Wednesday, July 8, 2009

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 loans.

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.