[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
IMPROVING FEDERAL CONSUMER PROTECTION
IN FINANCIAL SERVICES--CONSUMER
AND INDUSTRY PERSPECTIVES
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
July 25, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-55
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38-395 PDF WASHINGTON DC: 2007
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York PETER T. KING, New York
MELVIN L. WATT, North Carolina EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana RON PAUL, Texas
BRAD SHERMAN, California PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts WALTER B. JONES, Jr., North
RUBEN HINOJOSA, Texas Carolina
WM. LACY CLAY, Missouri JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York CHRISTOPHER SHAYS, Connecticut
JOE BACA, California GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts SHELLEY MOORE CAPITO, West
BRAD MILLER, North Carolina Virginia
DAVID SCOTT, Georgia TOM FEENEY, Florida
AL GREEN, Texas JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin, J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
July 25, 2007................................................ 1
Appendix:
July 25, 2007................................................ 31
WITNESSES
Wednesday, July 25, 2007
Gaberlavage, George, Director, Policy Research & Development,
Consumer and State Affairs, Public Policy Institute, AARP...... 9
Gonzalez, Raul, Legislative Director, National Council of La Raza 7
Johnson, Arthur C., Vice President, American Bankers Association,
and Chairman and Chief Executive Officer, United Bank of
Michigan....................................................... 10
Plunkett, Travis B., Legislative Director, Consumer Federation of
America........................................................ 5
Sivon, James C., Partner, Barnett, Sivon & Natter PC............. 12
APPENDIX
Prepared statements:
Gaberlavage, George.......................................... 74
Gonzalez, Raul............................................... 67
Johnson, Arthur C............................................ 81
Plunkett, Travis B........................................... 32
Sivon, James C............................................... 100
Additional Material Submitted for the Record
Frank, Hon. Barney:
Statement of the National Association of Realtors............ 111
IMPROVING FEDERAL CONSUMER
PROTECTION IN FINANCIAL
SERVICES--CONSUMER AND
INDUSTRY PERSPECTIVES
----------
Wednesday, July 25, 2007
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Present: Representatives Frank, Miller of North Carolina,
Scott, Green, Cleaver, Klein, Perlmutter; Gillmor, Neugebauer,
McHenry, and Bachmann.
The Chairman. We will begin the hearing. I thank the
witnesses for appearing.
This hearing is one in a series of hearings on the question
of what does consumer protection look like in the banking area,
in particular after preemption.
As I have said before, there are some of us who wish that
the preemption had not happened. I do. I also wish that I did
not get more tired at my age than I did 30 years ago and that I
could eat more and not gain weight. I have found it unwise to
act on the latter two of these, and we are having a hearing
today because it would not be wise to act on the first of them
either.
The preemption is not going away. If and when there were to
be a change in the political climate in which it might be that
you could repeal it, we could very well be in a situation, and
I am inclined to think we would be, where enough eggs have been
scrambled so that unscrambling them would be difficult.
I would tell you that those who want to preserve the
preemption should join in our effort to make sure that
preemption comes with adequate consumer protection.
In a couple of years, frankly, if the presidency changes
hands, and there is still a feeling that the Federal bank
regulators having preempted State laws do not themselves have
enough in terms of authority and resources and will to do
consumer protection, then the preemption will be called into
question.
I do not think that is the preferred option. The preferred
option is to say okay, here is where we are, let's spend the
next year or so working this out. I must say I am convinced
from conversations that the current set of tools and resources
that the Federal bank regulators have were configured in an era
in which the assumption was that there was a lot of State
consumer regulation going on as well. There is now, for
national banks, virtually no State consumer regulation,
certainly none that is specific to those banks.
It is not a matter of anyone's fault; it is just that there
has been a change. We had one set of circumstances, and now we
have another.
Part of the issue, and what I am going to ask people to
address, is that the Federal Reserve has the authority under
the Federal Trade Commission Act to spell out unfair and
deceptive practices.
Both the Comptroller of the Currency and the Chairman of
the Federal Deposit Insurance Corporation have said--these are
not consumer groups but two Federal regulatory agencies--they
would like their own authority to deal with unfair and
deceptive practices under the Federal Trade Commission Act
spelled out.
The Federal Reserve has said no, they do not want to do
that. They think it should be done on a case-by-case basis.
There are problems when you are doing things case-by-case, but
I do not want to be punitive. We certainly are not looking for
a regime in which we lock up a lot more people.
The total absence of any negative sanctions almost
guarantees that you will not have effective enforcement. It
really is not enough for consumer enforcement if the rule is
okay, whenever you do something wrong, we will tell you to stop
doing it. There needs to be some incentive to stop doing it
before you start doing it.
Absent penalties, that cannot be done. If you are in a
case-by-case situation under basic precepts of American law,
which we all support, that becomes harder to do. You do not
penalize someone for doing something when there was some
ambiguity about whether he or she had the right to do it.
In the absence of some rules spelled out, you have a harder
time enforcing when appropriate. It does seem to me that people
ought to know what the rules are.
Again, both the OCC and the FDIC have said they would like
to have those rules spelled out. I know the Office of Thrift
Supervision, which shares the preemption with the OCC, has in
fact spelled out some rules.
Apparently Congress, in some combination of moods, gave the
independent power to the OTS, but said that the OCC and the
FDIC had to ask the Fed. That is a result for which no rational
explanation is even conceivable, much less likely.
I do not know what we collectively were thinking when we
did that. Probably nothing. Probably we were busy with
something else. That is what happens in large, comprehensive
legislation. That is why we have oversight.
My strong view now is that something should be done
legislatively to correct that. I do not understand why the OTS
should have its own rules spelled out, but the OCC and the FDIC
should not.
There are a lot of questions, questions about whether or
not the States are involved. The States have a good deal of
expertise in regulation here. We have met with State attorneys
general and State bank supervisors. There is also the
enforcement power at the State consumer level. You have
attorney general enforcement power. It is not clear now who can
go to court, and if that is appropriate.
Let me close by saying that this is an issue on which we
invite all of you to help us. The goal here is to come up with
a rational and fair scheme of consumer protection.
I believe, as many of you know, and I think we have
demonstrated, in consumer protection and a good understanding
of the importance of financial institutions being able to
perform their intermediation role, if those are wholly
compatible. Our job is to come up with a better system than we
have now, not because anybody individually did something wrong,
but because the preemption makes that necessary.
I will just take 10 more seconds in probably a vain effort
to try and explain to the press that my repeated criticism over
the recent year-and-a-half of the Federal Reserve for not using
its authority has not primarily been aimed at their authority
under the Home Equity Protection Act. It has been under the
Federal Trade Commission Act.
It is as if some in the financial press cannot write about
more than one subject at a time, or cannot think about more
than one subject at a time.
When we talk about consumer protection, we are not talking
only about subprime mortgages. Indeed, we will probably be
doing something particular and special for subprime mortgages.
This is about the broader general question of consumer
protection involving a whole range of issues. It is that the
Federal Reserve has simply told us they are not interested in
using that authority, and that we probably, at the end of these
hearings, are going to want to put it somewhere else, but that
is something we will wait to hear from you on.
I will now call on the ranking member.
Mr. Gillmor. Thank you, Mr. Chairman. Ranking Member Bachus
could not be here and asked me to sit in for him temporarily,
and to read a statement from him, but I also want to echo what
you said, Mr. Chairman.
There are a number of areas the committee has been looking
at, and will be looking at, in the consumer area, not just
subprime but credit cards, overdraft fees, and a number of
other areas.
A statement from Ranking Member Bachus is as follows:
``Thank you, Chairman Frank, for holding this important
hearing on improving consumer protections in financial
services. In light of the Supreme Court's recent decision in
the Wachovia v. Watters case, it is important that this
committee re-examine the legal framework as it affects
consumers of financial products and services.
``U.S. financial systems set the gold standard for
economies around the world. Thanks to innovations ranging from
credit cards to Internet banking, American consumers have more
choices and options available to them than ever before.
``While these innovations have helped fuel a period of
unprecedented economic growth, not all consumers have
benefitted. For the financially illiterate, more choices can
mean greater opportunities to make bad decisions.
``This has underscored the importance of developing
strategies that will empower consumers by providing them with
the information and the tools they need to protect themselves.
``The agencies have begun making a number of strides in
enhancing regulatory cooperation, including the recent
Memorandum of Understanding between the OCC and the Conference
of State Banking Supervisors, to facilitate prompt referral of
consumer complaints to the Federal or State agency with the
regulatory authority to obtain redress for the consumer.
``Other constructive initiatives in this regard include the
new Web site that the OCC has developed for consumers to lodge
complaints and the announcement last week by Federal agencies
and State regulators that they will collaborate on an
innovative pilot project to conduct targeted consumer
protection compliance reviews of selected non-depository
lenders with significant subprime mortgage operations.
``Even with these developments, it is my belief that there
may be areas where legislative action is necessary. For
example, in light of recent problems in the subprime market, it
has become clear that we need a national registry and licensing
system for mortgage originators so that the bad actors do not
move from State to State victimizing consumers with impunity.
``The legislation I introduced 2 weeks ago with Congressmen
Gillmor and Price, members of the committee, would establish
such a system. Promoting accountability and professionalism
among mortgage originators and addressing a gap in the current
regulatory framework.
``Mr. Chairman, I look forward to hearing the perspective
of our witnesses on this and other consumer protection issues,
and I thank you for holding today's hearing.''
Mr. Gillmor. I yield back.
The Chairman. The gentleman from Texas.
Mr. Green. Thank you, Mr. Chairman. I especially thank you,
Mr. Chairman, for framing the issues for us. I always try to
get here on time because I benefit from your framing of the
issues.
I am honored today to be here to hear the perspectives from
both the consumers as well as the industry as it relates to
these issues: Unfair, deceptive financial practices and the
regulators' ability to deal with them; the addressing of
complaints and how we can improve the complaint process; and
the role of the State regulatory agencies and the enforcement
agencies.
If I could, I would just like to say this. One of the
things that kind of fascinated me when I had an opportunity to
review the materials is the notion that there may be some means
of according one-stop-shopping to consumers, so that consumers
might have just one number or one place, one agency, that they
can initiate their concerns, and from there, can go to many
other places, a multiplicity of other places, of course.
I think consumers are so inundated with materials now, so
much comes to us through the mail, e-mail, that it would be a
great benefit for us to focus on this and see if it is
achievable, such that consumers might better benefit from what
is available to them.
Many consumers are just not aware of what is available, the
methodology, the process. I think this may be a good thing for
the average consumer. I look forward to hearing testimony on
it.
Having said that, Mr. Chairman, I will have to leave. I
have another hearing, so I will be in and out. I do look
forward to this. I thank you again, Mr. Chairman, and the
ranking member, of course, and I yield back the balance of my
time.
The Chairman. Are there any further opening statements?
If not, we will go to the witnesses. We will begin with
Travis Plunkett, who is the legislative director of the
Consumer Federation of America.
STATEMENT OF TRAVIS B. PLUNKETT, LEGISLATIVE DIRECTOR, CONSUMER
FEDERATION OF AMERICA
Mr. Plunkett. Good morning, Chairman Frank, and
Representative Gillmor. My name is Travis Plunkett, and I am
the legislative director at the Consumer Federation of America.
I am speaking today on behalf of six national consumer
organizations with tens of millions of members.
I commend the committee for its diligence in examining this
important question about how to better protect consumers in the
financial services marketplace, especially using Federal
regulatory authority.
As Mr. Gillmor mentioned, the elephant in the living room
is the Supreme Court's Watters decision, which is the
culmination of efforts by the Office of the Comptroller of the
Currency to cut off the States' abilities to protect consumers
of national banks.
These preemptive efforts over a number of years have harmed
consumers, because while the States' regulatory efforts have
been far from perfect in many respects, and the committee has
highlighted some of those imperfections, States traditionally
have had the experience, the regulatory infrastructure, the
willingness to experiment, and the desire to protect consumers.
Unfortunately, the OCC and some of the other Federal
banking regulators are lacking in each of those areas.
Our recommendation is for the committee to continue to
examine Representative Gutierrez's legislation that would
restore in some modest ways the States' abilities to protect
consumers who purchase financial services from the national
banks.
In looking at the Federal regulatory scheme, we encourage
you to look at the detailed examples I have in our testimony of
the failure by Federal agencies to protect consumers beyond the
mortgage lending arena.
This committee, rightly so, has spent a lot of time in
looking at failures to regulate at the State and the Federal
level regarding subprime mortgage lending.
In my testimony, however, I also address failures in
regards to credit card regulation, overdraft loans, the
availability of deposits to consumers under the Check 21 law,
Internet payday lending, unlawful garnishment of Social
Security funds, and the manipulation of payment order of checks
by national banks.
The Subcommittee on Financial Institutions and Consumer
Credit has examined problems with credit card regulation at
length. They have spoken a lot about the Federal Reserve's new
disclosure proposal regarding Regulation Z of the Truth In
Lending Act.
This proposal is helpful in some respects but it does
nothing to stem many of the abusive practices the subcommittee
has heard about: Interest rates that are assessed for virtually
no reason that climb to over 30 percent; late fees when
payments are not late; tricks that credit card issuers use to
assess late fees when they are essentially paid on time; and a
number of other problems in the credit card marketplace.
Credit cards are Exhibit A as to why some Federal banking
agencies have failed in their efforts to protect consumers.
They have failed in areas where they have some jurisdiction to
act right now.
Regarding consumer assistance efforts, the OCC has
trumpeted their consumer assistance group. What they say is
they are vigilant in responding to consumer complaints. We
could not disagree more.
As Professor Art Wilmarth pointed out in testimony before
the subcommittee, compared to other financial regulators, a
much higher percentage of complaints filed with the OCC were
closed because consumers either withdrew their complaints or
commenced litigation. Meanwhile, the percentage of complaints
in which the OCC found bank errors declined steadily, a strong
indication that many consumers didn't find the OCC helpful.
Just last week, the OCC rolled out with much fanfare a new
consumer assistance Web site. We find the Web site to be
lacking in several areas. It is very discouraging in many
respects regarding complaints consumers may have about banks,
for instance, regarding the practice of clearing checks from
the smallest amount to the largest check in order to increase
bounced check fee income.
In at least one case, this Web site does not provide
complete information to consumers about their legal rights
regarding disputes if a product is purchased with a credit
card.
One of the most difficult problems the committee is going
to face when examining these problems is the culture of
coziness that exists between some banking agencies--I am
exempting the FDIC here--and the regulated institutions.
There are a number of underlying reasons for this, which we
address in our testimony. Let me just mention a few.
First, the OCC and the OTS in particular are funded
virtually entirely by assessments from regulated banks. A large
portion of that funding comes from a fairly small number of
banks.
Second, there is an over reliance on the examination
process as opposed to enforcement, which means the process is
not transparent and accountable.
I will summarize here because my time is up. I would urge
you to look at the recommendations that we have for making the
regulatory process more independent and for addressing the
underlying problems I mentioned. In particular, we encourage
the committee to look at giving the Federal Trade Commission
the authority to bring enforcement actions against national
banks and thrifts for unfair and deceptive practices, and
giving it concurrent and independent rule making authority over
all matters covered by the FTC Act.
Unlike the banking agencies, the FTC has no responsibility
to protect the profitability of the financial institutions that
they regulate; its sole job is to focus on consumer protection.
Thank you very much.
[The prepared statement of Mr. Plunkett can be found on
page 32 of the appendix.]
Mr. Miller of North Carolina. [presiding] Thank you.
Mr. Gonzalez, for 5 minutes.
STATEMENT OF RAUL GONZALEZ, LEGISLATIVE DIRECTOR, NATIONAL
COUNCIL OF LA RAZA
Mr. Gonzalez. Thank you very much. Thank you to the
committee for holding this hearing and inviting us to
participate.
My name is Raul Gonzalez, and I am the legislative director
at the National Council of La Raza. What I would like to do
today is talk about our Latinos and the credit card market and
provide some broad recommendations for expanding access to
affordable credit to Latinos and shifting the balance of power
back into the hands of consumers.
NCLR has worked to improve the opportunities for Hispanics
in the United States since 1968. Part of our mission includes
advancing policies that enable Latinos to build and maintain
assets and wealth.
With regard to credit cards, we have begun conducting
research on obtaining firsthand accounts from our community on
their experiences with credit cards and doing other policy
analyses.
For example, last summer, we held a roundtable discussion
which included individuals who collect complaints regarding
credit cards. We heard lots of complaints related to the high
cost of fees associated with using credit cards and Latinos
also filed numerous complaints about the difficulty in
evaluating credit card offers and finding a card with desirable
terms.
We also released an issues brief entitled, ``Latino Credit
Card Use: Debt Trap or Ticket to Prosperity?'' In this paper,
we described disparities in credit card use and in the
application of penalty rates and fees on Latino credit card
accounts.
I would like to briefly discuss key issues for Latinos in
the credit card market. These include unmanageable debt, credit
card scams, and hidden policies that result in revolving debt.
NCLR operates a national home ownership network which has
gotten tens of thousands of Hispanics into home ownership.
Every year, we interface with folks who are unable to go
through the process because they have unmanageable debt.
It is clear the unmanageable debt that they have that
precludes them from home ownership also makes them vulnerable
to obtaining credit cards with unfair and high APRs, and this
makes it difficult for them to climb into the American middle
class.
In addition to unmanageable debt, we are hearing from the
community that several credit card related scams have been
targeted to Latino consumers. These scams include fraudulent
credit repair services, affinity credit card scams, and fake
credit cards sold to consumers.
With regard to industry policies and practices, we know
that many low-income Latino consumers are unaware of harmful
policies such as universal default and double billing for
purchases made abroad.
They also do not understand the relationship between the
minimum payment requirement on the credit cards and their
credit card balance.
For Latinos, access to affordable credit has become
increasingly critical as they hope to gain access to the middle
class.
As you debate how to address abusive credit card policies
and practices, we ask that you consider the experiences of low-
income Latino families.
On the one hand, Latinos are becoming more integrated into
the financial fabric of the country. They are using credit
cards more and more. On the other hand, they are using credit
cards to pay for their basic needs, and they are also acquiring
debt.
There are several challenges that make it difficult for
Latinos to access the credit card system and build credit,
including using credit cards to pay for their basics.
According to one survey, 39 percent of Latinos reported
basic living expenses and 30 percent reported medical expenses
as contributing to household debt. They are using their credit
cards to pay for these.
A second challenge is the difficulty that Latinos
experience getting into the credit card system; 22 percent of
Hispanic borrowers have no credit score and many others have a
very thin file. The methods to evaluate creditworthiness make
it difficult for these individuals to obtain a credit card with
a fair APR.
Latinos are more likely than whites to pay interest rates
which exceed 20 percent as a result of this. As a result,
Latinos are not just in a vulnerable position with regard to
credit cards, but they are also in a vulnerable position with
regard to other debt they have, including their homes.
In addressing credit card reforms, policymakers should
begin by banning harmful industry policies and practices. This
would include universal default, changing term provisions,
deceptive monthly minimum payment requirements, double billing
on purchases made abroad, mandatory arbitration and the
inflation and application of fees.
We also believe that policymakers should improve the system
for collecting and reporting on consumer complaints.
There is an enormous opportunity for law makers and
industry leaders to integrate Latinos into the mainstream
financial system. This committee should move forward to enact
legislation that shifts the balance of power back into the
hands of consumers, including focusing on financial counseling.
We applaud the committee for holding this hearing and look
forward to working with you on this legislation. I would be
happy to answer any questions. Thank you.
[The prepared statement of Mr. Gonzalez can be found on
page 67 of the appendix.]
Mr. Miller of North Carolina. Thank you, Mr. Gonzalez.
Mr. Gaberlavage, for 5 minutes.
STATEMENT OF GEORGE GABERLAVAGE, DIRECTOR, POLICY RESEARCH &
DEVELOPMENT, CONSUMER AND STATE AFFAIRS, PUBLIC POLICY
INSTITUTE, AARP
Mr. Gaberlavage. Thank you, Mr. Chairman, Representative
Gillmor, and members of the committee, for the opportunity to
testify on this important matter.
A major priority for AARP is to assist Americans in
accumulating and effectively managing adequate retirement
assets. Key to achieving this goal is helping individuals
better manage financial decisions and protecting consumers from
financial fraud and abuse that can erode retirement savings and
financial resources.
The recent meltdown in the subprime mortgage market, rising
levels of foreclosures and credit card debt, increasing bank
fees and questionable practices, and a steady erosion of State
authority to protect consumers have brought us here today.
Consider a few statistics: One out of every five families
with a subprime mortgage is expected to lose their home to
foreclosure. Last year, Americans paid over $89 billion in
credit card fees, interest, and other charges, and consumers
paid over $17.5 billion in overdraft fees last year, an
increase of 75 percent from 2 years ago.
Add to this list the cost to consumers of fraudulent demand
drafts used to access consumer bank accounts, unequal treatment
of debits and credits to checking accounts under Check 21
provisions, and unauthorized garnishment of Social Security and
other Federal benefits, and it is clear why so many consumers
find themselves in financial difficulty.
Over the course of the last several decades, the
effectiveness of the regulatory system has eroded as the State
role in credit regulation has been preempted and the Federal
Government has declined to fill the gap.
In order to turn the tide, there are a number of
substantial hurdles in the current Federal system that will
first have to be overcome. These include an emphasis on safety
and soundness regulation, potentially at the expense of
consumer protection; a reliance on examinations in case-by-case
actions rather than rule making and enforcement; slow action by
regulators in the face of overwhelming evidence of a problem;
and dependence on disclosure rather than substantive regulation
to protect consumers.
Today, Congress has a very real opportunity to enact
meaningful reforms that will minimize abusive practices and
institutionalize reform so that progress continues when the
current spotlight dims.
Among AARP's legislative recommendations are the following:
First, authorize the Federal Trade Commission to bring
enforcement actions against national banks and thrifts for
unfair or deceptive practices. Given the FTC concurrent and
independent authority over national banks for all matters
covered by the FTC Act.
Second, allow States to enforce the Federal lending laws
and Federal unfair or deceptive practice provisions of the FTC
Act against national banks.
Third, as discussed more fully in our written statement,
adopt meaningful Federal reforms on a wide range of consumer
issues including credit cards, overdraft and other bank fees,
and subprime lending.
Fourth, put in place real opportunities for consumer
redress in the wake of abusive practices.
Finally, establish an effective centralized complaint
reporting and resolution mechanism.
At the same time, we encourage Congress to integrate as
fully as possible the States as partners in the effort to
restore fairness to consumers in the financial marketplace.
Experience shows that States have been leaders in finding
innovative solutions to the types of problems we are discussing
today.
In closing, we urge Congress to do all that it can to
ensure that Federal and State regulators and enforcement
officials are given the tools they need to adequately protect
consumers from the abuses we are witnessing today, and those
that will emerge in the future.
Thank you.
[The prepared statement of Mr. Gaberlavage can be found on
page 74 of the appendix.]
The Chairman. Thank you. We will hear from Arthur Johnson
on behalf of the American Bankers Association, who is here to
testify on matters he is discussing with Members of Congress
these days.
Mr. Johnson?
STATEMENT OF ARTHUR C. JOHNSON, VICE PRESIDENT, AMERICAN
BANKERS ASSOCIATION, AND CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
UNITED BANK OF MICHIGAN
Mr. Johnson. Thank you. Chairman Frank, Representative
Gillmor, and members of the committee, my name is Art Johnson,
and I am chairman and CEO of United Bank of Michigan, and I
also serve as vice chairman of the American Bankers
Association.
I would like to thank you for the opportunity to present
ABA's views on how to best protect consumers in light of the
recent Supreme Court decision in Watters v. Wachovia. That
decision settled the question of who has jurisdiction over the
operational subsidies of national banks and was the latest in a
long line of court decisions supporting the dual banking
system.
As requested, today we will be focusing on regulatory
structures to protect consumers today and not on specific
products or practices.
ABA believes that the dual banking system is the best
framework to ensure a balanced legal and regulatory environment
for the efficient and effective enforcement of consumer
protection laws.
We believe that the division of responsibility among State
banking agencies, State law enforcement, and Federal regulators
is appropriate, with each agency able to focus its resources on
institutions within its primary jurisdiction.
While State law enforcement authorities naturally share
concern about consumer protection, we believe the bank
regulators are in the best position to achieve this objective
through a vast array of supervisory and remedial options
available to them. Moreover, due to frequent examination and
access to a bank's books, regulators have a more complete
picture of any bank and are in a better position to stop
problems early and choose appropriate corrective measures.
I would note that States face real issues arising from the
institutions within their primary jurisdiction that demand
their attention and enforcement resources.
As was noted repeatedly at the hearing before this
committee just a few weeks ago, many of the problems in the
subprime area, for example, have arisen in institutions outside
the enforcement jurisdiction of Federal bank regulators.
With a clear division of authority, redundant supervision
and enforcement can be avoided. It is, however, appropriate for
these entities to coordinate their efforts to protect consumers
as they have recently done through information sharing
agreements, parallel examinations, and referrals of customer
complaints to the appropriate regulator.
In short, after the Watters decision, we can stop working
at cross purposes and focus instead on cooperating among
different agencies with the common purpose of ensuring that
customers are treated fairly.
This cooperation is further evidenced in the Federal system
by providing extensive and uniform protection for consumers
through interagency exam procedures.
In addition, each Federal agency has implemented a consumer
complaint process to address any claims of unfair or deceptive
practices. However, only the Federal Reserve Board, the OTS,
and the NCUA have explicit authority to make rules under
Federal unfair and deceptive acts and practices, or the UDAP
law; the OCC and the FDIC do not.
To address this anomaly, we support vesting all of the
Federal banking agencies with UDAP rule writing authority to be
exercised jointly. Only through joint authority can we ensure
that the UDAP law is uniformly enforced.
However, in exercising this authority, it is important to
target unfair or deceptive practices and not target products
that may otherwise benefit consumers.
Before closing, I want to emphasize how seriously bankers
take their responsibilities to treat our customers fairly. Take
my bank, for example. We have a compliance training program
that is required for all of our employees, not just our
compliance officer.
In addition, compliance management plays a role in every
aspect of our bank that touches our customers. Our directors
hold our employees accountable for meeting their obligations.
This is especially true for our compliance officer, who in the
case of our bank, just happens to be my son.
The important thing to realize is that our bank is typical
of thousands of others that invest heavily in a compliance
culture, each with dedicated compliance professionals who take
great pride in ensuring that consumers in the dual banking
system are being treated fairly.
I like to say that compliance is everyone's business,
because each time we serve a customer, we have an opportunity
to show our respect for them and that we deserve their trust
and their business. This is the cornerstone of successful
banking.
Thank you for this opportunity. I would be happy to answer
any questions that you may have.
[The prepared statement of Mr. Johnson can be found on page
81 of the appendix.]
The Chairman. Thank you. Next is Jim Sivon, who is a
partner at Barnett, Sivon & Natter.
STATEMENT OF JAMES C. SIVON, PARTNER, BARNETT, SIVON & NATTER
PC
Mr. Sivon. Chairman Frank, Congressman Gillmor, and members
of the committee, my name is Jim Sivon, and I am a partner in
the Washington, D.C., law firm of Barnett, Sivon & Natter.
I appreciate the opportunity to appear today to discuss
consumer protection issues following the decision in Watters v.
Wachovia.
In order to highlight those issues, I have organized my
statement from the beginning of a consumer credit transaction
to the end of a transaction.
At the beginning of a credit transaction, the best
protected consumer is an educated consumer. Financial literacy
has been the focus of a significant amount of attention in
recent years, yet more needs to be done.
The solution to this challenge, in my opinion, is to
incorporate financial literacy into our public school systems.
A few States have done this. The Federal Government and the
financial services industry should work together to make this
opportunity available nationwide.
The disclosure of key terms and conditions is the next step
in the credit process. Disclosure is an important consumer
safeguard. However, in order for disclosures to work properly,
they must be clear and understandable.
The Federal banking agencies have started to make use of
consumer testing in the development of new model disclosure
forms. Such testing should continue and disclosures that are
unnecessary or counterproductive should be eliminated.
Congress also should resist the temptation to mandate
detailed disclosure regimes; detailed statutes can result in
overly complex disclosures.
After selecting a particular financial product, a consumer
is concerned about the protections that apply. We have a
national consumer credit system, but all consumers do not enjoy
the same level of protection.
The recent problems in the mortgage market illustrate the
limitations of the current system.
The Federal banking agencies have responded to those
problems with two separate advisories on mortgage lending
practices. Those advisories, however, apply only to Federal
lenders, not to State licensed lenders. While efforts are
underway within the States to impose similar requirements,
nothing guarantees that all States will adopt them.
As a result, consumers that obtain a loan from a federally
regulated lender will receive one level of protection and
consumers who receive a loan from a State lender receive a
different level of protection. This not only deprives consumers
of comparable protection but allows institutions to engage in
regulatory arbitrage based on consumer protection standards.
Consumers of financial products should receive the same
protections regardless of the type of lender that provides the
product or the jurisdiction in which the product is delivered.
Uniform national consumer protection standards would meet this
goal.
Federal preemption is a key part of that approach. However,
I would agree with Chairman Frank's opening comments that to
work properly, such a system does require robust Federal
standards.
Today, national banks and Federal thrifts are subject to a
number of consumer protection standards. Yet, we may have
reached the point where additional safeguards are appropriate.
Both the Federal Trade Commission Act and the Home
Ownership Equity Protection Act authorize the Federal banking
agencies to define and prohibit acts or practices that are
unfair or deceptive. It now appears that the Federal Reserve
Board soon will propose revisions to its HOEPA rule to address
unfair and deceptive acts or practices in the mortgage market.
I would recommend that any such rule apply to all lenders.
Further, I would recommend that any rule based upon the FTC Act
be issued jointly by the Federal banking agencies in
consultation with the FTC. Joint rule making would ensure that
such a rule is uniform.
After a consumer acquires a financial product, the consumer
naturally expects that product to perform as advertised. Yet,
consumers do not always appreciate the legal distinctions
between different types of lenders and may not be sure where to
turn to assistance.
Consistent with Congressman Green's opening comments, I
would urge the Federal banking agencies to establish a
centralized system for consumer complaints and referrals under
the auspices of the Federal Financial Institutions Examination
Council.
Enforcement actions are an ultimate form of consumer
protection. Policymakers should seek to balance the use of
enforcement resources to ensure that consumers are adequately
protected.
During the recent problems in the mortgage market, lenders
of all types engaged in questionable practices. The
institutions that have gone bankrupt because of their practices
were State licensed and supervised. This suggests that State
supervisory resources were inadequate or not adequately
utilized.
In a natural allocation of supervisory resources, Federal
regulators should be responsible for federally chartered
lenders and State authorities should be responsible for State
licensed lenders.
The final step in the consumer credit process is funding.
This is not so much an issue for consumers as it is a policy
dilemma. Perhaps the best way to address this is to work
closely with lenders and investors to develop an approach that
balances reasonable accountability with continued liquidity.
Thank you again for the opportunity to appear today. I
would be happy to respond to any questions.
[The prepared statement of Mr. Sivon can be found on page
100 of the appendix.]
The Chairman. I will begin, and I appreciate the responses.
Mr. Plunkett, your whole statement will go into the record, so
the list of the organizations on whose behalf you are
testifying will be clear.
I was an original sponsor of the effort to overturn the
preemption. Without asking anyone to give up that ultimate
goal, I do think we need to move forward from where we are.
I want to focus on two questions: Rule making authority and
enforcement authority. They are linked. Let me start with rule
making authority.
Mr. Johnson and Mr. Sivon, I think you both referenced a
joint rule making authority involving all the bank regulators
and the FTC. I will tell you what the problem is.
In the Fair and Accurate Credit Transaction Act, we found
the problem, namely, if you are a consumer who gets your credit
report and you find on that credit report a negative report
about something where you were not in fact at fault, report of
a transaction where the store had agreed you should not owe
them the money, or the product was defective, or you were
double billed, or whatever, there is literally now no way for
you to contest that. Literally, no way, except to ask the
retailer to say, ``mea culpa''. They are not good at that.
We mandated in the Act, which I think we passed in 2003,
that the FTC and the bank regulatory agencies should work
together--the bank regulatory agencies plus the National Credit
Union Administration should come together and promulgate a set
of procedures whereby consumers could challenge these
inaccurate reports.
We had a hearing on that. What they said was well, we are
still working on it. Frankly, giving all of those regulatory
bodies the mandate jointly to come up with rules with nobody
having more power than anybody else to impose them is the
functional equivalent of recreating today's United States
Senate.
You get a very well meaning and elegant institution
incapable of action. I must tell you, it is not the fault of
any individual. You have seven agencies. They are busy
agencies. That one does not work, to me.
In this situation, by the way, I am going to be proposing
when we come back that we give the authority to the Federal
Trade Commission by itself with a duty to consult with and get
comments from the other agencies.
That is on the specific question of the right to contest
information in a credit report. Now, I do think we need to
spell out more authority, I believe, on unfair and deceptive
practices. The current situation is not good either for the
consumers or the regulated institutions.
One earlier Comptroller had said to me, well, we can do
what we need to do because we have the mandate to protect
safety and soundness. I asked for that to be explained. The
answer was well, if a bank is being unfair to its customers,
that could impugn safety and soundness. It could. It could
also, unfortunately, enhance the safety and soundness.
Sometimes there is money in not being nice to people.
The notion that any unfair credit practice will cause
reputational risk is not, unfortunately, the case. That would
be self-enforcing.
I think we need to propose some regulatory authority, some
rule making authority beyond what we have. I do agree that we
do not want everyone to have his or her own.
We are talking now about rule writing; enforcement is a
separate issue. I understand the banking organizations'
concerns if we invite the FTC in on enforcement.
For rule writing, we have two agencies now that have
enforcement responsibilities but do not yet have rules spelled
out because of the Federal Reserve's refusal to write them.
They were the ones given the authority--the OCC and the FDIC,
both of the major regulators.
What about from the rule writing now, not the enforcement,
leave that aside, asking the OCC--not asking--directing the OCC
and the FDIC to come together with a set of rules and a codicil
to that, directing also maybe that the OTS join in, so that we
have one set of rules for the OTS, the FDIC, and the OCC.
We have an OTS set of rules that they have just
promulgated. What are your comments on directing the OCC and
the FDIC together to come up with a set of rules?
Let me start with Mr. Sivon.
Mr. Sivon. If there is an opportunity for the agencies to
work together and come up with a common rule so that it is
uniform--
The Chairman. It is not a question of opportunity. I am
talking about what we tell them to do.
Mr. Sivon. Yes, of course.
The Chairman. A common set of rules spelling out unfair and
deceptive practices.
Mr. Sivon. Yes. I think that is what I was endorsing in my
comment, that they have a joint rule making authority. I was a
little confused in some of your comments about the
disadvantages of joint rule making.
The Chairman. Seven is disadvantageous, too. Six. The OTS,
the OCC, the FDIC, the Federal Reserve, the National Credit
Union Administration, and the Federal Trade Commission. That
appears to go beyond the number of people who will come
together and get everything done. That is what we did in the
FACT Act; two is very different than six.
Mr. Sivon. I was going to note that there certainly are
instances where the Federal banking agencies have worked
cooperatively on joint rules in the CRA area, FCRA privacy.
The Chairman. Yes, that worked well. I agree. Frankly, the
Federal Reserve has already demonstrated a reluctance to act in
this area. I think if you add the others to the Federal
Reserve, which has already said they do not think there is any
need for spelling out unfair and deceptive, you just continue
to give them the veto.
When they testified, the Comptroller and the Chairman of
the Federal Deposit Insurance Commission both said that they
would like these rules spelled out. They think it would be
better. The Federal Reserve said ``no.''
I do not think it makes sense to put all three of them in.
I think the two other agencies, that would make sense.
Mr. Johnson?
Mr. Johnson. Let me try to give you a little perspective
from where I come from in Grand Rapids, Michigan. We do
business in an area where we compete with every type of
chartered depository institution. We also compete in the
lending business with many non-depository lenders.
It is not good for any lender to be able to be in a
situation where they can have a competitive advantage over
someone else because they have less of a burden to be compliant
in the way they do business.
While I am not really from Washington and certainly do not
know my way around here, even the part about the deals with my
industry--
The Chairman. We have been speaking English here for quite
some time, Mr. Johnson. I think you will find it far less
inaccessible than you appear to believe.
Mr. Johnson. Thank you. I really believe that given the
opportunity for the joint rule making to work, so that there is
not a disparity out there on the street between consumer
protections is really the right thing.
Just the same way that our regulators always get our
attention when we are not being perhaps as proactive as we
might be on any element of our business, I would suspect that
you have the attention of the regulators.
The Chairman. That simply is not true. The Federal Reserve
has had this authority for I do not know how many years, and
they just recently told us, ``We are not going to use it.''
Let's not pretend. In Michigan, do they pretend things? You say
you are not used to Washington.
Here in Washington, where people have had the authority for
many years and say, ``We are not going to use it,'' I take them
at their word. The Federal Reserve has said they are not going
to use that authority; they do not think it should be done.
The OCC and the FDIC say it should. I do agree it would be
better to do it jointly. That is what I am talking about. Then
the question would be, would you have us rescind the authority
of the OTS and make them un-do what they did and then join in a
joint effort? They just went off on their own. It's statutory.
It is not their fault that they had that statutory authority.
Mr. Johnson. You are really getting a bit beyond my--
The Chairman. I appreciate it. I do agree with you that you
are at a disadvantage vis-a-vis the unregulated, and that is
why, in some areas, the answer is to take sensible regulation
that you are under and apply it to them, particularly in
subprime. I agree.
If only regulated depository institutions made mortgage
loans, we would not now be in the subprime crisis. Regulation
has avoided, in a sensible pro-growth way, the abuses that came
from the absence of regulation.
Any other comments on the joint OCC/FDIC?
Mr. Plunkett. Mr. Chairman, I agree with your notion that
the Fed has not acted and we need to look at alternatives and
certainly creating a little more regulatory competition to
allow those two agencies to write rules, in my opinion, could
not hurt.
I am speaking for the Consumer Federation here. I am not
sure that some of the organizations that have signed onto this
testimony would agree with that notion.
The Chairman. I want to separate that from FTC enforcement.
The question is writing the rules. They could be in the same
place. They could be altogether.
Mr. Plunkett. I have a ``but'' though, Mr. Chairman. We
urge concurrent authority, rule writing authority, for the FTC
as well, simply because the culture at the Agency at least
provides for the possibility of more independent enforcement.
At the OCC in particular, I am not sure you have
independent enforcement, given the factors that I have
outlined.
If they had rule writing authority, given what they have
done in other areas, I do not think that they would move
aggressively to protect consumers. We need to look at ways to
make the rule writing process more independent.
Our idea is to bring the FTC in. I am not sure that
shifting the rule writing authority without changing the
culture and particularly at the OCC is going to make--
The Chairman. You get to a certain number of institutions
and you are mandating nothing.
Mr. Plunkett. Here is an idea. In the Military Lending Act,
which deals with payday loans and other loans to Service
members, the Department of Defense was made the lead agency in
writing the rules. They were required to consult with the
banking agencies, but it was made clear that they were the
lead.
On specific laws, you make a particular agency the lead,
hopefully, and then the fall back is if the other agencies do
not collaborate, that agency has the rule writing authority.
The Chairman. I appreciate it. I am going to end my
questioning now. With the FACT Act, we should do that, I
believe, with the Federal Trade Commission. In the other case,
we gave it to the Federal Reserve. I just have to say that they
are very able and distinguished people at the Federal Reserve,
but in choosing between making world economic policy and
resolving consumer disputes, world economic policy seems to win
every time in terms of attention.
The gentleman from Ohio.
Mr. Gillmor. Thank you, Mr. Chairman. I have a couple of
questions. First, for our witness from AARP, you talked about
the problems of Federal preemption in a negative way vis-a-vis
consumer protection. I want your comments on this.
I think in one area, exactly the opposite is true, and that
is in the subprime area. The testimony we have had is that
there have been almost no problems in subprime in the federally
regulated banks and savings and loans. There have been
horrendous problems with mortgage brokers at the State level,
lenders regulated by the States, and that is where the problems
have come.
I have introduced a bill with Representatives Bachus and
Price which would mandate that the States go to a license or
registration program for brokers and originators to provide
that level of protection and if they do not, then HUD would
step in and do it.
That would be an area of Federal preemption. I just want to
have your thoughts on that legislation.
Mr. Gaberlavage. I think the licensing issue is a very
important one, Congressman. We would like to take a look at
your legislation. I do not think by any means the situation at
the State level is perfect. We have worked very hard at the
State level, particularly on predatory lending, to improve both
the laws and the enforcement at that level.
We definitely would like to take a look at what you are
proposing.
Mr. Gillmor. Okay. Mr. Sivon, you talked about the need for
clear and understandable disclosures. I certainly agree with
that. You now have some consumer testing and focus groups that
are being used to improve disclosures.
Is there an area where the disclosures really are
understandable to the consumer? For example, if anybody has
taken out a mortgage recently, and you look at all the
disclosures you have there, it is so voluminous. I doubt if
there is 1 in 10,000 mortgagors who read that disclosure. You
have huge disclosure that really is meaningless because it is
no disclosure.
There are a lot of people that think we would be a lot
better off to go to less disclosure and make the disclosure
that took place meaningful.
In that context, let me ask you this from an attorney's
point of view, is there a litigation risk to the person making
the disclosure by providing a simple disclosure as opposed to
all that complexity, because they are going to get sued if they
did not have a particular sentence in there?
If you could just comment on that problem, and how to solve
it.
Mr. Sivon. Of course. As a general matter, the policy of
having disclosures, I think, is a very solid policy and it has
worked well. You are absolutely right that in certain
instances, it seems we have reached a point where disclosures
can become overly complex and confusing. Some rationalization
of that and the use of consumer testing that the agencies have
undertaken, I think, makes a great deal of sense.
On the litigation side, the thing the committee might want
to consider is as disclosures are being designed, and the
agencies are given the authority to develop models, that there
could be safe harbors for institutions from that type of
litigation risk, that if they adhere to the particular model,
then that litigation risk would not arise.
Mr. Gillmor. How would you do that? Would you have the
regulator or the legislative body set out and say if you
disclose ``A,'' ``B,'' and ``C,'' then you have a safe harbor?
Mr. Sivon. It would probably have to be through
legislation.
Mr. Gillmor. Let me ask Mr. Gonzalez, you talked about
Latinos being subject to various credit card schemes. Is it any
bigger problem for Latinos compared to anybody else who might
fall in the same social/economic category as a Latino, and if
so, why would that be?
Mr. Gonzalez. We have seen that Latinos are more likely to
be targeted for credit card scams, in part because they are
less likely to be accessing the mainstream financial
institutions that give individuals, even low-income
individuals, the opportunity to kind of measure whether or not
a credit card offer is false.
If you do not have access to banking services, and you are
getting credit card offers from what may look like a banking
service but is not, then you are more likely to fall for these.
They are also targeted for affinity scams, which for
example, could be something related to a particular community
that looks like it is an actual credit card but is not a credit
card.
Because of lack of exposure to the financial system, and
also lack of financial counseling and other issues that could
improve financial savvy, they are more likely to be targeted.
Mr. Gillmor. One more question. Mr. Gonzalez, you talked
about while these consumers do not know what they are getting
into and the need for education, and I agree with you on that,
we had in the subprime area--I had a conference of lenders,
regulators and consumer groups from Ohio talk about the
subprime problems we had there.
I was surprised that the consensus that came out of the
group was that the most single most important thing we could do
would be to have greater education--that those who had
counseling did not have foreclosures.
If we agree on the concept that consumer education is good,
my question to you is, how would you effectively deliver that
education to consumers? How do you do it?
Mr. Gonzalez. Sure. We have a network of about 70 home
ownership counseling community based organizations that provide
home ownership counseling. In some cases, they counsel people
out of moving towards home ownership because they are not ready
for it and are more likely to default.
In our network, we have fewer defaults because of that.
What we find to be effective, not just for Latinos, our
networks are not just Latinos, is one-on-one counseling. Even
if you receive the education with relation to what are your
rights or what you should be looking for, without counseling,
if you are new to the financial services market, including
mortgages and credit cards, you still may make the wrong
choices based on your situation.
People want to access credit cards because they view it as
a way to build a credit score. They may make choices that are
not the best for them because of the situation they are in and
counseling in the community based organizations that are close
to where their community is, where they live and with whom they
have built trust, has been the most effective way to keep
people from home ownership default.
We view it as a great opportunity to build on that, to make
sure that people are not getting into unmanageable debt.
Mr. Green. [presiding] Thank you, sir. The gentleman's time
has expired. I now recognize myself for 5 minutes.
Mr. Gaberlavage. Mr. Chairman, can I make a comment on Mr.
Gillmor's issue of disclosures?
Mr. Green. Yes.
Mr. Gaberlavage. It is important, what the disclosure says
and how it is written is very important, but also the context
and the timing of when it is given is critical. It is not just
what it says. There is a whole slew of behavioral science that
has been done on consumer decisionmaking that shows,
particularly in these mortgage situations where people are
adverse to short term losses, that they will go for these loans
that promise them that they will not have to put a lot of money
up front, but in the long term, they are bad for them.
We really need to take that into account, as well as the
understandability of the disclosure.
Mr. Green. Thank you for your comments, sir.
I did not thank the entire panel when I gave my opening
statement earlier. I do want to thank you for coming in and
testifying. I had the privilege of testifying once before
Congress and I remember I prepared for weeks to give about a 5-
minute statement. I understand what you do and what you go
through. I thank you.
My issue will be the one of one-stop-shopping. I really
would like some input from you as to how this can become a
reality, if at all possible.
I understand that it will not be a panacea because you have
too many institutions that you are working with and there are
so many elements in the equation that it may be difficult to
get a handle on all of them.
How can we have one point of contact for the consumer? The
consumer is the most important part of all this and we all
agree. How can we have one point of contact for the consumer so
that the consumer can get an issue resolved by the appropriate
agency, not necessarily at the point of contact. The point of
contact will become the genesis of the process. The revelations
will be in the multiplicity of agencies that will have
enforcement authority, that we do not plan to eliminate.
How do we get to the point where we can give the consumer
good information about the entry point, the alpha of the
process, such that the omega can be ultimately achieved?
Who would like to help me with this?
Mr. Plunkett. I will give you some thoughts to start with,
if you would like.
Mr. Green. Yes, sir. Thank you. I will start left to right,
and we will hear from everyone, and hopefully my time will not
expire.
Mr. Plunkett. It is a good idea, and you put your finger on
the issue, that the quality of the information that is
provided, the advice that is provided, is high. As I just
pointed out about the OCC's new Web site, that does not appear
to be the case.
An obvious point here is to make sure that the effort is
well-financed. Put the agencies under tight timelines to work
together because on many occasions, they have shown an
incredible ability to take simple tasks and drag them out for
years and years.
Not too tight, of course. You want it well done. They need
to have specific deadlines they have to meet.
Third, have a process in place to review the information
and advice that is provided. The OCC's consumer assistance
group has been heavily criticized for not helping consumers
resolve complaints. They say they view themselves as a neutral
arbiter. In many cases, if you look at the information they
provide, they appear to be defending the practices of national
banks.
You need a process in place to make sure that the advice
that is being provided is actually helping people, and then
monitor it closely.
Mr. Green. Thank you. Mr. Gonzalez?
Mr. Gonzalez. Thank you. This is an area where we are just
now beginning to look at how the agencies should be brought
together to ensure there is information that consumers can
actually use.
We believe that currently getting the answers to your
questions or even filing a complaint is a scavenger hunt for
consumers, particularly from low-income communities, who can
become frustrated with the process.
We are looking into what are the best ways to get there.
This is a big issue for our community. We will get back to the
committee when we are able to complete that analysis.
Mr. Green. Thank you. Mr. Gaberlavage?
Mr. Gaberlavage. I would agree with the previous comments.
Also, I would add that our surveys show that the public is
really not very aware of who to go to, and particularly,
Government agencies rank very low, except for State AGs seem to
have attention of older consumers.
I think publicizing it has to be a key. Also, possibly
working through community organizations and making that known
to people, particularly in minority communities.
In a previous job I had at AARP, I ran a campaign to inform
people about electronic transfer and direct deposit. It is very
important to work through community organizations, and possibly
I wonder whether State agencies could be included in this in
some way, too.
The proposal on the form that the agencies are working on
now is good in the sense that it will provide uniform data that
can be analyzed. That is very important.
Mr. Green. Thank you. Mr. Johnson?
Mr. Johnson. I know we are running out of time here, and I
have more than 6 seconds worth to say.
I would like to tell you a little bit about how we handle
this sort of thing in our bank because it might give us a key
to how we can do it in a broader area.
What we do when there is a complaint or even a question
that is posed in person or on the phone by one of our customers
to one of our bankers, the key to resolving that question or
getting the right answer to that question or resolving that
complaint is for that first point of contact to take ownership
of this problem.
In many instances, we are able to just physically walk that
person over to the other banker who has the answer to their
question or who can help them work through their complaint.
I recognize that we cannot physically walk all of the
complainants around the country to the right person, but that
is something that works for us with the 120-some people we have
working for us.
I think the key is for that first point of contact to take
ownership and for them to know and to help that customer
determine who the next place is that they should be going to
with a high degree of accuracy.
One of the most frustrating things any of us can experience
is when we are on a help line some place and we have to talk to
five or six people before we get to the right one.
If we can have that initial point of contact take ownership
of that problem and figuratively walk the complainant to the
right place, and that as has been suggested, that is going to
take the participation of all the players for that to work, but
I think the OCC and their Web site has been a good start, but
it is just that, a good start.
Mr. Green. Thank you very much. My time has expired, Mr.
Sivon. What I will do is yield. Will you allow me 10 seconds or
so for Mr. Sivon?
Mr. McHenry. Of course.
Mr. Sivon. Thank you very much. I would like to respond. I
think we should acknowledge that the Federal banking agencies
have taken some positive steps in this area. They all have
consumer complaint procedures and systems in place.
The OCC and OTS also have entered into some agreements with
the States on information sharing on complaints.
I do think it should be taken to another level. The
mechanism that I would recommend that the committee explore is
the Federal Financial Institutions Examination Council.
All the Federal banking agencies sit on that body and last
year, Congress amended the FFIEC to include a representative of
State banking authorities. There you have an entity in which
the Federal banking authorities and the States can sit down and
ideally collectively come up with the type of system that you
are talking about that could be an one stop shop for consumers.
Mr. Green. Thank you. At this time, I recognize Mr. McHenry
for 5 minutes.
Mr. McHenry. I thank my good friend. This has been a very
informative panel. I want to start where I think we have some
consensus here across this panel. In some way, shape, or form,
each of your written testimony mentions this.
Mr. Plunkett begins actually in what you said before the
committee, much less what you have added in your testimony, you
said the process is not transparent. When offering credit,
consumers are not aware of all the details upon which they are
signing this document, this very complex legal document.
I agree with you. I very much agree with you that generally
speaking, whether it is A to Z in lending, in particular,
mortgage lending right now, the process is not transparent.
Should it be at least part of our focus to ensure that the
regulations are written in a clear English style so that
perhaps on one page, people can understand the key components
of what they are signing rather than a multi-page document
written in fine print to actually beyond that, have a
supplement to it that says clearly and concisely what the key
terms are for the transaction they are undertaking?
If we could just start with Mr. Plunkett, if you could just
briefly comment on that.
Mr. Plunkett. Sure. I actually agree with you that better
disclosure is helpful. When I was talking about the process, I
was talking about the regulatory process, the focus on
supervision over enforcement.
It is a secretive process. Consumers have a hard time
getting a handle on it, what the problems are with the
regulatory institutions that are being supervised.
Mr. McHenry. You would concur that transparency in the
actual lending process and the transaction process for the
consumer needs to be clearer?
Mr. Plunkett. Necessary. You are right. You cannot provide
too much information. It is not sufficient, however, if
products that are deceptive or abusive are still available, it
really does not help the consumer much if you tell them they
are going to be over charged or pay a fee that is not
reasonable. You also need to have some protections in place.
Mr. McHenry. Beyond protections, try to get an area of
consensus.
Mr. Plunkett. Better disclosure.
Mr. McHenry. Mr. Gonzalez?
Mr. Gonzalez. Yes. We would agree that there needs to be
more transparency, obviously. One focus might be in places
where there has been trouble with people, where the lack of
transparency has led to ongoing debt, such as the double
billing for purchases made abroad, or people not understanding
the minimum payments.
It would be very helpful to have plain English descriptions
of the terms. They should be clearly headed so people
understand them. They should not be scattered throughout the
disclosure document. Also, there should be a focus on things
that could get consumers in trouble.
Mr. McHenry. Thank you.
Mr. Gaberlavage. We would agree that the disclosure needs
to be much improved. One of our litigators says that they think
that the disclosure should be written on bright pink paper. I
do not know what color you like. I think one of the problems, I
agree with Travis, that it is the practices.
Mr. McHenry. Thank you.
Mr. Gaberlavage. And the timing. Timing of when they are
given.
Mr. McHenry. Mr. Johnson?
Mr. Johnson. Yes, I think clearly effective disclosure,
which is what we are talking about here, and which Mr. Gillmor
mentioned as well, is something that we should really all agree
on. Getting to there and what exactly that means is perhaps
more complex.
We would be more than happy to work with the committee and
the regulators to get there.
Mr. McHenry. Mr. Sivon?
Mr. Sivon. Same answer. I think disclosure is one of the
most important consumer safeguards, so having effective and
timely, I agree with the comment on proper timing, that it is
important.
Mr. McHenry. I want to go beyond this. There is a
discussion about the FTC being a better protector of the
consumer.
Mr. Johnson, are you a state regulated bank or a federally
regulated bank?
Mr. Johnson. State regulated.
Mr. McHenry. How many separate regulators oversee your
bank?
Mr. Johnson. We are a State non-member bank, which means we
are regulated by the Office of Financial and Insurance Services
in the State of Michigan, part of a Department of Commerce, and
the FDIC is our Federal bank regulator.
Mr. McHenry. For the discussion here about the FTC being
the better regulator, what is fascinating to me is you have,
through the OCC, roughly 1,800 full time bank examiners out in
the institutions monitoring, some on a daily basis, others on a
regular basis--basically 1,800 bank examiners that examine
1,850 banks.
What is fascinating to me is that you have an almost one-
to-one ratio between examiners and institutions. You have some
very large institutions that may have a number of examiners in
them.
What many of you are testifying, Mr. Gonzalez, Mr. Plunkett
and Mr. Sivon, in particular, is that the FTC would be the
better protector of consumers. I think what is important in
this discussion is what is the FTC capable of doing?
This committee does not have oversight over the FTC. FTC
employs 1,074 people; the OCC employs 1,800 examiners.
It is a very different notion. OCC employs somewhere over
3,000 people in its entirety. The FTC only employs roughly
1,000 people. What you want to do is add all these new
institutions in an area in which the FTC does not have any
existing knowledge of, and say they are a better protector of
the consumer.
I cannot quite understand why you believe the FTC would
actually take on minute details within financial institutions
when we all know the FTC largely focuses on high profile cases
that actually can have a ripple effect across the economy.
Mr. Plunkett, Mr. Gonzalez, Mr. Sivon, I would love to have
your response. Mr. Sivon is anxious.
Mr. Sivon. Just because I want to disassociate myself. I
did not testify to that effect. I do not agree that they should
be active in an enforcement role against nationally chartered
banks or federally chartered thrifts. If I gave that
impression, it was not my intent.
Mr. McHenry. My apologies.
Mr. Plunkett. This is our recommendation to deal with the
underlying problem I mentioned, which is a pretty clearly
established lack of independence, in particular, at the OCC,
from the regulated institutions.
You have two issues in bringing the Federal Trade
Commission in. One is unfair and deceptive acts and practices'
authority, which I think they would have existing staffing to
deal with, and clearly, experience to deal with.
It is not true that they do not have anything to do with
banking regulation. Right now, they are charged with regulating
some aspects of banking laws related to non-banking entities.
For instance, credit cards offered by retail establishments and
not through banks. Well, actually through banks, but not under
the auspices of those banks.
Already you have some split authority between the banking
regulators and the FTC, and this is our best recommendation in
how to bring a more independent, certainly not perfect, but
more independent agency into the process.
They would need additional funding if concurrent rule
making authority was granted to bring on additional staff.
Mr. McHenry. Do you have any cost estimates?
Mr. Plunkett. No.
Mr. McHenry. Mr. Gonzalez?
Mr. Gonzalez. We actually did not include this
recommendation in our testimony. We have not actually done the
analysis on which would be the better regulating agency.
Mr. McHenry. Thank you.
The Chairman. The gentleman from Missouri.
Mr. Cleaver. Thank you, Mr. Chairman.
Mr. Johnson and Mr. Sivon, both of you mentioned financial
literacy as perhaps a way to deal with the subprime and
predatory lending practices. One of you suggested we may want
to try to create in schools a financial literacy program.
While I agree partially with that, what would you say to
this? The most unproductive schools tend to be in the areas
where subprime and predatory lenders are most ravenous. Do you
get the point I am making? You are saying let's put it in
schools. The schools that do not work seem to be in the same
areas.
Mr. Sivon. I would not profess to have any expertise in the
area of education. It just struck me in preparing for this
testimony and as I thought about financial literacy that the
place to achieve it best would be in the school system.
It is a complex issue to drive it down to the school system
given the nature of the way schools are governed today in our
State based structure.
I do think it makes a great deal of sense and would solve a
lot of this problem.
Mr. Johnson. Yes, I agree. You make a very good point
about--I would stretch the point a little further to say that
in most school systems, public or private, the teachers who are
there, while they are very well-trained teachers, are not in
and of themselves prepared to do the financial literacy
education piece today.
That is something that I think the industry and the
regulators can help with. I was talking before the hearing
started with Congressman Green about a program that our bank
participates in as well as many, many ABA member banks, and a
program that Mr. Green participated in back in his district.
It is called National Teach Children to Save Day. We go
into schools and start the process of here is what you do to
save. Here is what the difference between a want and a need is.
This is at very low elementary levels all the way up. The
methods differ for grade, as you might expect.
Beyond the schools, we have an awful lot of adults out
there who are not in the school system any more who also need
education.
Mr. Cleaver. That is what I wanted to deal with now, and
maybe Mr. Plunkett and Mr. Gonzalez, although any of you can
respond to this, one of my points of intolerance is people
speeding through school zones. The signs are always clear. You
are supposed to slow down when you go through a school zone
because these are vulnerable pedestrians.
Do we all agree?
[Witnesses nodding affirmatively.]
Mr. Cleaver. When we find that there are specific areas
that are targeted, Mr. Gonzalez has already mentioned it for
Latinos, but it is also African Americans and to a lesser
degree lower income whites. Those are the areas that are
targeted by the predatory lenders.
Would you support a slowing down with regard to--these are
vulnerable borrowers. That you slow down when you are going
through those areas? In other words, when we see that an area
is being targeted, what are the negatives in requiring that
before a loan is made in these areas, that you have to do A, B
and C, you have to go through some kind of educational process?
I am not talking about 2 or 3 years. I am talking about to
make sure they understand what is going on.
If we slow down to protect vulnerable kids, why do we not
slow down to protect vulnerable borrowers?
Mr. Gonzalez?
Mr. Gonzalez. We would agree that we have to approach
subprime lending with caution. On the other hand, we need to
make sure that people who are in these areas that are ready to
enter the market and to build their credit and to enter home
ownership have a process to do that.
Through our home ownership counseling network, which puts
people through a rigorous robust process, which for some people
it means counseling them out of making this choice, we have
slowed down the process, but not with the intention of keeping
people out of home ownership, but with the intention of keeping
them in home ownership and making sure they keep their homes.
Mr. Cleaver. What if the lending institutions had to do it
as well? La Raza does it as one of its many programs, which I
am familiar with. I think it is one of the better things going.
You cannot touch everyone because everybody is not going to
make themselves available.
Mr. Gonzalez. Right. Details matter with that. I would be
concerned that some bigger lenders might decide not to enter
that.
Mr. Cleaver. Are you familiar with the Voting Rights Act?
Mr. Gonzalez. Yes.
Mr. Cleaver. What triggers the Federal involvement with
regard to the Voting Rights Act is if the voter registration
drops beneath a certain level, then Federal registrars are sent
into the area. I think this is a problem significant enough
that if we see that loans drop beneath a certain level, I think
that in itself ought to attract Federal involvement.
Mr. Gaberlavage. I think literacy is important but I think
this problem is beyond literacy. In many of the low-income and
minority communities, you have older persons who try to get a
loan because they need some cash flow to pay some bills and
things, and not only did they not get the money, but they are
losing their home, their primary asset. What happens to them in
retirement? Most of these people do not have pensions. What
happens to them in their old age?
We need some action on some of the practices that are
occurring in these communities and stop, slow down through
better regulation and stopping some of these practices that are
preying on people, particularly for the older population.
The financial system is very good at marketing. It is
sophisticated. It is pinpoint, it is accurate. They can tell
you, oh, your CD is expiring or it is maturing, and then there
have been cases where banks have marketed specifically to older
persons whose CDs were expiring and they marketed variable
annuities to them.
Fortunately, one of our regulators in Massachusetts, I
think, stopped this practice from occurring. These were
inappropriate investments.
It is very good at that, but when the consumer has a
problem, particularly in all of these areas, then the response
is uneven. The authority of the agencies that are charged with
protecting the consumer is uneven. It should be that no matter
what door a consumer goes through, whether it is a bank, a
credit union, or a thrift, whatever it is, that the protection
should be equivalent and it should be effective.
I think that is what we should aim for, and that would
really be--it is great to have literacy, but starting in
elementary school or something is not going to solve this
problem of whole communities losing their equity.
Mr. Cleaver. Thank you.
Mr. Plunkett. Congressman, when looking at particular
problems in say, minority communities, some of the legislative
proposals that your committee has looked at and that a number
of members have co-sponsored, do deal with specific practices
that have a particularly negative effect in those communities,
such as lending without adequate consideration of the ability
to repay, which has been shown in minority neighborhoods in
particular to be a serious problem, because many people are
getting loans at high interest rates when they could qualify
for better terms.
That is one way to approach the problem as well.
Mr. Cleaver. Thank you.
The Chairman. I will just add that the problem of people
getting old without regard to their ability to pay, I believe,
has been greatly enabled by securitization.
Your ability to make a loan without being concerned with
someone's ability to pay is enhanced if you are not the person
they have to pay. I think that is what securitization has done.
The gentleman from Colorado.
Mr. Perlmutter. Mr. Chairman, that was a good lead into
what I wanted to say. First, I am sorry that we do not have
more members here. We have had a lot of hearings on this
subject, and this has been the best panel I think we have had
period, just because you are all on the ground. You are
worrying about both kind of the individual banker piece of this
to the individual consumer.
I just want to thank you all for your testimony today.
The chairman hit on something, and Mr. Johnson, you were
sort of talking about this. There is this huge distance now
between the borrower and the banker in many cases.
You do not have the personal banker any more and that
relationship has sort of evaporated in many instances where you
call me up and you say, Mr. Perlmutter, you know, are you sure
you really want to borrow this money, or this is happening with
your account. You do not have that relationship as much as you
used to.
It is not that I want to go back 50 years, but I think that
is just something we have to deal with as Members of Congress.
Some of the comments about the over disclosure piece, and
Representative Gillmor was asking about this. There are so many
products available that if you try to disclose about all these
different products, you have a book to read.
We have two policies that I think we have to consider, and
we may have gone too far with them. It is not a question of
compliance. I think virtually all the banks and the credit card
companies and everybody else are complying.
The policy issue is have we pushed the goal of home
ownership so far that we allow one percent mortgages to get you
into your house and it fails, so it is a policy issue on home
ownership, and a policy issue on credit.
Have we extended credit so far with every little product
possible and with some Wharton MBA in the background coming up
with a new product, but also a new fee attached to that
product, that people cannot keep up.
I just think the materials you all provided, your testimony
today, was excellent. I am not sure what the answer is. I can
tell you the polling we have done and the people that I have
talked to, it is Iraq, immigration, health care and credit
cards. That is it.
The credit cards, they are mad just because the fees just
continue to mount up generally.
I do not mean just to give you a speech here. The issue is
that the bank or the lending institution has two things on its
side. It has time and education. If you have the education, you
usually do not have the time to worry about the fees that you
are getting charged. If you have the time, you generally do not
have the education.
I have said this in other instances. You all have helped me
kind of put my arms around this subject. It is sort of a
distance between the banker and the borrower. It is this over
disclosure because there is so many products, and the question
is do we, as a Congress, want to start limiting the extension
of credit, limiting home ownership or not.
If we do not, then we are going to continue to have these
kinds of things, and that may be the price you pay.
I do not have any questions. I just wanted to vent.
Thank you very much. Mr. Chairman, I just want to
congratulate you on putting this panel together. They are the
best I have heard on this subject.
The Chairman. I appreciate that. I am reminded to include
in the record, if there is no objection, a statement entitled,
``Improving Federal Consumer Protection'' from the National
Association of Realtors.
There being no objection, it is so ordered.
I know this encountered some skepticism but sometimes
congressional committees have hearings because we want to know
things. That is not usually why we have hearings. Sometimes, it
is. Today was a good example.
I thank all the witnesses. This was thoughtful testimony
from people engaged with the issue. I hope you feel the time
was well spent.
When we return from the recess in September, we will be
legislating, I believe, in some of these areas. There are
three. The narrowest issue, which is the subprime one, where I
believe we need some legislation.
There is the broader question of consumer protection after
preemption, and there is also the again narrow question of
creating a consumer right to contest bad credit information.
This one, it seems to be the consumer groups and the
financial institutions are somewhat aligned in their interest
because what happens is the typical dispute here is between the
consumer and the point of sale, and the financial institution
is caught in the middle. The entity that did the sale is
telling you they owe us the money and the consumer says, I do
not owe you the money, and you are the collectors.
What we want to put in place is a mechanism to cut you out
of that loop and let the debate happen where it should happen.
At any rate, I agree with the gentleman from Colorado. This
has been a very useful hearing. I thank all the witnesses. We
will be in considerable touch.
[Whereupon, at 11:38 a.m., the hearing was adjourned.]
A P P E N D I X
July 25, 2007
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