One Market, One Regulator?

Forbes ^ | 6/12/2007 | Brian Wingfield

[bruinbirdman]

Later this week, Barney Frank, chairman of the House of Representatives' Financial Services Committee, will haul in state and federal regulators, as well as the comptroller of the currency and the chief of the Federal Trade Commission, for a hearing to discuss the financial services industry.

He'll have questions about a range of banking issues. The hearings come amid a imploding subprime mortgage market, scandalous corroboration between student lenders and university officials, and allegations of unfair practices by credit card companies. It's been quite a legislative season.

Harvard Law School professor Elizabeth Warren has a solution: the Financial Product Safety Commission. Just as the government looks over child car seats and toasters for safety, it should also scrutinize loans and mortgages to make sure lenders aren't bilking their customers.

"To say that credit markets should follow a caveat emptor model is to ignore the success of the consumer goods market--and the pain inflicted by dangerous credit products," she writes in the newest edition of Democracy: A Journal of Ideas.

The commission would review new loan types and educate customers. Under Warren's plan, the commission would prevent credit card marketing to college students, provide statements to show when the balance will be paid off, and require that the card's terms remain the same until it expires. It's a Nader-esqe idea with little chance of happening, despite Washington's attention.

Frank has not indicated that he will support a single regulator. But he and Rep. John Dingell, D-Mich., suggested in a letter to federal regulators last month that they will push for the rules already in place to get tightened. The congressmen want the Federal Reserve, the Federal Home Loan Bank Board and the National Credit Union Association to define unfair lending practices and mandate ways to prevent them, as the law states.

"There clearly is the need for some new regulatory authority on the table," says Frank, adding that how this should be done remains to be resolved. "Whether it's a new regulator, or whether you lodge it with an existing one, is one of the questions we're going to be looking at" in the coming months.

Congress will also likely push for greater cooperation among state and federal regulators. Wednesday's hearing is prompted in part by a U.S. Supreme Court decision from earlier this year, Watters v. Wachovia. The justices ruled that states don't have regulatory authority over the subsidiaries of national banks like Wachovia, prompting concern by Frank. Regulators from Iowa and Massachusetts are expected to testify about this issue before the committee this week.

But why no single regulator? The industry has one answer: It's too simple. "Competition among the regulators helps to create the best regulatory environment," says Scott Talbott, a lobbyist with the Financial Services Roundtable, which represents industry heavyweights like JPMorgan Chase (nyse: JPM), Wells Fargo (nyse: WFC) and Citigroup (nyse: C). "If you don't have competition, the best result may not always occur."