Senate Banking Committee members questioned key aspects of the Obama administration's plan to create a consumer financial protection agency at a hearing yesterday, but failed to pin down answers from the star witness: Michael Barr, the Treasury's point man on the proposal.
Senators wanted to know why consumer protection should be separated from prudential regulation; how the new agency would ensure uniform enforcement among bank and nonbank lenders; and whether a requirement that plain-vanilla products be offered first would hamstring market innovation.
But Barr simply repeated his basic talking points without wading into details and members did not press him.
"In your statement you talk about how screwed-up the current system is and I agree with you and I think everybody in this committee understands that it is severely flawed right now," said Sen. Jon Tester, D-Mont. "I appreciate the administration coming forward with the proposal, but the question is does the proposal ... really fix the problem? Because we do have a fragmented system and you can shop for regulators and all that stuff - does it fix it?"
Barr, the Treasury assistant secretary for financial institutions, said it would. "I think it prevents the kind of regulatory arbitrage that we saw in the past and sets high standards across the playing field that applies to everybody," he said.
Throughout the hearing Barr argued for an overhaul of the current system of consumer protection.
"These deep structural flaws cannot be solved by tinkering with the consumer protection mandates or authorities of our existing agencies," he said. "The structure itself is the problem. There are too many agencies with consumer protection responsibilities. ... These problems have only one effective solution: a single federal financial consumer protection agency."
In response to a question from Tester on the proposal's likely impact on community banks, Barr said the fees banks pay the government would probably be lower under the plan.
"If you are a community bank or a credit union, you are going to be better off under this proposal," Barr told reporters after the hearing. "The agencies that have consumer compliance functions now, their resources, the fees they collect are going to be transferred over to the new consumer protection agency. ... You get rid of duplication and lower costs in the system, but you end up with more effective compliance."
Barr also shed more light on the vision for enforcement with promises to examine nonbank lenders on par with insured depository institutions for consumer protection, but without a commensurate regime for prudential supervision.
While House Financial Services Committee chairman Barney Frank said last week that he thought the new agency's enforcement would likely be driven by consumer complaints, Barr suggested otherwise Tuesday.
Sen. Robert Menendez, D-N.J., asked how the agency would reach previously unregulated institutions.
"Supervision and examination and enforcement with the same tools available to bank regulators ... would apply these strong consumer protections across the board 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."
Lawmakers on both sides of the aisle had questions about how the agency would enforce a requirement that standard products are offered first.
Sen. Bob Corker, R-Tenn., asked if it should be the government's role to force all lenders to offer the same products and prevent niche businesses specializing in a certain segment from developing. "That is a large departure from where our country has been," he said.
Barr frequently used mortgages as an example, saying lenders who wanted to offer option adjustable-rate mortgages would also have to offer a simple fixed-rate 30-year mortgage and an ARM with "straightforward" pricing first so the consumer had a basis for comparison.
He said that the administration's goal was to provide consumers with clear disclosures so they could compare products. "The goal is not to have micro-level decisions made by a consumer protection agency but to have a point of comparison," Barr said.
Sen. Mike Crapo, R-Idaho, added his voice to those expressing concerns asking how the lines would be drawn. "My point is where does it end?" he asked.
Sen. Mark Warner, D-Va., asked whether the administration envisioned drawing bright lines for 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."
Warner followed up by asking whether products would have to get pre-clearance or would be judged after the fact and asked if the agency would ban certain products.
Barr reiterated the reliance on disclosure.
But Warner questioned whether such a standard could possibly hold, since the proposal wipes out federal preemption by allowing state attorneys general to not only enforce federal standards, but set their own for all 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.
The House Financial Services Committee has already held two hearings on this issue and plans two more for this week. That panel plans to hold a vote on the legislation later this month.
Senate Banking Committee 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 yesterday that many details still need to be worked out.
"These are highly complicated areas," he said. "I appreciate the point that some members raised about how mandating, dictating, somehow driving certain product markets is something we have to be careful of."
But Dodd added that the fact that more than 60% of subprime borrowers could have qualified for cheaper mortgages cannot be overlooked.
"Having a process that protects people from that kind of behavior is a critical one. ... We have to take this issue on and find a mechanism that fills that gap."