WASHINGTON — Congress may break with the White House when it comes to details of a new agency to protect consumers of financial products.
At a hearing Wednesday, House Financial Services Committee Chairman Barney Frank signaled that he may leave enforcement of the Community Reinvestment Act with existing bank regulators rather than give it to the new agency as President Obama has suggested.
"What is your view about the notion of moving CRA — is there a problem there?" Frank asked witnesses. "You do have this issue where CRA is enforced to the extent that it is … enforced by the regulators. How do you make these two work together, the CRA role? That is the one conflict that I see that needs to be addressed."
Though Democrats voiced support for the concept of a consumer protection agency, some questioned whether investor protection should be shifted to the new agency rather than leaving that to the Securities and Exchange Commission as Obama has proposed.
Though a significant number of issues still need to be resolved, Rep. Frank said he remains committed to moving legislation quickly. He intends to split pieces of regulatory reform into multiple bills, including the new consumer protection agency, and pass at least some of them by the end of July.
Elizabeth Warren, the Harvard law professor who first pushed for a separate consumer protection agency, testified in favor of moving CRA enforcement to the consumer agency.
"There is something to be said about someone who worries about how financial products are read and understood looking at CRA," she said.
But Ellen Seidman, a former Office of Thrift Supervision director now with the New America Foundation, said CRA enforcement should stay with the banking regulators because it encompasses lending far beyond consumers. "Whether CRA belongs in this [consumer protection] agency, I suggest it may not," Seidman said.
She argued that important goals of CRA are to encourage investment in things like charter schools and rental housing. "All those kinds of investments are not consumer issues," she said.
While the Obama plan would keep investor protection at the SEC, it is unclear whether lawmakers will go along.
The current theory, Frank said, "is that we will leave securities enforcement to the SEC, and I believe the investor protection is a bigger part of the SEC's mission than consumer protection is for the OCC."
But he followed by asking the panel of witnesses if anyone disagreed.
Edward Yingling, the president and chief executive of the American Bankers Association, said, "We dissent in the sense that you have products that compete with each other, and we think that they ought to be subject to the same oversight."
Frank responded, "That's a reasonable point."
William Francis Galvin, the secretary of the Commonwealth of Massachusetts, jumped in, too.
"There's a number of products … that fall into this category. Annuities comes to mind," he said.
Frank said he would continue to examine the issue.
"I do think those are things we'll have to look at," he said.
Other critical issues went largely unexamined. Yingling said bankers fear what would happen if the new consumer protection agency and bank regulators disagreed with one another. The Obama plan makes no mention of how a dispute would be resolved — and lawmakers provided no guidance on how they would resolve it.
"It's hard to put a bank in the middle where they will have regulators pulling in different directions, with one regulator saying go this way and one saying go that way," Yingling said.
The administration's plan is also fuzzy on the math for financing the new agency, suggesting a hybrid of appropriations and industry supported funding.
Warren suggested the industry supplement funding through fees perhaps a penny a year for each auto loan and a nickel a year for every mortgage. But Rep. Ruben Hinojosa, D-Tex., said that if Congress creates such an agency, it must ensure it is effective.
"How do we hold them accountable with oversight and regulations and funding," he asked. "We can't have an unfunded mandate."
How a new consumer protection agency will enforce laws against banks — and whether national banks will be forced to comply with state consumer protection laws — also remains up in the air. The Obama plan would let the consumer protection agency establish a federal minimum standard for consumer protection but allow states to write tougher restrictions. State banking agencies would also have the power to enforce federal and state laws against all state and national banks.
Frank acknowledged that a pending case before the Supreme Court on preemption that will determine the extent of the Office of the Comptroller of the Currency's power — Cuomo v. Clearinghouse Association LLC — might be pointless if Congress changes the law.
"I do not think there is any likelihood that we are going to increase preemption," Frank said. "In fact … we are opposed to the OCC preemption of all state consumer protections and I believe we will address that. I have spoken to the secretary of the Treasury and he has initiated conversations with the Comptroller of the Currency and the state attorneys general and state supervisors. I believe we will have resolved that. I know that there is a Supreme Court case but we may moot the case by dealing with it."
Where other critical Democrats stand on these issues is not entirely clear. Though there was a flurry of interest in restructuring when the Obama plan was released, the hearing was sparsely attended by lawmakers.
Rep. Mel Watt said in an interview during a break in the hearing that he was still on the fence.
"I'm evaluating the arguments pro and con and trying to sort through how to get to the best result," said the North Carolina Democrat. "I am concerned that regulators who had the authority didn't exercise it in a responsible way. Of course I'm concerned that a new agency might not exercise it either, so it's a tough place to be."
During the hearing, Rep. Luis Gutierrez, D-Ill., said that he would only support a consumer protection agency if it had sufficient power, including oversight of all financial products such as payday loans.
Yingling later raised the same point, saying he feared community banks would fund the new protection agency through fees while payday lenders and other lenders may avoid supervision altogether.
"A major problem for us is going to be how this agency would interact with other state-regulated and in some cases unregulated entities," Yingling said. "The great, great, great majority of the subprime problem was not caused by the regulated banking industry. It was primarily mortgage brokers and others, and we are concerned this agency stops at state lines."
