Remarks
By
Sheila C. Bair, Chairman,
Federal Deposit Insurance Corporation;
before the
Financial Services Conference
of the
Consumer Federation of America; Washington, DC
November 30, 2006
Good afternoon, everyone. It is my pleasure to be part of the Consumer Federation of
America's nineteenth annual conference exploring the challenges and opportunities that
are taking place in the financial services industry.
For almost four decades, the CFA has distinguished itself as an honest broker on issues
that face American consumers. The FDIC appreciates the thoughtful feedback we
receive from the CFA on financial services regulatory issues. We look forward to a
continuing dialogue and partnership with the CFA on issues affecting the public.
I would like to begin my remarks today by giving you my thoughts on the importance of
economic inclusion. America is all about the achievement of dreams for a better life and
economic improvement. For some, that may be to own a car, start a business, send a
child to college or buy a home. A financial system should allow people to achieve
economic progress and financial security through the traditional values of hard work and
thrift. A financial system that strips wealth and locks hardworking families into an
endless cycle of debt and financial distress promotes feelings of exclusion, as well as
cynicism about our free market society and the ability of all to participate and benefit. An
inclusive financial system strengthens the fabric of our market based system and
spawns support for the principles of economic freedom upon which our political and
social structures are based.
While I am committed to market based solutions, I am also concerned that market
mechanisms are not working as well as they should in the area of financial services for
low-to-moderate income families. It almost seems as if the market has become divided
between two groups: those who successfully rely on banks for virtually cost-free basic
financial services, and those who pay high amounts. Examples abound. Some pay 18
percent for a line of credit linked to their checking account; others pay 500 to 600
percent for a payday loan. Some pay nothing or minimal fees for an unlimited checking
account, while others pay significant fees just to cash their paychecks and purchase
money orders to pay bills. Some pay a flat 6.7 percent for a fixed, 30-year mortgage and
others pay balloon rates as high as 11.4 percent for an exotic alternative loan. The
fortunate accumulate wealth through cost- free savings vehicles, IRAs and 401(k)s;
others pay set- up and maintenance fees for small dollar savings accounts which erode
principal..
By
Sheila C. Bair, Chairman,
Federal Deposit Insurance Corporation;
before the
Financial Services Conference
of the
Consumer Federation of America; Washington, DC
November 30, 2006
Good afternoon, everyone. It is my pleasure to be part of the Consumer Federation of
America's nineteenth annual conference exploring the challenges and opportunities that
are taking place in the financial services industry.
For almost four decades, the CFA has distinguished itself as an honest broker on issues
that face American consumers. The FDIC appreciates the thoughtful feedback we
receive from the CFA on financial services regulatory issues. We look forward to a
continuing dialogue and partnership with the CFA on issues affecting the public.
I would like to begin my remarks today by giving you my thoughts on the importance of
economic inclusion. America is all about the achievement of dreams for a better life and
economic improvement. For some, that may be to own a car, start a business, send a
child to college or buy a home. A financial system should allow people to achieve
economic progress and financial security through the traditional values of hard work and
thrift. A financial system that strips wealth and locks hardworking families into an
endless cycle of debt and financial distress promotes feelings of exclusion, as well as
cynicism about our free market society and the ability of all to participate and benefit. An
inclusive financial system strengthens the fabric of our market based system and
spawns support for the principles of economic freedom upon which our political and
social structures are based.
While I am committed to market based solutions, I am also concerned that market
mechanisms are not working as well as they should in the area of financial services for
low-to-moderate income families. It almost seems as if the market has become divided
between two groups: those who successfully rely on banks for virtually cost-free basic
financial services, and those who pay high amounts. Examples abound. Some pay 18
percent for a line of credit linked to their checking account; others pay 500 to 600
percent for a payday loan. Some pay nothing or minimal fees for an unlimited checking
account, while others pay significant fees just to cash their paychecks and purchase
money orders to pay bills. Some pay a flat 6.7 percent for a fixed, 30-year mortgage and
others pay balloon rates as high as 11.4 percent for an exotic alternative loan. The
fortunate accumulate wealth through cost- free savings vehicles, IRAs and 401(k)s;
others pay set- up and maintenance fees for small dollar savings accounts which erode
principal..
Why is market competition not working better? Part of the problem is that many people
lack the financial skills needed to analyze and compare products and their prices. In
many cases, the problem is lack of disclosures that fairly and simply describe a product
and its true cost. We see disclosure problems all the time. For example, fee based
overdraft protection is sometimes obscured in advertising for "free checking." Some
high cost mortgages prominently display teaser rates of 2 or 3 percent. Subprime credit
card applications may advertise seemingly reasonable annual percentage rates, but
bury exorbitant fees in the fine print.
I suspect that part of the problem may also lie with the regulatory structure. I intend to
investigate this during my tenure as Chairman of the FDIC and take action where it is
needed. For example, we need to find out whether aspects of safety and soundness
regulation unnecessarily deter banks from serving the needs of their communities, or
create perverse incentives or regulatory gaps that favor high cost products. Why, for
instance, do we subject lines of credit linked to checking accounts to the full panoply of
disclosure, underwriting, and capital standards normally applicable to credit products,
but do not do so for fee-based overdraft protection, which costs much more? Why do
we subject banks and thrifts to tough standards in their complex exotic mortgage
offerings, but do not subject non-bank mortgage companies—which account for so
much of the subprime market—to the same standards?
Part of the problem may also lie in the types of incentives we currently provide banks to
"do the right thing." Here, I think consumer groups such as the CFA need to lead the
debate. We need to know, for example, whether the Community Reinvestment Act
addresses the current needs of underserved populations or is trying to solve the
problems of two decades ago. Is the problem today not enough credit, or is the problem
too much high cost credit? Should we consider revamping CRA incentives so that at
least as much emphasis is placed on the provision of basic, low cost retail financial
services and asset accumulation products such as Individual Development Accounts?
I don't have all the answers, only questions, but I do sense a paradigm shift taking
place. In Congress, there are bipartisan discussions on the need for a strong national
anti-predatory lending law applicable to bank and non-bank lenders alike. In addition,
Congress recently enacted an amendment sponsored by Senator Talent of Missouri
and Senator Nelson of Florida that caps interest rates on loans to military personnel as
part of last year's Defense Department authorization. This legislation presents many
issues that can and will be addressed through regulation as we work with the
Department of Defense to implement it, but it has put a much-needed spotlight on the
pervasive need for more responsibly priced small dollar loans, particularly among our
service personnel.
Regulators and banking agencies are actively engaged on consumer protection issues
as well. The Federal Reserve is undertaking a comprehensive rewrite of Truth in
Lending Act disclosure rules that is urgently needed. The Conference of State Bank
Supervisors is committed to ensure that the recently issued guidance on alternative
mortgages will eventually apply to non-bank mortgage lenders in the 50 states. Further,
lack the financial skills needed to analyze and compare products and their prices. In
many cases, the problem is lack of disclosures that fairly and simply describe a product
and its true cost. We see disclosure problems all the time. For example, fee based
overdraft protection is sometimes obscured in advertising for "free checking." Some
high cost mortgages prominently display teaser rates of 2 or 3 percent. Subprime credit
card applications may advertise seemingly reasonable annual percentage rates, but
bury exorbitant fees in the fine print.
I suspect that part of the problem may also lie with the regulatory structure. I intend to
investigate this during my tenure as Chairman of the FDIC and take action where it is
needed. For example, we need to find out whether aspects of safety and soundness
regulation unnecessarily deter banks from serving the needs of their communities, or
create perverse incentives or regulatory gaps that favor high cost products. Why, for
instance, do we subject lines of credit linked to checking accounts to the full panoply of
disclosure, underwriting, and capital standards normally applicable to credit products,
but do not do so for fee-based overdraft protection, which costs much more? Why do
we subject banks and thrifts to tough standards in their complex exotic mortgage
offerings, but do not subject non-bank mortgage companies—which account for so
much of the subprime market—to the same standards?
Part of the problem may also lie in the types of incentives we currently provide banks to
"do the right thing." Here, I think consumer groups such as the CFA need to lead the
debate. We need to know, for example, whether the Community Reinvestment Act
addresses the current needs of underserved populations or is trying to solve the
problems of two decades ago. Is the problem today not enough credit, or is the problem
too much high cost credit? Should we consider revamping CRA incentives so that at
least as much emphasis is placed on the provision of basic, low cost retail financial
services and asset accumulation products such as Individual Development Accounts?
I don't have all the answers, only questions, but I do sense a paradigm shift taking
place. In Congress, there are bipartisan discussions on the need for a strong national
anti-predatory lending law applicable to bank and non-bank lenders alike. In addition,
Congress recently enacted an amendment sponsored by Senator Talent of Missouri
and Senator Nelson of Florida that caps interest rates on loans to military personnel as
part of last year's Defense Department authorization. This legislation presents many
issues that can and will be addressed through regulation as we work with the
Department of Defense to implement it, but it has put a much-needed spotlight on the
pervasive need for more responsibly priced small dollar loans, particularly among our
service personnel.
Regulators and banking agencies are actively engaged on consumer protection issues
as well. The Federal Reserve is undertaking a comprehensive rewrite of Truth in
Lending Act disclosure rules that is urgently needed. The Conference of State Bank
Supervisors is committed to ensure that the recently issued guidance on alternative
mortgages will eventually apply to non-bank mortgage lenders in the 50 states. Further,