Mr. MIERZWINSKI. You always get it right, Madam Chairwoman. Chairwoman ROUKEMA. Is the Consumer Program Director for the U.S. Public Interest Research Group, better known as PIRG. Certainly he is no stranger to this subcommittee, and he has a long time history as a public advocate for consumers. We look forward to your testimony this morning. Thank you. STATEMENT OF EDMUND MIERZWINSKI, CONSUMER Mr. MIERZWINSKI. Thank you. Madam Chairwoman, Members, Mr. Vento and other Members, it is a privilege to testify before you and provide you with the views of the United States Public Interest Research Group, which, as you know, is the national lobbying office for the State PIRGS, which are consumer environmental watchdogs active in about 37 States. Chairwoman ROUKEMA. Excuse me, I have been reminded and I should have announced, I will have to invoke the 5 minute rule on those testifying. I will try to be courteous about it, but if you could comply to the best of your ability. Mr. MIERZWINSKI. Thank you. Regardless of which legislative proposal before the committee is enacted, consumers will face increased strains in a less regulated marketplace. It is incumbent upon the Banking Committee to ensure that steps are taken to ensure that proposed legislation solves already existing problems and anticipates future and potential problems. In a recent letter from the major consumer organizations to Chairman Leach, Chairman D'Amato and to Secretary Rubin and others, we made four points which we feel ought to go forward if financial modernization is brought forward in the 105th Congress. First: Any bill must close the loopholes that allow banks to sell securities without being subject to the investor protection rules that registered brokers must follow. I would concur with the detailed analysis that is made in both Consumers' Union and Chairman Levitt's and other testimony that goes into some of the problems in this bill and others on that matter. Second: Consumer groups recommend anti-coercion and other sales practice rules for insurance sales to protect against banks forcing, or duping, consumers into buying products that they do not want, or do not need. Last month PIRG joined the Consumer Federation of America in releasing a major report documenting that each year consumers overspend on the order of approximately $400 million a year for the unnecessary rip off product called "credit life insurance." Many banks already sell this product, along, of course, with car dealers and small loan companies. Consumers are often pressured into buying it. It is very often unnecessary, and it is, most of the time, extremely overpriced. Our study found that the average loss ratio, or benefit to consumers on credit life insurance is approximately 42 cents on the dollar in 1995. Even the National Association of Insurance Commissioners, who are not characterized as a left leaning or liberal organization, believe that 60 cents on the dollar is a reasonable minimum, and the major consumer groups believe 70 cents a reasonable minimum. Now, in addition to credit life insurance, I would point out, as well, that banks are increasingly marketing with their credit cards companion products such as "credit disability, credit unemployment." All you have to do is look at all the so-called "preapproved" offers you receive in the mail for credit cards and look carefully at the offerings and you will see the aggressive marketing of these add-on products that I think are underregulated at this time. Third: The consumers groups recommend tough disclosure in advertising rules to make sure that consumers know the products they buy are not insured or guaranteed and that they carry some risks. Whether the studies are done by AARP, Consumers' Union, the North American Securities Administrators, or even by the FDIC, I think it is clear that when consumers buy investment products at banks, they do not understand that they are uninsured. They do not know that they carry higher risks, including the risk of loss of principal, and that is under current conditions and under current law. Fourth: The consumer groups recommend an enforcement mechanism to enable consumers to recover directly from the wrongdoer when the bank violates minimum Federal protections. As Chairman Levitt pointed out to the subcommittee, H.R. 268 does not grant bank customers a forum to address grievances, nor do the Federal banking laws contain private rights of action for investors. Unfortunately, neither the financial services marketplace, nor the current bank regulatory structure, adequately protects consumers. We have a number of additional recommendations in our testimony to protect consumers, and we urge that if any financial modernization proposal goes forward that consumer protections be highlighted. I want to commend Congressman LaFalce for the letter that we just received a copy of, urging the regulators to make sure that they make consumer protection an important part of anything they bring forward. Thank you. Chairwoman ROUKEMA. Thank you. [The prepared statement of Mr. Edmund Mierzwinski can be found on page 576 in the appendix.] Chairwoman ROUKEMA. Congressman LaFalce, would you like to do the honors in introducing Mary Griffin, Legal Counsel? Mr. LAFALCE. Yes, it is my pleasure to introduce a native Buffalonian, Mary Griffin. I have known her parents for a great, great many years. Her father is one of the most prestigious attorneys in Buffalo's largest and most prestigious law firm, and she has followed in his footsteps, actually gone a bit beyond that, not only obtaining her JD degree, but then getting her Master of Law degree and has worked in the consumer vineyard for a great many years now as insurance counsel to an insurance union, Consumers Union. We are very, very pleased to have Ms. Griffin with us. STATEMENT OF MARY GRIFFIN, INSURANCE COUNSEL, Ms. GRIFFIN. Thank you, Congressman LaFalce. Ms. GRIFFIN. My name is Mary Griffin, and I am with the Washington office of Consumers Union. We appreciate the opportunity to testify here today on H.R. 268 and the issue of financial modernization as it affects consumers. I, too, would like to take this opportunity thank you, Congressman LaFalce, for your letter to Mr. Hawke and Mr. Ludwig about the need for consumer protections, because obviously this is very important for consumers as banks move further and further into the financial services marketplace. Financial modernization is a laudable goal if it promotes competition, provides a regulatory structure that ensures safety and soundness and ensures consumers the needed protections as they attempt to make their way in the new and diversified marketplace. Today I would like to focus on the need to modernize consumer protection laws as part of any financial modernization package. Contrary to what many believe, banks have already made a substantial mark in the area of retail sales. According to industry estimates, bank insurance premiums totaled an estimated $16.3 billion in 1995. Their annuity sales accounted for one-third of all annuity sales in that same year. Consumers have already experienced problems with banks selling insurance, annuities, mutual fund stocks and other non-banking products, and with bank fees increasing, many wonder whether banks' further expansion will promote competition, or just provide an opportunity to squeeze more out of consumers' pocketbooks, and consumers have cause for concern. Study after study reveals that banks are not informing consumers about essential information relating to non-banking products. Banks argue that their expansion into the financial services marketplace will promote competition and help underserved areas. But as Mr. Mierzwinski just discussed, the track record for banks in the area of credit insurance, which is the second most sold insurance product for banks, shows more concern with increasing profits than with promoting a competitive market. How can Congress help ensure that banks' expansion in the financial services marketplace helps, rather than hurts, consumers? First, the gaps in investor protection rules must be closed. Banks are currently exempt from the Federal securities laws. This means that banks don't have to comply with investor protection rules that non-bank brokers have to comply with, rules such as the requirement that salespeople recommend only products that meet the financial needs and goals of the particular customer, or as many people refer to it as, "suitability rules.” Most importantly, consumers do not have recourse to arbitration for violation of the rules as they do under securities laws. Unfortunately, H.R. 268 does not fully close this gaping loophole. Second, strong disclosure in advertising rules are needed to ensure that banks don't mislead consumers. While H.R. 268 has some disclosure rules, they do not require disclosure prior to sale, which is the most important time. Nor do they cover insurance affiliates. Third, any modernization proposal must contain consumer protections to prevent coercive and deceptive practices in insurance sales. For example, banks use high pressure tactics on loan applicants awaiting their loan approval. To prevent this, banks should be allowed to sell insurance only after the loan decision has been made, and consumers must have an enforcement mechanism to recover directly from banks when they violate these rules. Finally, Congress should not preempt State consumer protection laws. The preemption language of H.R. 268 is very broad. In the area of privacy, we believe the bill does not go far enough to protect consumer privacy of the information they give to banks. In addition, we are also concerned that H.R. 268 may preempt State privacy laws that provide greater protection. In addition to the consumer protections we just discussed, we also would like to touch upon structural issues that have gotten quite a bit of attention. First, with regard to the mixing of commerce and financial firms, we are opposed to it because of the potential overconcentration of economic power, the possible skewing of credit markets and general safety and soundness concerns. In terms of risky activities such as underwriting securities and insurance, we believe the less risky approach is through a separately capitalized affiliate rather than permitting the activities in a federally insured bank subsidiary. We thank you for this opportunity to testify and look forward to working with you in this endeavor. [The prepared statement of Ms. Mary Griffin can be found on page 582 in the appendix.] Chairwoman ROUKEMA. Thank you. Mr. Allen Fishbein is General Counsel for the Center for Community Change and is no stranger to this subcommittee. He has been an advocate for consumer issues for a good number of years. Thank you. Welcome. STATEMENT OF ALLEN J. FISHBEIN, GENERAL COUNSEL, CENTER FOR COMMUNITY CHANGE Mr. FISHBEIN. Thank you very much, Madam Chairwoman. It is a pleasure to be here and appear before the subcommittee. I appreciate the opportunity to present my views and the views of the Center for Community Change on financial modernization and on H.R. 268. I want to commend you, Madam Chairwoman and Representative Vento, in particular, for holding these hearings. In my testimony, I want to focus on the implications of financial modernization and restructuring for modest income consumers and communities and the need for the modernization of the Community Reinvestment Act. For some time now, deregulation, new technologies, increased competition domestically and from abroad, have been reshaping the banking and financial services industry. Í don't think there is any question about that. As a result, Congress is contemplating legislation to allow interfinancial institution affiliations and perhaps even allow banks and commercial firms to own one another. But to paraphrase former French Premier Georges Clemenceau's comment about war and generals, we think that "banking is much too serious a matter to be entrusted to the bankers." But, unfortunately, as we all know, the debate over the necessity of these changes is all too often dominated by narrow turf issues 38-389 97-6 and various industry wish lists. However, issues of financial modernization should not be allowed to proceed along narrow lines. It presents an opportunity for a much broader discussion about the type of financial system American families want and need and what the appropriate public responsibilities should be for all types of financial institutions to better meet the needs of underserved communities and businesses. From the standpoint of most consumers, the case for making sweeping legislative changes at this time to our banking and financial system seem less than compelling. The banking industry is strong and enjoying record earnings. There has not been a huge outcry from most Americans. The need for financial supermarkets authorizing broader affiliations between banks and other financial institutions, such as securities firms and insurance companies, will unquestionably lead to increased concentration and the rise of a handful of superbanks. Yet consumers have not benefited from the concentration that has occurred thus far from within banking. There are also indications that small businesses, small farms, modest income communities may find themselves at greater risk should financial institutions become larger and larger. However, should Congress decide, after careful consideration of these and other relevant issues, that these sweeping changes are needed now, we urge that strengthened community safeguards and stronger consumer protections be incorporated into these legislative measures to help ensure that the broadest possible segment of Americans benefit from financial restructuring. In particular, and we set out in detail in my written testimony, we believe that the Community Reinvestment Act needs strengthening and modernization in order to maintain its effectiveness for stimulating increased lending and investments in underserved communities. We know it has been a tremendously effective law in the past, but it stands to become functionally obsolete if these changes are not made. And I propose in my testimony three areas that need to be addressed: One, financial modernization legislation should do no harm to the existing CRA statute. CRA can be undermined indirectly just as much as it can be through direct amendments to the statute; Two, that CRA must be modernized to reflect new realities between banks and non-bank affiliates of the same parent holding companies; and Number three, community reinvestment obligations should be expanded to non-bank financial institutions. There is an excellent article, by the way, on the public benefits that non-bank financial institutions receive, called the "Parallel Banking System and Community Reinvestment", which I would like to be offered to be introduced into the record. [The material referred to can be found on page 607 in the appendix.] Finally, we do not support cross ownership between banks and commercial firms. I see I am on safe ground with Chairman Volcker's testimony. While House Resolution 268 permits only limited forms of nonfinancial activity through a newly created financial services holding company, we are concerned that this would be seen as a foot in the |