Frank: Consumers Need Their Own Advocates

By Christopher Snow Hopkins  

Rep. Barney Frank, D-Mass.

NJ: How do banks confuse or mislead consumers, and why can't they correct these practices on their own?

Frank: Well, they could, but it is more profitable not to. I would say "confuse" more than "mislead," and instead of "mislead," "not tell them."...

We actually had situations before, which the banks acknowledged even, where people would go to an ATM machine, inquire as to the balance. They would be shown a balance that, unbeknownst to them, never having been told this, included overdraft protection. So people wrote a check to the amount that they were shown on the ATM, and were then penalized for it. Totally outrageous, and they stopped that. All they've said is, "People want this overdraft protection, it's better for them." And what we've said is, well, ask them. Incredibly, some banks have said, "Oh, no, we don't ask them." Why don't they want to ask them? Because then people will say no....

I had a situation in my early years in Congress where a woman called me and said that her daughter was about to be married, and the groom to be was in the military, he's about to be shipped overseas, and could I intervene to slow this down. So I began to do that, whereupon I got a call from the groom-to-be. He said: "Mind your own bleeping business!" So I learned then: don't do favors for people without asking them.

With credit cards, they would move the date of payment around for no reason, I think, other than probably to encourage people to miss the time. That, or what they called "universal default." If I had gone out and made purchases under my credit card, and I made every payment I was ever supposed to make, well beyond the minimum, and I incurred a balance in interest, they said that if I had an unrelated dispute with another merchant or another creditor, and I was reported by them to the credit agency, they would retroactively raise the interest on purchases I had already made. That's different than saying you're going to raise it going forward.

NJ: Why is it so important where the Consumer Financial Protection Agency is housed?

Frank: Well, there are three things that are important. One, what powers does it have? What can it reach? Not just mortgages, which are important, but check-cashers, and others. And including a lot of non-banks. Secondly, does it have independence? Can it be overruled? Third, there is this issue: If you house it somewhere, that has some influence.

The problem we've had is that there are consumer protection laws, but they're administered by bank regulators, whose primary obligation and orientation is towards keeping the banks profitable.... I admire Sheila Bair, she's a wonderful regulator. But her primary job is to keep the banks safe, and it is not to worry about consumers. I don't think there's a major conflict there, but it's a question of mindset.

Secondly, we had the bizarre notion that came from Senator [Bob] Corker that we put it in the Federal Reserve. Now, as I understand, the Republican view about the Federal Reserve is that it's an institution that is arrogant, elitist, nondemocratic, in league with the most corrupt of the financial institutions -- and therefore should be the place where you put consumer protection. That suggests that you don't think much of consumer protection.

And I don't want the agency to be housed in a place where it is the unwanted stepchild. A lot of stepchildren are very well done, but I don't want to create a Cinderella situation, where we have the two sisters that Mama is nice to and then all the bad stuff goes to the consumer agency.

NJ: Do you think housing it under Treasury --

Frank: Treasury would be fine, Treasury does not have that orientation towards the banks....

Now, I have to say, the notion that if you have an independent agency, it would undermine the safety and soundness of banks, really doesn't speak well to banks. What it's sort of saying is, if there's an agency that has to be fair to consumers, then the banks can't make money. I don't think that's the case.

NJ: What do the House and Senate versions of the bills have in common?

Frank: Well, there's a lot that we have in common. Senator [Christopher] Dodd's bill and our bill work very similar. We are both saying that we will have a way to identify an institution, like AIG in the past, that was getting so in debt that it was endangering the whole system, and we will empower agencies to step in and say stop it! You can't sell any more credit-default swaps, you have to significantly increase your capital, you have to sell off this entity.

We also say together, we solve the big problem that the Bush administration confronted. Secretary [Hank] Paulson told us, and Chairman [Ben] Bernanke, they had a choice in 2008, when first Lehman Brothers and then AIG said "we can't handle our debts." They believed that the law as it then existed -- and it still exists, since we haven't finished this amending process -- required them to make one of two choices: pay every debt, or pay no debt. So they paid no debts to Lehman Brothers and the economy very nearly melted down, they tell us. They, therefore, at AIG, paid every debt. We give them, both bills, the power to say, "no, here, investor, we want to tell you this; here, creditor."...

I hope we will have restrictions on what we call "securitization." Thirty years ago, if you borrowed money, you borrowed it from the person you were going to have to pay back, and the person who expected to be paid back was very careful about lending it to you. Then they began to sell off the loans.... Requiring some risk retention, as we call it, "skin in the game"... will be in both bills.

NJ: Are you concerned that any of the reforms you just spoke of will be diluted during Senate negotiations?

Frank: Yes, I am. Look, some [details] were diluted more than I would have liked in the House. I do think we were able to fight hard and maintain an acceptable minimum everywhere. There's one where we put into our bill a requirement that brokers, who are dealing with consumers, be held to a fiduciary responsibility. That is, people not be allowed to sell you things unless it is in your best interest. We hear the Senate's going to weaken that, and we will fight hard against it if that were to happen....

If the bill that we sent to the Senate passes in the form that we sent it, and we have a conference, then the Obama administration will be able to implement everything in the "Volcker rule." Whether or not they bind future administrations would be the question. My own view is that, while I'm ready to give them the power to bind them, at least in the current climate and for the next years, if an administration steps in and did these things, it's hard to think that somebody would run for president in 2012 on the platform that they were going to undo financial regulation.

NJ: Do you think Republicans' opposition to financial regulatory reform will be a political liability for them?

Frank: Yes. And it should be if they try to block this....

My own view is that the Republicans will be a lot less willing to cut back a consumer agency and make it inoperative if they have to do it in public with their votes. We just saw that with Senator [Jim] Bunning, where, when the Democrats finally did what many of us have said, and they forced Bunning to stand up, he backed down.... If the Republicans are successful in weakening this, it ought to be done after a very public process.

My intention would be, if we get a bill from them that substantially weakens it, that we have a conference. Very radical notion, let's have a House-Senate conference. It's a return to the thrilling days of yesteryear, as they used to say in "The Lone Ranger."