A month after House Financial Services Committee Chairman Barney Frank told the Federal Reserve Board to use or lose its power to ban unfair and deceptive banking practices, the Massachusetts Democrat said he wants to hand that power to two other agencies.
At a hearing Wednesday, Rep. Frank said the Federal Trade Commission Act should be amended to give not just the Fed but also the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. the power to police lending practices.
The Office of Thrift Supervision has similar authority, he said, but for reasons for which "no rational explanation is even conceivable, much less likely," lawmakers have denied the OCC and the FDIC the same right.
"My strong view now is that something should be done legislatively to correct that," Rep. Frank said.
Testifying on behalf of the American Bankers Association, Arthur Johnson, the chairman and chief executive of United Bank of Michigan in Grand Rapids, said he would support such a move, but only if the agencies issued uniform rules.
"It would be anomalous — and harmful — for the five federal agencies … to adopt different standards of what is an unfair or deceptive act or practice," Mr. Johnson said.
But Rep. Frank said lawmakers learned from their experience with the Fair and Accurate Credit Transactions Act of 2003 that giving seven regulators the shared task of writing rules proved to be a disaster. The law is still not fully in effect, because regulators have not finalized the implementing rules.
That many regulators are "incapable of action," he said. "So that one doesn't work to me."
Rep. Frank criticized the Fed's approach of dealing with problems on a case-by-case basis. Not setting parameters first is inefficient, he said.
"It really isn't enough for consumer enforcement that the rule is 'OK, whenever you do something wrong, we'll tell you to stop doing it,' " he said. "There needs to be some incentive to stop doing it before you start doing it."
Rep. Frank tried to bolster his argument for reform by saying the current federal regulatory regime does not protect consumers adequately, because preemption has undercut state laws.
"The current set of tools and resources that the federal banking regulators have were configured in an era where the assumption was there was a lot of state consumer regulation going on," he said. "There is now, for national banks, virtually no state consumer regulation, certainly none that is specific to banks."
The preemption issue "is not going away," he said.
Rep. Frank said he is still weighing how best to use state supervisors and attorneys general to enforce rules and laws against unfair and deceptive practices.
"The goal here is to come up with a rational and fair … [set] of consumer protectionism," he said. "Our job is to come up with a better system than what we have now. There are other questions — questions about whether or not the states should be involved. The states have a good deal of expertise in regulation here."
The committee's ranking Republican, Rep. Spencer Bachus of Alabama, missed the hearing, but he supported regulatory change in a statement read at the hearing.
"Although our consumer protection system is robust, I believe there is room for improvement. The federal banking regulators and the states should work cooperatively to promote uniformity in oversight and stronger consumer protection regulation and enforcement," Rep. Bachus said.
"Another proposal that deserves this committee's serious consideration is the suggestion by Comptroller [John] Dugan and FDIC Chairman [Sheila] Bair at our last hearing on consumer protection that their agencies be given 'unfair or deceptive practices act' authority under the Federal Trade Commission Act," he said.
He also called for the committee to pass his subprime mortgage bill to create new standards for nonbank lenders to protect consumers.
During the hearing consumer advocates urged lawmakers to consider a slew of statutory changes, while industry representatives backed more modest reforms.
Travis Plunkett, the legislative director for the Consumer Federation of America, who testified on behalf of six consumer organizations, said banking regulators have enough power to stop unfair practices but have chosen not to use it. He said the FTC should be able to take enforcement actions against depository institutions and to ban specific bank practices.
"The key to addressing these root problems is to make the regulatory process more independent of the financial institutions that are regulated," he said.
Mr. Plunkett also asked Congress to outlaw specific unfair practices in the areas of credit cards, mortgages, and overdraft systems and to free consumers from mandatory arbitration.
James Sivon, a partner with the Washington law firm Barnett Sivon & Natter PC, suggested reforms in the areas of financial literacy and disclosures, as well as uniform national protections for all types of lenders and establishing a centralized system for all consumer complaints under the Federal Financial Institutions Examination Council.
He urged lawmakers to leave enforcement with federal regulators and to avoid reforms that would make investors liable for violations.
After the hearing Rep. Frank told reporters that he plans to tackle several other consumer issues after the August recess. Among them are creating national standards for subprime lending, making it easier for consumers to dispute and resolve inaccuracies on their credit reports, and reforming certain card practices.
"Clearly in subprime there are two reasons why you have to legislate," he said. "You've got to cover currently unregulated lenders, and you've got to do something about liability up the chain for securities. … What you have now are unregulated lenders who lend and don't pay enough attention, and they are going to sell the thing very quickly. … Securitization has increased liquidity and decreased responsibility."
On credit cards, he said, "There is a lot of concern about universal default, about the retroactive application of higher interest rates, and the algorithm they have which allows them to mail out the bill at the exact time when you are the least likely to get it and pay it on time."
Interchange fees are "also on the table," Rep. Frank said.
