issued an Interpretive Letter allowing high-to-low check clearing when banks follow
the OCC’s considerations in adopting this policy. Those considerations include: the cost
incurred by the bank in providing the service; the deterrence of misuse by customers of banking
services; the enhancement of the competitive position of the bank in accordance with the bank’s
business plan and marketing strategy; and the maintenance of the safety and soundness of the
institution.53 None of the OCC’s considerations relate to consumer protection.
The Office of Thrift Supervision (OTS) addressed manipulation of transaction-clearing rules in
the Final Guidance on Thrift Overdraft Programs issued in 2005. The OTS, by contrast, advised
thrifts that transaction-clearing rules (including check-clearing and batch debit processing)
should not be administered unfairly or manipulated to inflate fees.54 The Guidelines issued by
the other federal regulatory agencies merely urged banks and credit unions to explain the impact
of their transaction clearing policies. The Interagency “Best Practices” state: “Clearly explain to
consumers that transactions may not be processed in the order in which they occurred, and that
the order in which transactions are received by the institution and processed can affect the total
amount of overdraft fees incurred by the consumers.”55
53 12 C.F.R. 7.4002(b).
54 Office of Thrift Supervision, Guidance on Overdraft Protection Programs, February 14, 2005, p. 15.
55 Dept. of Treasury, Joint Guidance on Overdraft Protection Programs, February 15, 2005, p. 13.
CFA and other national consumer groups wrote to the Comptroller and other federal bank
regulators in 2005 regarding the unfair trade practice of banks ordering withdrawals from highto-
low, while at the same time unilaterally permitting overdrafts for a fee. One of the OCC’s
“considerations” is that the overdraft policy should “deter misuse of bank services.” Since banks
deliberately program their computers to process withdrawals high-to-low and to permit
customers to overdraw at the ATM and Point of Sale, there is no “misuse” to be deterred.
No federal bank regulator took steps to direct banks to change withdrawal order to benefit lowbalance
consumers or to stop the unfair practice of deliberately causing more transactions to
bounce in order to charge high fees. CFA’s survey of the sixteen largest banks earlier this year
found that all of them either clear transactions largest first or reserve the right to do so.56 Since
ordering withdrawals largest first is likely to deplete scarce resources and trigger more overdraft
and insufficient funds fees for many Americans, banks have no incentive to change this practice
absent strong oversight by bank regulators.
K. The regulators have failed to enforce the Truth In Savings Act requirement that banks
provide account disclosures to prospective customers.
According to a 2008 GAO report57 to Rep. Carolyn Maloney, then-chair of the Financial
Institutions and Consumer Credit subcommittee, based on a secret shopper investigation, banks
don’t give consumers access to the detailed schedule of account fee disclosures as required by the
1991 Truth In Savings Act. From GAO:
Regulation DD, which implements the Truth in Savings Act (TISA), requires depository
institutions to disclose (among other things) the amount of any fee that may be imposed
in connection with an account and the conditions under which such fees are imposed.
[…] GAO employees posed as consumers shopping for checking and savings accounts
[…] Our visits to 185 branches of depository institutions nationwide suggest that
consumers shopping for accounts may find it difficult to obtain account terms and
conditions and disclosures of fees upon request prior to opening an account. Similarly,
our review of the Web sites of the banks, thrifts, and credit unions we visited suggests that
this information may also not be readily available on the Internet. We were unable to
obtain, upon request, a comprehensive list of all checking and savings account fees at 40
of the branches (22 percent) that we visited. […]The results are consistent with those
reported by a consumer group [U.S. PIRG] that conducted a similar exercise in 2001.
This, of course, keeps consumers from being able to shop around and compare prices. As cited
by GAO, U.S. PIRG then complained of these concerns in a 2001 letter to then Federal Reserve
56 Consumer Federation of America, Comments to Federal Reserve Board, Docket No. R-1343, Reg. E, submitted
March 30, 2009.
57 “Federal Banking Regulators Could Better Ensure That Consumers Have Required Disclosure Documents Prior to
Opening Checking or Savings Accounts,” GAO-08-281, January 2008, available at
http://www.gao.gov/new.items/d08281.pdf (last visited 21 June 2009).
Board Chairman Alan Greenspan.58 No action was taken. The problem is exacerbated by a 2001
Congressional decision to eliminate consumers’ private rights of action for Truth In Savings
L. The Federal Reserve actively campaigned to eliminate a Congressional requirement that
it publish an annual survey of bank account fees.
One of the consumer protections included in the 1989 savings and loan bailout law known as the
Financial Institutions Reform, Recovery and Enforcement Act was Section 1002, which required
the Federal Reserve to publish an annual report to Congress on fees and services of depository
institutions. The Fed actively campaigned in opposition to the requirement and succeeded in
convincing Congress to sunset the survey in 2003.59 Most likely, the Fed was unhappy with the
report’s continued findings that each year bank fees increased, and that each year, bigger banks
imposed the biggest fees.
If the CFPA is to be effective in its mission, it must be structured so that it is strong and
independent with full authority to protect consumers. Our organizations have strongly endorsed
two complementary proposals regarding what should be the agency’s jurisdiction,
responsibilities, rule-writing authority, enforcement powers and methods of funding. Earlier this
year, Representatives Delahunt and Brad Miller proposed H.R. 1705, which would create a new
Financial Product Safety Commission with jurisdiction over credit, savings and payment
products. (Senator Richard Durbin has offered the same proposal, S. 566.) Just last week,
President Obama offered a very strong and detailed proposal to create a CFPA with a broad
jurisdiction to include not only the above-mentioned products, but also existing fair lending and
community reinvestment laws.60
In its work to protect consumers and the marketplace from abuses, the CFPA as envisioned by
the Administration would have a full set of enforcement and analytical tools. The first tool
would be that the CFPA could gather information about the marketplace so that the agency itself
could understand the impact of emerging practices in the marketplace. The agency could use this
information to improve the information that financial services companies must offer to customers
about products, features or practices or to offer advice to consumers directly about the risk of a
variety of products on the market. For some of these products, features or practices, the agency
might determine that no regulatory intervention is warranted. For others, this information about
the market will inform what tools are used. A second tool would be to address and rein in
58 The 1 November 2001 letter from Edmund Mierzwinski, U.S. PIRG, to Greenspan is available at
http://static.uspirg.org/reports/bigbanks2001/greenspanltr.pdf (last visited 21 June 2009). In that letter, we also
urged the regulators to extend Truth In Savings disclosure requirements to the Internet. No action was taken.
59 The final 2003 report to Congress is available here
http://www.federalreserve.gov/boarddocs/rptcongress/2003fees.pdf (last visited 21 June 2009). The 1997-2003
reports can all be accessed from this page, http://www.federalreserve.gov/pubs/reports_other.htm (last visited 21
June 2009).
60 “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,”
Department of the Treasury, June 17, 2009, pages 55-70.
deceptive marketing practices or require improved disclosure of terms. The third tool would be
the identification and regulatory facilitation of “plain vanilla,” low risk products that should be
widely offered. The fourth tool would be to restrict or ban specific product features or terms that
are harmful or not suitable in some circumstances, or that don’t meet ordinary consumer
expectations. Finally, the CFPA would also have the ability to prohibit dangerous financial
products. We can only wonder how much less pain would have been caused for our economy if
a regulatory agency had been actively exercising the latter two powers during the run up to the
mortgage crisis.
A. Agency Jurisdiction. Under the Administration proposal, the agency will govern the sale
and marketing of credit, deposit and payment products and services and related products and
services, and will ensure that they are being offered in a fair, sustainable and transparent manner.
This should include debit, pre-paid debit, and stored value cards; loan servicing, collection,
credit reporting and debt-related services (such as credit counseling, mortgage rescue plans and
debt settlement) offered to consumers and small businesses. Our organizations support this
jurisdiction because credit products can have different names and be offered by different types of
entities, yet still compete for the same customers in the same marketplace. Putting the oversight
of competing products under one set of minimum federal rules regardless of who is offering that
product will protect consumers, as well as promote innovation provides consumers with valuable
options and spurs vigorous competition
As with the Administration and H.R. 1705, we recommend against granting this agency
jurisdiction over investment products that are marketed to retail investors, such as mutual funds.
While there is a surface logic to this idea, we believe it is impractical and could inadvertently
undermine investor protections. Giving the agency responsibility for investment products that is
comparable to the proposed authority it would have over credit products would require the
agency to add extensive additional staff with expertise that differs greatly from that required for
oversight of credit products. Apparently simple matters, such as determining whether a mutual
fund risk disclosure is appropriate or a fee is fair, are actually potentially quite complex and
would require the new agency to duplicate expertise that already exists within the SEC.
Moreover, it would not be possible simply to transfer the staff with that expertise to the new
agency, since the SEC would continue to need that expertise on its own staff in order to fulfill its
responsibilities for oversight of investment advisers and mutual fund operations. In addition,
unless the new agency was given responsibility for all investment products and services a broker
might recommend, brokers would be able to work around the new protections with potentially
adverse consequences for investors. A broker who wanted to avoid the enhanced disclosures and
restrictions required when selling a mutual fund, for example, could get around them by
recommending a separately managed account. The investor would likely pay higher fees and
receive fewer protections as a result. For these reasons, we believe the costs and risks of this
proposal outweigh the potential benefits.
The Administration plan is silent on whether the agency should have any authority over
insurance products. We would recommend that strong consideration be given to providing the
agency with jurisdiction over insurance products that are central or ancillary to credit
transactions, such as credit, title, mortgage and forced place insurance. This would provide the
agency with holistic jurisdiction over the entire credit transaction, including ancillary services
often sold with or in connection with the credit. Additionally, there is ample evidence of
significant consumer abuses in many of these lines of insurance, including low loss ratios, high
mark ups, and “reverse competition” where the insurer competes for the business of the lender,
rather than of the insurance consumer.61 This federal jurisdiction could apply without interfering
with the licensing and rate oversight role of the states.
The United States has never sufficiently addressed the problems and challenges of lending
discrimination and redlining practices, the vestiges of which include the present day unequal,
two-tiered financial system that forces minority and low-income borrowers to pay more for
financial services, get less value for their money, and exposes them to greater risk. It is
therefore, imperative that the Consumer Financial Protection Agency also focus in a
concentrated way on fair lending issues. To that end, the Agency must have a comprehensive
Office of Civil Rights which would ensure that no federal agency perpetuated unfair practices
and that no member of the financial industry practices business in a way that perpetuates
discrimination. Compliance with civil rights statutes and regulations must be a priority at each
federal agency that has financial oversight or that enforces a civil rights statute. There must be
effective civil rights enforcement of all segments of the financial industry. Moreover, each
regulatory and enforcement agency must undertake sufficient reporting and monitoring activities
to ensure transparency and hold the agencies accountable. A more detailed description of the
civil rights functions that must be undertaken at the CFPA and at other regulatory and
enforcement agencies can be found in the Civil Rights Policy Paper available at
B. Rule-Writing . Under the Administration proposal and H.R. 1705, the agency will have
broad rule-making authority to effectuate its purposes, including the flexibility to set standards
that are adequate to address rapid evolution and changes in the marketplace. Such authority is
not a threat to innovation, but rather levels the playing field and protects honest competition, as
well as consumers and the economy.
The Administration’s plan also provides rule-making authority for the existing consumer
protection laws related to the provision of credit would be transferred to this agency, including
the Truth in Lending Act (TILA), Truth in Savings Act (TISA), Home Ownership and Equity
Protection Act (HOEPA), Real Estate Protection Act (RESPA), Fair Credit Reporting Act
(FCRA), Electronic Fund Transfer Act (EFTA), and Fair Debt Collection Practices Act
(FDCPA). (H.R. 1705 is not explicit on this matter.) Current rule-writing authority for nearly
20 existing laws is spread out among at least seven agencies. Some authority is exclusive, some
joint, and some is concurrent. However, this hodge-podge of statutory authority has led to
fractured and often ineffectual enforcement of these laws. It has also led to a situation where
federal rule-writing agencies may be looking at just part of a credit transaction when writing a
rule, without considering how the various rules for different parts of the transaction effect the
marketplace and the whole transaction. The CFPA with expertise, jurisdiction and oversight that
cuts across all segments of the financial products marketplace, will be better able to see
61 Testimony of J. Robert Hunter, Director of Insurance, Consumer Federation of America, before the Subcommittee
on Capital Markets, Insurance and Government Sponsored Enterprises of the U.S. House Financial Services
Committee, October 30, 2007, pages 8-9.
62 http://ourfinancialsecurity.org/issues/leveling-the-playing-field/
inconsistencies, unnecessary redundancies, and ineffective regulations. As a market-wide
regulator, it would also ensure that critical rules and regulations are not evaded or weakened as
agencies compete for advantage for the entities they regulate.
Additionally the agency would have exclusive “organic” federal rule-writing authority within its
general jurisdiction to deem products, features, or practices unfair, deceptive, abusive or
unsustainable, and otherwise to fulfill its mission and mandate. The rules may range from
placing prohibitions, restrictions or conditions on practices, products or features to creating
standards, and requiring special monitoring, reporting and impact review of certain products,
features or practices.
C. Enforcement. A critical element of a new consumer protection framework is ensuring that
consumer protection laws are consistently and effectively enforced. As mentioned above, the
current crisis occurred not only because of gaps and weakness in the law, but primarily because
the consumer protection laws that we do have were not always enforced. For regulatory reform
to be successful, it must encourage compliance by ensuring that wrongdoers are held
A new CFPA will achieve accountability by relying on a three-legged stool: enforcement by the
agency, by states, and by consumers themselves.
First, the CFPA itself will have the tools, the mission and the focus necessary to enforce its
mandate. The CFPA will have a range of enforcement tools under the Administration proposal
and H.R. 1705. The Administration, for example, would give the agency examination and
primary compliance authority over consumer protection matters. This will allow the CFPA to
look out for problems and address them in its supervisory capacity. But unlike the banking
agencies, whose mission of looking out for safety and soundness led to an exclusive reliance on
supervision, the CFPA will have no conflict of interest that prevents it from using its
enforcement authority when appropriate. Under both the Administration proposal and H.R.
1705, the agency will have the full range of enforcement powers, including subpoena authority;
independent authority to enforce violations of the statues it administers; and civil penalty
Second, both proposals allow states to enforce federal consumer protection laws and the CFPA’s
rules. As stated in detail in Section 5, states are often closer to emerging threats to consumers
and the marketplace. They routinely receive consumer complaints and monitor local practices
which will permit state financial regulators to see violations first, spot local trends, and augment
the CFPA’s resources. The CFPA will have the authority to intervene in actions brought by
states, but it can conserve its resources when appropriate. As we have seen in this crisis, states
were often the first to act.
Finally, consumers themselves are an essential, in some ways the most essential, element of an
enforcement regime. Recourse for individual consumers must, of course, be a key goal of a new
consumer protection system. The Administration’s plan appropriately states that the private
enforcement provisions of existing statutes will not be disturbed, and H.R. 1705 also leaves these
protections intact.
The Administration’s plan does not address the enforceability of new CFPA rules, but it is
equally critical that the consumers who are harmed by violations of these rules be able to take
action to protect themselves. H.R. 1705 provides a right of action for consumers to enforce these
Consumers must have the ability to hold those who harm them accountable for numerous
• No matter how vigorous and how fully funded a new CFPA is, it will not be able to
directly redress the vast majority of violations against individuals. The CFPA will likely
have thousands of institutions within its jurisdiction. It cannot possibly examine,
supervise or enforce compliance by all of them.
• Individuals have much more complete information about the affect of products and
practices, and are in the best position to identify violations of laws, take action, and
redress the harm they suffer. An agency on the outside looking in often will not have
sufficient details to detect abusive behavior or to bring an enforcement action.
• Individuals are an early warning system that can alert states and the CFPA of problems
when they first arise, before they become a national problem requiring the attention of a
federal agency. The CFPA can monitor individual actions and determine when it is
necessary to step in.
• Bolstering public enforcement with private enforcement conserves public resources. A
federal agency cannot and should not go after every individual violation.
• Consumer enforcement is a safety net that ensures compliance and accountability after
this crisis has passed, when good times return, and when it becomes more tempting for
regulators to think that all is well and to take a lighter approach.
• The Administration’s plan rightly identifies mandatory arbitration clauses as a barrier to
fair adjudication and effective redress. We strongly agree — but it is also critically
important to access to justice that consumers have the right to enforce a rule.
Private enforcement is the norm and has worked well as a complement to public enforcement in
the vast majority of the consumer protection statutes that will be consolidated under the CFPA,
including TILA, HOEPA, FDCPA, FCRA, EFTA and others.
Conversely, the statutes that lack private enforcement mechanisms are notable for the lack of
compliance. The most obvious example is the prohibition against unfair and deceptive practices
in Section 5 of the FTC Act. Though the banking agencies eventually identified unfair and
deceptive mortgage and credit card practices that should be prohibited (after vigorous
congressional prodding), individuals were subject to those practices for years with no redress
because they could not enforce the FTC Act. Not only consumers, but the entire economy and
even financial institutions would have been much better off if consumers had been able to take
action earlier on, when the abusive practices were just beginning.
Two other statutes that lack private enforcement mechanisms are also notable for the lack of
compliance. The right of action under the Truth in Saving Act was eliminated in 2001. As
discussed above, a 2008 GAO survey found that 22% of depositories were not complying with
TISA’s simple disclosure requirements. That is a shockingly high number and shows the effect
of the lack of enforcement.
Similarly, RESPA’s requirement that homebuyers be given a good faith estimate of closing costs
ahead of time also lacks private enforcement, with predictable results: it is honored in the breach.
Estimates are often given to homebuyers only moments before a closing, too late to do any good,
and when they are given in advance they often bear little resemblance to the actual closing costs.
In HUD’s latest proposed rulemaking, it cites as one reason the need to make the GFE binding is
the prevalence of “surprise ‘junk fees'” at closing.63
In the debt collection area, the FTC received 78,000 complaints against debt collectors last year,
an industry that consistently tops the FTC’s list of complaints. Though the weak penalties in the
Act are insufficient to deter wrongdoing, consumers at least have the ability to seek redress
directly without waiting for the FTC to Act.
The CFPA will have the ability to craft its rules and enforcement regime to protect those who
comply. The agency can define “plain vanilla,” safe products that are presumptively in
compliance. The agency will also be able to craft exemptions from its regulations. But products
outside parameters determined to be safe may be subject to principles that carry the risk of
significantly higher penalties for violations. Where the agency promulgates a rule addressing
features or practices in certain products, private enforcement will be one tool to see that the rule
is followed, benefiting both the individuals who use the product and the honest competitors who
follow the rules.
This three-legged stool of federal, state, and individual enforcement is critical to making the
consumer protection regime work in practice. It ensures that there are no gaps in protections and
that lagging attention in one location does not bring down the system. This tripartite approach
ensures a friendly competition, a race to the top, not a dangerous scheme of eggs all in one
D. Product evaluation, approval and monitoring. Under the Administration’s proposal and
HR. 1705, the agency would have significant enforcement and data collection authority to
evaluate and to remove, restrict or prevent unfair, deceptive, abusive, discriminatory or
unsustainable products, features or practices. The agency could also evaluate and promote
practices, products and features that facilitate responsible and affordable credit, payment devices,
asset-building and savings. Finally, the agency could assess the risks of both specific products
and practices and overall market developments for the purpose of identifying, reducing and
preventing excessive risk, (e.g. monitoring longitudinal performance of mortgages with certain
63 73 F.R. 14020, 14034
features for excessive failure rates; and monitoring the market share of products and practices
that present greater risks, such as weakening underwriting.)
Specifically, we would recommend that the agency take the following approach to product
evaluation, approval and monitoring under the proposal offered by the Administration and H.R.
• Providers of covered products and services could be required to file adequate data and
information to allow the agency to make a determination regarding the fairness,
sustainability and transparency of products, features and practices. This could include
data on product testing, risk modeling, credit performance over time, customer
knowledge and behavior, target demographic populations, etc. Providers of products and
services that are determined in advance to represent low risk would have to provide de
minimus or no information to the agency.
• “Plain vanilla” products, features or practices that are determined to be fair, transparent
and sustainable would be determined to be presumptively in compliance and face less
regulatory scrutiny and fewer restrictions.
• Products, features or practices that are determined to be potentially unfair, unsustainable,
discriminatory, deceptive or too complex for its target population might be required to
meet increased regulatory requirements and face increased enforcement and remedies.
• In limited cases, products, features or practices that are deemed to be particularly risky
could face increased filing and data disclosure requirements, limited roll-out mandates,
post-market evaluation requirements and, possibly, a stipulation of pre-approval before
they are allowed to enter or be used in the marketplace. Harvard Professor Daniel
Carpenter has offered some thoughtful ideas on how such an ex ante approval process
might work fairly and effectively.64
• The long-term performance of various types of products and features would be evaluated,
and results made transparent and available broadly to the public, as well as to providers,
Congress, and the media to facilitate informed choice.
• The Agency should hold periodic public hearings to examine products, practices and
market developments to facilitate the above duties, including the adequacy of existing
regulation and legislation, and the identification of both promising and risky market
developments. These hearings would be especially important in examination of new
market developments, such as, for example, where credit applications will soon be
submitted via a mobile phone, for example, and consumer dependence on the Internet for
conducting financial transactions is expected to grow dramatically. In such hearings, in
rule-makings, and in other appropriate circumstances, the Agency should ensure that
there is both opportunity and means for meaningful public input, including consideration
of existing models such as funded public interveners.
E. Funding. The Administration proposal is fairly vague on how it should be funded. H.R.
1705 would fund the agency through Congressional appropriations. The major goals for the
agency would be to have a stable (not volatile) funding base that is sufficient to support robust
64 “Particulars of a Financial Product Safety Commission,” Professor Daniel Carpenter, Director of the Center for
Political Studies, Harvard University, The Tobin Project.
enforcement and is not subject to political manipulation by regulated entities. Funding from a
variety of sources, as well as a mix of these sources, should be considered, including
Congressional appropriations, user fees or industry assessments, filing fees, priced services (such
as for compliance examinations) and transaction-based fees. See Appendix 4 for a comparison of
current agency funding and fee structures.
None of these funding sources is without serious weaknesses. Industry assessments or user fees
can provide the regulated entity with considerable leverage over the budget of the agency and
facilitate regulatory capture of the agency, especially if the regulated party is granted any
discretion over the amount of the assessment (or is allowed to decide who regulates them and
shift its assessment to another agency.) Transaction-based fees can be volatile and
unpredictable, especially during economic downturns. Filing fees can also decline significantly
if economic activity falls. Congressional appropriations, as we have seen with other federal
consumer protection agencies over the last half-century, can be fairly easily targeted for
reduction or restriction by well funded special interests if these interests perceive that the agency
has been too effective or aggressive in pursing its mission.
If an industry-based funding method is used, it should ensure that all providers of covered
products and services are contributing equally based on their size and the nature of the products
they offer. A primary consideration in designing any industry-based funding structure is that
certain elements of these sectors should not be able to evade the full funding requirement,
through charter shopping or other means. If such requirements can be met, we would
recommend a blended funding structure from multiple sources that requires regulated entities to
fund the baseline budget of the agency and Congressional appropriations to supplement this
budget if the agency demonstrates an unexpected or unusual demand for its services.
F. Consumer Complaints. As the Administration proposal details, the agency should receive,
analyze and work to resolve all federally-directed complaints regarding credit or payment
products, features or practices under the agency’s jurisdiction. Ideally, the agency should be the
sole repository of consumer complaints on products, features or practices within its jurisdiction,
and should ensure that this is a role that is readily visible to consumers, simple to access and
responsive. The agency should also be required to conduct real-time analysis of consumer
complaints regarding patterns and practices in the credit and payment systems industries and to
apply these analyses when writing rules and enforcing rules and laws. From the Foundation
The CFPA should have responsibility for collecting and tracking complaints about
consumer financial services and facilitating complaint resolution with respect to
federally-supervised institutions. Other federal supervisory agencies should refer any
complaints they receive on consumer issues to the CFPA; complaint data should be
shared across agencies….65
G. Federal preemption of state laws. As the Administration proposal states, the agency should
establish minimum standards within its jurisdictions. CFPA rules would preempt weaker state
laws, but states that choose to exceed the standards established by the CFPA could do so. The
65 “A New Foundation”, Pages 59-60, The Obama Administration, June 2009
agency’s rules would preempt statutory state law only when it is impossible to comply with both
state and federal law.
We also strongly agree with the Administration recommendation that federally chartered
institutions be subject to nondiscriminatory state consumer protection and civil rights laws to the
same extent as other financial institutions. A clear lesson of the financial crisis, which pervades
the Administration’s plan, is that protections should apply consistently across the board, based
on the product or service that is being offered, not who is offering it.
Restoring the viability of our background state consumer protection laws is also essential to the
flexibility and accountability of the system in the long run. The specific rules issued by the
CFPA and the specific statutes enacted by Congress will never be able to anticipate every
innovative abuse designed to avoid those rules and statutes. The fundamental state consumer
protection laws, both statutory and common law, against unfair and deceptive practices, fraud,
good faith and fair dealing, and other basic, longstanding legal rules are the ones that spring up
to protect consumers when a new abuse surfaces that falls within the cracks of more specific
laws. We discuss preemption in greater detail in the next section.
H. Consumer Empowerment: As discussed briefly above, the CFPA should have the authority
to grant intervener funding to consumer organizations to fund expert participation in its
stakeholder activities. The model has been used successfully to fund consumer group
participation in state utility ratemaking. Second, a government‐chartered consumer organization
should be created by Congress to represent consumers’ financial services interests before
regulatory, legislative, and judicial bodies, including before the CFPA. This organization could
be financed through voluntary user fees such as a consumer check‐off included in the monthly
statements financial firms send to their customers. It would be charged with giving consumers,
depositors, small investors and taxpayers their own financial reform organization to counter the
power of the financial sector, and to participate fully in rulemakings, adjudications, and lobbying
and other activities now dominated by the financial lobby.66
Proactive, affirmative consumer protection is essential to modernizing financial system oversight
and to reducing risk. The current crisis illustrates the high costs of a failure to provide effective
consumer protection. The complex financial instruments that sparked the financial crisis were
based on home loans that were poorly underwritten; unsuitable to the borrower; arranged by
persons not bound to act in the best interest of the borrower; or contained terms so complex that
many individual homeowners had little opportunity to fully understand the nature or magnitude
of the risks of these loans. The crisis was magnified by highly leveraged, largely unregulated
financial instruments and inadequate risk management.
Opponents of reform of the financial system have made several arguments against the
establishment of a strong independent Consumer Financial Protection Agency. Indeed, the new
CFPA appears to be among their main targets for criticism, compared with other elements of the
66 As his last legislative activity, in October 2002. , Senator Paul Wellstone proposed establishment of such an
organization, the Consumer and Shareholder Protection Association, S 3143.
reform plan. They have basically made six arguments. They have argued that regulators already
have the powers it would be given, that it would be a redundant layer of bureaucracy, that
consumer protection cannot be separated from supervision, that it will stifle innovation, that it
would be unfair to small institutions and that its anti-preemption provision would lead to
balkanization. Each of these arguments is wrong.
A. Opponents argue that regulators already have the powers that the CFPA would be
This argument is effectively a defense of the status quo, which has led to disastrous results.
Current regulators already have between them some of the powers that the new agency would be
given, but they haven’t used them. Conflicts of interest and missions and a lack of will have
worked against consumer enforcement. While our section above goes into greater detail on the
failures of the regulators, two examples will illustrate:
• NO HOEPA RULES UNTIL 2008: The Federal Reserve Board was granted sweeping
anti-predatory mortgage regulatory authority by the 1994 Home Ownership and Equity
Protection Act (HOEPA). Final regulations were issued on 30 July 2008 only after the
world economy had collapsed due to the collapse of the U.S. housing market triggered by
predatory lending.67
Further, between 1995 and 2007, the Office of the Comptroller of Currency issued only
one public enforcement action against a Top Ten credit card bank (and then only after the
San Francisco District Attorney had brought an enforcement action) and only one other
public enforcement order against a mortgage subsidiary of a large national bank (only
after HUD initiated action). In that period, “the OCC has not issued a public enforcement
order against any of the eight largest national banks for violating consumer lending
laws.68” The OCC’s failure to act on rising credit card complaints at the largest national
banks triggered Congress to investigate, resulting in passage of the 2009 Credit Card
Accountability, Responsibility and Disclosure Act (CARD Act).69 While that law was
under consideration, other federal regulators used their authority under the Federal Trade
Commission Act to propose and finalize a similar rule.70 By contrast, the OCC requested
the addition of two significant loopholes to a key protection of the proposed rule.
Federal bank regulators currently face at least two conflicts. First, their primary mission is
prudential supervision, with enforcement of consumer laws taking a back seat. Second, charter
shopping in combination with agency funding by regulated entities encourages a regulatory race
to the bottom as banks choose the regulator of least resistance. In particular, the Office of the
Comptroller of the Currency and the Office of Thrift Supervision have failed utterly to protect
67 73 FR 147, Page 44522, Final HOEPA Rule, 30 July 2008
68 Testimony of Professor Arthur Wilmarth, 26 April 2007, before the Subcommittee on Financial Institutions and
Consumer Credit, hearing on Credit Card Practices: Current Consumer And Regulatory Issues
69 HR 627 was signed into law by President Obama as Public Law No: 111-24 on 22 May 2009.
70 The final rule was published in the Federal Register a month later. 74 FR 18, page 5498 Thursday, January 29,
consumers, let alone the safety and soundness of regulated entities. Instead, they competed with
each other to minimize consumer protection standards as a way of attracting institutions to their
charters, which meant that they tied their own hands and failed to fulfill their missions. (Note:
they weren’t trying to fail, but that was a critical side effect of the charter competition).
Establishing a new consumer agency that has consumer protection as its only mission and that
regulated firms cannot hide from by charter-shopping is the best way to guarantee that consumer
laws will receive sustained, thoughtful, proactive attention from a federal regulator.
B. Opponents argue that the CFPA would be a redundant layer of bureaucracy.
We do not propose a new regulatory agency because we seek more regulation, but
because we seek better regulation. The very existence of an agency devoted to consumer
protection in financial services will be a strong incentive for institutions to develop strong
cultures of consumer protection.
— The Obama Administration, Financial Regulatory Reform: A New Foundation, page 57
The new CFPA would not be a redundant layer of bureaucracy. To the contrary, the new agency
would consolidate and streamline federal consumer protection for credit, savings and payment
products that is now required in almost 20 different statutes and divided between seven different
agencies. As the New Foundation document continues:
The core of such an agency can be assembled reasonably quickly from discrete
operations of other agencies. Most rule writing authority is concentrated in a single
division of the Federal Reserve, and three of the four federal banking agencies have
mostly or entirely separated consumer compliance supervision from prudential
supervision. Combining staff from different agencies is not simple, to be sure, but it will
bring significant benefits for responsible consumers and institutions, as well as for the
market for consumer financial services and products.71
And today, a single transaction such as a mortgage loan is subject to regulations promulgated by
several agencies and may be made or arranged by an entity supervised by any of several other
agencies. Under the CFPA, one federal agency will write the rules and see that they are
C. Opponents argue that consumer protection cannot be separated from supervision.
The current regulatory consolidation of both of these functions has led to the subjugation of
consumer protection in most cases, to the great harm of Americans and the economy.
Nevertheless, trade associations for many of the financial institutions that have inflicted this
harm claim that a new approach that puts consumer protection at the center of financial
regulatory efforts will not work. The American Bankers Association, for example, states that
71 The Obama Administration, Financial Regulatory Reform: A New Foundation, page 57
while the length of time banks hold checks under Regulation CC may be a consumer issue,
“fraud and payments systems operational issues” are not.72
Again, as the administration points out in its carefully thought-out blueprint for the new agency:
The CFPA would be required to consult with other federal regulators to promote
consistency with prudential, market, and systemic objectives. Our proposal to allocate
one of the CFPA’s five board seats to a prudential regulator would facilitate appropriate
We concur that the new agency should have full rulemaking authority over all consumer statutes.
The checks and balances proposed by the administration, including the consultative requirement
and the placement of a prudential regulator on its board and its requirement to share confidential
examination reports with the prudential regulators will address these concerns. In addition, the
Administration’s plan provides the CFPA with full compliance authority to examine and evaluate
the impact of any proposed consumer protection measure on the bottom line of affected financial
institutions. While collaboration between regulators will be very important, it should not be used
as an excuse by either the CFPA or other regulators to unnecessarily delay needed action. The
GAO, for example, has identified time delays in interagency processes as a contributor to the
mortgage crisis.74 This is why it is important that the CFPA retain final rulemaking authority, as
proposed under the Administration’s plan. Such authority, along with the above mentioned
mandates, will ensure that both the CFPA and the federal prudential regulator collaborate on a
timely basis.
For most of the last twenty years, bank regulators have shown little understanding of consumer
protection and have not used powers they have long held. OCC’s traditional focus and
experience has been on safety and soundness, rather than consumer protection.75 Its record on
consumer protection enforcement is one of little experience and little evidence of expertise. In
contrast, as already noted, the states have long experience in enforcement of non-preempted state
consumer protection laws. OCC admits that it was not until 2000 that it invoked long-dormant
consumer protection authority provided by the 1975 amendments to the Federal Trade
Commission Act.76
72 Letter of 28 May 2009 from the American Bankers Association to Treasury Secretary Tim Geithner, available at
(last viewed 21 June 2009).
73 The Obama Administration, Financial Regulatory Reform: A New Foundation, page 59
74 “As we note in our report, efforts by regulators to respond to the increased risks associated with the new mortgage
products were sometimes slowed in part because of the need for five federal regulators to coordinate their response.”
“Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S.
Financial Regulatory System, Testimony before the U.S. Senate Committee on Banking, Housing and Urban
Affairs, February 4, 2009, pages 15-16.
75 See Christopher L. Peterson, Federalism and Predatory Lending: Unmasking the Deregulatory
Agenda, 78 Temp. L. Rev. 1, 73 (2005).
76 See Julie L. Williams & Michael L. Bylsma, On the Same Page: Federal Banking Agency Enforcement of the
FTC Act to Address Unfair and Deceptive Practices by Banks, 58 Bus. Law. 1243, 1244, 1246 & n.25, 1253 (2003)
(citing authority from the early 1970s indicating that OCC had the authority to bring such an action under Section 8
of the Federal Deposit Insurance Act, noting that OCC brought its first such case in 2000, and conceding that “[a]n
D. Opponents argue that a single agency focused on consumer protection will “stifle
innovation” in the financial services marketplace.
To the contrary, protecting consumers from traps and tricks when they purchase credit, savings
or payment products should encourage confidence in the financial services marketplace and spur
innovation. As Nobel Laureate Joseph Stiglitz has said:
There will be those who argue that this regulatory regime will stifle innovation.
However, a disproportionate part of the innovations in our financial system have
been aimed at tax, regulatory, and accounting arbitrage. They did not produce
innovations which would have helped our economy manage some critical risks
better—like the risk of home ownership. In fact, their innovations made things
worse. I believe that a well-designed regulatory system, along the lines I’ve
mentioned, will be more competitive and more innovative—with more of the
innovative effort directed at innovations which will enhance the productivity of
our firms and the well-being, including the economic security, of our citizens.77
E. Opponents argue that the CFPA would place an unfair regulatory burden on small
banks and thrifts.
Small banks and thrifts that offer responsible credit and payment products should face a lower
regulatory burden under regulation by a CFPA. Members of Congress, the media and consumer
organizations have properly focused on the role of large, national banks and thrifts in using
unsustainable, unfair and deceptive mortgage and credit card lending practices. In contrast,
many smaller banks and thrifts have justifiably been praised for their more responsible lending
practices in theses areas. In such situations, the CFPA would promote fewer restrictions and less
oversight for “plain vanilla” products that are simple, straight-forward and fair.
However, it is also important to note that some smaller banks and thrifts have, unfortunately,
been on the cutting edge of a number of other abusive lending practices that are harmful to
consumers and that must be addressed by a CFPA. More than 75 percent of state chartered
banks surveyed by the FDIC, for example, automatically enrolled customers in high-cost
overdraft loan programs without consumers’ consent. Some of these banks deny consumers the
ability to even opt out of being charged high fees for overdraft transactions that the banks chose
to permit. Smaller banks have also been leaders in facilitating high-cost refund anticipation
loans, in helping payday lenders to evade state loan restrictions and in offering deceptive and
extraordinarily expensive “fee harvester” credit cards. (See appendix 1 for more information.)
obvious question is why it took the federal banking agencies more than twenty-five years to reach consensus on their
authority to enforce the FTC Act”).
77 “Too Big to Fail or too Big to Save? Examining the Systemic Threats of Large Financial Institutions,” Joseph E.
Stiglitz, April 21, 2009, page 10.
F. Opponents argue that the agency’s authority to establish only a federal floor of
consumer protection would lead to regulatory inefficiency and balkanization.
The loudest opposition to the new agency will likely be aimed at the administration’s sensible
proposal that CFPA’s rules be a federal floor and that the states be allowed to enact stronger
consumer laws that are not inconsistent, as well as to enforce both federal and state laws. This
proposed return to common sense protections is strongly endorsed by consumer advocates and
state attorneys general.
We expect the banks and other opponents to claim that the result will be 51 balkanized laws that
place undue costs on financial institutions that are then passed onto consumers in the form of
higher priced or less available loans. In fact, this approach is likely to lead to a high degree of
regulatory uniformity (if the CFPA sets high minimum standards,) greater protections for
consumers without a significant impact on cost or availability, increased public confidence in the
credit markets and financial institutions, and less economic volatility. For example,
comprehensive research by the Center for Responsible Lending found that subprime mortgage
loans in states that acted vigorously to rein in predatory mortgage lending before they were
preempted by the OCC had fewer abusive terms. In states with stronger protections, interest
rates on subprime mortgages did not increase, and instead, sometimes decreased, without
reducing the availability of these loans.78 Additionally, as Nobel Laureate Joseph Stiglitz has
pointed out, the cost of regulatory duplication is miniscule to the cost of the regulatory failure
that has occurred.79
It is also clear that the long campaign of preemption by the OTS and OCC, culminating in the
2004 OCC rules, contributed greatly to the current predatory lending crisis. After a discussion of
the OCC’s action eliminating state authority, we will discuss more generally why federal
consumer law should always be a floor.
F.1 The OCC’s Preemption of State Laws Exacerbated The Crisis
In 2000-2004, the OCC worked with increasing aggressiveness to prevent the states from
enforcing state laws and stronger state consumer protection standards against national banks and
their operating subsidiaries, from investigating or monitoring national banks and their operating
subsidiaries, and from seeking relief for consumers from national banks and subsidiaries.
These efforts began with interpretative letters stopping state enforcement and state standards in
the period up to 2004, followed by OCC’s wide-ranging preemption regulations in 2004
purporting to interpret the National Bank Act, plus briefs in court cases supporting national
banks’ efforts to block state consumer protections.
78 Wei Li and Keith S. Ernst, Center for Responsible Lending, The Best Value in the Subprime Market: State
Predatory Lending Reforms, February, 23, 2006, page 6.
79 “Some worry about the cost of duplication. But when we compare the cost of duplication to the cost of damage
from inadequate regulation—not just the cost to the taxpayer of the bail-outs but also the costs to the economy from
the fact that we will be performing well below our potential—it is clear that there is not comparison,” Testimony of
Dr. Joseph E. Stiglitz, Professor, Columbia University, before the House Financial Services Committee, October 21,
2008, page 16.
In a letter to banks on November 25, 2002, the OCC openly instructed banks that they “should
contact the OCC in situations where a State official seeks to assert supervisory authority or
enforcement jurisdiction over the bank.”80 The banks apparently accepted this invitation,
notifying the OCC of state efforts to investigate or enforce state laws. The OCC responded with
letters to banks and to state banking agencies asserting that the states had no authority to enforce
state laws against national banks and subsidiaries, and that the banks need not comply with the
state laws.81
For example, the OCC responded to National City Bank of Indiana, and its operating
subsidiaries, National City Mortgage Company, First Franklin Financial Corporation, and
Altegra Credit Company, regarding Ohio’s authority to monitor their mortgage banking and
servicing businesses. That opinion concluded that “the OCC’s exclusive visitorial powers preclude
States from asserting supervisory authority or enforcement jurisdiction over the Subsidiaries.”82
The OCC responded to Bank of America, N.A., and its operating subsidiary, BA Mortgage LLC,
regarding California’s authority to examine the operating subsidiary’s mortgage banking and
servicing businesses and whether the operating subsidiary was required to maintain a license
under the California Residential Mortgage Lending Act. That opinion concluded that “the
Operating Subsidiary also is not subject to State or local licensing requirements and is not
required to obtain a license from the State of California in order to conduct business in that
State.” 83
The OCC wrote the Pennsylvania Department of Banking, stating that Pennsylvania does not
have the authority to supervise an unnamed national bank’s unnamed operating subsidiary which
engages in subprime mortgage lending.84 (The national bank and operating subsidiary were not
named because this interpretive letter was unpublished.)
80. Office of the Comptroller of the Currency, Interpretive Letter No. 957 n.2 (Jan. 27, 2003) (citing OCC Advisory
Letter 2002-9 (Nov. 25, 2002)) (viewed Jun. 19, 2009, at http://www.occ.treas.gov/interp/mar03/int957.doc , and
available at 2003 OCC Ltr. LEXIS 11).
81. E.g., Office of the Comptroller of the Currency, Interpretive Letter No. 971 (Jan. 16, 2003) (letter to Pennsylvania
Department of Banking, that it does not have the authority to supervise an unnamed national bank’s unnamed
operating subsidiary which engages in subprime mortgage lending (unnamed because the interpretive letter is
unpublished) (viewed Jun. 19, 2009, at http://comptrollerofthecurrency.gov/interp/sep03/int971.doc, and available at
2003 OCC QJ LEXIS 107).
82. Office of the Comptroller of the Currency, Interpretive Letter No. 958 (Jan. 27, 2003) (viewed Jun. 19, 2009, at
http://www.occ.treas.gov/interp/mar03/int958.pdf, and available at 2003 OCC Ltr. LEXIS 10).
83. The OCC’s exclusive visitorial powers preclude States from asserting supervisory authority or
enforcement jurisdiction over the Subsidiaries (Jan. 27, 2003) (viewed Jun. 19, 2009, at
http://www.occ.treas.gov/interp/mar03/int957.doc), and available at 2003 OCC Ltr. LEXIS 11).
84. Office of the Comptroller of the Currency, Interpretive Letter No. 971 (unpublished) (Jan. 16, 2003) (viewed Jun.
19, 2009, at http://comptrollerofthecurrency.gov/interp/sep03/int971.doc, and available at 2003 OCC QJ LEXIS
The OCC even issued a formal preemption determination and order, stating that “the provisions
of the GFLA [Georgia Fair Lending Act] affecting national banks’ real estate lending are
preempted by Federal law” and “issuing an order providing that the GFLA does not apply to
National City or to any other national bank or national bank operating subsidiary that engages in
real estate lending activities in Georgia.”85
As Business Week pointed out in 2003, not only did states attempt to pass laws to stop predatory
lending, they also attempted to warn federal regulators that the problem was getting worse.86
A number of factors contributed to the mortgage disaster and credit crunch. Interest rate
cuts and unprecedented foreign capital infusions fueled thoughtless lending on Main
Street and arrogant gambling on Wall Street. The trading of esoteric derivatives amplified
risks it was supposed to mute. One cause, though, has been largely overlooked: the stifling
of prescient state enforcers and legislators who tried to contain the greed and foolishness.
They were thwarted in many cases by Washington officials hostile to regulation and a
financial industry adept at exploiting this ideology.
Under the proposal, critical authority will be returned to those attorneys general, who have
demonstrated both the capacity and the will to enforce consumer laws. In addition to losing the
states’ experience in enforcing such matters, depriving the states of the right to enforce their nonpreempted
consumer protection laws raises serious concerns of capacity. According to a recent
congressional report, state banking agencies and state attorneys general offices employ nearly
700 full time staff to monitor compliance with consumer laws, more than seventeen times the
number of OCC personnel then allocated to investigate consumer complaints.87
Earlier this year, Illinois Attorney General Lisa Madigan testified before this committee and
outlined the numerous major, multi-state cases against predatory lending that have been brought
by her office and other state offices of attorneys general. However, she included this caveat:
State enforcement actions have been hamstrung by the dual forces of preemption of state
authority and lack of federal oversight. The authority of state attorneys general to
enforce consumer protection laws of general applicability was challenged at precisely
the time it was most needed – when the amount of subprime lending exploded and riskier
and riskier mortgage products came into the marketplace.88
85 Office of the Comptroller of the Currency, Preemption Determination and Order, 68 Fed. Reg. 46,264, 46,264
(Aug. 5, 2003).
86 Robert Berner and Brian Grow, “They Warned Us About the Mortgage Crisis,” Business Week, 9 October 2008,
available at http://www.businessweek.com/magazine/content/08_42/b4104036827981.htm, (last visited 21 June
87 See H. Comm. on Financial Services, 108th Cong., Views and Estimates on Matters To Be Set Forth in the
Concurrent Resolution on the Budget for Fiscal Year 2005, at 16 (Comm. Print 2004). “In the area of abusive
mortgage lending practices alone, State bank supervisory agencies initiated 20,332 investigations in 2003 in
response to consumer complaints, which resulted in 4,035 enforcement actions.”
88 Testimony of Illinois Attorney General Lisa Madigan Before the Committee on Financial Services, Hearing on
Federal and State Enforcement of Financial Consumer and Investor Protection Laws, 20 March 2009, available at
http://www.house.gov/apps/list/hearing/financialsvcs_dem/il_-_madigan.pdf (last visited 22 June 2009).
This month, General Madigan and seven colleagues sent President Obama a letter supporting a
Consumer Financial Protection Agency preserving state enforcement authority:
[W]e believe that any reform must (1) preserve State enforcement authority, (2) place
federal consumer protection powers with an agency that is focused primarily on
consumer protection, and (3) place primary oversight with government agencies and not
depend on industry self regulation.89
F.2 Why Federal Law Should Always Be a Floor
Consumers need state laws to prevent and solve consumer problems. State legislators generally
have smaller districts than members of Congress do. State legislators are closer to the needs of
their constituents than members of Congress. States often act sooner than Congress on new
consumer problems. Unlike Congress, a state legislature may act before a harmful practice
becomes entrenched nationwide. In a September 22, 2003 speech to the American Bankers
Association in Hawaii, Comptroller John D. Hawke admitted that consumer protection activities
“are virtually always responsive to real abuses.” He continued by pointing out that Congress
moves slowly. Comptroller Hawke said, “It is generally quite unusual for Congress to move
quickly on regulatory legislation – the Gramm-Leach-Bliley privacy provisions being a major
exception. Most often they respond only when there is evidence of some persistent abuse in the
marketplace over a long period of time.” U.S. consumers should not have to wait for a persistent,
nationwide abuse by banks before a remedy or a preventative law can be passed and enforced by
a state to protect them.
States can and do act more quickly than Congress, and states can and do respond to emerging
practices that can harm consumers while those practices are still regional, before they spread
nationwide. These examples extend far beyond the financial services marketplace.
States and even local jurisdictions have long been the laboratories for innovative public policy,
particularly in the realm of environmental and consumer protection. The federal Clean Air Act
grew out of a growing state and municipal movement to enact air pollution control measures.
The national organic labeling law, enacted in October 2002, was passed only after several states,
including Oregon, Washington, Texas, Idaho, California, and Colorado, passed their own laws.
In 1982, Arizona enacted the first “Motor Voter” law to allow citizens to register to vote when
applying for or renewing drivers’ licenses; Colorado placed the issue on the ballot, passing its
Motor Voter law in 1984. National legislation followed suit in 1993. Cities and counties have
long led the smoke-free indoor air movement, prompting states to begin acting, while Congress,
until this month, proved itself virtually incapable of adequately regulating the tobacco industry.
A recent and highly successful FTC program—the National Do Not Call Registry to which fiftyeight
million consumers have added their names in one year—had already been enacted in forty
But in the area of financial services, where state preemption has arguably been the harshest and
most sweeping, examples of innovative state activity are still numerous. In the past five years,
89 Letter of 15 June 2009 from the chief legal enforcement officers of eight states (California, Connecticut, Illinois,
Iowa, Maryland, Massachusetts, North Carolina and Ohio) to President Obama, on file with the authors.
since the OCC’s preemption regulations have blocked most state consumer protections from
application to national banks, one area illustrating the power of state innovation has been in
identity theft, where the states have developed important new consumer protections that are not
directed primarily at banking. In the area of identity theft, states are taking actions based on a
non-preemptive section of the Fair Credit Reporting Act, where they still have the authority to
act against other actors than national banks or their subsidiaries.
There are seven to ten million victims of identity theft in the U.S. every year, yet Congress did
not enact modest protections such as a security alert and a consumer block on credit report
information generated by a thief until passage of the Fair and Accurate Credit Transactions Act
(FACT Act or FACTA) in 2003. That law adopted just some of the identity theft protections that
had already been enacted in states such as California, Connecticut, Louisiana, Texas, and
Additionally FACTA’s centerpiece protection against both inaccuracies and identity theft, access
to a free credit report annually on request, had already been adopted by seven states: Colorado,
Georgia, Maine, Maryland, Massachusetts, New Jersey and Vermont. Further, California in
2000, following a joint campaign by consumer groups and realtors, became the first state to
prohibit contractual restrictions on realtors showing consumers their credit scores, ending a
decade of stalling by Congress and the FTC.91 The FACT act extended this provision nationwide.
Yet, despite these provisions, advocates knew that the 2003 federal FACTA law would not solve
all identity theft problems. Following strenuous opposition by consumer advocates to the blanket
preemption routinely sought by industry as a condition of all remedial federal financial
legislation, the final 2003 FACT Act continued to allow states to take additional actions to
prevent identity theft. The results have been significant.
Since its passage, fully 47 states and the District of Columbia have granted consumers the right
to prevent access to their credit reports by identity thieves through a security freeze. Indeed, even
the credit bureaus, longtime opponents of the freeze, then adopted the freeze nationwide.92
A key principle of federalism is the role of the states as laboratories for the development of
law.93 State and federal consumer protection laws can develop in tandem. After one or a few
states legislate in an area, the record and the solutions developed in those states provide
important information for Congress to use in deciding whether to adopt a national law, how to
craft such a law, and whether or not any new national law should displace state law.
90 See California Civil Code §§ 1785.11.1, 1785.11.2, 1785,16.1; Conn. SB 688 §9(d), (e), Conn. Gen. Stats. § 36a-
699; IL Re. Stat. Ch. 505 § 2MM; LA Rev. Stat. §§ 9:3568B.1, 9:3568C, 9:3568D, 9:3571.1 (H)-(L); Tex. Bus. &
Comm. Code §§ 20.01(7), 20.031, 20.034-039, 20.04; VA Code §§ 18.2-186.31:E.
91 See 2000 Cal. Legis. Serv. 978 (West). This session law was authored by State Senator Liz Figueroa. “An act to
amend Sections 1785.10, 1785.15, and 1785.16 of, and to add Sections 1785.15.1, 1785.15.2, and 1785.20.2 to the
Civil Code, relating to consumer credit.”
92 Consumers Union, U.S. PIRG and AARP cooperated on a model state security freeze proposal that helped ensure
that the state laws were not balkanized, but converged toward a common standard. More information on the state
security freeze laws is available at http://www.consumersunion.org/campaigns/learn_more/003484indiv.html (last
visited 21 June 2009).
93 New State Ice Co. v. Leibman, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting).
A few more examples from California illustrate the important role of the states as a laboratory
and a catalyst for federal consumer protections for bank customers. In 1986, California required
that specific information be included in credit card solicitations with enactment of the then-titled
Areias-Robbins Credit Card Full Disclosure Act of 1986. That statute required every credit card
solicitation to contain a chart showing the interest rate, grace period, and annual fee.94 Two years
later, Congress chose to adopt the same concept in the Federal Fair Credit and Charge Card
Disclosure Act (FCCCDA), setting standards for credit card solicitations, applications and
renewals.95 The 1989 federal disclosure box96 (know as the “Schumer Box”) is strikingly similar
to the disclosure form required under the 1986 California law.
States also led the way in protecting financial services consumers from long holds on deposited
checks. California enacted restrictions on the length of time a bank could hold funds deposited
by a consumer in 1983; Congress followed in 1986. California’s 1983 funds availability statute
required the California Superintendent of Banks, Savings and Loan Commissioner, and
Commissioner of Corporations to issue regulations to define a reasonable time after which a
consumer must be able to withdraw funds from an item deposited in the consumer’s account.97
Similar laws were passed in Massachusetts, New York, New Jersey and other states. Congress
followed a few years later with the federal Expedited Funds Availability Act of 1986.98
California led the way on security breach notice legislation. Its law and those of other states have
functioned as a de facto national security breach law, while Congress has failed to act.99
It is certainly not the case that states always provide effective consumer protection. The states
have also been the scene of some notable regulatory breakdowns in recent years, such as the
failure of some states to properly regulate mortgage brokers and non-bank lenders operating in
the sub-prime lending market, and the inability or unwillingness of many states to rein in lenders
that offer extraordinarily high-cost, short term loans and trap consumers in an unsustainable
cycle of debt, such as payday lenders and auto title loan companies. Conversely, federal
lawmakers have had some notable successes in providing a high level of financial services
consumer protections in the last decade, such as the Credit Repair Organizations Act and the
recently enacted Military Lending Act.100 This is why it is necessary for this new federal agency
to ensure that a minimum level of consumer protection is established in all states.
Nonetheless, as these examples show, state law is an important source of ideas for future federal
consumer protections. As Justice Brandeis said in his dissent in New State Ice Co., “Denial of
the right [of states] to experiment may be fraught with serious consequences to the Nation” (285
U.S. at 311). A state law will not serve this purpose if states cannot apply their laws to national
banks, who are big players in the marketplace for credit and banking services. State lawmakers
94 1986 Cal. Stats., Ch. 1397, codified at California Civil Code § 1748.11.
95 P. L. 100-583, 102 Stat. 2960 (Nov. 1, 1988), codified in part at 15 U.S.C. §§ 1637(c) and 1610(e).
96 54 Fed. Reg. 13855 (April 6, 1989 Appendix G, form G-10(B)).
97 1983 Cal. Stat. Ch. 1011, § 2, codified at Cal. Fin. Code § 866.5.
98 P. L. 100-86, Aug. 10, 1987, 101 Stat. 552, 635, codified at 12 U.S.C. § 4001.
99 More information on state security breach notice laws is available at
http://www.consumersunion.org/campaigns//financialprivacynow/002215indiv.html (last visited 21 June 2009).
100 Military Lending Act, 10 U.S.C. § 987. Credit Repair Organizations Act, 15 U.S.C. § 1679h (giving state
Attorneys General and FTC concurrent enforcement authority).
simply won’t pass new consumer protection laws that do not apply to the largest players in the
banking marketplace.
Efficient federal public policy is one that is balanced at the point where even though the states
have the authority to act, they feel no need to do so. Since we cannot guarantee that we are ever
at that optimum, setting federal law as a floor of protection as the default—without also
preempting the states—allows us to retain the safety net of state-federal competition to guarantee
the best public policy.101
As detailed above, a strong federal commitment to robust consumer protection is central to
restoring and maintaining a sound economy. The nation’s financial crisis grew out of the
proliferation of inappropriate and unsustainable lending practices that could have and should
have been prevented. That failure harmed millions of American families, undermined the safety
and soundness of the lending institutions themselves, and imperiled the economy as a whole. In
Congress, a climate of deregulation and undue deference to industry blocked essential reforms.
In the agencies, the regulators’ failure to act, despite abundant evidence of the need, highlights
the inadequacies of the current regulatory regime, in which none of the many financial regulators
regard consumer protection as a priority.
As outlined in the testimony above, establishment of a single Consumer Financial Protection
Agency is a critical part of financial reform. As detailed above, its funding must be robust,
independent and stable. Its board and governance must be structured to ensure strong and
effective consumer input, and a Consumer Advocate should be appointed to report semi‐annually
to Congress on agency effectiveness.
Our organizations, along with many other consumer, community, civil rights, labor and
progressive financial institutions, believe that restoring consumer protection should be a
cornerstone of financial reform. It will reduce risk and make the system more accountable to
American families. We recognize, however, that other reforms are needed to restore confidence
to the financial system. Our coalition ideas on these and other matters can be found at the
website of Americans For Financial Reform, available at ourfinancialsecurity.org.
Thank you for the opportunity to testify. Our organizations look forward to working with you to
move the strongest possible Consumer Financial Protection Agency through the House of
Representatives and into law.
101 For further discussion, see Edmund Mierzwinski, “Preemption Of State Consumer Laws: Federal
Interference Is A Market Failure,” Government, Law and Policy Journal of the New York State Bar Association
Spring 2004 (Vol. 6, No. 1, pgs. 6-12).
Appendix 1: Abusive Lending Practices by Smaller Banks and Thrifts
Appendix 2: Private Student Loan Regulatory Failures and Reform Recommendations
Appendix 3: Rent-A-Bank Payday Lending
Appendix 4: Information on Income (primarily user and transaction fees depending on
agency) of Major Financial Regulatory Agencies
Appendix 1: Abusive Lending Practices by Smaller Banks and Thrifts
Members of Congress, the media and consumer organizations have properly focused on the role
of large, national banks and thrifts in using unsustainable, unfair and deceptive mortgage and
credit card lending practices. In contrast, smaller banks and thrifts have justifiably been praised
for their more responsible lending practices in theses areas. However, when considering the
need for and responsibilities of a federal Consumer Financial Protection Agency, it is also
important to note that some smaller banks and thrifts have, unfortunately, been on the cutting
edge of a number of other abusive lending practices that are harmful to consumers and that must
be addressed by a CFPA.
High Cost Refund Anticipation Loans
The high cost refund anticipation loans (RALs) sold by tax preparers to the working poor are
made by some of the largest banks, JPMorgan Chase and HSBC, but also by much smaller Santa
Barbara Bank & Trust and Republic Bank & Trust. In fact, refund anticipation loans offered by
the two smaller banks are much more expensive than those now sold by Chase and HSBC. For
the 2009 tax season, a typical $3,000 refund anticipation loan cost $62.14 at H&R Block through
HSBC and $62 through independent preparers who used JPMorgan Chase to make RALs. In
contrast, Republic Bank & Trust charged $110.45 and Santa Barbara Bank & Trust charged
$104.95 for the same $3,000 RAL. Furthermore, Santa Barbara permits the independent tax
preparers with whom it partners to charge an additional $40 (we do not have information on the
amount of additional fees for Republic Bank & Trust). With all fees included the annual
percentage rate for RALs at the small banks ranged from 134 percent up to 187 percent for a
$3,000 loan repaid by direct deposit of the taxpayers tax refund and/or Earned Income Tax
Rent-A-Bank Payday Lending
Payday lenders partnered with small banks based in states with deregulated interest rates in order
to make loans in states that retained usury laws, small loan rate caps, or had slightly restrictive
payday loan laws. Through enforcement action, the Comptroller of the Currency stopped four
small national banks from renting their charters to payday lenders. The Federal Reserve put
regulatory pressure on the only state-chartered member bank involved in rent-a-charter lending
and the bank withdrew from payday lending. The Office of Thrift Supervision prevailed on a
small thrift in Ohio to stop.
For years, about a dozen very small state banks “rented” their charters to enable payday lenders
to evade state usury and small loan protections. These banks ended this abusive practice only
after state regulators and consumer attorneys initiated litigation, the National Association of
Attorneys General sent a stern letter, consumer groups launched a multi-year advocacy campaign
by across the country, key Congressional leaders sent letters, and new leaders at the FDIC used
102 Chi Chi Wu and Jean Ann Fox, “Big Business, Big Bucks: Quickie Tax Loans Generate Profits for Banks and
Tax Preparers While Putting Low-Income Workers at Risk,” National Consumer Law Center and Consumer
Federation of America, February 2009, page 10.
all the enforcement tools at their disposal.103 By the time bank regulators deprived payday
lenders of willing bank partners, state consumer protections had been undermined.
Bank Overdraft Loans
Small banks also extend extremely expensive unauthorized credit through overdraft loans,
charging consumers steep fees for covering transactions on accounts with insufficient funds.
Instead of denying point-of-purchase debit card purchases or cash withdrawals from ATMs,
banks large and small cover those overdrafts and charge high fees. The FDIC issued a groundbreaking
report in late 2008 based on a survey of 462 FDIC-supervised state banks drawn from a
sample of 1,172 banks which included banks scheduled for examination from May through
December 2007, as well as FDIC-supervised banks with at least $5 billion in assets. The FDIC
found that 75.1 percent of the mostly small banks surveyed automatically enrolled customers in
automated overdraft programs with some of them denying consumers the ability to even opt out
of having overdrafts paid for a fee. The fees charged by FDIC banks ranged from $10 to $38
with the median fee $27. About a fourth of these state banks added sustained overdraft fees
when consumers did not repay the overdraft in just days. A quarter of all banks surveyed and
over half of the largest surveyed banks batch processed overdraft transactions largest to smallest,
which the FDIC noted can increase the number of overdrafts. Small banks turn their overdraft
programs over to third-party vendors to manage and pay them a percentage of the fees generated,
typically 10 to 20 percent of additional fees.
Overdraft and insufficient funds fees are a major source of revenue for banks, including the
smaller state banks supervised by the FDIC. These fees in 2006 represented three-quarters of the
$2.66 billion in service charges on deposit accounts reported by the surveyed banks in their Call
Reports. Banks that permit overdrafts at cash registers with debit cards and at ATMs collected
more in fees than banks that deny those transactions at no cost to consumers. Banks that process
withdrawals largest first also rake in more revenue than banks that do not.104
Third-Party Direct Deposit Arrangements with Check Cashers and Loan Companies
Last year, CFA surveyed third-party direct deposit account arrangements by which federal
exempt funds are delivered to unbanked recipients through check cashers, loan companies, and
other outlets that partner with a handful of banks. The Wall Street Journal published a front
page story, titled “Social Insecurity: High Interest Lenders Tap Elderly, Disabled105,” which
described the high cost and unfair terms of financial arrangements that target low-income
recipients of taxpayer-supported federal benefits. Readers were shocked to learn that the Social
Security Administration would direct deposit Social Security and SSI benefits into a bank
103 Jean Ann Fox, Consumer Federation of America and Edmund Mierzwinski, USPIRG, “Rent A Bank Payday
Lending: How Banks Help Payday Lenders Evade State Consumer Protections,” November 2001. See, also, Jean
Ann Fox, Consumer Federation of America, “Unsafe and Unsound: Payday Lenders Hide Behind FDIC Bank
Charters to Peddle Usury,” March 2004, and Testimony, Jean Ann Fox, House Oversight and Domestic Reform
Subcommittee on Domestic Policy Regarding Foreclosures, Predatory Lending and Payday Lending in America’s
Cities, March 21, 2007.
104 FDIC, “FDIC Study of Bank Overdraft Programs,” November 2008, pages ii-v.
105 Ellen Schultz and Theo Francis, “Social Insecurity: High Interest Lenders Tap Elderly, Disabled,” Wall Street
Journal, February 12, 2008, A1.
account controlled by a loan company, not by the recipient. The Social Security Administration
and Treasury Department permit delivery of exempt benefits through Master/Sub account
arrangements that can include a bank, an intermediary, and the outlet where consumers go to
pick up their “checks.” Unbanked recipients are targeted by these “third-party direct deposit
providers” as a means of getting faster access to their checks that is safer than receiving paper
checks in the mailbox. Loan companies also use the direct deposit arrangements to secure
repayment of loans before recipients gain access to their funds.
Banks set up a master account to receive exempt funds in the name of the recipient. The
beneficiary goes to the check cashing outlet and pays to receive and then cash the “check”
printed to deliver their funds or to have funds loaded onto a prepaid debit card. Fees are charged
to set up the account, to deliver each payment, and to cash each check. The direct deposit
accounts offered by check-cashers simply convert the electronic payment of benefits back into a
paper check. When the benefits are delivered by debit card, recipients are provided a stored
value card, which appears to be not covered by Federal Reserve Regulation E protections that
provide limits on liability for unauthorized transfers, procedures to resolve disputes, disclosures,
and other substantive protections.
Recipients who are enrolled in these third-party direct deposit accounts have no direct control
over their funds. The bank deducts its fees and those paid to the check casher or other entity that
delivers the “check” or provides the debit card. Contracts include fine print that permits the bank
to channel exempt funds to make loan payments on behalf of the recipient before handing over
the rest of that month’s check. Recipients get what is left over.
CFA presented testimony to both the Social Security Administration and to the House Ways and
Means Subcommittee on Social Security last June that detailed the bank/third-party
arrangements in effect at that time. Banks included in the survey were Republic Bank & Trust,
based in Louisville, Kentucky; River City Bank, based in Kentucky; Bank of Agriculture and
Commerce in California; and First Citizens Bank/FirstNet/Cornerstone Community Bank based
in Radcliff, Kentucky and Chattanooga, TN.106 Following the hearing, the FDIC investigated
and took regulatory action against the banks they supervise.107
Third-Party Subprime “Fee-Harvester” Credit Card and Loan Arrangements
Smaller banks also issue high fee, low limit credit cards to consumers with impaired credit.
These “fee-harvester” cards are marketed to the most vulnerable consumers, and come with
loaded high fees that use up most of the card’s capacity, leaving consumers with minimal credit
at an exorbitant price. While some large banks engaged in the fee-harvester sector, a report by
the National Consumer Law Center identified several small banks that partnered with card
issuers, including Columbus Bank and Trust and several other small banks that partnered with
106 Testimony of Jean Ann Fox, Consumer Federation of America, Before the Subcommittee on Social Security,
Committee on Ways and Means, “Hearing on Protecting Social Security Beneficiaries from Predatory Lending and
Other Harmful Financial Institution Practices,” June 24, 2008.
107 “Bank Ordered to Cease and Desist ‘unsound’ Banking Practices,” Central Valley Business Times, March 28,
2009. See also, Social Security Administration Policy Instruction: EM-09039, “FDIC Investigation of the Bank of
Agriculture & Commerce One-Time-Only Instructions, effective date May 15, 2009.
CompuCredit Corporation in Atlanta, Georgia; South Dakota based First Premier bank; First
National of Pierre (SD); First Bank of Delaware, and Applied Bank, formerly known as Cross
Country Bank. A MasterCard issued by CorTrust exemplifies the abuses of fee-harvester cards,
as it featured a $250 credit limit that was quickly consumed by a $119 Acceptance Fee, a $50
annual fee, and a $6 per month Participation Fee, leaving users just $75 in total usable credit. A
First Bank of Delaware card issued by Continental Finance in 2007 started with a $300 credit
limit but provided only $53 in usable credit after charging a $99 account set-up fee, an $89
Participation Fee, a $49 Annual Fee, and $10 per month in Account Maintenance fees.108
Last year the Federal Trade Commission and the FDIC brought charges against CompuCredit
and its small bank partners, accused of using unfair practices in marketing fee-harvester cards.
The small banks subject to the FDIC’s enforcement actions included $118 million-asset First
Bank of Delaware in Wilmington, Delaware and $794 million-asset First Bank & Trust in
Brookings, South Dakota.109 In addition, $6 billion-asset Columbus Bank and Trust, Columbus,
Georgia, settled the FDIC’s charges related to CompuCredit by agreeing to a Cease and Desist
Order and paying $2.4 million in a civil money penalty.110 First Bank of Delaware agreed to a
cease and desist order which required the bank to terminate its relationship, not only to
CompuCredit, but with seventeen third-party lending programs and providers in total. These
third party entities included payday lender Check ‘n Go Online, CashCall, Inc., ThinkCash (TC
Loan Service LLC), Fortris Financial, LLC, and several prepaid card providers.111 First Bank &
Trust was ordered by the Office of Comptroller of the Currency in 2003 to stop partnering with
payday lenders and to set aside $6 million to reimburse credit card customers impacted by
deceptive lending practices.112
Bank Payday Loans
As described at length in a separate appendix on Rent-A-Bank payday lending, starting in the
1990s and early 2000s, many smaller banks partnered with payday lenders to pass on their
preemptive powers to avoid state payday loan laws. Though those rent-a-bank partnerships have
ended, preemptive bank payday lending has not.
MetaBank, a federally chartered savings association headquartered in South Dakota, offers the
iAdvance line of credit on prepaid cards, including payroll cards. The loan operates exactly like
a payday loan. The loans are small, short term credit with a flat fee ($25 per $200); require that
the borrower have a regular paycheck (direct deposit of wages or government benefits onto the
prepaid card); and lead to frequent rollovers and a triple digit APR. The disclosed APR is 150%,
but that assumes that the loan is outstanding for 30 days. That is highly unlikely, as the loans are
most likely taken out toward the end of the pay cycle. The APR is 650% if the loan is taken out
a week before payday.
108Rick Jurgens and Chi Chi Wu, National Consumer Law Center, “Fee-Harvesters: Low-Credit, High-Cost Cards
Bleed Consumers,” November 2007, Pages 1, 6.
109 Cheyenne Hopkins, “Will Third-Party Crackdown Set Stage for Showdown?” American Banker, June 11, 2008.
110 Press Release, “FDIC Seeks in Excess of $200 Million Against Credit Card Company and Two Banks for
Deceptive Credit Card Marketing,” June 10, 2008, http://www.fdic.gov/news/news/press/2008/pr08047.html.
111 FDIC Stipulation and Consent to the Issuance of An Order to Cease and Desist, Order for Restitution, and Order
to Pay, First Bank of Delaware, FDIC-07-256b. FDIC-07-257k, Exhibit A, October 3, 2008.
112 Steve Young, “S.D. Bank Denies Credit Card Deception,” Argus Leader, June 12, 2008.
But in several respects the loans are worse than payday loans. First, the bank is able to preempt
state usury, small loan, and payday loan laws.
Second, unlike a payday lender, which must cash a check that can be stopped (at least in theory),
the bank has immediate access to offset the loan against the next payment of the consumer’s
wages or benefits, even benefits that are exempt from garnishment.
Third, the cost can be much higher because the loan is not even necessarily outstanding the full
two weeks that a typical payday loan is. It might only be a few days.
Some larger banks also have payday-loan products. Wells Fargo, Fifth Third Bank, and U.S.
Bank have direct deposit account advances, which operate just like Meta Bank’s iAdvance loans
except that they offset a bank account not a prepaid card account.
Appendix 2: Private Student Loan Regulatory Failures and Reform
During the height of the most recent wave of abusive mortgage loans, federal regulators took
almost no public action. There was a similar lack of regulatory activity in the student loan area.
There were problems in the federal student loan industry as well. However, at least for these
products, there is a comprehensive set of borrower protections in the Higher Education Act
(HEA) and a clear regulatory authority, the U.S. Department of Education. We recommend that
jurisdiction over federal student assistance remain in the HEA and Department of Education.
In contrast, many different types of lenders originate, service, and collect private student loans
and as a result, there is a wide range of regulatory agencies. These products are similar to other
private unsecured credit products, such as credit cards.
In recent years, a subprime private student loan industry began to prey on vulnerable borrowers
seeking to better their lives through education. Key problems included:
1. Pressuring Borrowers into High Cost Private Loans.
Many schools and lenders pressured borrowers into high cost private loans even in cases where
borrowers had not yet exhausted the more affordable federal loans (and even grants in some
cases). New York Attorney General Andrew Cuomo and others recently exposed many of the
improper financial arrangements and collusions between schools and lenders.
2. Private Loans and Scam Schools.
As the private student loan industry developed, a particularly unholy alliance developed between
unlicensed and unaccredited schools and mainstream banks and lenders. The creditors didn’t just
provide high-interest private loans to students to attend unscrupulous schools; they actually
sought out the schools and partnered with them, helping to lure students into scam operations.
Regulatory agencies for the most part ignored their responsibility to stop unfair lending practices.
A key regulatory check, the FTC Holder Rule, could be more efficiently enforced by a single
agency with clear jurisdiction over all financial players. If banks are routinely being referred
loans by schools and the schools are not arranging for the banks to put the notice in the notes as
they are required to do, then the banks are using notes that violate federal law and should be
liable for unfair practices.
Banking regulators must coordinate to enforce the FTC holder rule. The trade commission, state
attorney generals, state licensing and accreditation agencies must review loan documents
provided to students by schools and sue schools that violate federal law by not including the
holder notice. Meanwhile, government agencies supervising lenders must monitor school notes
and sue lenders that violate federal law by contradicting or otherwise trying to evade the holder
The FTC rule must also be amended so that lenders in addition to schools are obligated to
include the notice. Other federal agencies must also adopt the FTC rule so that there is absolutely
no doubt that loan providers outside of the FTC’s jurisdiction, including all national banks, can
be held liable. A single agency should be able to more efficiently enact these reforms.
3. Unchecked Rates and Fees.
As in the subprime mortgage and credit card industries, very high cost loans were made to
borrowers without evaluation of reasonable ability to repay. In a March 2008 report, NCLC
surveyed a number of private student loan products and found that all of the loans in our survey
had variable rates. The lowest initial rate in our sample was around 5% and the highest close to
19%. The average initial disclosed annual percentage rate (APR) for the loans in our survey was
Some of the margins were shockingly high. Multiple loans in our survey had margins of close to
10%. None of the loans we examined contained a rate ceiling. A few set floors. These floors
are particularly unfair for borrowers in an environment of declining interest rates.
There are no limits on origination and other fees for private student loans. According to the loan
disclosure statements we reviewed, there were origination charges in all but about 15% of the
loans. For those with origination fees, the range was from a low of 2.8% up to a high of 9.9%.
The average in our survey was 4.5%. Most of the lenders in the private student notes we
surveyed reserved the right to charge additional fees for other services.
4. Denying Access to Justice, including Mandatory Arbitration Clauses.
Sixty-one percent of the loan notes in the March 2008 NCLC report contained mandatory
arbitration clauses. These clauses are just one example of lenders’ systematic strategy to limit a
borrower’s ability to challenge problems with the loans or with the schools they attend.
5. Arbitrary and Unfair Default Triggers.
Borrowers are in default on federal loans if they fail to make payments for a relatively long
period of time, usually nine months. They might also be in default if they fail to meet other
terms of the promissory note. There are no similar standardized criteria for private loan defaults.
A few of the default “triggers” in the loans we reviewed in the March 2008 report were
particularly troubling. For example, the typical loan we reviewed stated that borrowers could be
declared in default if “in the lender’s judgment, they experience a significant lessening of ability
to repay the loan” or “are in default on any other loan they already have with this lender, or any
loan they might have in the future.”
Another troubling trigger is the lender’s discretion to declare a default if the lender believes that
the borrower is experiencing a significant lessening of her ability to repay the loan. If interpreted
broadly, a borrower could be placed in default if she requests a temporary postponement of loan
payments due to job loss or some other factor.
113 National Consumer Law Center, “Paying the Price: The High Cost of Private Student Loans and the Dangers for
Student Borrowers” (March 2008), available at:
6. Disclosures.
The Higher Education Opportunity Act (HEOA) amended TILA to significantly improve
disclosures for private student loans. A coalition of consumer advocacy organization filed
comments on these proposed regulations in May 2009.114 There is significant overlap between
the new private student loan disclosure requirements and disclosure requirements for other types
of credit. Enforcement should be enhanced if jurisdiction is clearly within one oversight agency.
7. Lack of Loss Mitigation Relief.
A key barrier to improved assistance programs is that lenders have not been required to provide
redress for their irresponsible actions. Voluntary efforts have been few and far between. Similar
trends occurred in the mortgage industry where most creditors failed to act on their own to stem
the foreclosure tide.
Meaningful assistance should include loan restructuring and flexible repayment. Servicers
should have the authority to modify loan terms, change interest rates, forbear or forgive
principal, extend maturity dates, offer forbearances, repayment plans for arrearages, flexible
repayment and deferments. Congress and the Administration should also act to ensure that
borrowers receiving relief through these programs do not face tax consequences.
8. False and Misleading Advertising.
Private student loans are increasingly sold directly to consumers. We recommend schools be
required to certify these loans before funds are disbursed.
9. Data Collection.
It is very difficult to understand private loan trends, including such important data as default
rates. There is no comprehensive data base for private loans as there is for federal loans. The
new regulatory agency should develop a data base of easily accessible data. The lack of this type
of information in the private student loan context is a major impediment to understanding the
scope of the problem and helping borrowers.
10. Private Enforcement.
Victims of abusive lending practices have very little recourse because the industry often uses its
market power to limit borrowers’ access to justice. To be effective, consumer protection laws
must: (1) give borrowers a private right of action, the right to pursue class actions, and the right
to raise school-related claims and defenses against lenders in cases where the school and lender
have a referral relationship or other close affiliation; (2) contain strong remedies and penalties
for abusive acts; (3) provide effective assignee liability so that borrowers can pursue legitimate
claims even when the originator has sold their loan; and (4) prohibit mandatory arbitration
clauses that weaken victims’ legal rights and deny them access to seeking justice in a court of
law. Without these fundamental procedural protections, other consumer protection rules are
114 See http://www.studentloanborrowerassistance.org/uploads/File/policy_briefs/PrivateLoanCommentsJune09.pdf.
Appendix 3: Rent-A-Bank Payday Lending
Federal regulators also fueled the explosive growth of payday lending during the late 1990s and
early 2000s by allowing banks to partner with loan companies to evade state protections. Payday
lenders solicit consumers to write unfunded checks for immediate cash loans that are due in full
on the borrower’s next payday, in order to keep the check from bouncing. By claiming the right
to “export” weak regulations from the states where their bank partners were based, payday
lenders charged interest rates of 400 percent and higher in states with stronger laws.
The payday loan industry used its “National Bank Model” as a two-edged sword in state
legislative debates, urging state legislators to legalize payday loans to “keep out” the out-of-state
banks and provide “competition” for banks that brokered payday loans. Then, when industryfriendly
laws were enacted, some payday lenders continued to partner with out-of-state banks to
by-pass the limits in the new payday loan law. For example, ACE Cash Express was a leader in
enacting the Colorado payday loan law but dropped its state license, claiming that its loans were
made by a national bank. It is widely believed that payday loan authorizing legislation was
enacted in Virginia because rent-a-bank payday lenders had entered the state and a state law was
the only way legislators thought they could impact the market.
Payday lenders also used bank partners to stay in business when the North Carolina legislature
permitted the payday loan law to sunset in 2001. Instead of closing up shop, payday lenders with
about five hundred branches affiliated with national banks to continue making loans. By late
2001, the North Carolina Banking Commissioner reported that seven banks were partnering with
payday lenders, including Peoples National Bank of Paris, Texas; First National Bank,
Brookings, SD; First Bank of Delaware; Brickyard Bank, Illinois; County Bank of Rehoboth
Beach, DE; Eagle National Bank, PA; and Goleta National Bank, CA. Eventually, the North
Carolina Attorney General settled cases against the remaining “rent-a-bank” lenders to exit the
state. Class action litigation against the same lenders continued.
To combat the explosion of triple-digit interest lenders in states with usury or small loan caps,
state regulators and Attorneys General brought enforcement actions, filed litigation, and sought
legislation to close loopholes being exploited. For example, the Massachusetts Banking
regulators shut down a retail outlet that partnered with County Bank of Rehoboth Beach, DE for
violating the Massachusetts usury and small loan act.115 Other state regulators that went to court
to stop rent-a-bank payday lending include Colorado, Georgia, North Carolina, New York,
Oklahoma, and Ohio.
By partnering with banks located in states with no usury cap, payday lenders were able to charge
consumers much higher rates than state laws permitted and use other loan features that trapped
borrowers in debt. For example, a 2001 CFA/USPIRG survey found that ACE Cash Express
(Goleta National Bank) and Advance America (BankWest, SD) charged Virginia consumers 442
percent APR for payday loans despite Virginia’s 36 percent small loan rate cap. The same
survey noted that Money Mart (Eagle National Bank) charged 455 percent APR and loan
servicers for County Bank of Rehoboth Beach, DE charged 780 percent APR for two-week loans
115 Press Release, Commonwealth of Massachusetts Consumer Affairs and Business Regulation, “High Rate Payday
Loan Operation Shut Down by Consumer Affairs Agency,” April 20, 2000.
in Virginia.116 Rent-a-bank lenders also made loans that exceeded the limits set by states that
had authorized this product. ACE Cash Express partnered with Goleta National Bank and Dollar
Financial Group partnered with Eagle National Bank to make loans up to $500 in California, a
state that limited payday loans to $255 (if a lender charged the maximum fee). Colorado’s
payday loan law prohibited loan renewals but rent-a-bank lenders “rolled over” loans three or
four times, charging borrowers the fee each payday without paying off the loan. While it is
difficult to quantify the cost of rent-a-bank payday lending to consumers, the Center for
Responsible Lending wrote to the FDIC Board of Directors in 2004 that 3,000 payday loan stores
were at that time partnering with FDIC-supervised state banks. CRL estimated that over one
million borrowers annually were trapped in a cycle of borrowing at a cost of about $750 million
in fees per year that would otherwise be illegal under state law.117
Timeline of regulatory actions
The campaign to stop banks from renting their charters to enable payday lenders to evade state
usury, small loan, and payday loan laws stretched over a decade. Below are noted key regulatory
developments that eventually stopped this tactic. This list does not include numerous class
action lawsuits, advocacy campaigns, and state law enforcement cases that were also
instrumental in curbing usury by banks through payday lending outlets.
1999: National and state consumer groups wrote to Comptroller of the Currency John D.
Hawke, in mid-1999, to urge regulatory action on Eagle National Bank, a small bank based in
Pennsylvania, which partnered with payday loan outlets to make loans in states that prohibited
such high interest rates.118 The Comptroller replied on November 30, 1999 that “In the final
analysis, there may, practically speaking, be little that bank regulators can do to eliminate
abusive payday lending practices that comply with existing law.”
September 2000: Office of Thrift Supervision lowered Crusader Bank’s CRA rating because of
its payday loan operations. The bank was later acquired and the program was discontinued.
November 2000. The Office of Comptroller of the Currency and the Office of Thrift Supervision
issued advisory letters warning banks of the risks of partnering with payday lenders. “Title loans
and payday loans are examples of types of products being developed by non-bank vendors who
have targeted national banks and federal thrifts as delivery vehicles…We urge national banks
and federal thrifts to think carefully about the risks involved in such relationships, which can
pose not only safety and soundness threats, but also compliance and reputation risks.” The OCC
and OTS letter bluntly noted “Payday lenders entering into such arrangements with national
116 Jean Ann Fox and Edmund Mierzwinski, Consumer Federation of America and U. S. PIRG, “Rent-a-Bank
Payday Lending: How Banks Help Payday Lenders Evade State Consumer Protections,” November 2001, page 14.
117 Mark Pearce and Eric Stein, Center for Responsible Lending, Letter to FDIC Board of Directors, Re: The Need
for FDIC Action Regarding Payday Lending Rent-A-Bank Arrangements,” August 26, 2004, page 15.
118 California Reinvestment Committee, Consumer Federation of America, Consumers Union, Greenlining Institute,
National Community Reinvestment Coalition, National Consumer Law Center, U.S. Public Interest Research Group,
Woodstock Institute, Letter Re: Eagle National Bank and “Payday Loans,” Address to The Honorable John D.
Hawke, Jr., Comptroller of the Currency, July 27, 1999.
banks should not assume that the benefits of a bank charter, particularly with respect to the
application of state and local law, would be available to them.”119
April 2001: National Credit Union Administration issued a directive, reminding federal credit
unions of their 18 percent annual interest rate cap and urging credit union members to serve the
legitimate short term credit needs of their members.120
September 2001. The Comptroller of the Currency filed an amicus brief in the Colorado
Attorney General’s case against ACE Cash Express for failing to get a license to make payday
loans after partnering with Goleta National Bank. In a dramatic break with OCC preemption
policy, the Comptroller stated that “ACE is the only defendant in this case and ACE is not a
national bank.”121
January 2002: Comptroller of the Currency ordered Eagle National Bank to cease its payday
loan program, noting that “the bank essentially rented out its national bank charter to a payday
lender to facilitate that nonbank entity’s evasion of the requirements of state law that would
otherwise be applicable to it.”122
September 2002: The Illinois banking regulator and the Federal Deposit Insurance Corporation
set high enough capitalization requirements for Brickyard Bank that the bank withdrew from its
payday lending arrangement with Check ‘n Go in Texas and North Carolina.
October 2002: Comptroller of the Currency ordered Goleta National Bank to cease making
payday loans. The bank had partnered with ACE Cash Express. This action also brought
resolution to state litigation against Goleta in Ohio, Colorado, North Carolina and in class action
lawsuits filed in Florida, Texas, Maryland, and Indiana.
January 2003: Comptroller of the Currency ordered Peoples National Bank to terminate its
payday loan arrangements with Advance America due to safety and soundness concerns.123
January 2003: Comptroller of the Currency issued a cease and desist order to First National
Bank in Brookings, SD to terminate its payday loan program.124
January 2003: The Office of Thrift Supervision directed First Place Bank in Warren, Ohio to
terminate its payday loan arrangements in Texas with Check ‘n Go.125
119 OCC Advisory Letter AL 2000-10, “Payday Lending,” November 27, 2000, p. 1
120 NCUA Letter to Credit Unions, Letter No. 01-FCU-03, April 2001.
121 Amicus Curiae brief filed by Julie Williams, Chief Counsel, Comptroller of the Currency, State of Colorado v.
ACE Cash Express, Inc., Civil Action No. 01-1576, United States District Court for the District of Colorado,
September 26, 2001.
122 Press Release, “OCC Orders Eagle to Cease Payday Lending Program,” January 3, 2002, NR 2002-01.
123 Office of Comptroller of the Currency, Notice of Charges for Issuance of an Order to Cease and Desist, In the
Matter of Peoples National Bank, Paris, TX, AA-ED-02-03, May 17, 2002.
124 Press Release, OCC, January 27, 2003.
125 “Texas Payday Lending to End: First Place Lists Earnings,” Tribune Chronicle, Warren, Ohio, Jan. 30, 2003.
July 2003: FDIC issued guidelines for bank payday loan programs that did not definitively
prohibit rent-a-bank payday lending by banks.126 State banks continued to partner with payday
October 2003: The FDIC permitted First Bank of Delaware to switch to its supervision after the
Federal Reserve imposed stiff regulatory requirements on the bank’s payday loan business.127
March 2005: The FDIC issued revised payday loan guidelines for banks which further tightened
lending to repeat borrowers by limiting loans to no more than three months out of a twelve
month period.128
February 2006: The FDIC reportedly sent letters to all the remaining rent-a-bank payday
lenders, asking the banks to consider terminating their arrangements. Since this was not an
enforcement action, the FDIC did not issue the letters publicly, but payday lenders and banks
impacted filed notices with the SEC and issued press releases making it clear that the FDIC had
lowered the final curtain on rent-a-bank payday lending. Rent-a-bank payday lending ceased by
126 FDIC, Guidelines for Payday Lending, issued July 2003.
127 CFA Letter to FDIC Chairman Powell, October 8, 2003, www.consumerfed.org/fdicletter10-2003.pdf.
128 Press Release, “FDIC Revises Payday Lending Guidance,” March 2, 2005.
APPENDIX 4: Information on Income (primarily user and transaction fees
depending on agency) of Major Financial Regulatory Agencies
User fee income 2008: $245.699 million (2009 estimated: $246.706)3
FY 2009 Budget: $246.706 million3
Consumer Affairs Budget: $4.4 million4
Consumer Affairs Budget percent of total budget: 1.78%
OTS receives no appropriations from Congress, budget funded by user fees.
User fee revenue: $ 707.5 million
Total Budget 2008: $749.1 million2
Consumer Affairs Budget: $12.1 million ($9.1 million in 2008)2
Consumer Affairs Budget percent of total budget: 1.21%
Total FY 2008 revenue: $736.1 million2
Revenue from investment income: $ 26.1 million
Other revenue: $2.5 million (Other sources of revenue include bank licensing fees, revenue
received from the sale of publications, and other miscellaneous sources.)2
The OCC receives no appropriations from Congress.
User fee revenue was $2.965 billion for fourth quarter 2008.8
FY 2009 Budget: $2,243,765,244 ($1,205,161,868 in 2008)7
FTE for Consumer Affairs: 28 (33 in 2008)4
Consumer Affairs Budget: $7.2 million ($4 million in 2008)4
Consumer Affairs Budget as % of total Budget in 2009: .32%
FY 2008 HSR Filing Fees: $144.600 million 10
Do-Not Call Fees: $19 million 10
General Fund: $76.639 million 10
FY 2008 Total Budget: $240.239 million10
FY 2008 Total FTE: 1,084 10
FY 2008 Consumer Protection Budget: $139.122 million 10
FY 2008 Consumer Protection FTE: 581 10
% of total Budget spent on Consumer Affairs: 57.9%
Total Revenue from services provided to depositary institutions: $773.4 million 1
Income from Priced Services: $53.4 million 1
Budgeted Cost of Consumer and Community Affairs: $38.2 million budgeted 2008-200911
Total Board Operations: $706.3 million11
Percent of total Budget spent on Consumer Affairs: 5.04 %
FY 2009 Budget: $913 million13
SEC Source of Fees:
Registration of securities: Securities Act of 1933: $234 million (FY 2008 estimate)13
Securities transactions under the Securities Exchange Act of 1934: $892 million (FY 2008
estimate) 13
Merger and Tender Fees under the Securities Exchange Act of 1934: $21 million (FY 2008
estimate) 13
Collections amount total: $1,147 million (FY 2008 estimate) 13
Investor Protection and Education Program: $124.449 million13
Investor Protection Budget is 14% of total Budget.6
Investor Protection, 524 FTE are 15% of all FTE.6
Congressional Appropriation FY 2008: $63 million12
Exchange Revenues:
Securities Transactions Fees $794.672 million12
Securities Registration, Tender Offer, and Merger Fees $161.377 million12
Total Exchange Revenues: $956.317 million. 12
2008 accounting support fee of $134.5 million.5
Total Budget: $144.6 million for 2008.5
The PCAOB income is from registration fees, user fees and transaction fees as approved by the
[1] http://www.federalreserve.gov/boarddocs/rptcongress/annual08/pdf/fro.pdf
[2] http://www.occ.treas.gov/annrpt/1-2008AnnualReport.pdf
[3] http://files.ots.treas.gov/481151.pdf
[4] http://www.house.gov/apps/list/speech/financialsvcs_dem/viewsandestimates2009.pdf
[5] http://www.pcaobus.org/About_the_PCAOB/Budget_Presentations/2008.pdf
[6] http://www.sec.gov/about/secfy08congbudgjust.pdf
[7] http://www.fdic.gov/about/strategic/report/2007annualreport/bud_exp_prog.html
[8] http://www.fdic.gov/about/strategic/corporate/cfo_report_4qtr_08/sum_trends_results.html
[9] http://ftc.gov/os/testimony/P064814subprime.pdf
[10] http://www.ftc.gov/ftc/oed/fmo/budgetsummary08.pdf
[11] http://www.federalreserve.gov/boarddocs/rptcongress/budgetrev/br08alt.htm
[12] http://www.sec.gov/about/secpar/secpar2008.pdf#sec3
[13] http://www.sec.gov/about/secfy09congbudgjust.pdf