We Need a Strong Consumer Financial Protection Agency

Mr. Merkley:

I rise to give voice to my strong support for President Obama’s
proposal to create a consumer financial protection agency separate from
our prudential banking regulators. I believe establishing this new
independent agency is critical to protecting the economic security of
the American middle class and ensuring the stability of our financial
system and the banks within it.

Let me share with you a story about Ira Cheatham. Ira is a
73-year-old retired veteran of the Korean war. I think his story helps
explain why we need to do more to protect middle-class economic
security. Ira and his wife lived in Portland, OR, for 21 years. By
2002, this couple had nearly paid off their mortgage. But a few years
ago, in the midst of the subprime boom, the family received what looked
like a check from their bank, their mortgage company, a check for
$1,000. Ira cashed in the check. Ira did not realize that the check
actually represented a high-interest loan.

Within a week or two after cashing the check, the family
received a call from their mortgage company urging the couple to
consolidate this $1,000 loan with their credit card debt into a single
mortgage. This family had excellent credit, and the mortgage company
promised the couple they would receive an interest rate between 5 and 6
percent, which would have reduced monthly payments.

Based on this promise, the couple agreed. But what they
soon discovered was they had been assigned an interest rate of 11.8
percent. Moreover, the loan contained discount points financed into the
loan, inflating the loan amount and stripping away equity in the house.
Under this new subprime loan, the mortgage payments swelled to
$1,655–nearly 60 percent of the family’s monthly income.

Having discovered this, it would have been great if this
family could have simply refinanced. But in the loan was a $7,500
prepayment penalty; in other words, stripping them of another $7,500.
Once they discovered what they had been trapped into–what they had
been tricked into–they were then locked into this prepayment penalty
that would further decimate their equity.

They did not have many good options–an unsustainable
interest rate, an outrageous prepayment penalty–but, finally, they
took and did what they had to do, which was to pay that prepayment
penalty in order to refinance their mortgage with another lender.

Our financial marketplace has become infested with these
kinds of predatory lending products and practices that exploited this
elderly couple and millions of other families across this Nation. Now
these practices are commonplace because they are not regulated. They
are commonplace because they are highly profitable. They are embedded
in documents inches thick in a home loan. They are written in light
gray ink on the back of a check. When deposited, you have actually
signed a financial document.

Well, these types of tricks and traps are unacceptable. Mr.
President, $2.7 trillion in losses to subprime writedowns only
scratches the surface of the total cost of this economic catastrophe–a
catastrophe that would have been avoided if banks had sold stable prime
loans instead of tricking and trapping families into volatile subprime

In short, we need to reestablish strong consumer protection
in our financial markets. The solution is simple and should have been
adopted a long time ago: centralizing financial consumer protection
regulation in a single agency, an agency that is not compromised by
having another mission, another mission of regulating monetary policy
or another mission of overseeing the stock market or another mission
here or there; no, a mission responsible to the consumers of this
Nation of financial products that says our transactions are going to be
transparent, the terms are going to be clear, we are going to get rid
of the tricks and traps.

Many of you know we recently passed a bill in this Chamber on credit
cards to get rid of the tricks and traps we know of in the credit card
industry. That is a tremendous step forward. But who would doubt–who
in this Chamber would doubt; who in America would doubt–that within 12 months we will have a new set of tricks and traps?

You cannot simply legislate every time one of these is created. You need a consumer financial products agency to oversee this process, to make sure we protect the consumer from new, clever ways of stripping Americans’ wealth.

Establishing a strong consumer financial protection
agency would be a major step forward in protecting the economic
security of working Americans. There are folks who say: You know what,
we are making a lot of money. We don’t want this type of regulation.

Let’s draw a parallel here to consumer
products in other areas. How about toys for our children. There are
folks who would say: No, we shouldn’t regulate the quality of toys, we
shouldn’t regulate whether there are small parts that will choke our
child, we shouldn’t regulate whether there are exploding parts that
might take out an eye, we shouldn’t regulate the lead in the paint,
because this reduces choice. But we have recognized that when it comes
to consumer products
appearing in our homes, we need to have ongoing oversight to make sure
products are fair and safe, and we need to do the same thing in the
financial world.

The failure to regulate has had an enormous toll: $700
billion in taxpayer money spent to bail out our banks, $12.2 trillion
in household wealth lost in America since 2007, and the tragedy of
millions of Americans losing their homes and their jobs. Those are the
real costs of failing to regulate financial consumer protection .

Let’s look at a few things such an agency would do.

First, it would mean less bureaucracy and less cost. Each of our banking regulators already has a consumer protection obligation, a consumer protection division. Three of four Federal banking agencies have separate consumer protection
functions from the rest of the agency. Now, that mission is often set
aside, that mission is often ignored, in light of the other missions of
the agency, but it is far more effective, cost-effective, to have these
missions combined into a single entity with the responsibility directly
to consumers.

A second concern has been that it would be a mistake to
have folks who offer financial products provide a simple, plain-vanilla
product as a comparison to give them a framework for the contract being
put before them. But these types of straightforward, plain-vanilla
comparisons are very useful to consumers to allow them to make an
informed choice. In the long term, a smarter consumer produces better competition between those who provide these products because now they are forced to compete not
on tricks and traps but on transparency, on consumer
service–customer service–and that is a positive thing. It means real
competition in terms of price. I think our community financial
institutions in particular would have a stronger claim in such new
business because who provides better consumer service than our local community bankers?

Third, a consumer protection
agency would clear the field of unregulated bad actors whose
competition lowers standards across financial products. Well, I wish to
draw a bit of an analogy here to a football game. Imagine a football
game where only one side gets called for penalties. That is what
happens when you have one responsible financial player and another that
isn’t abiding by any sort of fairness or transparency. That does not
produce good competition. If only your opponent can jump the line or
face mask or get away with just about anything without penalty flags
being thrown, how is your team going to compete? That is the challenge
the responsible players have in the marketplace today. Well, let’s not
put them in such a difficult position. Let’s make sure all of the
players are acting responsibly, and that is the role such an agency
would carry on.

We need a consumer financial protection
agency to protect the hard-earned wealth of hard-working
Americans–Americans like the elderly couple I told the story about
earlier, Americans like Maggie from Salem, OR. Maggie paid her credit
card bill on time, and then what happened? She was charged a late fee.

So she called up and said: Why is that?

The credit card company said: Well, you know what, we get to
sit on your payment for 10 days before we post it, so technically you
are late even though you paid us early.

Maggie said: Where is the fairness in that?

Folks like Maggie across this country are asking that simple question: Where is the fairness in that?

Our consumers deserve fairness. Let’s not try to have
short-term profits that undermine the success of our families by
stripping wealth through tricks and traps. Let’s have our consumers
say: Isn’t it great that here in America we make sure there is fairness
in our financial products, that we don’t try to depend on tricks and
traps that strip wealth from elderly couples, strip wealth from young
families trying to raise children, that take away the opportunities of
those families to provide for their children. Let’s put a referee into
the game again. We need this agency.