Chairman D'Amato, Senator Sarbanes and members of the committee: U.S. PIRG is pleased to offer our views on Financial Modernization today. As you know, U.S. PIRG serves as the national lobbying office for state Public Interest Research Groups. PIRGs are non-profit, non-partisan consumer and environmental watchdog organizations with offices around the country.
Consumer groups are not opposed to the concept of financial modernization. Properly implemented, financial modernization could bring benefits to consumers in the form of new products and more competition. However, despite the vast amounts of time that has been spent so far moving H.R. 10 narrowly through the House and to consideration before this committee, in our view, the bill still represents a triumph of special interests -- albeit somewhat balanced against each other -- over consumers, communities and taxpayers. While we understand that the committee may not ultimately choose H.R. 10 as a markup vehicle, we think it makes a good starting point for discussion of what we feel are some of the problems with Financial Modernization as proposed by the financial services industry, that must be addressed by this committee if the bill is to move forward.
To summarize our views, the following parts of the bill must be protected or strengthened, and cannot in any way be weakened:
In addition, the bill must be strengthened in the following areas:
Additionally, we associate our remarks with those of the community groups here today, regarding ways -- including extension of the act's coverage to new financial combinations -- to ensure that financial modernization does not weaken the Community Reinvestment Act (CRA) that protects the flow of credit and financial services into our nation's neighborhoods.
The financial industry is going through an unprecedented period of mergers and acquisitions. Enactment of HR 10 will exacerbate two trends. First, it will encourage the growth of bigger banks generally and second, it will encourage the diversification of bank holding companies into new structures. As has been pointed out, H.R. 10 will legalize the already announced merger of Citibank and Travelers, which is proceeding through loophole and exception. In the view of diverse analysts, merger mania has not benefited consumers.(1)
Bigger banks means bigger fees. Both PIRG and Federal Reserve bank fee studies have confirmed that bigger banks use monopoly muscle to charge their customers higher fees than small banks and credit unions do. PIRG's 1997 study of deposit account fees at over 400 banks found a 15% fee gap between high cost big banks and low cost small banks; credit union fees were half those of big banks. PIRG's 1998 ATM surcharging report found that more big banks surcharge non-customers and big bank surcharges were higher. So were the fees big banks charged their own customers to use other owners' ATMs.
Already announced and future mergers will result in less consumer choice and less competition-- that means even higher fees for consumers. Although PIRG is appalled that to date, both the Department of Justice and the Federal Reserve have rubber-stamped every financial merger they have seen, we are pleased that H.R. 10 retains Federal Trade Commission authority over bank and non-bank combinations. Additionally, however, we believe that rapid industry consolidation warrants a review of the adequacy of the modest anti-monopoly provisions of the banking laws to prevent price-gouging.
Besides sheer size, financial holding companies such as Citigroup pose the question of the "one-stop financial supermarket." In our view, unless H.R. 10's consumer protection provisions are protected and enhanced, captive customers will not only pay higher fees, but might be encouraged to buy unsuitable investment products and unnecessary add-on products while facing potential privacy invasions as various affiliates shared their customer profiles, perhaps inappropriately and certainly without informed consent. The consumer protection principles we outline below will help to limit these consequences.
The following are detailed comments on the issues we have highlighted:
(1) The Bill's Consumer Protections When Uninsured Investment Or Insurance Products Are Offered To Consumers Must Be Maintained
One of the few victories on behalf of consumers on the House floor was the acceptance of strengthening amendments ensuring that consumers gain protection from unfair insurance and securities sales practices. Numerous studies by the FDIC, AARP, the National Association of State Securities Administrators, Consumers Union, and other groups have documented the need for strong consumer protections when banks sell both insured and uninsured products. Recently, Nationsbank agreed to a civil penalty totaling $6.75 million for allegedly misleading some 13,000 unsophisticated, elderly investors who were sold complex derivative-based securities instruments. Nationsbank had previously settled a class action case for $40 million by former customers.(2)
U.S. PIRG concurs with the detailed analysis of Consumers Union in their testimony today regarding the need for these consumer protections. When banks function as one-stop supermarkets, they have tremendous power over consumers. Consumers must be guaranteed that products will be marketed fairly, with no tying, and with full disclosure. Consumers must also have the same rights of redress when they purchase a product from a bank as when they do so from an insurance agent or a brokerage.
(2) The Bill's Requirement That Banks Affiliated With Financial Holding Companies Offer Low-Cost Lifeline Bank Accounts Must Be Protected
According to the conservative estimates of the Comptroller of the Currency, over 12 million American families do not have bank accounts and the vast majority of these families are low-income.(3) In our view, the bill's requirement that banks offer lifeline accounts will help solve this problem. Incredibly, no current federal law requires federally insured banks to offer low-cost bank accounts. As both PIRG and the Federal Reserve Board have pointed out in recent studies, bank fees are rising, and are highest at bigger banks.(4)
Worse, the consumers who cannot afford bank accounts end up as customers of fringe bankers ranging from check cashers and pay day loan operators to rent-to-own stores, high cost mortgage lenders and pawn shops. These largely unregulated firms are notorious for charging egregious fees to cash checks or borrow money.(5)
Consumer and community groups have listened, ever since deregulation began in 1980, to the banks and their claims that lifeline bank regulation is unnecessary or burdensome. Over the years, the regulators have made numerous claims that banks will soon be offering low-cost accounts(6) and the banks have made similar unsubstantiated claims that they already do. PIRG's bank studies have found little evidence that any significant number of banks offer lifeline accounts. Lately, the banks have argued that we should wait for the 1999 Electronic Funds Transfer (EFT99) law to take effect, and certainly, by then, banks will be offering low-cost accounts. As you know and have pointed out, Mr. Chairman, EFT99 may instead lead to a new debacle: "triple-dipping" ATM surcharges, as banks may impose heinous fees on program participants. In recent testimony on the implementation of EFT99 regulations, advocates for low-income and elderly consumers expressed grave consumers that Treasury's proposals would be too expensive,(7) further exacerbating the need for H.R. 10's lifeline provisions.
Only two states, New Jersey (1991) and New York (1994), require low-cost affordable lifeline bank accounts. As the preemption section below discusses, were it not for abusive OCC preemption policies, other states may have copied these important laws. The New Jersey and New York laws are modeled after various proposals championed by Senator Howard Metzenbaum and others throughout the 1980s and early 1990s. The bills require all banks to offer a low-cost account that provides approximately 8-10 checks or debits each month at a fee not to exceed $3/month. This fee structure is adequate to cover banks' reasonable costs, without gouging consumers, although we would be prefer that fees be lower in any federal regulation. Restrictive opening balance requirements are prohibited. Neither law requires any certification of need.
The HR 10 language requiring banks to offer lifeline accounts is not controversial. In questions-and-answers before the House Banking Committee, the provision's author, Rep. Maxine Waters, asked bank witnesses whether they supported lifeline banking, and those that were knowledgeable to respond gave answers such as these by Paul Polking, Nationsbank General Counsel: "We at Nationsbank have always supported HR 10, as you know, and included the lifeline banking provision" or of Stephen Bennett, General Counsel, Banc One, "We have supported HR 10, Representative Waters, and we have understood that support to extend to the lifeline banking amendment."(8) In addition, Citibank strongly supports HR 10, as passed by the House, which includes the lifeline provision.
(3) Provisions Expanding Federal Agency Preemption Of State Law Must Be Removed From The Bill
H.R. 10 includes unnecessary, punitive language designed to assert national control over all state consumer protection laws. The language, purportedly to codify the Supreme Court's so-called Barnett standard for bank insurance sales regulation, is included in Section 104(b)(1) and would give expanded authority to regulators to allow federally chartered banks to avoid state consumer law, even when there is no federal law or regulation providing such consumer protection, including any activity authorized under "any other provision of federal law."
In our view, this last clause must be deleted, and additional language based on the preemption analysis in the Riegle-Neal conference report discussed below must be codified in HR 10 to rein in the out-of-control OCC.
OCC preemption determinations have not only restricted the applicability of laws passed by states, but have had a chilling effect on state consideration of other proposals. Bank lobbyists use a tag team approach to defeat, weaken or delay pro-consumer proposals. National bank lobbyists tell state legislators that bills will not apply to them; then, state bank lobbyists claim that bills will create an "unlevel playing field." The result: most bills do not pass.
Preemption has had a chilling effect on consideration of legislation to ban the double-dipping ATM surcharge. A recent PIRG survey found that more than half the states are currently considering ATM surcharge bans, yet none have been enacted.(9)
In Massachusetts, for example, an ATM surcharge ban bill has passed the Senate unanimously, and has a plurality of co-sponsors in the House, yet bank lobbyists have boxed it in. In addition, in Massachusetts, a new law capping certain Deposit Item Return (DIR) fees was narrowed to only apply to state-chartered banks, despite the absence of any federal legislation capping these onerous fees imposed on the unknowing victim-recipients of others' checks that bounce.(10) The narrowing of the bill was directly tied to the overt threat of OCC preemption.
The meritorious ATM surcharge ban legislation you have proposed, Mr. Chairman, faces a difficult road in the U.S. Senate, where a vote may be very close. Yet, were one or more states to first pass a law, the Congress might be more apt to follow suit. However, under the current regulatory environment, the states are afraid that the OCC will abuse its preemption authority. Consequently, Mr. Chairman, the states are prohibited by an unelected regulator from exercising their traditional role as the "laboratories of democracy," and everyone suffers, as neither the states, nor the Congress, enact pro-consumer legislation.
Over the last ten years, the OCC, at the behest of banking institutions, has sought to override the long-standing right of the several states to enact stronger consumer protection laws, even in the absence of concomitant federal legislation. While the Congress itself has abused preemption, such as in the 1996 Fair Credit Reporting Act amendments(11), it has also made modest attempts to rein in the OCC. In 1994, the Conference Report of the Reigle-Neal Interstate Branching Efficiency Act stated that the Congress found the OCC had gone too far, especially when it preempted the New Jersey Checking Account law of 1991.(12)
Generally, State law applies to national banks unless the state law is in direct conflict with the Federal law, Federal Law is so comprehensive as to evidence the Congressional intent to occupy a given field, or the State law stands as an obstacle to the accomplishment of full purposes and objectives of the federal law...
....the Conferees have been made aware of certain circumstances in which the federal banking agencies have applied traditional preemption principles in a manner in which the Conferees believe is inappropriately aggressive, resulting in preemption of state law in situations where the federal interest did not warrant that result. One illustrations is OCC Interpretative Letter #572, dated January 15, 1992, from the OCC to Robert M. Jaworski, Assistant Commissioner, New Jersey Department of Banking...In the case of Interpretive Letter #572, it is the sense of the Conferees that the fact that the Congress has acknowledged the benefits of more widespread use of lifeline accounts through the Bank Enterprise Act did not indicate that Congress intended to override State basic banking laws, or occupy the area of basic banking services to such an extent as to displace State laws, or that the existence of State basis banking laws frustrated the purpose of Congress.(13) (emphasis added).
Since New Jersey enacted its legislation, only New York has followed with additional lifeline rules. Riegle-Neal also statutorily required the OCC to begin to subject preemption determinations to a form of administrative notice and comment. When the New Jersey Banking Commissioner submitted a petition, which has yet to be acted on by the OCC, the agency admitted that no federal law requires lifeline banking.
"the BEA [Bank Enterprise Act] does not, however, require depository institutions to offer these lifeline accounts; that decision is left to individual depository institutions." (emphasis added)(14).
Recognizing the agency's recalcitrance on the critical matter of state consumer protection rules, when the Congress amended Riegle-Neal in 1997, it called for an annual report analyzing the agency's abuses of preemption. The first report has not yet been completed.(15)
In analyzing the problems that HR 10's sweeping preemption language will create, it is important to note that the Congress has not adequately regulated in numerous areas -- such as lifeline banking and ATM surcharge rules. No federal law explicitly requires banks to provide lifeline banking accounts. No regulatory policy of either the OCC, the FDIC or the Federal Reserve Board or any other agency explicitly requires financial institutions to provide any account or service in conflict with the New Jersey Checking Account law. In the absence of conflicting federal law, it has long been the federal tradition of this country that the states proceed to protect their consumers, as New Jersey and New York have correctly done. Over 700,000 New Jersey consumers have obtained New Jersey Checking Accounts.(16) Other states should have followed this successful lead, but were restrained by the inappropriate actions of an unelected regulator. The Comptroller of the Currency should be reined in. HR 10, instead, would throw off the reins altogether.
(4) Provisions Allowing Companies Undergoing Mutual-To-Stock Insurance Conversions (Redomestication) Without Consumer Protections Must Be Eliminated
Provisions of HR 10 pertaining to mutual insurance stock conversions could precipitate a race to the bottom, as companies forum-shop for states with no consumer protections, convert, and then fail to compensate mutual policyholders. While HR 10 contains some modest consumer protections, they do not go far enough. The amounts of money at stake are staggering. In New Jersey, a Prudential conversion could transfer assets worth $20 billion.(17) Total insurance assets under consideration for conversion are now approximately $50 billion(18). Laws must guarantee that policy holders receive adequate compensation. According to a Center for Insurance Research analysis of a new report by the New York State legislature on necessary consumer protections in mutual to stock conversions, the following are necessary conditions:
-- requiring "real, tangible compensation" to policyholders in an MHC conversion,
-- providing a means for policyholders to share in the future profitability of the MHC entities,
-- tightening limits on executive compensation in stocks and options,
-- forbidding management to waive dividends to the MHC,
-- limiting the sale to outsiders of all types of stock, not just voting stock,
-- requiring a majority of all policyholders eligible to vote to approve a plan to convert,
-- mandating that a MHC conversion be approved only if it is in the "best interests" of policyholders,
-- requiring SEC-type disclosure to policyholders of all the risks of the proposed conversion
-- requiring insurers to set aside funds to ensure that policyholders have adequate means to communicate with each other before a vote on the conversion,
-- abolishing the requirement that a bond be posted before a court challenge to a conversion.(19)
In U.S. PIRG's view, the provisions of HR 10 pertaining to mutual-to-stock conversions should be reviewed based on these findings. Sections 311-315 should be eliminated from the bill or substantially modified to meet these conditions before the bill goes forward.
(5) Provisions Protecting Consumers From Privacy Invasions Caused By Unfair And Unreasonable Personal Information Sharing By Holding Company Affiliates Must Be Added To The Bill.
While U.S. PIRG has been encouraged that numerous recent stories have documented the problems inherent in information sharing between and among the affiliates of large bank holding companies, no provision of HR 10 would strengthen too pliant laws that allow too much information sharing with too little consumer protection. Although Rep. Ed Markey attempted to add amendments in both committee and on the House floor that would have improved the situation, no changes were made.
As enacted in 1970, the Fair Credit Reporting Act (15 USC 1681) included an exception from the definition of credit report for so-called "experience information." The exception's intent was to allow a merchant or employer to provide a reference without triggering the duties of a credit bureau. That section has been abused by debt collectors, that falsely claim to be reporting on their own experience with a debtor only. In our view, it can also be exploited by large financial institutions, which could use the exception to establish unregulated credit bureaus.
In 1996, at the behest of large financial holding companies and despite the vigorous opposition of both the Federal Trade Commission and consumer groups, Congress expanded the experience loophole to allow so-called "affiliate sharing." (FCRA Section 603(d)(2)(A)(ii) and (iii)). Under this provision, once a financial holding company affiliate has obtained a credit report it can share that credit report (as well as any other information from experience or the consumer's application) with any other affiliate under common corporate control, without triggering the consumer protection provisions of the Fair Credit Reporting Act. The proposal established a meager opt-out provision, which has been criticized even by the OCC.
Recently, Acting Comptroller of the Currency Julie Williams added her important voice to those calling for reform. In a May speech, she admonished bank officials to improve privacy controls and improve disclosures to consumers of their rights to opt-out of this controversial "affiliate sharing exception" to the Fair Credit Reporting Act:
"In the affiliate information-sharing area, an institution that wants to share information with a related company may do so free of restrictions placed on credit bureaus, provided that the consumer receives advance notice and opportunity to direct that the information not be shared. In other words, consumers have the right to "opt out" of any information-sharing arrangements.
But, unfortunately, it has been known to happen that the affiliate-sharing "opt out" disclosure is buried in the middle or near the end of a multi-page account agreement. For existing accounts, some institutions have gotten into the habit of reducing the required "opt out" disclosures to the fine print along with a long list of other required disclosures. Few consumers are likely to have the fortitude to wade through this mass of legal verbiage, and fewer still will take the time to write the required "opt out" letter. I have even heard of people getting two separate notifications covering different types of information, requiring two separate letters to opt out. Such techniques may fall within the letter of the law, but they certainly fall short of its spirit."(20)
On 12 June, Williams announced formation of a new privacy working group: "Financial privacy is one of the most important issues facing the public today. I intend to do everything possible to make sure that our nation's banks emerge as leaders in efforts to protect consumer privacy."
In PIRG's view, strengthening the opt-out is a modest first step. It does not, however, go far enough. We do not think a health insurance subsidiary should be able to share confidential data with a credit card subsidiary. We don't think that consumer experience information -- bank account balances, types of accounts owned -- should be shared with affiliates or third-parties. As the Federal Trade Commission has recently pointed out, more needs to be done.
"Cross-industry mergers, such as the Citicorp/Travelers Group transaction, may raise important privacy concerns, in particular over the treatment of consumer information by affiliated companies. Such mergers may allow detailed and sometimes sensitive information about consumers, including medical and financial data, to be shared with relatively few restrictions among newly related corporate entities. Consumers might not anticipate that providing information to one entity for insurance underwriting purposes, for example, might later be used for different purposes by a financial institution that is or becomes an affiliate.(21)"
It would not be an overstatement to say that, of all the compromises consumer groups were forced to agree to in the long battle to amend the FCRA, the establishment of the affiliate sharing exception is the one that concerned us the most, since it rolled back consumer privacy rights, failed to establish offsetting privacy protections, and posed the greatest risk of unknown (to Congress anyway, but perhaps not to its proponents) consequences.
If the committee goes forward with HR 10, it must eliminate or at least narrow the "experience information" and "affiliate sharing" exceptions to the Fair Credit Reporting Act, strengthen consumer disclosures for remaining information sharing, if any, and change the unacceptable opt-out provision to an opt-in.
Thank you for the opportunity to present our views today. Properly constructed, financial modernization offers opportunities for consumers and financial institutions. It is the
responsibility of the Congress to ensure that any final bill maintains the safety and soundness of
our financial system, and protects consumers and communities, as well as modernizes the
structure of the industry. We look forward to working with you.
1. See for example a 1996 report by Stephen Brobeck, Consumer Federation of America, "Bank Mergers and the Consumer Interest." See also, testimony of William McQuillan, Independent Bankers Association of America or of Professor James Brock of Miami University (OH), both before the House Judiciary Committee, 3 June 1998.
2. See "Nationsbank To Pay $6.75 Million In Fines," Marcy Gordon, the Associated Press, 4 May 1998.
3. A 1988 GAO report, "Government Check Cashing," probably more accurately placed the estimate at 18 million families. We doubt that there has been such improvement.
4. See "Big Banks, Bigger Fees," U.S. PIRG, 31 July 1997 (http://www.pirg.org/consumer> or see "Annual Report to Congress of Fees and Services of Depository Institutions," Federal Reserve Board, June 1997, <http://www.bog.frb.fed.us/boarddocs/RptCongress/feesIndex.htm>. The U.S. PIRG study compares fees at the nations' 300 largest banks (which hold 2/3rds of all deposits) to those at other banks and documents a widening 15% fee gap between large and small institutions. The fed compares fees at single state and multi-state institutions, finding that multi-state institutions, which are larger, charge higher fees.
5. For an excellent analysis with recommendations for action, see Hudson, Michael, "Predatory Financial Practices: How Can Consumers Be Protected?" AARP, Winter 1998.
6. See, for example, the OCC's 1997 polemic, "Financial Access in the 21st Century," or former Comptroller Ludwig's 12 Jan 98 address to a Los Angeles forum convened by Rep. Maxine Waters, author of HR 10's lifeline provisions, for typical agency analysis: "Despite the numerous accomplishments of U.S. depository institutions to date, we know that millions of American households do not have deposit accounts. What we do not know well is why..." (Ludwig, at 25).
7. See, for example, Testimony of Gene Barrett, AARP, 4 March 1998, before the House Financial Institutions Subcommittee Hearing on EFT 99.
"AARP is concerned that unless the implementing regulations contain appropriate safeguards, mandatory conversion to EFT will force many recipients to accept undesirable payment options and leave them exposed to a variety of unfair and deceptive practices. Therefore, it is critical that the Secretary use the broad authority granted under the Act to (1) protect payment recipients from unnecessary or excessive charges to access their benefits, (2) assure the availability of hardship waivers that effectively meet individual needs, and (3) create meaningful opportunities for those currently without accounts to obtain essential financial services and participate more fully in the nation's financial system."
or of Margot Saunders, Staff Attorney, National Consumer Law Center, on behalf of NCLC and other groups, before the same hearing: "The cost of the account to the recipient should be the most important factor in the design of the ETA for needs-based recipients. Cost would be less critical if Treasury were willing to permit the majority of the currently unbanked to claim a waiver from ETA on the basis of financial hardship, as most of these individuals are now able to have checks cashed at little or no cost. One of the major reason some recipients have avoided establishing bank accounts is because they cannot afford the fees and have found alternative means for cashing their benefit checks. For low income recipients living on fixed incomes any new expense is in fact a financial hardship. Accordingly, we would urge that Treasury waive all fees for a basic ETA for all unbanked recipients of needs based federal benefits and that some sort of sliding fee scale be established for all other recipients based on their actual monthly income. (footnotes deleted)."
8. Transcript of hearing of House Banking Committee on Financial Mergers, 29 April 1998, pages 238-240.
9. Connecticut and Iowa Banking Commissioners have imposed administrative bans.
10. Massachusetts DIR legislation took effect in February 1998, (St. 1997, c. 178) amending MA. GL c. 167D Sec 3 and c. 171, Sec 41a.
11. Comprehensive 1996 amendments to the Fair Credit Reporting Act, 15 USC 1681 et seq., could have been enacted in 1992, were it not for the financial industry's demand that all state laws in the area be overturned. Under the 1996 compromise, the state laws pertaining to pre-screening, notices, obsolescence and timetables, which arguably are of interstate import, were preempted, but so were all provisions pertaining to regulation of banks. However, these provisions all sunset eight years after enactment.
12. 15 Jan 92 letter (Interpretative Letter #572) of OCC General Counsel William Bowden preempting New Jersey's Proposed Regulation 1991-620.
13. Pgs. 53-54, Report No. 103-651, U.S. House of Representatives, 2 August 1994.
14. 4516 FR Vol 61#25, 6 Feb 96
15. Public Law 105-24 enacting HR 1306, Section 2(b).
16. Testimony of New Jersey Banking Commissioner John M. Traier before the NJ Assembly Committee on Financial Institutions, 4 March 1996, at 6.
17. See Joseph Treaster, "New Laws Could Shortchange Prudential Policyholders," the New York Times, 18 June 1998 for a discussion of consumer advocate concerns over a new law governing a Prudential conversion.
18.See "Insurance Giants May Go Public", Associated Press, AP On-Line, June 21, 1998.
19. See press release of Center for Insurance Research, April 29, 1998, "NEW YORK ASSEMBLY INSURANCE COMMITTEE BLASTS MUTUAL HOLDING COMPANY CONCEPT." Also see letter of CIR and other groups to Rep. John LaFalce criticizing HR 10's conversion language, 12 May 1998.
20. Remarks by Julie L. Williams, Acting Comptroller of the Currency before the Banking Roundtable Lawyers Council, May 8, 1998, <http://www.occ.treas.gov/ftp/release/98-50a.txt>
21. Testimony of William Baer, Director, Bureau of Consumer Protection, Federal Trade Commission, before the House Judiciary Committee, 3 June 1998, Hearing On Bank Mergers.
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