AFR Response to Industry Arguments Against Financial Reform

The Chamber of Commerce is descending upon Capitol Hill today, intending to kill financial reform.

AFR offers the following responses to the Chamber’s anticipated arguments:

Americans for Financial Reform, a collation of nearly 200 national, state and local consumer, employee, investor, community and civil rights organizations, strongly supports creating an independent Consumer Financial Protection Agency (CFPA).  The CFPA should be an independent oversight agency charged solely with protecting consumers from unfair, deceptive, and irresponsible financial products.  It should have broad authority to police financial products and services, promoting clear contract terms, fairness, and safety.

This memorandum responds to some objections to the CFPA proposal originally raised by a coalition of industry representatives in an October 13th letter to House Financial Service Committee Chairman Barney Frank, and likely to be made by members of the Chamber of Commerce in their lobby visits with member offices today.

The CFPA must have authority to police unfair, deceptive and abusive practices.

Industry argues that the rulemaking standards under the CFPRA Act are “vague and open to endless interpretation” and will “cause disruptions in credit markets due to extensive legal uncertainty.” The Federal Trade Commission has had authority to address “unfair or deceptive acts or practices” since 1938.  The Federal Reserve also has unfairness authority.  These standards are well established and have been applied to a variety of credit products.  It is simply untrue to say that these standards are a departure from the legal standards that have applied to credit products for many years, and there is no reason that they should lead to any disruption in the credit market.

Agencies will coordinate to avoid conflict, but CFPA must remain independent.

Industry is concerned about the potential for conflicts between the CFPA and banking agencies.  The proposal provides ways to avoid or resolve disputes between regulators.  The CFPA will also coordinate with the banking agencies to prevent conflicts from arising.  Banking regulators will have a seat on CFPA’s advisory board and CFPA and the relevant banking agency will work together on examinations and share examination results.  In the event that some conflict should arise between the CFPA and a banking agency, the proposal provides a dispute resolution mechanism.

Under the existing regulatory structure, conflicts between safety and soundness and consumer protection were resolved in a very simple way: consumer protection almost always lost.  Going forward, there will be few—if any—instances in which these missions conflict.  The CFPA will promote transparency, protect against unfair practices, and ensure that consumers have the information they need to make informed choices.  Banking agencies will be concerned with capital levels, liquidity, asset quality, management, earnings and market risk.  These are not conflicting missions, and the banking agencies should not be allowed to continue their veto power over consumer protection.

The CFPA should promote simple, easy-to-understand products.

Having pressured lawmakers to remove the “plain vanilla” product requirement, industry now raises the specter that the CFPA could mandate such “plain vanilla” products using their rule writing authority.  While it is unlikely that the CFPA would revive the “plain vanilla” requirement, it is true that the CFPA will favor institutions that engage in traditional, non-risky, non-deceptive lending.  Institutions will have an opportunity to constructively exempt themselves from CFPA rules.  If a bank does not offer harmful products, it will not be subject to the rules that apply to such products.  This approach should favor smaller banks that engage in simple, transparent transactions.  Indeed, many small, community banks already offer “plain vanilla” products without any requirement to do so.

The CFPA must have authority over (most) businesses that engage in financing, credit sales, and advertising.

Industry argues that the CFPA proposal is a departure from our lax and tattered consumer protection structure because the CFPA will issue rules for particular credit products, like mortgages, rather than overseeing certain types of institutions.  The CFPA will have authority over 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.  Automobile dealers, for-profit educational institutions and other merchants should be subject to CFPA authority to the extent that they engage in these activities.  If merchants do not wish to be subject to CFPA authority, they can exempt themselves by not engaging in financial activities, particularly ones that harm consumers.

The CFPA’s authority must extend to officers, directors, controlling shareholders, and some employees of financial institutions.

Industry objects to the CFPA having jurisdiction over individuals who control or materially participate in the practices of covered persons.  The CFPA Act includes certain individuals in positions of responsibility as “related persons” because corporations are artificial entities that act only through individuals, and promoting effective oversight and regulation of financial services companies requires that these individuals be held accountable.  The definition is narrow and does not include, and therefore will not apply to, employees who are not in positions to know about or prevent violations.

This authority already exists in the banking sector, as the “related person” definition in the House Bill is similar to the long-established “institution affiliated party” found in the Federal Deposit Insurance Act.  These requirements provide similar authority to the CFPA.  For non-banks, it is particularly important that the CFPA be able to reach individuals that control or participate in the practices of the company.  Many non-bank companies are thinly capitalized and effectively operate on the outskirts of the law, with the ability to quickly dissolve the corporation if the government tries to hold them accountable for their actions.  In order to ensure compliance, particularly with reporting and registration requirements, controlling or participating individuals must be covered.

Designers, issuers and sellers of stored value cards must be covered by CFPA.

Stored value cards of various types compete for the same consumer dollars.  Cards may be issued and provided by a bank; issued by a bank but provided by a third party; or issued and provided by a retailer.  The seller may be the issuer/provider or an entirely independent third party.  The CFPA bills treat competing products the same by covering the issuers and providers of all stored value cards.  The CFPA bills treat entirely independent sellers of all types of cards the same—any seller who does not influence the terms and conditions facing the consumer is not covered.

Stored value cards are sold both by persons who participate in the design of the card program, and those who merely act as a conduit for sale.  The bills reject artificial distinctions between affinity entities who influence the terms and conditions faced by the consumer for a stored value card and banks or retailers who exercise the same influence.  Anyone who participates in or influences the design of the product is included/anyone who simply sells the product is excluded.

The CFPA must have the capacity to keep pace with emerging credit products.

Industry identifies the CFPA’s authority to classify additional products or services as “financial activities,” and objects that the standards are “vague” and lack “Congressional oversight.” This provision exists to allow the CFPA to react to new activities in the marketplace.  The financial industry prides itself on its “innovation” and the CFPA should be able to keep pace with innovative products, particularly if there is reason to believe that an innovative product is harmful to consumers.

There will be robust oversight of the CFPA’s actions.  Any expansion of its “financial activities” authority is subject to the notice and comment rulemaking process.  Congress will always have oversight authority over the CFPA and it can remove any of the agency’s authority if it feels that the CFPA has overstepped its bounds.

Enhancing FTC authority will contribute to consumer protection.

Industry objects to new, streamlined authority that the proposal grants to the Federal Trade Commission (FTC).  Comprehensive consumer protection does not begin and end with creating a CFPA.  The FTC has asked Congress to have its authority streamlined and expanded to help it better protect consumers, and we support those changes.

The CFPA must restore States’ ability to protect their citizens.

Industry is concerned about state participation in consumer protection.  Allowing states to address gaps in consumer protection and emerging predatory financial practices represents a model of cooperation between them and the federal government.  The rolling back of federal preemption is not a failure or a shortcoming of the CFPA.  Rather, the CFPA restores states’ rightful and historic role as first responders to local financial consumer protection problems, and enables states to act appropriately when the federal government fails to do so.  The broad federal preemption of consumer protection laws as they apply to national banks is a largely new phenomenon that has emerged in the last thirteen years.  National banks committed their most egregious consumer protection and civil rights violations under the cloak of this preemption.  In 2006, national banks, federal thrifts, and their operating subsidiaries, untouchable by state laws, made $700 billion in risky loans that have had a high rate of failure.[1] Given very broad preemption in 2004, these banks dramatically increased their subprime lending in states with anti-predatory lending laws, increasing their subprime market share from 9% to 20%.[2] This federal preemption has eliminated important consumer protections and removed states’ ability to serve as an important backdrop in the face of poor federal enforcement.  The CFPA remedies this problem.

[1] Lauren Saunders, Preemption and Regulatory Reform: Restore the States’ Traditional Role as “First Responder,” National Consumer Law Center (Sept. 2009).

[2] University of North Carolina Center for Community Change, State Anti-Predatory Lending Laws: Impact and Federal Preemption Phase I Descriptive Analysis (Oct. 5, 2009).