WASHINGTON Senate Banking Committee members questioned key aspectsof the administration's plan to create a consumer financial protectionagency at a hearing Tuesday, but failed to pin down answers from thestar witness: Michael Barr, the Treasury's point man on the proposal.
Senatorswanted to know why consumer protection should be separated fromprudential regulation; how the new agency would ensure uniformenforcement among bank and nonbank lenders; and whether a requirementthat plain-vanilla products be offered first would hamstring marketinnovation.
But Barr simply repeated his basic talking points without wading into details and members did not press him.
"Inyour statement you talk about how screwed-up the current system is andI agree with you and I think everybody in this committee understandsthat it is severely flawed right now," said Sen. Jon Tester,D-Mont. "I appreciate the administration coming forward with theproposal, but the question is does the proposal really fix theproblem? Because we do have a fragmented system and you can shop forregulators and all that stuff, does it fix it?"
Barr, theTreasury assistant secretary for financial institutions, said it would."I think it prevents the kind of regulatory arbitrage that we saw inthe past and sets high standards across the playing field that appliesto everybody."
Throughout the hearing Barr argued for an overhaul of the current system of consumer protection.
"Thesedeep structural flaws cannot be solved by tinkering with the consumerprotection mandates or authorities of our existing agencies," he said."The structure itself is the problem. There are too many agencies withconsumer protection responsibilities. These problems have only oneeffective solution: a single federal financial consumer protectionagency."
In response to a question from Tester on the proposal'slikely impact on community banks, Barr said the fees banks pay thegovernment would probably be lower under the plan.
"If you are acommunity bank or a credit union, you are going to be better off underthis proposal," Barr told reporters after the hearing. "The agenciesthat have consumer compliance functions now, their resources, the feesthey collect are going to be transferred over to the new consumerprotection agency. You get rid of duplication and lower costs in thesystem, but you end up with more effective compliance."
Barr alsoshed more light on the vision for enforcement with promises to examinenonbank lenders on par with insured depository institutions forconsumer protection, but without a commensurate regime for prudentialsupervision.
While House Financial Services Committee Chairman Barney Franksaid last week that he thought the new agency's enforcement wouldlikely be driven by consumer complaints, Barr suggested otherwiseTuesday.
Sen. Robert Menendez, D-N.J., asked how the agency would reach previously unregulated institutions.
"Supervisionand examination and enforcement with the same tools available to bankregulators would apply these strong consumer protections across theboard so no one competes without a high bar," Barr said.
"Nonbanks will be subject to the same enforcement tools and the same supervision [as banks] for the first time ever."
Lawmakerson both sides of the aisle had questions about how the agency wouldenforce a requirement that standard products are offered first.
Sen. Bob Corker,R-Tenn., asked if it should be the government's role to force alllenders to offer the same products and prevent niche businessesspecializing in a certain segment from developing. "That is a largedeparture from where our country has been," he said.
Barrfrequently used mortgages as an example, saying lenders who wanted tooffer option adjustable-rate mortgages would also have to offer asimple fixed-rate 30-year mortgage and an ARM with "straightforward"pricing first so the consumer had a basis for comparison.
Barrsaid that the administration's goal was to provide consumers with cleardisclosures so they could compare products. "The goal is not to havemicro-level decisions made by a consumer protection agency but to havea point of comparison," he said.
Sen. Mike Crapo,R-Idaho, added his voice to those expressing concerns asking how thelines would be drawn. "My point is where does it end?" he asked.
Sen. Mark Warner,D-Va., asked whether the administration envisioned drawing bright linesfor what was an acceptable product or practice and what was not.
Barr replied, "The bulk of those tools will be disclosure that clearly disclose the product or service."
Warnerfollowed up by asking whether products would have to get pre-clearanceor would be judged after the fact and asked if the agency would bancertain products.
Barr reiterated the reliance on disclosure.
ButWarner questioned whether such a standard could possibly hold, sincethe proposal wipes out federal preemption by allowing state attorneysgeneral to not only enforce federal standards, but set their own forall financial services providers including national banks.
"We are still allowing 50 independent state AGs to go out and raise the bar higher? Correct?" he asked.
Barr agreed and said that the new agency would set higher standards for all financial services products.
TheHouse Financial Services Committee has already held two hearings onthis issue and plans two more for this week. That panel plans to hold avote on the legislation later this month.
Senate Banking Chairman Chris Dodd also supports the creation of a separate consumer protection agency but plans to work on legislation later in the year.
Dodd acknowledged Tuesday that many details still need to be worked out.
"Theseare highly complicated areas," he said, "I appreciate the point thatsome members raised about how mandating, dictating, somehow drivingcertain product markets is something we have to be careful of."
ButDodd added that the fact that more than 60% of subprime borrowers couldhave qualified for cheaper mortgages cannot be overlooked.
"Havinga process that protects people from that kind of behavior is a criticalone. We have to take this issue on and find a mechanism that fillsthat gap."