January 16, 2009
Professor Elizabeth Warren
Chair, Congressional Oversight Panel
Via Electronic Mail
Re: Upcoming COP Report on Reforming the Financial Regulatory System
Dear Professor Warren and Members of the Congressional Oversight Panel,
Consumers Union, the nonprofit publisher of Consumer Reports, is deeply interested in creating a more effective structure for the regulation of all participants in the financial markets. Financial regulation must be designed to protect individuals as consumers of credit and deposit services, as investors and as taxpayers.
The spark for the financial crisis was unsuitable, poorly underwritten loans being sold to individual homeowners. The risk was amplified by widespread sale of financial instruments based on those mortgages. The resulting crisis of confidence has led to reduced credibility for the U.S. financial system, gridlocked credit markets, loss of equity for homeowners who accepted subprime mortgages and for their neighbors who did not, empty houses and reduced property tax revenue.
Any future financial regulatory structure must include active federal and state oversight, a priority on consumer protection, rules to make the pricing and features of financial products less complex, and more accountability by financial entities at each step of a financial transaction.
- Regulators must be required to proactively monitor new products and practices to address dangers before they spread. Each financial regulator must be required to identify, evaluate, and mitigate emerging risks both to the financial system and to individuals. Federal regulators must abandon the outdated “wait and see” regulatory approach, where a problem has to grow to be national in scope, or even be in the public eye, before it is addressed. Instead, financial regulators should have an express charge to regulate for the prevention of harm both to individuals and to the financial system. . One tool to consider is to require an annual, public “emerging risks” report from each federal financial regulator. Financial regulators must be independent of the entities they oversee. Federal financial regulators should not be able to, or forced to, wait for a long interagency process before taking steps to protect the public. Moreover, financial regulators should be held to formal accountability requirements.
- Financial system regulators should give the same priority to consumer protection as to safety and soundness. The mortgage crisis and its aftermath dramatically illustrate that the consumer protection and safety and soundness are inextricably linked. Each regulator must increase the priority placed on consumer protection.
- Practices and features that make financial products sold to individuals too complex to understand must be stopped. Regulatory reform will be incomplete unless lawmakers and regulators identify and stop practices that make credit and deposit products difficult for individuals to understand and evaluate. Financial products which are too complex for the intended consumer carry special risks to individuals and to the economy. In subprime mortgages, for example, many homeowners were induced to refinance an existing loan into a new loan that offered only a temporarily reduced payment. Other homeowners were quoted a payment that did not even cover all of the accruing interest. Still others were assured that they could refinance later, yet the loan documents contained an expensive prepayment penalty. In the area of credit cards, many of the over 60,000 individuals who filed comments in the federal docket on unfair or deceptive credit card practices complained about complex products and practices that operated unfairly. Many consumers reported that they learned about a harmful credit card practice only when it was first invoked against them.
- We need a federal agency to focus on consumer protection in financial services. No single federal agency leader can foresee all of the consequences of new practices and products. For this reason, Consumers Union supports both an independent federal consumer protection agency for financial services products with concurrent jurisdiction with existing financial regulators and more state power to develop and enforce consumer protections.
- States have a key role to develop effective consumer protection rules and pursue strong enforcement of state and federal consumer protection requirements. State legislators and state regulators are well positioned to spot emerging problem areas and address them promptly. However, preemption has made it extremely difficult for states to effectively protect their consumers. Restoring the ability of the states to take vigorous action in the financial services markets can reduce the level of economic risk to individuals as consumers, investors, and taxpayers.
- Accountability must be built into the financial system. During the build-up to the crisis, loan originators and securitization packagers got fees even if loans couldn’t later be repaid. Regulatory restructuring should include changing the incentives in the private market by requiring that everyone who gets a fee in connection with a credit product also keeps some of the risk of future nonpayment and the risk of problems with the loan. In addition, everyone who offers financial products to consumers should be subject to suitability requirements and fiduciary duties.
We look forward to working with the COP, Congress, and the new Administration to create a strong, trusted regulatory structure for financial products and the financial markets. This is essential to rebuilding public confidence in the U.S. financial markets.
Very truly yours,
Gail Hillebrand
Financial Services Campaign Manager
Consumers Union of U.S., Inc.