Jul 14 2009

Shelby Outlines Concerns with CFPA Proposal

U.S. Senator Richard Shelby today raised a number of questions and concerns regarding the Obama Administration’s proposed Consumer Financial Protection Agency at a Senate Banking Committee hearing on the proposal.  Shelby later discussed the proposal and the hearing on CNBC’s “Street Signs.”

Click here to view a video playlist of Shelby’s statement, questions and interview.

The prepared text of Sen. Shelby’s opening statement is below.

Hearing on Consumer Financial Protection Agency
July 14, 2009

“Thank you, Mr. Chairman.  Today, the Committee will examine the Administration’s proposal to establish a stand-alone consumer protection agency.  Well regulated and transparent financial markets have been and must continue to be one of the central goals of our financial regulatory system.  The purpose of our markets is to benefit consumers by giving them ways to save, invest, and conduct transactions. 

“Consumers are not likely to participate in our markets, however, unless they know they are protected against fraud, and unfair dealings.  In addition, consumers are more likely to use financial products if they have the information they need to make good financial decisions.  By creating confidence in our markets, consumer protection promotes consumer participation which, in turn, provides additional benefits by increasing the size, vitality, and resilience of our financial system.  Good consumer protection therefore makes good economic sense.

“Since the start of the ongoing financial crisis, I have stated that we should approach regulatory reform in a thorough and deliberate manner.  I believe this Committee should examine what caused this financial crisis, develop solutions to the problems identified by that examination and then consider the practical consequences of any reform measures. 

“This morning, we begin our examination of the Administration’s proposal.  This is our first chance to review the Administration’s findings regarding the problems they have identified and the solutions they seek.  As part of our consideration, I believe it would be very useful, if not necessary, for the Administration to submit for the record the data and evidence they used to craft their regulatory restructuring proposal.

“In addition, the fact that the Administration has produced a legislative draft gives us a chance to consider some of the practical questions associated with the proposal:

“For example, how will this new agency interact with the other banking regulators?

“Who will have the final discretion over things like capital treatment for alternative mortgage products or other consumer credit products?

“What authority would the administration leave to state banking regulators?

“What if there is a disagreement between a prudential supervisor and the new consumer protection agency?

“What if a prudential supervisor fails to operate in a manner consistent with the consumer protection agency’s guidelines?

“Will a prudential supervisor be allowed to overrule the consumer protection agency?

“Will certain types of financial products be banned?

“What standards would be used to make the decision to remove products from the marketplace?  

“Beyond the practical issues regarding the program, I want to highlight some conceptual issues that I believe we must recognize as we consider financial consumer protection reform.  First, I believe that we must clearly acknowledge and accept that risk cannot be eliminated from our financial markets.  It is risk taking that generates return.  It would be both false and irresponsible to lead the American people to believe that an enhanced regulator can provide them with risk-free opportunities.

“Second, I believe that we must also acknowledge that the risks associated with financial products are largely dependent on the circumstances surrounding the particular transaction and consumer.

“Some have tried to make overly-simplistic analogies comparing defective consumer products to certain financial products.  This is inaccurate and highly inappropriate.

“For example, a defective electrical device is dangerous under every circumstance where it used.  That is not the case for financial products.  A ‘plain vanilla’ 30 year-fixed mortgage is not inherently safer than a shorter, adjustable rate product.  In fact, a 30 year-fixed mortgage could involve higher costs and provide less value to the consumer.

“Consumers need the relevant information and the means to understand it so they can purchase products and engage in the transactions that best fit their needs and circumstances.  This point bears on what I believe is the final and most important issue associated with consumer protection reform – Who is best able to decide about the value and necessity of any particular financial product or service?

“Some, including those in the Administration, have decided that consumers will not act in their own best interest and therefore it is necessary that we remove or greatly restrict products that in some situations might cause financial harm.  Implied in this belief is the notion that some people, such as government bureaucrats, can make informed decisions about the value of products and services while others, such as the American consumer, cannot.  In other words, ‘yes we can’ has become ‘no, you can’t.’

“While I can accept the view that in some cases consumers do not have the necessary information or understanding to make sound financial decisions, I do not accept the premise that the remedy is to deny consumers decision-making power altogether.  I think this would be a very significant and paternalistic departure from the notions of liberty and personal responsibility that have previously guided our regulatory efforts.

“Quite frankly, I find it a bit disturbing and somewhat offensive that the concept of the ‘intellectually deficient consumer’ has now found a voice in our legislative process.  To the extent that there is any merit to this theory, I believe it would be better to provide those with deficiencies the means to address them rather than seizing from them their right to make free and informed decisions.

“While I look forward to hearing from our witnesses, I am greatly concerned over many aspects of the President’s plan, not to mention its underlying premise.

“Thank you, Mr. Chairman.”