[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
                       IMPROVING FEDERAL CONSUMER

                    PROTECTION IN FINANCIAL SERVICES

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 13, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-40



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York         DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York           STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North 
RUBEN HINOJOSA, Texas                    Carolina
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
JOE BACA, California                 GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts      SHELLEY MOORE CAPITO, West 
BRAD MILLER, North Carolina              Virginia
DAVID SCOTT, Georgia                 TOM FEENEY, Florida
AL GREEN, Texas                      JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey              STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio                 JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut   MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KENNY MARCHANT, Texas
JIM MARSHALL, Georgia                THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 13, 2007................................................     1
Appendix:
    June 13, 2007................................................    63

                               WITNESSES
                        Wednesday, June 13, 2007

Antonakes, Steven L., Commissioner of Banks, Commonwealth of 
  Massachusetts, on behalf of the Conference of State Bank 
  Supervisors....................................................    22
Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance 
  Corporation....................................................    16
Dugan, Hon. John C., Comptroller of the Currency, Office of the 
  Comptroller of the Currency....................................    14
Kroszner, Hon. Randall S., Governor, Board of Governors of the 
  Federal Reserve System.........................................    12
Majoras, Hon. Deborah Platt, Chairman, Federal Trade Commission..    17
Miller, Hon. Thomas J., Attorney General, State of Iowa..........    21
Polakoff, Scott M., Deputy Director and Chief Operating Officer, 
  Office of Thrift Supervision...................................    19

                                APPENDIX

Prepared statements:
    Maloney, Hon. Carolyn........................................    64
    Moore, Hon. Dennis...........................................    65
    Waters, Hon. Maxine..........................................    66
    Antonakes, Steven L..........................................    67
    Bair, Hon. Sheila C..........................................    91
    Dugan, Hon. John C...........................................   120
    Kroszner, Hon. Randall S.....................................   159
    Majoras, Hon. Deborah Platt..................................   180
    Miller, Hon. Thomas J........................................   205
    Polakoff, Scott M............................................   219

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    Follow-up letter from Hon. John Dugan, Comptroller of the 
      Currency, dated August 3, 2007, in response to Chairman 
      Frank's request............................................   236
    Letter from the National Association of Insurance 
      Commissioners, dated June 12, 2007.........................   237
Bachmann, Hon. Michele:
    Additional information requested during the hearing from Hon. 
      John Dugan, Comptroller of the Currency....................   239
Waters, Hon. Maxine:
    Responses to questions submitted to Hon. Sheila Bair, 
      Chairman of the FDIC.......................................   241
    Responses to questions submitted to Governor Randall S. 
      Kroszner, Board of Governors of the Federal Reserve System.   246
    Responses to questions submitted to Scott Polakoff, Office of 
      Thrift Supervision.........................................   251


                       IMPROVING FEDERAL CONSUMER



                    PROTECTION IN FINANCIAL SERVICES

                              ----------                              


                        Wednesday, June 13, 2007

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10 a.m., in room 
2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Present: Representatives Frank, Maloney, Watt, Ackerman, 
Sherman, Moore of Kansas, Clay, Miller of North Carolina, 
Scott, Green, Cleaver, Davis of Tennessee, Ellison, Klein, 
Wilson, Perlmutter; Bachus, Baker, Castle, Gillmor, Biggert, 
Barrett, McHenry, Campbell, and Bachmann.
    The Chairman. The committee will come to order. There are 
vacant seats, so if there are citizens who would like to sit in 
the seats, please fill them. There are people waiting. We 
shouldn't have empty seats.
    This is a very important hearing, in my mind, and it is one 
which I hope we will produce a lot of information. Contrary to 
the prevailing notion, sometimes Members of Congress have 
hearings because we want to learn things. I understand that is 
not the norm for hearings, but in this case, there is a need 
for information, and it is information to fill, in my judgment, 
a very clear-cut void.
    The preemptions by the Comptroller of the Currency and the 
Office of Thrift Supervision were controversial. Many of us in 
Congress on both sides did not like them. A former colleague, 
the gentlewoman from New York, Ms. Kelly, for example, was a 
very strong critic of them on the Republican side. But reality 
sets in; those preemptions are not going to be undone in any 
substantial way. We have a President in power who would veto 
any effort to do that, and by the time we might get a different 
President, I do not think we could unscramble that particular 
set of eggs.
    So I regret the scope of the preemptions. I acknowledge the 
extreme unlikelihood of our being able substantially to cut 
them back. There was some uncertainty until the Wachovia case 
was decided. Those of us who felt it was not an absolutely 
clear-cut decision take some solace in the fact it was 5-3; it 
would have been 5-4, I believe, if Justice Thomas had not 
recused, given his past voting pattern.
    But the preemptions are in place, and that leaves us with 
the problem, in my judgment, that we, the Federal Government, 
have at this point bitten off much more than we are currently 
able to chew. Essentially to change metaphors a little bit, we 
have bitten off 50 heads, but we don't have the brainpower 
ourselves to replace them. What we have done is to eliminate 
the major source of consumer protection in the financial area, 
because in the American system, for a variety of reasons, 
consumer protection has come primarily at the State level.
    And let me, as an elected official, explain to people why 
there is an institutional reason for that, and why I am 
particularly concerned about the need to take serious action 
here. I want to say what may be imprudent, but making 
international macroeconomic supermonetary policy is more fun 
than arbitrating disputes between a cranky customer and a bank 
clerk. And it is much better to debate the Basel accords, or 
how going forward to do assignee liability in subprime, or any 
of a number of other issues that we have, the effect of 
monetary policy on employment, those are more stimulating 
intellectually, more rewarding than a, ``He said, she said;'' 
``I did not, yes, you did, no, I didn't,'' dispute.
    There is a reason why consumer protection has been more 
often done at the State level; State regulators are more likely 
to be elected officials than Federal regulators--State 
attorneys general, State insurance commissioners, and other 
State officials. This is one case where being the closest to 
the electorate is a serious fact. And I will tell you, in my 
own office, and among Members of Congress, we do a certain 
amount of consumer protection because we run for office. And I 
will tell you this: If you ask me, where is the greater 
intellectual stimulation, where do I think any individual 
energy is that I express, where will I get greater results, it 
is probably in making broad national policy.
    But cumulatively dealing with these individual consumer 
complaints is very, very important for two reasons: first, for 
the injustice done to individuals; and second, if there is no 
consumer protection mechanism in the society, things will go 
off track, and there could become this bias against consumers.
    Now it is not that I believe that the banks and other 
institutions that are regulated are rapacious or greedy beyond 
the norm that we are supposed to have in a capitalist system. 
It is just that we all make mistakes, and even more of a 
problem, we don't like to admit our mistakes; we like to cover 
them up, we like to deny that we made them, and we like to 
blame other people for them. Those are human traits. I do not 
impute them to the banks; I impute them to human beings.
    Consumer protection exists to be something of a corrective 
force, and here's the problem: I do not think that the Federal 
agencies as currently and historically constituted, given their 
mission, are at present adequately staffed or oriented or 
legally structured to provide consumer protection.
    I had a conversation with one bank regulator who told me 
that the existence of safety and soundness powers--and, by the 
way, we will take 20 minutes on each side. We have only one 
panel. This is a serious issue, and so we are going to go to 
the fullest extent. However, I want to lay it out so that 
people have a sense of where we are on this. We are going to be 
within our 20 and 20. I was told by one of the regulators, 
well, we can do regulation of consumer protections under our 
power to enforce safety and soundness on the banks, the 
argument being that a bank that does not treat consumers well 
can be called to account because it is jeopardizing its safety 
and soundness. I wish.
    In fact, done cleverly enough, being unfair to consumers 
can contribute to the safety and soundness of a bank. I 
believe, for example, that the overdraft fees that people get 
hit with, where people go to an ATM and are told by the ATM 
that they have so much money, or they read on the ATM--I don't 
think we have talking ATMs yet. I guess we do for people who 
are vision impaired. But when people learn from the ATM that 
they have so much money--and that includes, without them having 
asked for it, an overdraft amount--and they write a check for 
that, they get whacked with a fee. I wish that jeopardized the 
safety and soundness of the banks who did it, but I see no 
evidence of that.
    The fact is that banks are not stupid, and they do not do 
these things to put themselves at risk; they do them because 
they make money off of them. And they are there to make money 
and provide that money in our capitalist system to people who 
are invested in the intermediary function, but there are 
abuses.
    So here are a couple of problems I want to examine. One, 
legally, do the various Federal bank regulators have the 
authority to step in and replace the regulations that were done 
at the State level? Two, do they have the proper resources for 
enforcement? There is no reason why these couldn't be changed. 
The fact is that even where State laws have applied, the 
visitation rights do not apply; States may not even enforce 
those laws where they can apply the law. Why? Are we the 
world's best--we, the Federal Government, are we such super-
duper law enforcers that we don't need any help from anybody, 
and we can replace everybody else?
    I think the opposite is the case. I think that cooperation 
in this area of law enforcement is a good idea. My colleagues 
want cooperation in other areas of law enforcement on 
immigration and elsewhere. I don't understand why we can say 
that all of these State regulators, with all of their 
experience, are totally incompetent to help us, the Federal 
Government, the all-wise, all-knowing, omnipotent Federal 
Government.
    So we have the legal authority. We have the statutory 
powers. We also have the question of the culture, and I hope 
that is changing. And then we have this problem, and that is 
why I have asked all of you to be here together. And I am going 
to ask you all to keep your hands on the table so that nobody 
goes like this when we are asking why something isn't being 
done. You know, Harry Truman wanted a one-armed economist. I 
want regulators without fingers, because I don't want them 
being pointed at other people.
    Here is the problem: We have been told by some of the 
regulators that they are not fully able to do regulation to the 
extent that we want because the Federal Reserve Board of 
Governors has not used their authority under the Federal Trade 
Commission Act to list things. That is why we appreciate 
Commissioner Majoras being here, with, by the way, I will say 
to you, the full acquiescence of Chairman Dingell, who has the 
primary congressional jurisdiction over the FTC. We have a 
combination. We are told, well, it is the FTC Act, and the 
Federal Reserve has their responsibilities under the FTC Act, 
and only they can give responsibilities to the other bank 
regulators.
    Well, you are all here, and at the very least, when we 
leave today, we are going to know who does what, and who is 
responsible for what, and whether, in fact, the failure, as 
some have said, of the Fed to spell this out does interfere or 
not.
    So that is where we are. I do believe that we have a common 
interest. I do believe that the people here before us from the 
Federal side do want to do consumer protection, but it is not 
primarily what you were instructed.
    I have to say, and I am grateful that the Governor is here, 
but--let me give you this example. Former Governor Gramlich 
expressed a difference of opinion with former Chairman 
Greenspan about consumers, and Chairman Greenspan's response 
was very revealing. He said, ``Oh, how can people say I wasn't 
interested in consumer affairs? I always followed the staff 
recommendation on that.'' Can anyone imagine Alan Greenspan 
saying, you know, when it came to interest rates, I always 
followed the staff recommendation? When it came to deciding 
whether there were problems in the stock market, I always 
followed the staff's recommendation? The fact that Alan 
Greenspan always followed the staff recommendation in consumer 
affairs is confirmation that this was not highest on his 
agenda. Alan Greenspan is not a man who is known for being 
staff-led. He was not known for his intellectual passivity. 
Yes, he goes to the staff, because he didn't become Chairman of 
the Federal Reserve, the supereconomic chiefdom of the world, 
to worry about a couple of people having an argument about a 
bank deposit in Chicago. And if we don't do that better than I 
think we would otherwise do it, then we are going to have a 
problem. So that is why we are here.
    I now recognize the gentleman from Alabama. He has asked 
for 5 minutes. It is divided up. So I will just say to the 
clerks that he will have his time.
    Mr. Bachus. Thank you, Mr. Chairman.
    Let me start by saying that I am a strong supporter of the 
dual banking system, and I think it has served our country 
well. Since the 19th century, where the OCC regulates our 
national banks the OCC, and then our Federal banks by the 
Federal Reserve and the FDIC, and our State agencies, the 
Supreme Court has basically preempted some State regulation on 
our national banks and established one national standard, which 
obviously provides a great deal of efficiency and ease of 
operation.
    I think a national standard--OCC preemption--reduces the 
costs of the banks. It enhances, I think, their ability or at 
least their opportunity, to serve their customers, particularly 
in a global marketplace. However, critics have expressed 
concerns about--and it is a concern that I share--the adequacy 
of the OCC's regime for enforcing consumer protection. I 
wouldn't have said that 5 years ago; 5 years ago, I would have 
said that I am confident that regulation of our national banks 
and our State charter banks is sufficient. But recent practices 
have really called into question my judgment that customers are 
being well served, really, by both State and Federal 
regulators.
    When we passed Check 21, we were assured by the regulators 
that this was a way to modernize our system, take cost out, 
which was an excellent opportunity to modernize and bring our 
banking system forward. But we were told that it would not 
prejudice customers. Within 6 months, we began to get 
complaints that while checks were being debited to the account 
realtime, deposits were not. Deposits were being held until the 
next day.
    I like to cite real examples. And again, a lot of the 
people who come to us with these complaints, it is the 
principle of the matter. I said that about credit cards. I had 
a gentleman who was getting work done at his house, he had a 
guy working there, and he paid the contractor an $8,000 check. 
Before he paid him, he actually said, ``I have to go to the 
bank and make a deposit.'' He went to the bank, made a deposit, 
came back, and paid the contractor.
    Well, it was about 2:30. The contractor went to a bank 
around 5:00 and deposited his check. It was the same bank where 
the gentleman had made his deposit. The deposit wasn't 
credited, but the check was, because the bank explained to the 
gentleman that after 2:00, it was the next business day for 
deposits, but not for checks. It was only the deposit which was 
the next business day. Now what really enraged this constituent 
of mine, and actually I probably had heard this on many 
occasions, was that his wife had written two small checks, one 
for $6 or $8, and one for about $18. Well, the bank could have 
paid those checks, but instead of paying those checks, they put 
the larger one in first so it would overdraw the account. He 
was actually told by his banker, and I confirmed this, that the 
bank had a computer program which took the larger check first 
to maximize overdraft charges. And, in fact, that has become a 
common practice to take the larger check when there are two or 
three checks presented at the same time. It maximizes the 
profit of the bank, but it obviously operates to the detriment 
of the client.
    Now, a lot of the people who come to complain to me, they 
have time, they have money, they have resources, and it is not 
a life-or-death situation to them. But I am in a district that 
has counties where the median income is $18,000. After taxes, 
it is $12,000, and when someone writes three or four checks, 
and one overdraws their account, and the bank chooses to charge 
them for each of those three checks, that is $100. That can 
represent half of their disposable income for a week, and I see 
that as sharp practice. I see that as unconscionable.
    You heard last week, many of you, in the last week or two, 
you had appeared before this committee on credit cards. Many of 
the practices--I have heard no one defend them as saying they 
are fair. I have had no one stand up and say this. I have had 
bankers and institutions that do it say, we realize there is a 
problem there, but no one is addressing the problem. And all of 
these practices are recent practices.
    I talk to bankers in Birmingham. I talked to one of the 
gentlemen who established one of the large banks in Alabama. He 
said that as long as he was there--and he is in his 80's--the 
bank never would have done what is being done now. He said they 
wouldn't have even thought to have done such a thing.
    I mentioned Check 21, clearing the checks, some of the 
credit card things. My fear with preemption, I think it can be 
a very good thing. It can only be a very good thing if Federal 
regulators both work with the State and coordinate their 
efforts to protect consumers, and they also get serious about 
some of these abusive sharp practices which are not just fact. 
Yes, it increases the profits of the bank, but that shouldn't 
be--you know, that is not a justification for unfair practice. 
The customer has to have a seat at the table. And I would hope 
that Federal regulators would promote uniformity in Federal 
oversight, but also in strong consumer protection in both 
regulation and enforcement. I think that those are steps which 
will ultimately improve the bank's ability to serve their 
customers.
    In this regard, the memorandum of understanding between the 
OCC and the Conference of State Banking Supervisors to 
facilitate proper referral of consumer complaints to Federal 
and State agencies with the regulatory authority is a step in 
the right direction, and I hope we will protect customers. But 
let me tell you what it won't protect, the two things that we 
keep saying that we have, and they are important, but they 
don't do the job alone. One is financial literacy. It is very 
important, but it is not an end-all, do-all, and disclosure is 
not an end-all, do-all. The idea that it is in the agreement, 
the customer was given notice of this practice, the chairman 
and I discussed yesterday. We are both law school graduates, we 
are very proud of our academic record in law school, and yet we 
get these disclosures, and we don't understand them.
    The practice of the banks, to us, appears as something is 
simple, what we call sharp practice or unconscionable. And I do 
believe, and many of my Republican colleagues might disagree, 
but I do believe the Federal regulators: one, don't carry 
forward on the promises that they made to us when we passed 
Check 21; and two, if they do not start addressing some of 
these egregious practices, I do believe that the confidence of 
this committee and this Congress--if the Federal regulators in 
concert with State regulators don't protect the customers, I 
believe this committee will lose confidence and take action.
    There are some on this committee who will never do that, 
they will never intervene. They will basically let the market 
sort it out between institutions and banks with a lot of 
financial resources and customers with almost no resources and 
very little ability to protect themselves. It is not a level 
playing field. And part of leveling that playing field is 
strong consumer protection. It has been a tradition of the 
Republican Party. It is a tradition I would like to see honored 
both on my side and on the other side. And I know these 
regulators; I know the people on the first panel. I know that 
they want to do what is right for the customer. Thank you.
    The Chairman. How much time has been consumed by both 
sides? All right. We have 14 minutes left on this side. The 
gentleman has 9 minutes left.
    I am going to recognize for 2 minutes the gentleman from 
Ohio, Mr. Wilson.
    Mr. Wilson. Thank you, Mr. Chairman.
    Let me start by saying, first of all, thank you for holding 
this hearing today, and I am pleased to be able to give an 
opening statement. Let me welcome our witnesses.
    I am Charlie Wilson. I am from the Ohio Sixth Congressional 
District, and it is ironic we should be doing this today 
because just a year ago, I was in the Ohio Senate working on 
predatory lending. Ohio, ladies and gentlemen, has been a 
victim of predatory lending, and unfortunately we lead the 
Nation, the entire Nation, in foreclosures. That is not 
something we are very proud of, and we are a proud State with 
11.4 million people, and we do a lot of things right. So we 
sincerely want to get started on this at the Federal level.
    As I said, last year we did Senate bill 185. We ran into 
some lame duck problems at the end of the session, and lost 
some of the teeth that were in Senate bill 185; however, we 
feel that we have made some strides toward helping. We realize 
it is a combination of problems that brings about the losses 
that we have.
    Let me say that it is an honor to have representation of 
the Federal Reserve Board, the OCC, the FDIC, the Federal Trade 
Commission and all of you who are here today. Thank you for 
taking your time, and we hope to be able to get some direction 
and learn from you as to what we need to do. I say this not 
only as a State legislator, but as a former bank chairman, and 
a guy who spent the majority of his life on a bank board and 
saw it grow in great increments and did lots of things right.
    I might say that when we did a lot of our investigation on 
the predatory lending that is going on in my home State of 
Ohio, it didn't seem to be the banks, it was more the subprime 
and the mortgage companies, and we found different things that 
were really being abused that we needed to address. So I really 
welcome the opportunity to hear from you today as to what 
protections we can put in, what we can do to be able to move 
the ball and be able to clear up this cancer that is in our 
society.
    So I appreciate the opportunity to speak, Mr. Chairman, and 
thank you to the witnesses for being here today. I look forward 
to hearing from you.
    The Chairman. I thank the gentleman.
    Next, the gentleman from Louisiana is recognized for 5 
minutes.
    Mr. Baker. Thank you, Mr. Chairman.
    I wish to establish that I have been a preemption advocate 
for some time, so my position here is not necessarily 
inconsistent with past practices. I have challenged Attorney 
General Spitzer in his role as assuming the role of promisee in 
the securities marketplace. I was in the majority then, but I 
was in the minority, though, supporting that position. I have 
now cemented my position in the minority and continue to be in 
such a minority.
    However, I think to attempt to balance the record just a 
bit, the issue of preemption begins in 1819 with McCulloch v. 
Maryland, when a State attempted to tax the Bank of the United 
States. This is not a revelation that has developed since the 
ATM machine. This is something that has been a customary 
practice for one principal reason: to provide stability in our 
capital markets and solvency among our financial institutions 
who engage in risk-taking by extending credit to those who 
qualify for the credit they seek.
    Let us make clear that this is not about the OCC. The OTS 
has a long-standing authority for actions in preemption. In 
fact, during the early 1980's, a painful time in the real 
estate industry under President Carter, interest rates, prime, 
approached 21 percent, and States began to take action to 
prohibit individuals from transferring the terms of their 
mortgage to the new borrower in order to instill an 
artificially low interest rate environment while the prime rate 
to the lending institutions themselves were 2, 3, 4, or 5 times 
the availability of the funds from the existing mortgage terms.
    That was litigated all the way to the Supreme Court, and in 
the mid-1980's, it was held as a right of the OTS for the 
safety and soundness of the institutions involved and, I would 
point out, lost in this debate is the taxpayers of the United 
States who stand in good faith and ready to back up the losses 
of those institutions should they become insolvent. And need I 
remind everyone that in the late 1980's, we ultimately created 
the RTC, and many members of this committee spent many long 
hours derailing and bemoaning the actions of those thrifts in 
Louisiana and Texas which took extreme action to extend the 
losses to the American taxpayer. This is not incidental stuff. 
It has real-life consequences. Preservation and market 
stability is important. It is not necessarily just for those 
who are here at the table this morning.
    The Credit Union Association, the NCUA, is not represented 
here this morning. They have the preemptive right to regulate 
not only nationally chartered, but State-chartered, federally 
insured credit unions. The National Federal Credit Union Act 
requires the regulation of federally insured, State-chartered 
credit unions to comply with certain provisions of NCUA's rules 
and regulations, not merely a regulator's action, but by action 
of this Congress. Therefore, to unwind the preemptive role of 
the NCUA from the function of regulating credit unions in this 
country, the Congress would have to act. We simply cannot beat 
up a handful of regulators and claim it is all at fault.
    Beyond the question of the credit union, which I suggest 
would not likely be a helpful contribution to the overall 
debate this morning, an Executive Order issued during President 
Reagan's term, the great defender of free markets, said Federal 
action limiting the policymaking discretion of the State should 
be taken only when constitutional authority for the action is 
clear and certain that the national activity is necessitated by 
the presence of a problem of national scope. There is a way to 
define the need for preemption to preserve the integrity of our 
national capital markets while not at the same time obviating 
the States' ability to intercede on consumer protection 
advocacy. Both can be done, not mutually exclusive.
    When we look back to the authorities of the OCC currently 
in question, there are areas where they are not now able to 
preempt contract law, criminal law, torts, actionable torts, in 
some cases the OTS, even in zoning matters. In other cases, the 
OTS doesn't match up exactly, but is similar in context.
    So there is an obligation of the regulator for the sake of 
the United States taxpayer, whether a bank, whether a savings 
and loan, or whether a credit union, to act in a manner which 
is reasonable and prudent to ensure the continued solvency of 
that financial system. It does not, however, require that a 
regulator turn their back on actions which do not serve public 
policy well, and joining with State regulators can take action 
against those who engage in activities not for the common 
economic good or to the prejudice of the individual consumer.
    If we can back this down a notch and focus our attention on 
where the real problem is, whether a State regulator can govern 
the actions of a subsidiary of a national bank really should 
not be an issue. Whether you are in the main office in Chicago, 
or you are standing next to the potted plant in west Texas, it 
is the same institution governed by the same set of rules, and 
should they violate those rules, they will be held accountable 
by the national regulator; and should they engage in activities 
which are found to be cannibalizing the assets of normal, 
everyday, hard-working consumers, I will join with every other 
member of this committee in seeking out those problems and 
providing a Federal remedy, if necessary, if the States are 
unable to act.
    But if the States are able to act, we should not get in 
their way. And I would assume--and questions of those on the 
panel this morning--we can determine whether they choose or 
will choose to intervene in consumer protection policies and 
intercede on the behalf of banks, or will you balance your 
judgment between the consumer and stability of our financial 
markets.
    I yield back.
    The Chairman. The gentlewoman from New York, the chairwoman 
of the Financial Institutions Subcommittee, is now recognized 
for 5 minutes.
    Mrs. Maloney. I thank the chairman for yielding and for 
organizing this incredibly important issue on the overarching 
issues of Federal and State consumer regulation. And I 
compliment you on the all-star cast of witnesses who are 
assembled today. And as you mentioned, the subcommittee which I 
chair is charged with consumer protections, so this is 
tremendously important to me, and I would say to all consumers 
and all Members of Congress.
    Whether it is in the context of credit card regulation or 
subprime mortgage lending, the fact of growing OCC preemption 
requires us to ask who is best able to make new rules and who 
can enforce them.
    I do want to mention that I have been involved and 
concerned about some of the abuses that Chairman Frank and 
Ranking Member Bachus highlighted. Chairman Frank mentioned the 
overdraft fees as an abuse, and I want to mention that I have 
legislation concerning this before Congress which would call 
for notice at ATMs on these overdraft fees.
    And in the area that Ranking Member Bachus mentioned on 
deposit holds, I had a bill in last year to speed up deposit 
holds, and in this Congress I did not introduce it. I was 
awaiting the response from the Fed and their report on the bank 
adoption of Check 21 enforcement. But it is now clear that the 
Fed will not be regulating, or so they have said in their 
report, so I will be reintroducing my bill. I do want to note 
that Chairman Frank and I wrote a letter last week, literally, 
to the Fed urging them to regulate in this area.
    On the issue that is before us today, it may be correct, as 
the OCC says, that the Watters decision changed the law very 
little, if at all, but in legal history books, I believe it 
will be seen as marking the end of one era and the beginning of 
the next. I hesitate to announce the impending death of the 
dual-banking system, but I wonder what meaningful role is left 
for State regulators. As an elected official, I believe very 
strongly in the statements earlier by Chairman Frank that 
elected officials are the most responsive to the needs of the 
public, to the needs of their constituents and to the needs of 
consumers. And as a New Yorker, I know that an active State AG 
is a very effective consumer protector. On the other hand, in 
today's global market we may no longer be able to afford the 
luxury of having the most banking regulators in the world. 
Uniformity may be an advantage we can no longer afford to do 
without.
    So I would like to see the Federal regulators prove that 
they can take up this responsibility and build a record on 
consumer protection to match the record they have built on 
safety and soundness. For instance, I would like to see the Fed 
use its authority in unfair and deceptive practices to regulate 
in both the subprime mortgage area and in the credit card area 
to ban abuses. As I suggested at last week's hearing, maybe we 
should extend the power to the other agencies as well so that 
there would be more regulatory vigilance. Joint rulemaking 
would give a seat at the table to the various sectors and 
provide more input and different views.
    I would like to see the OCC and the FDIC ramp up their 
staffing and resources to make it possible for consumers to 
call and complain and get a helpful response. Structurally, I 
am concerned that the consumer protection sections of the 
agencies, that they should have direct access to the top 
decisionmakers and have a seat at the head table.
    I also think we should support and encourage efforts by 
Federal regulators to work with States. For example, the OCC 
and the Conference of State Banking Supervisors have agreed on 
a model framework for sharing consumer complaints that has been 
put into place in my home State of New York with an MOU between 
the OCC and the New York State Banking Department. I understand 
that 17 other States have followed New York's lead and have 
gone forward with such agreements.
    I hope we can explore these and other issues, and I very 
much look forward to the testimony on this critically important 
issue. And I yield back the balance of my time. Thank you, Mr. 
Chairman.
    The Chairman. I thank the gentlewoman.
    I will await the Ranking Member for the disposition of his 
last minutes, and I will recognize the gentleman from Kansas 
for 4 minutes.
    Mr. Moore of Kansas. Thank you, Mr. Chairman, for having 
this hearing, and again I want to also thank the witnesses who 
are here to testify and to help answer some of our questions 
about what we can do to address this issue.
    Before I came to Congress, I was for 12 years the elected 
district attorney in Johnson County, Kansas, which is a suburb 
of Kansas City, and our office early in my tenure investigated 
and successfully prosecuted a national oil company charged with 
breaking gas pumps to cheat consumers. Things seemed to happen 
again and again.
    We had problems then. We are having problems now. Consumers 
who file complaints with the consumer protection division of my 
office, which was really a very straightforward process, 
especially compared, I think, to the prospect of filing a 
complaint faced by banking customers today when they have a 
problem with their financial institution--I don't think the 
average person has any idea where to file a complaint when 
something has gone wrong with their bank. In the past, a 
consumer who had a problem with a bank would often call the 
banking regulator or the attorney general's office, but the 
role has been significantly reduced in today's atmosphere.
    When it comes to Federal regulators, I don't think most 
consumers have even heard the name of the several of them--
Federal Reserve, OCC, NCUA, FTC, and OTS--and they all, I 
suppose, have seen the sign on the bank doors, FDIC, but they 
don't even know what these other institutions do. Even if the 
consumer knows the right Federal regulators, it is often then 
hard to find consumer complaint resources on the regulatory Web 
sites. Some of them require a great deal of searching to find a 
telephone number or complaint form. And when the consumer 
submits the complaint to the regulator, the process, I think, 
can be confusing and intimidating.
    Our committee needs to feel confident that if consumers 
have fewer opportunities to go to State regulators for 
satisfaction, the Federal regulators are doing all they can to 
make this process as consumer friendly as possible and using 
what they learned from consumers to push financial institutions 
for better performance. Generally consumers are seeking 
assistance from regulatory agencies because they have 
experienced some level of frustration with their bank or their 
financial institution. We owe it to them to ensure that the 
process they encounter, the resolution they receive is not a 
source of greater frustration than the original complaint.
    Again, thank you all for being here, and I hope we can work 
together and address some of these issues.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman from Colorado is now recognized 
for 2 minutes.
    Mr. Perlmutter. Thank you, Mr. Chairman. Thanks for the 
opportunity to make a statement this morning.
    Recent actions such as Watters v. Wachovia give me some 
concerns because it weakens the role that States play in 
consumer transactions. The Supreme Court ruling, I believe, 
will make it more difficult for State banking consumer 
protections, which are considerably, in many instances, tougher 
than Federal measures, and I would ask those of you who are 
working with the various State regulators to continue to do 
that and allow for the States to continue to play a significant 
role in connection with consumer protection. In Colorado, we 
have really some good consumer protection laws, and some 
outstanding regulators, and the States must continue to play a 
role.
    The other day Chairman Maloney convened a hearing on 
consumer protection and credit card practices, and I didn't get 
to speak until the very end, the third panel, and I missed many 
of you. But I went into sort of a tirade, and I will apologize 
for that now. But I did it because I come from a background 
representing banks and credit unions and financial 
institutions.
    But I can tell you that in Colorado, there is a populist 
uprising. And Mr. Bachus, I think, hit it on the head, the 
chairman hit it on the head. Just looking at the regulation Z--
and people were calling it the periodic statement. For me it is 
more confusing than the periodic table because people are 
getting charged so many fees and such high rates. That is where 
we are coming from, whether it is the ATM charge--in Mr. 
Bachus' State, it is $39. Thank goodness in Colorado it is only 
$34. If you have a $2 overdraft, you get a $34 overcharge. If 
you have--you believed you paid off your card that month, but 
you didn't realize there was a double billing cycle, and you 
still have 50 cents. You don't pay the 50 cents, so you get a 
$25 late charge. That is what people are upset about.
    The disclosures are fine and dandy if you can understand 
them because they are complicated. I mean, if you look at all 
the different fees just on the credit card regulation Z table, 
which we have simplified, it is still very difficult for 
anybody to understand, you know, not just the ordinary guy 
trying to make some kind of transaction.
    So Mr. Baker is right about the preemption and the role of 
solvency versus the consumer. But what I think all of us are 
concerned about is that the consumer, the charges--somebody 
called it the other day risk-based lending. I call it profit-
based lending. These fees make a lot of money for the financial 
institutions at the cost of the consumers, and they have gotten 
out of hand.
    Thank you, Mr. Chairman. I will yield back.
    The Chairman. All time has expired on this side. I believe 
we are through on both sides.
    I sincerely apologize for the length of the statements, but 
I think it was important for all of you to know how--and I 
think on a bipartisan basis we express this--we feel this 
concern.
    And we are now going to begin. No inferences should be 
drawn by the order. I never know exactly what the order was. 
Maybe people knew that our two chairs here would be color-
coordinated, and they should be together. But for whatever 
reason, we will begin with Mr. Kroszner.

STATEMENT OF THE HONORABLE RANDALL S. KROSZNER, GOVERNOR, BOARD 
           OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Kroszner. Thank you very much. Chairman Frank, Ranking 
Member Bachus, and members of the committee, I really 
appreciate the opportunity to discuss the Federal Reserve 
Board's role in protecting consumers in financial services 
transactions with you today.
    An important part of the Federal Reserve's mandate is 
promoting the availability of credit throughout the banking 
system. Equally important, the Federal Reserve has 
responsibility for implementing the laws designed to protect 
consumers in financial services transactions.
    In carrying out its responsibilities related to consumer 
protection, the Federal Reserve has four complementary roles: 
First, we write rules to implement the consumer financial 
services and fair lending laws; second, we examine the 
financial institutions we supervise for compliance and as 
necessary take action to enforce the laws and resolve consumer 
complaints; third, the Federal Reserve actively promotes 
consumer education through its publications in a variety of 
partnerships with other organizations; and fourth, through the 
community affairs program, we promote community development and 
fair and impartial access to credit.
    In my oral remarks today I would like to focus on our role 
as rule writer. Many of the laws we implement are based on 
ensuring that consumers receive adequate disclosures about the 
features and risks of a particular product. When consumers are 
well-informed, they are in a better position to make decisions 
that are in their best interest. Effective disclosure also 
enhances competition and has the capacity to help weed out some 
abuses.
    Advances in technology have fostered the development of 
products that are increasingly diverse, but also increasingly 
complex. While this has expanded consumer choices, it also 
presents a challenge to ensure effective disclosures about 
these complex products.
    The Board is committed to developing more effective 
disclosures, and we have recently undertaken an innovative 
approach, namely using consumer surveys and testing in detail 
to understand consumers' needs in order to develop our 
regulatory response. Consumer testing can help us improve the 
effectiveness of disclosures by providing insight into 
consumers' understanding of financial products and their 
decision-making processes.
    Given the complexity of some products, we must also be 
aware of the potential for information overload and design 
disclosures that not only are accurate, but clear and simple 
enough so that they are meaningful and useful to the consumers.
    The Board is keenly aware that disclosures and financial 
education may not always be sufficient to combat abusive 
practices. The consumer laws implemented by the Board contain a 
number of restrictions, and the Board has the responsibility to 
prohibit other practices by issuing rules, for example, if the 
Board finds they meet the legal standard for unfair and 
deceptive practices. Crafting effective rules under the unfair 
or deceptive standard, however, presents a significant 
challenge. Whether the practice is unfair or deceptive depends 
heavily on the facts and circumstances of the individual case.
    To be effective, rules must be broad enough to encompass a 
wide variety of circumstances so they are not easily 
circumvented. At the same time, broad prohibitions can limit 
consumers' options in legitimate cases that do not meet the 
required legal standard. This has led the Federal Reserve to 
focus primarily on addressing potentially unfair and deceptive 
practices through case-by-case determinations rather than 
through rulemaking. The Federal Trade Commission, which has 
authority to prohibit practices from financial services firms 
that are not depository institutions, I believe has taken a 
similar approach. Because prohibition on unfair or deceptive 
practices applies to all the depository institutions as a 
matter of law, the banking and thrift agencies can and do 
enforce prohibition using their supervised reinforcement 
powers.
    The Board also addresses concerns about some practices 
under other statutes, such as the Truth in Lending Act and the 
Truth in Savings Act. For example, the Board adopted a rule to 
address so-called flipping of high-cost mortgages and revised 
the Truth in Savings Act rules to address concerns about 
overdraft protection programs.
    In conclusion, the Federal Reserve takes its consumer 
protections responsibilities very seriously and is committed to 
addressing abusive practices. We will consider how we might use 
our authority to prohibit specific practices consistent with 
the legal standards in appropriate cases such as when there are 
widespread abuses that cannot be effectively addressed on a 
case-by-case basis. For example, tomorrow I will be chairing a 
hearing to examine how the Board might use its rulemaking 
authority to address practices in the subprime mortgage market. 
We must be careful, however, not to curtail responsible 
subprime lending. Any rules should be drawn sharply to avoid 
creating legal and regulatory uncertainty which could have the 
unintended consequence of substantially reducing consumers' 
access to legitimate credit options.
    Again, I want to thank the committee very much for holding 
this hearing today, and I look forward to the questions that 
you have. Thank you.
    [The prepared statement of Governor Kroszner can be found 
on page 159 of the appendix.]
    The Chairman. Next we will hear from the Comptroller of the 
Currency, Mr. Dugan.

 STATEMENT OF THE HONORABLE JOHN C. DUGAN, COMPTROLLER OF THE 
      CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY

    Mr. Dugan. Chairman Frank, Ranking Member Bachus, and 
members of the committee, I welcome this opportunity to discuss 
consumer protection. As the Federal Reserve just said, the OCC 
also takes this responsibility very seriously, especially since 
retail banking has become a much larger part of the activities 
of national banks.
    Frankly, our comprehensive approach to consumer protection, 
integrating guidance, supervision, enforcement, and complaint 
resolution is just not well understood. The fact is consumer 
protection is a fundamental part of the OCC's mission, and we 
are not simply a safety and soundness regulator as some have 
suggested. OCC supervision plays a unique and critical role in 
ensuring compliance with Federal consumer protection standards. 
Our extensive and continual presence in national banks, from 
large teams of resident examiners at our largest banks, to our 
frequent on-site examinations of our community banks, allows us 
to identify and fix consumer compliance issues early before 
they become major problems. As a result, our compliance regime 
is not enforcement only. Instead, it is better described as 
supervision first, enforcement if necessary.
    With supervision addressing so many problems early, that 
formal enforcement often is not necessary. For this reason, the 
number of formal enforcement actions taken by any bank 
supervisory agency is a misleading measure of the effectiveness 
of its consumer compliance regulation. Yet when we have needed 
to take strong enforcement action, the OCC has not hesitated to 
do so, often providing new standards to protect bank customers.
    The OCC also has developed a robust process for addressing 
consumer complaints. Our Customer Assistance Group integrates 
skilled professionals and up-to-date technology to redress 
individual problems, answer questions, educate consumers, and 
support our consumer compliance supervision.
    While we believe this comprehensive approach is effective, 
it does have three significant limits: statutory limits set by 
Congress, rule-writing limits in that the OCC has no authority 
to write most consumer protection regulations; and 
jurisdictional limits in that our authority obviously only 
extends to national banks.
    Let me also briefly share our view of the Supreme Court's 
recent preemption decision. The Watters case does not mark a 
shift in prevailing law, but it does clarify responsibility and 
accountability. In particular, it makes clear that Federal and 
State regulators both have important jobs to do, but they are 
different. Ours is to regulate and supervise national banks for 
which we should be held accountable. Theirs is to regulate 
State-chartered entities for which they should be held 
accountable.
    And to those who argue that there should be both Federal 
and State supervision of national banks, that there can never 
be too many cops on the beat, I must respectfully disagree. We 
believe it is counterproductive for States to focus their 
finite enforcement resources on national banks that are already 
heavily regulated, especially when there are lightly regulated 
State entities, like many subprime lenders and mortgage 
brokers, that clearly have been the source of real problems. 
You can indeed have too many cops on the same beat if it means 
leaving other, more dangerous parts of the neighborhood 
unprotected.
    We believe consumers benefit most when the OCC and the 
States focus on our respective areas of responsibility and find 
productive ways to cooperate. The OCC is doing just that. For 
example, since last November we have reached agreements with 18 
States, as was mentioned earlier, to refer and share complaint 
information. Similarly, the OCC and the other Federal banking 
agencies have cooperated with the States to extend the coverage 
of the nontraditional mortgage guidance and the proposed 
subprime lending guidance.
    I am also very pleased to announce another cooperative 
initiative today on mortgage brokers: parallel examinations of 
national banks regulated by the OCC and the mortgage brokers 
that they use regulated by the States. This intersection of our 
regulatory jurisdictions provides a real and useful opportunity 
to coordinate our efforts, especially given the recent 
criticism of mortgage broker practices. Though still in the 
early stages, and limited in scope, both we and the Conference 
of State Bank Supervisors believe this new initiative shows 
real promise.
    Finally, my testimony provides the following suggested 
improvements to Federal consumer protection regulation: First, 
joint agency authority, including for the OCC, to write 
regulations defining unfair and deceptive practices applicable 
to banking organizations; second, a requirement that an agency 
charged with writing consumer protection regulations consult 
before issuing such regulations with the regulators charged 
with implementing them; third, a requirement that consumer 
protection regulations be revised and updated more regularly 
than they are now in order for the regulations to keep pace 
with change; and fourth, the development of a centralized Web 
site for complaints by consumers of any banking institution 
regardless of charter to help eliminate much of today's 
confusion.
    Thank you very much. I look forward to answering questions.
    [The prepared statement of Comptroller Dugan can be found 
on page 120 of the appendix.]
    Thank you, Comptroller.
    And next, the Chairman of the Federal Deposit Insurance 
Corporation, Chairman Bair.

 STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, FEDERAL 
                 DEPOSIT INSURANCE CORPORATION

    Ms. Bair. Chairman Frank, Ranking Member Bachus, and 
members of the committee, I appreciate the opportunity to 
testify on Federal consumer protection in financial services.
    The U.S. financial system has undergone a significant 
change in recent years. Consumers overall have benefited from 
the huge number of new and innovative products and services 
they can now choose from. But along with all this consumer 
choice has come more complexity in product terms and cost 
structures. This complexity has created financial pitfalls for 
the unsophisticated and unwary. We also see many new players in 
the market, many of them beyond the reach of Federal regulatory 
agencies.
    The greatest weakness in today's financial marketplace is 
the absence of clear consumer protection standards applied 
uniformly to all participants in the market. As you know, 
consumer protection is a key part of our job at the FDIC. We 
closely examine our banks for compliance with consumer 
protection laws and regulations and take enforcement actions 
where warranted. We also devote significant resources to 
investigating and resolving consumer complaints. And we 
carefully monitor and analyze consumer complaints to signal 
problems in particular services or financial institutions.
    We have several recommendations for improving Federal 
consumer safeguards that would provide stronger, more uniform 
protections and help level the playing field. First, as I have 
previously testified, the FDIC supports national standards for 
subprime mortgage lending by all lenders through HOEPA 
rulemaking or by statute. Ideally, national standards would 
include a number of elements which I detail in my written 
testimony, such as requiring underwriting at the fully indexed 
rate, restrictions on prepayment penalties, and restrictions 
against misleading marketing.
    Second, Congress should consider expanding rulemaking 
authority to all Federal banking regulators to address unfair 
and deceptive practices under the FTC Act, not just to three of 
the five regulators, as is the case under current law. This 
change in law would include the prospective input at the FDIC 
and OCC in rulemaking to protect consumers; together, we 
account for about 7,000 banks.
    Third, to enhance enforcement of Federal consumer 
protection laws, Congress could consider expanding the Truth in 
Lending Act as well as the FTC Act to allow State authorities 
to enforce those laws against nonbank financial service 
providers. Nonbank providers are a significant portion of 
today's market. Allowing more regulators to enforce these laws 
would beef up compliance.
    Finally, I am a big believer in financial literacy. 
Educated consumers are better able to make sound choices and 
protect themselves against scams. Integrating financial 
education into existing public school curriculum, such as in 
math classes, would help kids from all income levels and expose 
them to basic financial principles year after year. There are a 
number of Teach the Teacher programs offered at many 
universities to assist school systems in integrating financial 
education into core curriculum, but such programs could greatly 
benefit from Federal financial support.
    In conclusion, I would say that market competition is the 
best way to set prices and allocate resources. However, markets 
need rules. Abusive or misleading financial practices not only 
hurt consumers, they hurt the reputation of the entire 
industry. The FDIC stands willing to assist you and our fellow 
regulators in finding ways to serve the needs of consumers and 
the markets. Thank you, and I would be happy to answer your 
questions.
    [The prepared statement of Chairman Bair can be found on 
page 91 of the appendix.]
    The Chairman. Next, the Chair of the Federal Trade 
Commission. And Chairwoman Majoras, we know we are not your 
usual venue, so we very much serious appreciate you doing this. 
But it did seem to us that having all the regulators together 
is really the prerequisite, and we hope that this won't be the 
last time you all will be together talking about this issue. 
Madam Chairwoman, please proceed.

  STATEMENT OF THE HONORABLE DEBORAH PLATT MAJORAS, CHAIRMAN, 
                    FEDERAL TRADE COMMISSION

    Ms. Majoras. Chairman Frank, Ranking Member Bachus, and 
members of the committee, I am pleased to be here with you and 
with my colleagues today.
    Because financial issues affect all consumers, whether they 
are buying a home, trying to improve their credit rating, or 
dealing with rising debt, protecting consumers of financial 
services is a key part of the mission at the FTC.
    Now, of course, the FTC is primarily a law enforcement 
agency. We don't have the same sort of supervisory authority 
over particular entities that some of my colleagues here have. 
And, of course, we don't have jurisdiction over banks. But 
under the FTC Act and several other consumer protection and 
financial statutes, the Commission has broad jurisdiction over 
nonbank financial companies, including nonbank mortgage 
companies, mortgage brokers, finance companies, and some units 
of bank holding companies.
    The FTC uses three main tools to protect consumers: law 
enforcement; consumer education; and policy research and 
development. We focus our investigations and prosecutions on 
combating and preventing unlawful acts and practices that are 
most likely to cause consumer harm. Recently in this area, we 
focused on the following: mortgage lending and servicing; 
nonmortgage lending and leasing; gift card sales; advance fee 
loan scams; debt collection practices; credit and debt 
counseling services; and credit reporting.
    The Commission has targeted deceptive or unfair practices 
in all stages of mortgage lending, for example, from 
advertising and marketing through to loan servicing. In the 
past decade, the FTC has brought 21 such actions, focusing 
particularly on the subprime market.
    As a result of these actions, courts have ordered the 
return of more than $320 million to consumers. And because law 
enforcement is highly effective, indeed, it is most effective 
when government agencies cooperate, we have done so whenever 
possible and appropriate. For example, we brought an action 
against Fairbanks Capital Corp., one of the country's largest 
third-party subprime loan services a few years ago with HUD. We 
charged that Fairbanks failed to charge consumers' payments 
upon receipt, charged unauthorized fees, and reported consumer 
payment information that it knew to be inaccurate to the credit 
bureaus. And Fairbanks and its former CEO paid over $40 million 
in consumer redress.
    Attacking debt collection abuses is another critical part 
of our agenda. Today, I am announcing the Commission's 20th 
debt collection case since 1998. This week, the FTC filed an 
action to stop debt collectors who targeted Spanish-speaking 
consumers and engaged in repeated egregious violations of the 
Fair Debt Collection Practices Act. The case has been filed 
under seal, and we are waiting for the judge to rule in our 
request for a temporary restraining order.
    Another recent area of enforcement has been gift cards, and 
we recently brought two cases against sellers of gift cards 
that carried concealed fees. Both Kmart Corporation and Darden 
Restaurants agreed to settle claims that they engaged in 
deceptive practices and advertising in selling gift cards and 
are now implementing programs to either refund consumers or 
restore fees that were deducted from the consumers' gift cards.
    Now, while law enforcement is essential, consumers are best 
served if they can avoid the injury in the first place. To 
empower them to avoid the harm, we have developed extensive 
consumer education programs addressing financial services 
focusing on expanding the reach of these materials to get them 
out there.
    In the last fiscal year, we distributed over 4 million 
printed copies of financial education brochures, and had over 6 
million hits on the same publications on our Web site. In 
addition, we have educated young people who have limited 
experience with credit by conducting outreach on college 
campuses, at local district college fairs, and in high schools, 
including local high schools here in the District.
    Of course, financial services markets are dynamic and 
continue to evolve, and recognizing that, we and other 
policymakers must continually assess how we adapt our policies 
and practices, and how we engage in research and policy 
development concerning financial services and consumers.
    And today the Commission's Bureau of Economics released a 
study that confirms the need to improve mortgage disclosures. 
The key findings of that study, which we have with us here 
today, are: first, that the current federally required 
disclosures fail to convey key mortgage costs to consumers; 
second, that better disclosures--there was a prototype that our 
economists used--can significantly improve consumer recognition 
of the various costs; third, that both prime and subprime 
borrowers fail to understand key loan terms, and they benefited 
from improved disclosures; and fourth, not surprisingly, that 
improved disclosures provide the greatest benefit for more 
complex loans, whether they were prime or subprime. We look 
forward to working with our colleagues on the next steps.
    Looking ahead to October, the FTC, in response to a growing 
number of complaints about the practices of debt collectors, is 
holding a public workshop to examine changes in debt collection 
and the impact on consumers and competition, and we hope 
whatever we learn there we can use to assist policymakers in 
developing further laws, policies, and procedures.
    Mr. Chairman, and members of the committee, I appreciate 
the opportunity to provide the FTC's input today, and I assure 
you that you have our commitment to work tirelessly for the 
consumers of this Nation. Thank you.
    [The prepared statement of Chairman Majoras can be found on 
page 180 of the appendix.]
    The Chairman. Next we have Scott Polakoff, the Deputy 
Director and Chief Operating Officer of the Office of Thrift 
Supervision.

   STATEMENT OF SCOTT M. POLAKOFF, DEPUTY DIRECTOR AND CHIEF 
        OPERATING OFFICER, OFFICE OF THRIFT SUPERVISION

    Mr. Polakoff. Good morning, Chairman Frank, Ranking Member 
Bachus, and members of the committee. Thank you for the 
opportunity to present the views of OTS on the adequacy of 
consumer protections in financial services.
    Consumer protection, maintaining the safety and soundness 
of the thrift industry, and ensuring the continued availability 
of affordable housing credit are three critical 
responsibilities of the OTS.
    On the subject of today's hearing, consumer protection, 
there are four important components detailed in my written 
statement. Briefly, effective consumer protection by regulators 
requires: Number one, an emphasis on consumer protection in 
both the examination process and the application process; 
number two, an effective supervision program including the use 
of formal and informal enforcement actions to address threats 
to consumer protection; number three, a robust consumer 
complaint mechanism to address issues as they arise and to use 
the information in the supervisory process; and number four, 
effective training and continuing education of examiners 
regarding consumer protection issues.
    OTS has a consolidated examination structure that is unique 
among the Federal banking agencies. The program combines our 
safety and soundness and compliance examinations to better 
address institutions' risk during the exam process. Part of the 
rationale for this approach is that compliance and safety and 
soundness go hand-in-hand. We believe this provides a more 
comprehensive assessment of an institution's risk profile, more 
accurately exposes weaknesses and deficiencies in an 
institution's overall program, and provides us with an accurate 
assessment of an institution's overall business strategy.
    Our examiners are subject to an intensive cross-training 
program to acquire the knowledge and skills needed to lead a 
melded examination. We also maintain a cadre of compliance 
experts to assist examination teams in handling complex 
compliance matters.
    Because Federal thrifts may conduct their lending and 
deposit-taking programs subject only to the requirements of 
Federal law, the OTS is required to ensure that Federal thrifts 
conduct their activities and programs in compliance with 
applicable consumer protection laws and subject to rigorous 
scrutiny of all aspects of an institution's program.
    We regularly examine risks for compliance with Federal 
protection statutes including the Truth in Lending Act, HOEPA, 
RESPA, the Truth in Savings Act, ECOA, the Fair Housing Act, 
and the Credit Reporting Act, among others.
    We also continually track, investigate, and respond to 
consumer complaints involving thrift institutions. We follow up 
with the institution on all consumer complaints filed with the 
Agency, and we typically process and conclude consumer 
complaints investigations within our 60-day timeframe.
    In addition, this data plays a significant role in 
identifying areas to focus on during on-site examinations in 
assessing the adequacy of an institution's overall compliance 
management program and in pursuing corrective action that may 
be appropriate to address programmatic weaknesses or 
deficiencies.
    I should also mention that we have finalized the model 
memorandum of understanding with the Conference of State Bank 
Supervisors to share consumer complaint data between the OTS 
and State banking supervisors.
    When an institution's lending programs are found to be 
potentially predatory or lacking adequate controls to support 
responsible lending, there are numerous options that OTS can 
take to stop these practices and correct the situation. These 
include formal enforcement actions and informal agreements. 
While we find informal actions to be an effective mechanism to 
address these types of supervisory concerns, we do not hesitate 
to use our formal enforcement authority when appropriate.
    Fundamental to our continuing oversight of the industry we 
regulate is ensuring that institutions conduct their activities 
in a manner consistent with sound consumer protection. In my 
written statement we describe various programs, publications, 
and initiatives that the OTS has worked on its own and 
cooperatively with various other agencies and organizations to 
promote consumer education and responsibility. We also have 
various initiatives to improve financial literacy, and we work 
closely with our institutions to encourage them to do the same.
    Regarding the adequacy of our existing authority to address 
consumer protection issues and potential abuses that may arise 
going forward with the programs of OTS-regulated thrifts and 
their affiliates, I believe our authority is complete and 
adequate. I do not believe that an additional statutory 
authority is necessary at this time for OTS to continue to 
effectively supervise, regulate, and enforce Federal consumer 
protection laws.
    I look forward to answering your questions and thank you 
for the opportunity to comment.
    [The prepared statement of Mr. Polakoff can be found on 
page 219 of the appendix.]
    The Chairman. Next to represent those involved here, the 
attorney general of the State of Iowa, who has been active with 
the other State attorneys general, and I believe speaks for 
many of them today, Mr. Tom Miller.

STATEMENT OF THE HONORABLE THOMAS J. MILLER, ATTORNEY GENERAL, 
                         STATE OF IOWA

    Mr. Miller. Thank you, Mr. Chairman. Mr. Chairman, Ranking 
Member Bachus, and members of the committee, thank you for 
inviting me, and thank you for listening to the views of myself 
and State attorneys general.
    The Watters case, I suppose we could debate whether it 
changed the law or reaffirmed the law, but that debate is over. 
What has happened, though, over the last 5 to 8 years is that 
the practice has been changed, the practice of the role of 
State AGs and State banking superintendents, in dealing with 
consumer complaints in the banking area and related areas. For 
decades, we dealt with those complaints, we dealt with those 
issues. Now we are prohibited from doing so in many instances. 
So the practice has changed considerably under the direction 
and institution of the OCC.
    So we--like the chairman, like CSBS--think the law should 
be changed. We think the States should have the role that they 
played for decades, really, starting from the 1960's on, with 
consumer protection, but we recognize that the law probably 
won't be changed. I think the chairman stated the political 
realities very, very well. So what happens next?
    I think the huge challenge for the Federal people is the 
volume of complaints. This is the potentially intractable 
problem--probably millions of complaints each year, some of 
them not heard, but out there and maybe will be heard by the 
Federal regulators. How do they deal with those complaints? Now 
many of those complaints at a national level don't have a lot 
of significance, but for that individual person, it has a huge 
amount of significance. That is their challenge.
    Now, what do we, State attorneys general, think might be 
done? Well, first of all, they have considerable rulemaking 
power that generally in the past has not been used, in part 
because I think they thought the States were doing these kinds 
of activities, and we were. So they have rulemaking authority. 
And they have enormous power because of their regulatory 
authority over the various banks and institutions. So that is 
an enormous opportunity, but they can't be reticent, for 
whatever reason, to use their authority.
    Recently, as a result of a New York Times story, the demand 
draft issue has come forward where people can send through 
demand drafts, checks that are unsigned, if they get the bank 
account number, and clean out a person's account. Well, that is 
something the Federal regulators can take care of. In that 
story, it indicated that the bank involved, 59 percent of the 
checks were returned. Well, consumer protection people would 
tell you if it is 2 or 3 or 4 percent, that is fraud in the 
biggest, strongest possible letters as a warning signal. So the 
Federal regulators need to figure out where the banks--when 
they get a certain percentage of checks returned for those 
reasons, they have to investigate, and invariably they will 
find fraud. And frankly, if they do that, they can do in this 
area more than the State attorneys general and do it more 
effectively.
    Another area is what I call soft-core fraud dealing with 
membership clubs and getting people in membership clubs and 
banks giving the names and sharing the profits. Banks shouldn't 
be doing that. They shouldn't be using their names. The 
regulators can stop that, and, again, more effectively than the 
States.
    The Federal regulators have to get the expertise in 
consumer protection. They have some, but they need a lot more, 
because as a practical matter, they have a lot more 
responsibility. They can draw perhaps on former State officials 
that dealt with this area, and many others, to build up their 
expertise in the consumer area. And it is also a matter of 
focus. The chairman was, as always, brilliant on that, that the 
focus has been safety and soundness. The focus of consumer 
protection with this increased role has to increase at the 
agencies.
    And finally, in terms of complaints, I go back to that, 
that is something that in an informal way we might help on. But 
in any area where there is problems and challenges, there is 
opportunities, and I think there is one amazing opportunity 
that is present today, and that is for all of us to work 
together in the subprime area and on predatory lending. That is 
an area where we still have some considerable authority. And if 
we work together, what has happened is that some of the bad 
actors are out of business; some of the better actors are 
continuing in business and have reputational issues. There have 
been problems that have been raised for the country. There has 
been pain for both consumers and investors. This industry, 
which is a chronic one, could be cleaned up if we all worked 
together--meaningful, not just lip service, but we got 
together, shared our expertise and shared our power, figured 
out on an ongoing basis at a staff level--I have a a guy, 
Patrick Madigan, who works this all the time. He understands it 
completely. There are other people in the State offices and in 
the Federal offices. If they worked on it on an ongoing basis, 
and the principals, the elected officials, the appointed 
officials, came in at the appropriate time, we could clean up 
the subprime industry if we worked together, and if we had the 
will to use the powers that we all have on a complementary, 
comprehensive basis.
    Thank you, members of the committee.
    [The prepared statement of Mr. Miller can be found on page 
205 of the appendix.]
    The Chairman. And now my own State bank commissioner, 
Commissioner Steven Antonakes, from Massachusetts.

   STATEMENT OF STEVEN L. ANTONAKES, COMMISSIONER OF BANKS, 
 COMMONWEALTH OF MASSACHUSETTS, ON BEHALF OF THE CONFERENCE OF 
                     STATE BANK SUPERVISORS

    Mr. Antonakes. Good morning, Chairman Frank, Ranking Member 
Bachus, and distinguished members of the committee. My name is 
Steven Antonakes, and I serve as the commissioner of banks of 
the Commonwealth of Massachusetts. I am also the chairman the 
FFIEC State Liaison Committee. It is my pleasure to testify 
today on behalf of the Conference of State Bank Supervisors.
    I commend you, Mr. Chairman, for calling this hearing to 
discuss consumer protection and financial services. The States 
have long been recognized as leaders in providing consumer 
protection. CSBS is committed to working with Congress and our 
Federal counterparts to further the development of a fair and 
efficient system of consumer protection that serves the 
interest of financial services customers.
    As you may know, nearly every consumer protection that 
exists at the Federal level or that Congress is currently 
contemplating, has its roots in State law. However, as the 
result of OCC and OTS interpretations supported by the courts, 
it is unclear if the States will continue to have the ability 
to serve as the laboratory for innovation for banking consumer 
law.
    Maintaining a local role in consumer protection and a 
strong State banking system is more important than ever as our 
Nation's financial system consolidates. As the Nation's largest 
banks become less connected with the communities they serve, 
they are also finding ways to become less accountable to those 
communities through preemption of State law and law 
enforcement. CSBS believes that the effective supervision of 
the financial marketplace requires a coordinated effort among 
the Federal agencies and the States.
    Ultimately the goal for Congress and the regulators should 
be to create an efficient supervisory structure that allows 
institutions to compete effectively and to make their products 
and services available to a broad demographic while offering 
effective consumer protection and recourse against fraudulent 
and abusive practices.
    Recently the States, through CSBS, agreed to a framework 
for the sharing of consumer complaints and resolutions between 
State agencies and the OCC and the OTS. CSBS and the OCC are 
also working with the other agencies to develop a model 
consumer complaint form. In addition, I look forward to working 
with Comptroller Dugan to coordinate examinations of national 
banks and State license brokers and originators.
    These are all positive steps to improve service to 
consumers, however, these efforts do not address our 
fundamental concern about the impact of OCC and OTS preemption 
on how consumer protections are developed and how they are 
enforced.
    Recognizing that only Congress can address our concerns, we 
would suggest the following:
    Congress should require that the FFIEC write regulations 
and guidance for consumer protection. This will allow the 
States to have more input in the process and result in more 
consistent standards for consumers.
    Congress should give the FFIEC rule-writing authority for 
unfair and deceptive acts and practices.
    Congress should consider creating a centralized system for 
the collection and distribution of consumer complaints to the 
appropriate regulators.
    Additionally, banks and their subsidiaries should disclose 
who their primary regulator is and how to address consumer 
complaints to that specific regulator.
    We ask that Congress direct the Federal banking agencies to 
list applicable and preempted State laws. The Riegle-Neal 
Interstate Branching Act stated that the OCC shall enforce 
applicable State consumer protection laws. It is important that 
banks, the States, and consumers know which State laws are 
being enforced and which have been preempted.
    Congress should clarify State enforcement authority and the 
limits of applicable State law for federally chartered 
institutions. State legislators and attorneys general need a 
clear statement of their roles in protecting the citizens of 
their States. The current state of confusion is not acceptable.
    And Congress should encourage Federal and State 
coordination to develop consistent interpretation and 
enforcement of applicable State laws.
    I urge Congress to continue its examination of the adequacy 
of OCC and OTS consumer protections and enforcement. The 
States, through CSBS and our involvement on the FFIEC, want to 
be part of the solution. We want to ensure that consumers are 
protected regardless of the chartering agent of their financial 
institution. We want to preserve the viability of both the 
Federal and State charter options to maintain a meaningful 
choice in charters and the success of the dual-banking system.
    Thank you for inviting me to testify. I look forward to 
your questions.
    [The prepared statement of Mr. Antonakes can be found on 
page 67 of the appendix.]
    The Chairman. Thank you.
    I am going to swap places with the gentleman from Kansas, 
Mr. Moore. He will ask in my place, and I will wait until he 
would have been reached. I recognize the gentleman from Kansas.
    Before that, I want to introduce into the record a letter 
from the National Association of Insurance Commissioners, by 
unanimous consent, in which they say, ``We would like to share 
with you some of the examples of the negative effects of 
Federal preemption on State regulation of health insurers.'' 
They acknowledge that we don't have health, but they are 
expressing their concerns about the negative effects of 
preemption in that area. That will be part of the record.
    The gentleman from Kansas.
    Mr. Moore. Thank you, Mr. Chairman, for swapping time with 
me here.
    I want to ask a question of Mr. Dugan. Pages 21 and 22 of 
your testimony indicate that data derived from your customer 
assistance group are used in identifying problems at banks. OCC 
claims that it fields 70,000 inquiries and complaints each year 
compared to the OTS, which received 5,200 complaints in 2006, 
and the Fed, which received 1,900 in each of the last 2 years.
    And I want to refer to a GAO report in February of 2006 
which says, in reporting its performance, OCC includes data on 
its response to consumers' inquiries which typically take less 
time, thereby overstating its performance on timeliness to 
responses or complaints.
    Could you break down that number, that 70,000 number, for 
me in terms of inquiries versus complaints? Can you give 
examples of enforcement actions, formal or informal, that 
originates from consumer complaints? Can you break down the 
number first, sir?
    Mr. Dugan. I can get the number on breaking it down for 
complaints versus inquiries in just a moment, but we don't 
trace which inquiry leads to a formal or informal enforcement 
action. More often than not, these lead to situations where we 
assist the consumer by resolving a dispute and providing 
financial relief. We have tracked and provided over $30 million 
of financial relief to consumers in the last 5 years that was 
facilitated through that process.
    Mr. Moore. You are familiar with this GAO report in 
February of last year, correct?
    Mr. Dugan. Yes, I am familiar with it. I am not sure these 
are the same ones that you are talking about, but it is the 
41,000 inquiries and 29,000 complaints. I am not sure that is 
the bar that you were looking at.
    Mr. Moore. That is really what I was looking for.
    Mr. Dugan. And we are very familiar with that 
recommendation. We do break that down directly like that now as 
a result of the report. We are quite conscious of that.
    Mr. Moore. Thank you.
    According to this GAO report, OCC agreed with the 
conclusions and recommendations.
    Mr. Dugan. Yes, sir.
    Mr. Moore. You are going to follow that?
    Mr. Dugan. Absolutely.
    Mr. Moore. I appreciate that.
    I am pleased that some of you mentioned in your testimony, 
and the attorney general mentioned in his testimony, that you 
are working toward the goal of a uniform consumer complaint. I 
think OCC talked about that and OTS and FDIC in your reports. 
While you are developing this uniform complaint, which I think 
is great, wouldn't it be helpful to create a single toll-free 
number--any comments by any of the panelists on that--so people 
who had a problem with their financial institution would know 
where to go?
    I looked at some of the Web sites, and it is very, very 
confusing and takes several clicks sometimes to get to a 
complaint form or a toll-free number. Any comments about a 
single toll-free number that maybe all financial institutions 
could use?
    Mr. Dugan. Speaking for the OCC, I think this is an idea 
definitely worth exploring. We have had some preliminary 
discussions in a forum. I think the FTC actually has a number 
that they use in these sorts of circumstances. It is more 
complicated than it first sounds, but we can do more as a group 
to have a centralized, easy-to-understand, easy-to-find 
function. And as my testimony indicates, I really do think we 
should pursue that.
    Ms. Bair. Could I add, since we are the deposit insurer, 
the FDIC logo is displayed in all banks and thrifts. Because we 
recently needed to change our logo due to the merger of two of 
our funds, our Web site and all the information that is sent 
out about the FDIC is displayed at banks and will have our Web 
site address on it.
    Anticipating your question, it only took us two clicks to 
get to the complaint form on our Web site. But if we could 
improve that and put the complaint form on the FDIC home page, 
I am happy to do that. But I do think that de facto we serve as 
a clearinghouse now because a lot of people come to us because 
they know our name. We would be happy to expand upon that role.
    Mr. Moore. Any other comments by panelists up here? Mr. 
Kroszner?
    Mr. Kroszner. We also have been moving towards having a 
single 800 number for all the Federal Reserve banks, because we 
have a system of 12 regional Federal Reserve banks. Rather than 
have the customer try to find the regional Federal Reserve bank 
that is appropriate to them, by 2008 we will have a centralized 
clearinghouse with one number for everyone to call. I am very 
much supportive of that idea.
    We also now have a beta version of the Web site up that if 
you have your institution's name, you can type that 
institution's name in, and it will tell you whether it is a 
Federal Reserve supervisor, an FDIC supervisor, or an FCC 
supervisor, etc. Also, if you call that 800 number, there will 
be a person who can tell you if it is a Fed institution, or it 
is an OCC or other institution, and then direct the person 
directly to that. But I think it is extremely valuable that we 
do this, and we are working towards that end.
    Mr. Moore. A real person you are talking about that 
consumers can talk to?
    Mr. Kroszner. A real person, not a series of, ``Press 5 if 
you would like to wait for 5 minutes.''
    The Chairman. In what country will this real person be 
working?
    Mr. Kroszner. I believe--this will be up in 2008, but I 
believe that real person will be working in the United States.
    The Chairman. That is reassuring.
    The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman.
    Comptroller Dugan, you mentioned the importance of working 
with State officials. Could you give us some greater detail on 
areas where you have worked with them or you are open to 
working with them in the future?
    Mr. Dugan. Absolutely. As I mentioned, we have been trying 
for some time to figure out a way to share consumer complaint 
information, and, last November, after a series of meetings and 
good cooperation of the Conference of State Bank Supervisors, 
we adopted a model memorandum of understanding where we can 
share information about complaints, get referrals, and report 
back on the disposition of information. And, as a result of 
that, we entered into an agreement first with the State of New 
York, and since then with 17 other States, and we are pursuing 
that with a number of other States.
    We have entered into similar agreements with 14 State 
insurance commissioners. When we did our nontraditional 
mortgage guidance, it became apparent that a huge part of the 
mortgage business is being conducted at the State level, not 
just by non-national bank people, but by nonbank-affiliated 
lenders. Over half of the subprime mortgages were issued there, 
for example, and it became very important for us to have some 
kind of agreement by States to adopt similar rules for that.
    Lastly, as we just announced today, we have spoken with 
Commissioner Antonakes and the State of New York's 
commissioner, Superintendent Neiman, to try to develop a way to 
look more closely at State-regulated brokers that originate 
mortgages that are used by national banks, and have parallel 
examinations where we can share information. I believe this 
will be particularly important going forward to make sure this 
new guidance is being implemented not just by employees of the 
banks that we supervise, but by the brokers that they use and 
with whom the banks don't necessarily have the same kind of 
contact as they do with their own employees.
    Those are several types of things. We are open to other 
kinds of suggestions. We welcome them.
    Mr. Bachus. Complaints that OCC has not taken any 
enforcement actions, does that indicate you are not doing your 
job?
    Mr. Dugan. No. It is something I did try to spend some time 
discussing in our testimony. First of all, we do take 
enforcement actions. We are not an enforcement-only regime as 
is the case in many places that don't have regulated 
institutions.
    We, because of our extensive presence in the banks that we 
supervise, which is also true of the other bank regulators, are 
able to effect change much more quickly in a way that never 
reaches an enforcement action. We have a series of graduated 
steps that we take to effect corrective action beginning with 
something called a ``matter requiring attention.'' And, if you 
look at our record over the last 5 years, which we did in 
anticipating this hearing, we totaled up the number of formal 
enforcement actions that we took in consumer-related issues. It 
is about 200. Similarly we took about 200 informal enforcement 
actions on consumer issues. But if you look at the ``matters 
requiring attention'' that start this process, there were 1,500 
of them. And that is what you want to see. You want to see 
identification early of what those problems are, telling 
management to fix this, and they don't result in enforcement 
actions but instead result in correction.
    The problem for us is that as a public relations matter, 
people don't see that. And that is the point really I am trying 
to get across, which is you can't measure how well we do what 
we do in this area by only looking at formal enforcement 
actions.
    Mr. Bachus. All right. Let me ask the total panel, anybody, 
if you would like to comment. Neither the OCC or the FDIC has 
rule-writing authority to define unfair and deceptive practices 
under the FTC Act. Is that going to limit your ability to 
protect consumers?
    Ms. Bair. Well, we enforce UDAP, but we don't have the 
ability to write rules. And so because there are no rules, we 
are finding out we have to use case-by-case determinations and 
consult a great deal with the Fed and the FTC about what is 
unfair or deceptive because we don't have the ability to define 
these terms.
    Rule-writing authority would be extremely helpful, 
especially in the subprime area. If you have a rule, you can 
have a preventive effect. You can let the industry know as a 
whole that certain types of practices are going to be viewed as 
unfair and deceptive, as opposed to having to go in bank-by-
bank in the supervisory process. Also, if you take informal 
action, it is not public, so there is not any precedential 
impact.
    It will certainly be used in consultation and coordination 
with the other regulators, and I do think it would be helpful.
    Mr. Dugan. And I would just add that I agree with that. For 
many years it was not clear that banking agencies could even 
take enforcement action under unfair and deceptive. The OCC was 
the first agency to go down that path. We have taken a number 
of enforcement actions on a case-by-case basis, but we do think 
it would be helpful to have rule-writing authority.
    Frankly, I think it would be most helpful to have it on a 
joint basis. Our concern is that if one agency adopts a rule, 
people could use other charters to do the same activity, 
although I agree with my colleague that as a practical matter 
we would probably work together in any event. But I do think 
that is important.
    Mr. Bachus. Could I ask one other question? Have any of the 
regulators or the FDIC found any credit card practices to be 
unfair or deceptive? Let me highlight three or four. One is 
that they apply your payment to your lowest interest rate. 
Another one is universal default where they increase your 
interest rate simply because your credit score goes up, or you 
approach your credit limit, or you take out a loan to buy an 
automobile, or a double-billing cycle, or a short billing 
cycle.
    Even I now face a situation where you are up here all week, 
and sometimes you get home, and you have about 8 days or 6 days 
to get that check in the mail. And the cycle continues to 
shorten, it appears. And they also--as the chairman documented, 
many times they will--even though the payment arrives on a 
certain day, it is posted, but it is not credited until the 
next day.
    Mr. Dugan. We regulate a number of the credit card banks in 
the country. We have taken a number of enforcement actions 
against credit card banks for unfair and deceptive practices, 
primarily subprime credit card practices, and as a result there 
are very few subprime credit card providers left in the 
national banking system.
    Having said that, the types of practices you described, 
double-cycle billing, universal default, those are not things 
that we have taken or regarded as unfair and deceptive so long 
as they are adequately disclosed. The regime that we have 
always operated under as a statutory matter is that fees and 
charges are not things that we generally regulate unless they 
rise to the level of being something that is unfair and 
deceptive the way that is defined in the Federal Trade 
Commission Act. And if those fees are adequately disclosed, 
they have not been treated as unfair or deceptive, and I don't 
know of any regulator that has treated them that way.
    Ms. Bair. I think those practices are highly troubling, but 
even assuming we thought they were unfair or deceptive, we 
would not have the ability to write a rulemaking that 
determination, whereas, we can write rules on safety and 
soundness.
    I think previously you mentioned that universal default, in 
effect, is piling onto a person who has problems already. 
Perhaps you could make a safety and soundness argument to issue 
a rule to address the problem of universal default.
    However, since we only have 15 percent of the credit card 
market, even if we could find authority under safety and 
soundness to write a rule, we would be imposing a rule only on 
FDIC-supervised credit card issuers that would not apply to 
banks not supervised by the FDIC.
    The Chairman. And you would pretty soon have 1.5 percent of 
the market and not 15 percent if you had rules and he did not.
    The gentlewoman from New York.
    Mr. Bachus. The Chairman of the FTC was trying to--
    The Chairman. I am sorry. Please, Madam Chairwoman.
    Ms. Majoras. I was going to add one thing. At the FTC, we 
don't have jurisdiction over very many credit card issuers 
because so many of them are banks, but where they haven't been, 
we have brought cases under deception and unfairness authority. 
And we do have a rule that prohibits advance-fee credit card 
and loan schemes. A lot of these are out-and-out scams, which 
is where we specialize. But I would point out that is one of 
the places where we do have a rule, but most of the time we use 
our deception and unfairness authority without any rules. We 
just use it in our enforcements.
    The Chairman. I was glad you mentioned gift cards. That is 
an issue where in Massachusetts we went after where you gave a 
gift, and pretty soon it was you gave a gift that kept on 
shrinking, and you did not know that. By the time the person 
cashed the gift card, you looked like Uncle Cheapskate because 
it was half of what it was supposed to be.
    I congratulate the Comptroller--I think it was the 
Comptroller's predecessor. There was an effort by the issuing 
banks who were shilling for the merchants there to invoke the 
preemption, and the OCC did not go along with that. So we were 
able to preserve, I believe, State authority there. But I 
appreciate you bringing it out. That is the prime example of 
the kind of protection we want to give.
    The gentlewoman from New York.
    Mrs. Maloney. Thank you, Mr. Chairman. I was impressed with 
the list of reforms Chairwoman Bair proposed for Congress. And 
I would like to ask the other panelists about some of them, 
particularly the Honorable Kroszner and Honorable Dugan. What 
do you think of giving the States a greater enforcement role 
under truth and lending and the FTC Act against nonbank 
financial providers? And also the FTC?
    Mr. Dugan. I think it is a good idea myself. You might say 
it is easier for me to say because you are not saying it is 
providing it against national banks. But I do think that what 
recent history has shown is that the less regulated 
institution--and here I am not talking about State banks, I am 
talking about State-chartered institutions that are not 
regulated, like mortgage brokers or mortgage lenders--have been 
a significant source of the problem, and I think finding a way 
to devote more resources to addressing that issue is a good 
thing.
    Mrs. Maloney. Mr. Kroszner.
    Mr. Kroszner. I certainly agree it is very important to 
devote resources to protect consumers, and there are many 
things that are outside the scope of what the Federal Reserve 
can do in terms of enforcement, and so we very much rely on and 
coordinate with the States both for the institution--certainly 
for the institutions that we regulate, the State member banks. 
We coordinate very much with the States on those institutions. 
But there are many institutions, as Comptroller Dugan 
mentioned, that are outside of our purview for enforcement, and 
so providing appropriate resources to make sure that the laws 
are enforced to protect consumers is very important.
    Mrs. Maloney. And Chairman Majoras?
    Ms. Majoras. There is no question in my mind or anyone at 
the FTC about the States' importance in enforcing consumer 
protection laws in this country. We work with them all the 
time, and we are a relatively small agency, and if we did not 
have them working side by side with us, we would do a lot less. 
So I will start by saying that.
    The FTC has always taken the position that the States don't 
need authority under the FTC Act because--Tom could probably 
say it better--if not all of them, almost all of them have what 
we call little FTC Acts; in other words, they have passed their 
own statute that essentially mocks the FTC Act. And so we have 
previously said we don't think it is necessary.
    We file cases as co-plaintiffs or in big law enforcement 
sweeps where we announce cases on the same day all the time, 
and it has not inhibited us. The thing to remember is that if 
you have too many regulators all enforcing the same statute, 
you can end up with some inconsistency. And what the States 
have typically done is look to Federal case law under the FTC 
Act, and that has kept us all, I think, marching in the same 
direction.
    Mrs. Maloney. I am also concerned about this, and it has 
been touched upon. I am concerned about banks entering into 
agreements with unregulated third parties who want to issue 
subprime credit cards. And I know the FDIC has investigated 
some of these activities, and I would just like to know, or to 
get a sense of, how big is the rent-a-charter problem? And is 
there a role for the States in this area? And how can Congress 
help? Maybe start with the FDIC and the OCC and the Fed.
    Mr. Dugan. Well, as I said earlier, we had a number of 
significant problems both on the safety and soundness and the 
consumer protection side with subprime credit card practices. 
We took a number of quite strong enforcement actions, and as a 
result of that whole series of actions that we took over a 
period of years, there just are not many subprime credit card 
lenders in the national banking system anymore.
    Ms. Bair. We carefully scrutinize these arrangements 
because they are prone to abuse. We are conducting a joint 
investigation with the FTC right now concerning the so-called 
rent-a-bin arrangements. We have identified about 10. We, 
again, closely scrutinize them. I don't know if I can 
categorically say they are all problematic, but they are 
certainly prone to abuse, and we are carefully reviewing them.
    Mr. Kroszner. Fortunately, we do not have any banks that 
are engaged in this practice, so we haven't undertaken any 
actions because there are no banks doing this.
    Mrs. Maloney. Any other comments? And then my time has 
expired.
    Mr. Miller. This is our great nightmare, of course, the 
rent-a-charter situation, where there could be enormous bad 
actors using the shield of Federal preemption. I think by and 
large, so far, Federal agencies have been fairly vigilant about 
that issue, and they really need to be. That is probably the 
biggest nightmare that we are dealing with in the sort of set 
of circumstances we have been put in with the Watters case and 
related cases.
    Mr. Polakoff. Congressman, I would offer from the OTS 
perspective that rent-a-charters are simply not acceptable, and 
if we find it, we stop it. And whether it is credit card, 
subprime credit card, payday lending, it makes no difference. 
It is not an acceptable practice.
    The Chairman. The gentleman from Louisiana.
    Mr. Baker. Thank you, Mr. Chairman.
    I am appreciative of the fact that there has not been 
insurmountable attention given to the preemption issue, but 
rather where do we go now, in light of the definitive decision 
in the Watters case?
    Mr. Dugan, in your testimony you recite the observation 
that the FTC Act vests with the Federal Reserve the ability to 
regulate unfair or deceptive practices at banks--comparable 
authority is invested with the OTS for thrifts, and the NCUA 
for credit unions. And so you establish that Congress has acted 
with regard to each specific financial sector to provide 
consumer advocacy responsibilities, but you go on to suggest 
that a unified working group of sorts that could provide for 
joint rulemaking opportunity would do great service towards the 
absence of venue shopping and having as best we can an 
equitable enforcement practice.
    I would like to suggest and seek your counsel. Would it not 
be advisable, in light of the comments made by those 
representing State interests here today, that a representative 
of the CSBS at least in an advisory capacity, because it may 
not be proper for them to be voting on national bank 
regulation, but perhaps they would have perspectives of value, 
as well as, of course, the FTC, to provide some sort of working 
group format? We have presidential working groups of regulators 
that come out with reports which are generally ignored, but we 
could have a consumer working group, as an example, solely 
focused on consumer advocacy, identifying practices 
inconsistent with sound fiscal policy, and leave it then to 
each specific regulator to act consistent with others.
    If we were to suggest something of that sort, that would 
not necessarily in itself require congressional action if 
agencies chose to work in such a cooperative manner, quarterly, 
semiannually, annually, even if it were just to report to 
Congress and say here is what we should do and let us evaluate 
that policy, if that is what you deem to be most appropriate.
    From what I am hearing from everything is can't we share 
information? Can't we work together? No one has the resources 
to do this all on their own. Everybody can see problems. You 
might see a problem across the fence that is not in your 
jurisdiction, and if we got everybody together and had a more 
uniform system of consumer advocacy rules, the market wins and 
the consumers win. Is that an inappropriate observation?
    Mr. Dugan. Not at all. I think it is actually a quite good 
observation. I think recently in the last Congress, the State 
representative was added to the Federal Financial Institution 
Examination Council, FFIEC as we call it, and that would be a 
place to share that kind of information.
    I think if you go beyond that to rule writing, which is one 
of the things you talked about, I think you did hit on one of 
the issues that would be involved as a constitutional matter 
and appointments matter. It is quite murky if you have a State 
official voting on something--
    Mr. Baker. Let me be clear. I meant only in an advisory 
capacity. They would certainly not want you voting on their 
rules. But I think the pressure would be if there was an 
identified problem by this group, and generally action were 
taken, that those aberrant players who did not subsequently act 
to protect their consumers would have immense political 
responsibility for their failure to act in light of the public 
discussion.
    Let me also suggest that, given restricted resources, 
multiple 1-800s and multiple Web pages--I note on page 23 of 
your testimony that you will have up this summer your own Web 
page, which is helpmewithmybank.gov. So, you can log on and 
find out what you need to know and then move to the appropriate 
regulator.
    It might also be appropriate for this group to think about 
consolidating those informational resources, because with 
everybody having its own Web page and 1-800, that gets to be 
confusing, and if there would be a way to consolidate that 
where you ultimately end up with a real person who lives in the 
United States and can speak in the language with which you are 
calling--I know that yours will be bilingual, I think that is 
appropriate--you would end up with something of value instead 
of having disparate standards which confuse consumers, and they 
don't understand exactly with whom they should make their 
complaints. This would be something that you guys could 
perform, I think, a significant service and perhaps break 
through this idea that you don't care about consumers.
    Mr. Dugan. Mr. Baker, I totally agree. It is one of the 
things that I talk about a little bit in my testimony. As you 
heard today, we are all doing different things, and you wonder 
if there is a way that we can coordinate and--
    Mr. Baker. What gets this started? Do we have to do it, or 
can you do it?
    Mr. Dugan. No, I think we can do this. I think we can do 
this at the FFIEC, and we can also invite our colleague at the 
FTC to participate as well. But that is one of the things that 
I haven't discussed yet with my colleagues, but I think it is 
something that we could do if people were amenable to it, and I 
certainly am.
    Mr. Baker. Mr. Chairman, I hope you will encourage their 
participation in seeking out a negotiated settlement on this. I 
take ``yes'' for an answer and yield back.
    The Chairman. The gentleman from New York.
    Mr. Ackerman. Thank you, Mr. Chairman.
    Last week one of our subcommittees held a hearing that 
focused on some of the more disingenuous practices within the 
credit card industry, and some of our witnesses and Members 
made the comment that the Congress has not given the Federal 
Reserve enough regulatory authority to sufficiently restrict 
some of the egregious practices. Some of them we have talked 
about were universal default and double-cycle billing and pay-
to-pay fees.
    The question that I would like to ask first is, does the 
Federal Reserve feel, Governor Kroszner, that these are 
practices that require some type of restriction? In general, 
would the American people be better served if the Federal 
Reserve were given increased authorities to regulate the credit 
card industry?
    Mr. Kroszner. Thank you very much.
    Certainly we take our responsibilities with respect to 
credit cards quite seriously. As you know, in the hearing last 
week we discussed a number of the new proposals that we put out 
to deal with these issues because we think they are very, very 
important issues.
    The approach that we have so far taken is primarily through 
our regulation Z, TILA, Truth in Lending Act, authorities 
through trying to improve disclosure. I think it is true, as 
one of the other Members had said earlier, that the current 
disclosures are not adequate for consumers to understand what 
is going on, and that is why we have really focused on consumer 
testing to ask real people real questions about what do they 
understand, what can they get out of the forms that they are 
seeing? And we went back and forth quite a few times to improve 
the information that is out there, not only the accuracy of the 
information, but the understandability, the usefulness to 
individuals.
    I believe that we have--we believe that we have sufficient 
authority to deal with these issues as of today; however, we 
are continuing to take actions to look further into what needs 
to be done in this area and a number of other areas, and 
certainly we will not hesitate to come back to Congress to ask 
for further authority if we need to.
    Mr. Ackerman. Thank you. I appreciate that.
    I have a second concern. I get these letters in the mail 
all the time, besides the credit card ones, again with 
mortgages, and I get a lot of them. Sometimes they are very 
official-looking, and I am sure that is not by accident. And 
they are designed to make it look like it is from the Federal 
Government or sometimes the State government or sometimes some 
unknown great official authority. And it is very, very 
misleading.
    This one does not identify who it is from on the cover. 
This one is a similar design. It happened to come from the same 
source, I believe. And it says right on the front, Re: Your 
current loan with Citibank North America--which is one of the 
mortgages that I have a property--Request for immediate action. 
I think this is from my bank when I get it. Most people would 
think that because it is up there in the return address area. 
But it is not.
    And there are all sorts of warnings on here that are postal 
regulations that everybody knows about. You don't have to put 
it on the envelope, but you do if you want to make it look 
official: Warning, a $2,000 fine and 5 years imprisonment for 
anyone interfering with or obstructing the delivery of this 
letter. This is an important letter. There are all sorts of 
codes, and then it says, your mortgage recorded in the county 
of, and there is all sorts of stuff that actually I once had. I 
guess they did not know that I paid that one off and already 
switched it to somebody.
    And it goes on looking real official-like. And then there 
is a big notice on this part of the page: Notice, the Queens 
County property code in Jamaica, New York, notification date. 
Recent changes in our mortgage policy. There are programs now 
available to Queens County residents.
    Now, I would think this is some kind of government program 
if I was an average person or somebody who is not reading this 
carefully because they don't have the time, but gets an 
impression and all sorts of things. And they give you--I can 
get this deal for a rate of 1.25 percent. Now, if I am a senior 
citizen on a fixed income, and I think I had an interest rate 
that I am paying now of 6 or 7 or 8 percent or something, and I 
am going to be able to pay 1 percent, I don't realize that they 
could eventually take my house, or I am going to owe more on 
the mortgage than the house is worth, but they don't care 
because that is not going to be 1.25 percent for too long.
    I get this one that does not have any return address on the 
front, nothing on the back, and it says, ``Certificate 
enclosed.'' That is all it says besides my address. And it 
comes looking like this. That certificate of finance, 
preferred, bearer's certificate, made out to me. This looks so 
official with big ``equal employment'' thing on there and FHA 
things and certificate numbers and guys, you know, half 
dressed, carrying shields and swords, and things looking like 
they came from dollar bills printed in the color of ink. You 
have to read it 10 times to find out that it is not from my 
bank, but somebody that wants to snipe my mortgage.
    Is this fair? Should the industry not be policing itself, 
or should some greater authority be supervising what is going 
on here?
    Mr. Miller. Congressman, that is deceptive, deceptive in so 
many ways, and it is a violation of Federal laws and a 
violation of State law, depending on preemption, of course, and 
that is the kind of thing that we all should be after.
    Mr. Ackerman. Are we after it, though? What is being done?
    Mr. Antonakes. I would add in Massachusetts last year we 
passed a law prohibiting those very types of deceptive 
advertisements featuring the third-party use of a bank name. 
And we have taken enforcement actions against entities that we 
license and referred others that use these types of 
advertisement. I would also just add quickly that we will 
enforce that law whether the complaint is against a State-
chartered bank or a national bank.
    Mr. Ackerman. I always liked Massachusetts. I hope the 
chairman makes a note of that.
    Shouldn't there be a Federal role in this?
    Mr. Polakoff. I would like to offer that I suspect that did 
not come from an insured financial institution. I suspect it 
came from a mortgage bank or a mortgage broker, and I think 
that is where the emphasis should be focused.
    Mr. Antonakes. I would not disagree. They generally come 
from third parties. We would enforce the law whether the 
complaint was from a State bank or a national bank for the 
illegal third-party use of their name, and it has also come 
from insurance companies, as well.
    Ms. Majoras. Briefly, Congressman, the FTC has enforced 
against a number of nonbank mortgage lenders that have made 
deceptive representations to consumers, whether it is about 
interest rates or fees and the like. We have done that.
    Now, just, you know, what it says on the envelope, that by 
itself, to be honest is not the only story, because we can also 
bring cases when consumers are truly harmed by it. But if you 
go inside, and it is telling you that you can get a mortgage at 
a particular percentage and can't and so forth, that we have 
taken very seriously.
    The Chairman. Let me ask, we get letters like this all the 
time. How can they send that to me? If I got a letter that like 
that, and I wanted to refer my constituent to a place where he 
or she might be able to get enforcement action, which of your 
agencies should we refer that to? In Massachusetts, it would be 
you.
    Mr. Antonakes. Absolutely.
    Mr. Miller. Our office too, or State attorney general's 
office. But there is maybe a larger point here.
    The Chairman. Let me ask first, would any of the Federal 
agencies--I think that is what the gentleman was getting at. I 
wouldn't want his dramatic reading to not get its full impact 
here. Would any of the--
    Mr. Ackerman. I appreciate the rescue.
    The Chairman. Would any of the Federal agencies be 
responsive if we were to say, look, what is going on? What can 
you do about it?
    Ms. Majoras. We do get these things all the time at the 
FTC, and we look at them. And incidentally, since we have been 
talking about complaint filing, too, we get probably 15,000 
complaints a year that would involve actual banks or other 
depository institutions.
    The Chairman. I would assume, for the three bank 
regulators, if it did not come from a regulated financial 
institution, you have no jurisdiction. It would be the FDIC.
    Ms. Bair. This is right. I am sure this letter did not come 
from an insured institution. I see this all the time. I get 
these at home. I get the spam faxes. That is one of the reasons 
we are urging that State authorities, the attorneys general, 
and the Federal supervisors at the State level, be given the 
authority to supplement what the FTC already does to go after 
the entities that are conducting this type of marketing.
    Also we very much work with the Federal agencies with the 
hope of rulemaking to expressly say, we think that this is 
unfair and deceptive. I don't have the power to write the rule, 
but the Fed does, to say specifically that this type of 
advertising is unfair and deceptive.
    The Chairman. Would the Fed have the right to write that 
rule covering both depository institutions and others?
    Ms. Bair. Yes, for the extension of mortgage credit they 
would.
    The Chairman. The gentlewoman from Minnesota.
    Mrs. Bachmann. I have a question for the Comptroller, Mr. 
Dugan.
    Mr. Dugan, I understand that the OCC has entered into some 
agreements with the States related to the identification and 
enforcement of State laws, and I was just wondering if you 
could describe for me some of those agreements?
    Mr. Dugan. I think the agreements I was talking about 
earlier are the agreements for information sharing about 
complaints. So if we get a complaint filed that really belongs 
with the States, much like we were just talking about, we would 
have a way to get that to the State efficiently, and vice 
versa, and if the State got a complaint that related to a 
national bank that we needed to take care of, there would be an 
efficient process not only for us to get it, but for us to 
share information about what we did with it with respect to a 
consumer in that State.
    And so we entered into a model type of agreement with the 
Conference of State Bank Supervisors, and then individually 
have been contacting States to try to get them to enter into 
agreements so we could do it as a practical matter, and since 
December, we have 18 States that have agreed to do that.
    Mrs. Bachmann. Thank you. Do the State anti-discrimination 
laws apply to the national banks?
    Mr. Dugan. State anti-discrimination laws do apply to 
national banks by long-standing legal precedent.
    Mrs. Bachmann. How about the State unfair and deceptive 
practices laws, do they apply to the national banks?
    Mr. Dugan. They do if the way they are applied or the way 
they are ordered don't actually put in specific requirements 
that regulate, or attempt to regulate, the particular banking 
activities of a bank. So if it is a general unfair and 
deceptive act, what we were talking about earlier, the little 
FTC acts, those on its face are not preempted, we would say.
    Mrs. Bachmann. What consumer protection laws do not apply 
to national banks?
    Mr. Dugan. Well, this is an issue of course that has come 
up and people have been talking about it recently, and it is 
something that the GAO looked at as well. We have pledged to 
talk with the States about how we look at which laws we believe 
are not preempted, and which ones are. Frankly, a lot of that 
got put on hold because of the Watters case and the outcome of 
it. Now that it is over, we do recognize that we need to get 
more clarity on that. We already have addressed this in 
significant ways in our regulations and what we have put out, 
but we need to provide more.
    I think, as GAO recognized, it is not a situation where it 
is practical to go to each State and go through the code and 
identify every single one that is or is not preempted. So there 
will be principles that we will be articulating in outreach 
meetings as we committed to do.
    Mrs. Bachmann. Mr. Dugan, could you tell the committee, how 
does the OCC's regulation compare with the rules that were 
adopted by OTS and NCUA?
    Mr. Dugan. To have such a specific comparison, I would love 
to be able to get back to you for the record on that. I know 
what ours does, but I can't give you chapter and verse on 
exactly what theirs do. But I would be happy to respond for the 
record if that would be appropriate.
    Mrs. Bachmann. That would be fine. We have an example of 
one of the State attorneys general investigating student 
lending, and that suggests that State attorneys general are 
playing a very important role in consumer protection. I wonder 
if you could tell the committee what would be the impact on the 
national banking system if State attorneys general which bring 
enforcement actions against national banks.
    Mr. Dugan. Well, I think this is the same question, whether 
it is student lending or other issues that the Supreme Court 
had to address, which is what is the legislative scheme that 
Congress has adopted with national banks. And it has always 
been our view that historically the idea has been to have a 
uniform set of Federal laws that apply to the national banks 
wherever they operate, or whatever part of the country that 
they are in. And that is what the Watters case upheld, that if 
national banks are exercising their banking powers, whether at 
the bank level or at a subsidiary level, it is a set of uniform 
rules that applies. And so in those circumstances, State laws 
would be preempted.
    We believe we have robust ways, as I have tried to outline 
in our statement, to address the consumer protection issues 
that we have been charged with addressing, and that regime is 
established by Congress, by you, and can be expanded or 
contracted. And we will faithfully implement those laws, but do 
so in a uniform way throughout the country.
    Mr. Miller. If I could jump in, I think your question was 
what effect would happen if the State AGs enforced the laws, 
not what the law is. The effect, I think, would be great. It 
would be consistent with our Federal system. The State AGs have 
stepped forward and done some innovative things in the 
securities area, insurance with Eliot Spitzer, now in the 
predatory lending area, as well as in student loans, and the 
country is better off for that. Those laws in various forms 
weren't being enforced. The AG stepped forward and protected 
the public and pursued the public interest, and we are all 
better off for it. And it is consistent with our Constitution, 
consistent with the great wisdom of our Founding Fathers 
concerning checks and balances and federalism. It is an 
incredible system that at least in my view is now frustrated by 
the recent practices of the OCC and the Supreme Court decision.
    Mrs. Bachmann. Attorney General, thank you for your 
comments. I wonder, could you also tell me what resources you 
have to examine national banks and Federal thrifts for 
compliance with State law?
    Mr. Miller. We don't, and shouldn't have, resources to 
examine them for safety and soundness. We never suppose that we 
should do that nor should our colleagues, the banking 
superintendents, and they don't. But we have enormous resources 
in the consumer protection area. That is one of the bread and 
butter of many of our offices. And we bring those and used to 
bring those resources to the national banks in an effective 
creative way. I think there was one estimate in terms of 
consumer protection, the States bring 17 times the resources of 
the Federal agencies that are here today in terms of consumer 
protection.
    Mrs. Bachmann. I have a question.
    The Chairman. We are over time.
    Mrs. Bachmann. Thank you, Mr. Chairman.
    The Chairman. I thank the gentlewoman for those questions.
    Mr. Kroszner, I am going to ask you a question, but as we 
proceed I am going to make a statement with regard to your 
rulemaking authority: use it or lose it. I was struck by the 
agreement. The Comptroller and the Chair of the FDIC didn't 
agree on everything. It does seem that both are in a position 
of being criticized because you did not roll out the rules 
which they can use. I don't think case-by-case does it. I don't 
think case-by-case in complex situations like we live in is a 
good idea. And I think I speak here probably for the majority 
of this committee. If the Fed doesn't start to use that 
authority to roll out the rules, then we will give it to 
somebody who will use it. You reinforce my sense that the Fed 
is not the best place to do consumer protection. And all of our 
legal traditions about people knowing what they are doing, 
etc., having some due process, that is important.
    It is also the case, it seems to me, that we don't want to 
stop people doing bad things after the fact: we want to deter 
people from doing bad things. If you are in a case-by-case 
situation you are greatly constrained against penalizing 
people. It is one thing to penalize people who have violated 
rules. It is another to tell people to stop doing something 
case-by-case where they can legitimately say, well, I didn't 
know that. And without rules that would be the case.
    So I think the rulemaking authority is important. Now, 
there is a--again, I would rather see the OCC and the FDIC, and 
I assume the OTS would agree on this, but the rulemaking 
decision should be joint. And obviously, it is better to have 
one set of rules. If the Fed is willing to work with them to do 
it, that is fine. But I will tell you if we need to begin to 
see the process of rulemaking going into effect for this area. 
And the answer is that it is especially true now with the 
preemption. Their workload, what they have to do with regard to 
consumer protection, has clearly increased as a result of the 
most recent decision about preemption, so I think this just has 
to happen.
    Now, the next two questions. We have--yes, Mr. Kroszner.
    Mr. Kroszner. If I might just very briefly respond. We 
really do take the consumer protection area very, very 
seriously. We have an entire division--this gets back to an 
earlier point that you made about monetary policy versus 
consumer protection. We have a division of monetary affairs but 
we also have a division of consumer community affairs at the 
Federal Reserve board, and we have similar divisions at all the 
regional Federal Reserve banks, and so we do have it at the 
highest level.
    The Chairman. I don't think it is what motivates people 
mostly. Certainly that wasn't the experience, it seemed to me, 
of Governor Gramlich. But there is also a philosophical 
distinction. You say specifically in your testimony that the 
Fed doesn't think it should use the rulemaking authority. I 
believe overwhelmingly this Congress will think that it should. 
And I want to put you on notice that it is not a personal 
thing, but there is a real difference. And I believe, 
particularly now that the role of the Federal regulators has 
increased, there has to be a change in the rulemaking 
authority. It can be done jointly, but it I think has to be 
done. And I think the absence of rules is a serious problem 
that needs to be dealt with.
    For example, the Comptroller said with regard to the 
practices like these that credit card companies engage in that 
make a lot of people angry, justifiably, essentially as long as 
they are explicit about what they plan to do, they can do 
almost anything. Maybe that is the current state of the law. I 
will tell you that I think there are some things that are so 
counterintuitive to individuals that if you nailed it to their 
foreheads, they still wouldn't fully understand it. There are 
some things that consumers think, well, that can't be. And I 
will say for the credit card issuers, no, we don't want fixed 
rates. But there is an intermediate position between rate 
setting and simply telling people--let me put it this way in 
effect--maybe I will have to clear up the record later. We are 
your credit card company. By the way, here on page 7, it says 
that we may screw you from time to time and by signing this 
application you have waived any objection to that? That is 
notification, but it is not going to be enough.
    But two other questions specifically. One, we have 
unregulated entities, it has been noted in response to Mr. 
Ackerman's question. We need at a Federal level, I believe, to 
pass some laws to cover currently unregulated entities. I think 
that is right. If only the entities that the banks regulated 
issued subprime loans, we would not now be in a crisis. The 
banks are entitled to have us acknowledge that. There are 
entities that make these loans that do other things that are 
not now regulated. I think there needs to be a national law. 
Exactly how it fits with State law, to what extent it is 
preemptive, we will work that out. But it does seem to me that 
there needs to be a national law if only to keep institutions 
from leaving a State that has strong laws to go to places that 
don't.
    What I would want from you, and it doesn't have to be 
today, is a sense of who should be that regulator? It is one 
thing to create the rules. We are going to have to create some 
new rules, I believe, about subprime. And we are talking about 
unregulated institutions, nondepository institutions. Do one of 
you want to take that over? I am serious. Or does it go to the 
FTC or does it go to HUD? We are not going to adequately be 
able to regulate that unless we create a regulator. I would ask 
your advice in writing about that.
    The other issue is on the States. I will say that I agree 
with much of what you said, but when you talked about your 
concern for the overstressed State resources, to be honest, 
that did not strike me as your primary motivation. When you 
say, oh, you don't want the States involved in this thing 
because you have such sympathy with these poor overstressed 
State regulators, well, we will worry about them. I appreciate 
your compassion in this case, but it does not seem to me that 
was your primary motive. I think the States have the resources.
    Let me ask you about one specific issue. One entity that 
has been very much active in State regulation is the attorney 
general in each State; that is why Mr. Miller is here. You 
don't have any comparable Federal authority, for example, Ms. 
Bair doesn't have any comparable authority. You have the 
Justice Department, but it is not the same. The ability to 
bring injunctive lawsuits, the ability maybe even to get 
punitive damages in abusive cases, but you have to have rules 
before you can do that. Are you not somewhat handicapped vis-a-
vis the States? And I would say this to the Federal regulators. 
Mr. Antonakes can go to the attorney general of Massachusetts. 
In the absence of that kind of legal enforcement, to the extent 
that we transfer from the State regime where the supervisors 
and the attorneys general work closely together to a national 
regime with an attorney general, how is that not a diminution 
to some extent of the force with which we can apply these 
protections?
    Mr. Dugan. Actually, Mr. Chairman, I think we have more 
authority with respect to the banks that we regulate. We don't 
have to go to a separate agency to get a bank to stop 
immediately doing something that we find that violates the law. 
We have extraordinary powers under the Federal Deposit 
Insurance Act to take formal enforcement action. Long before 
you get there, we have the power to get--
    The Chairman. You never want to go to court, or you do?
    Mr. Dugan. It is actually quite rare that we go to court 
because institutions almost always settle because of the great 
power that we have as a formal enforcement matter. That is a 
reality.
    The Chairman. The other point I want to make is, you talked 
about matters requiring attention and how many of you deal with 
them. You say that many of them are consumer related. I will 
close with this: I guess we are talking about things being 
unfair and deceptive. I want to get disjunctive. I think we 
need to make sure we get things that are unfair or deceptive. A 
regime in which deception has to be there does not protect 
consumers. There are unfair practices that are not technically 
deceptive. And I guess that is the sense. You got it from my 
colleague, the ranking member, and others. We do not think you 
now are adequately dealing with practices which are unfair, 
probably because you don't have the authority. You may need the 
statutory authority. You may need the rulemaking. This is not a 
personal failing on the part of any of you. But I guess that is 
what I would leave you with. In today's world, with the banks 
so creatively making money off fees, off overdraft fees--I 
mean, I think that there are people who watch their 
congressional calendar, and they see when I get a vote on 
Friday, so they mail my credit card bill because then I will be 
a day late getting back to it. There are so many of these other 
practices that are not deceptive, but I believe they are 
unfair.
    So I will close with this. Somebody is going to have to do 
some rulemaking and you are going to have to go beyond 
deceptive into unfairness. We are not talking about rate 
setting, we are not trying to put anybody out of business, but 
I think you have a broad consensus to do that.
    Mr. Dugan. I will defer to my colleague after this from the 
FTC because they actually have the authority. I think we need 
to be careful here, if unfair or deceptive, but the unfair 
standard legally under the Federal Trade Commission Act is not 
a judgment about unfairness.
    The Chairman. I understand that, but you are not here 
arguing as a lawyer before the Federal Trade Commission. We 
will rewrite the Federal Trade Commission Act with Mr. 
Dingell's cooperation. So understand, we are not now into 
statutory interpretation, we are into statute writing. And what 
I can tell you is, and it may be that you don't have enough 
statutory authority, but we have to give you a broader reach to 
go after things that are in the perception of the people in 
this country unfair. And if the problem is lack of statutory 
authority, then it is our job to care about that.
    Ms. Bair. I would just say that there can be a restrictive 
legal standard. If you are looking at the statutory language in 
this area, you might consider adding the term ``abusive.'' 
``Abusive'' is a standard that is contained in HOEPA that the 
Fed is looking at using in the context of mortgage lending. But 
``abusive'' is a more flexible standard to address some of the 
practices that make us all uncomfortable.
    Ms. Majoras. I just wanted to clarify that, in fact, the 
FTC Act allows us to attack practices that are unfair or 
deceptive, and we do. And we have brought plenty of cases that 
attack unfair practices. But it was Congress that went back to 
the FTC at one point and said you need to define what 
unfairness means, because of course Congress didn't want it to 
mean just whatever, whoever happens to be sitting in my seat 
thinks it means. So there is a standard.
    The Chairman. I appreciate that. When was that?
    Ms. Majoras. I think it was in the 1980's.
    The Chairman. In the interim, a lot of my good friends work 
for financial institutions and they play an essential role in 
this country and I am grateful to them and I work with them, 
but they have succeeded in angering a significantly large part 
of the American people by nickel-and-diming them on credit card 
late fees and overdraft fees. And I think you are going to find 
a Congress today that is less inclined to restrain you and more 
inclined to encourage you to reach out and give consumer 
protection.
    Mr. Campbell. Thank you, Mr. Chairman. I just have a few 
questions for Mr. Dugan here. The first concerns subprime. My 
understanding is that over 90 percent of the subprime loans are 
not originated in banking institutions that are supervised.
    Mr. Dugan. In national banks last year, that is right.
    Mr. Campbell. In national banks, okay, last year, great. 
Given that statistic, is this an area where a national rule 
makes more sense than a State-by-State if over 90 percent of 
the loans are not?
    Mr. Dugan. It is certainly true that because we have such a 
small part of that market, and because we haven't frankly had 
the same kinds of problems with the banks that we regulate that 
engage in these activities, you do need broader coverage. But 
that is exactly why the bank regulators have gotten together 
and proposed guidance that applies to all, not only insured 
institutions, but companies affiliated with them, which we are 
about to finalize, and, getting to your point, we have enlisted 
the Conference of State Bank Supervisors to get their agreement 
to try to get that same guidance out to the State lenders that 
none of the Federal regulators touch.
    So do I think that there needs to be some kind of national 
standard? The answer is yes, because so much of this market 
comes through the States. It can be done by each of the Federal 
regulators and each of the State regulators, which is one 
approach. Another that has been talked about is the Federal 
Reserve addressing some of these issues through their rule 
writing authority. And failing that, the last line would be 
actual legislation. But it is absolutely imperative that we 
have some kind of nationwide approach to this problem.
    Mr. Campbell. Just to understand that answer better, that 
order you gave is the order that you believe is preferable?
    Mr. Dugan. I guess I would say, one, we can do now and are 
in the process of doing and working down that path. I think the 
second is an area where the Federal Reserve, and Governor 
Kroszner, of course, can speak for themselves. But they are 
holding a hearing tomorrow to talk about it. And I just think 
as a matter of time, precedent and so forth, getting to 
Congress is a third practical reality.
    Mr. Campbell. Another question along the same lines, but 
not just subprime--a lender in one State can make loans to 
people in any State. So does that make, if you are looking at 
consumer protection, does that make some kind of uniform 
consumer protection a better approach?
    Mr. Dugan. I think there are certain practices that have 
become national products, commodities if you like, and they 
raise the same issues over and over again. And those are the 
ones that I believe cry or call out more for national kinds of 
standards. Because as you say, things can happen in different 
States.
    Mr. Campbell. And the third question, I think you kind of 
touched on in discussing things with the chairman a little, but 
just maybe you can elaborate on preemption by you guys. We have 
talked a lot about resources relative to State license mortgage 
lenders, resources at the State level versus preemption by you 
guys. It sounds like you believe that looking for more 
resources or more involvement at the State level is something 
preferable to preemption by you guys.
    Mr. Dugan. I guess what I would say is that I think we do 
have adequate resources to put in place a standard. Let me give 
you an example. One of the things that I have spoken about 
recently is the use of stated income or totally undocumented 
income in order to make loans. It is something that we will 
address, I think forcefully, in the guidance we are about to 
issue to make that no longer the general rule when you do a 
subprime loan. If we adopt that guidance, we would be able to 
implement that guidance in national banks around the country 
wherever they are situated to have that as a standard. There is 
no similar mechanism to make sure it gets done in the same way 
in the more than half of the market that Federal regulators 
don't touch. The States individually are going to do that. But 
if they are not actually in those institutions supervising 
them, it will take a longer time to do it. That is really what 
I am getting at. If you have a finite amount of resources, 
rather than devote them all to the really heavily regulated 
insured institutions, doesn't it make more sense to devote them 
to the States? We do the national banks, hold us accountable, 
but that it is a better division of labor in order to achieve 
the maximum benefit for the consumer.
    Mr. Campbell. Okay. I yield back. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Missouri.
    Mr. Clay. Thank you, Mr. Chairman. Thank you for this 
hearing. I certainly will attempt to observe the 5-minute rule. 
I have a set of questions for the entire panel. Recently I was 
reading an article entitled, ``Unsafe At Any Rate,'' written by 
Elizabeth Warren, and I want to use that analogy that she used. 
It is impossible to buy a toaster that has a one in five chance 
of bursting into flames and burning down your house. But it is 
possible to refinance an existing home with a mortgage that has 
the same one in five chance of putting the family out on the 
street and the mortgage won't even carry a disclosure of that 
fact to the homeowner. Similarly, it is impossible to change 
the price on a toaster once it has been purchased. But long 
after the papers have been signed, it is possible to triple the 
price of the credit used to finance the purchase of that 
appliance, even if the customer meets all the credit terms in 
full and on time.
    The question is this. And Ms. Warren suggested that perhaps 
we create a financial services product safety commission. 
Should there be more Federal regulation? Why are consumers safe 
when they purchase tangible consumer products with cash, but 
when they sign up for a routine financial practice like 
mortgages and credit cards, they are left at the mercy of their 
creditors? The answer given by the author is regulation.
    I ask, where are we dropping the ball? What is your answer 
to this problem, and where do we go from here? If we could 
start with Mr. Kroszner, please.
    Mr. Kroszner. Thank you very much. It is certainly 
extremely important in all areas to protect consumers, whether 
it is health and safety regulation, or their financial well-
being. So these are both very important issues. I do think 
there is a bit of a distinction between something like a 
toaster and some financial products. I think it is very easy to 
objectively define whether a toaster is likely to burst into 
flames. With respect to financial products, some things that 
could be helpful and useful to certain types of customers may 
not be helpful and useful to other types of customers. I think 
with respect to a toaster bursting into flames, it is very 
clear that one bursting into flames with a one in five chance, 
that is harmful no matter who you are, and no matter where you 
are. With respect to financial products it becomes a little 
trickier, because certain types of products which may not be 
appropriate to some people may be appropriate for other people. 
So it is much more difficult, I think, to set up those types of 
bright line distinctions.
    That said, it is very important to make sure that if there 
are certain types of practices that are inappropriate, that we 
address those, and that is one of the reasons why with respect 
to mortgages we are holding the hearing tomorrow on HOEPA to 
look to see whether there are sort of certain systematic 
patterns and practices that we need to address.
    Mr. Miller. Congressman, I said earlier that if the seven 
of us at this table really meant it, and worked together, and 
used all of our power in the subprime market, and we all have 
power, including the States have significant power there, going 
forward, we could reform the industry. And I say that because 
of what has happened. Some of the bad companies are out of 
business, some of the better companies are still there. They 
have reputations to deal with. There has been pain for the 
people who have been foreclosed on, there has been pain for the 
investors. The time is right. If the seven of us and the people 
who work for us really work together cooperatively and spot the 
various problems and use our expertise, we could really clean 
up the industry.
    There is one other thing that needs to be done, and that is 
that the current situation with all those foreclosures--there 
what has to happen is, with us and with everybody in the 
industry, they have to have what we call Iowa common sense. And 
that is to renegotiate some of the terms so that the consumer, 
the borrower, can make the payments and the creditor, the 
investor, is better off because they make more money that way 
than on foreclosing. We went through that in the farm crisis. I 
think more and more people are understanding that. The whole 
industry has to understand that, act on it, and that can 
ameliorate the current crisis considerably.
    So we know what to do. The question is, will the seven of 
us do it.
    Mr. Clay. Mr. Miller, have the consumers been unexpectedly 
caught off guard as far as knowledge of these balloon payments?
    Mr. Miller. They have, they have. It is a scandal in the 
sense that the mortgages, particularly the subprime mortgages, 
are enormously complex. The people are very much at need. They 
are the working, the lower working class Americans, who don't 
have any margin for error. They have an economic situation, 
they need the loan, it is very complex. And in the past, there 
has been so much willingness on the part of certain players to 
abuse them, they have been taken advantage of, and it is a 
national scandal. And we can wring our hands about that, and we 
brought some lawsuits and that is good. But the big thing is, 
what do we do now? Do we solve the current problem and do we 
work together using our powers and using them aggressively 
where necessary, always reasonably, or do we all sort of 
splinter up, the seven of us up here?
    Mr. Clay. Thank you for your response. May I?
    The Chairman. Yes, you can continue another couple of 
minutes.
    Mr. Clay. Ms. Bair.
    Ms. Bair. I have a lot of respect for Professor Warren. She 
serves on our Advisory Committee on Economic Inclusion. 
Although I haven't read the complete report yet, I am familiar 
with some of her thoughts on this. I agree with your analysis, 
but I am not sure that we need a new financial regulator. There 
are seven of us here on this panel. I think there are some ways 
that we can improve existing authorities and use them perhaps 
more proactively. In a coordinated fashion, I think we can take 
care of this problem without a new regulator.
    Mr. Clay. Thank you, ma'am.
    Ms. Majoras. I would start with this, closure. There have 
been comments here about well, closure is not the whole answer. 
I understand that. But we released a study today that our 
economists have been working on for some time which shows that 
even consumers who are fairly educated, and think they 
understand the current mortgage disclosure forms, don't. 
Because when our people sat down and worked through it with 
them, they realized that there were costs and charges and they 
didn't have any idea what they are, so people don't know what 
this is costing them. We hope we can use this, and we developed 
some prototypes on what would work, what consumers would better 
understand. Because I do think it has to start with that. Ray 
is right in the sense that you have to be careful here because 
there are some bad things that happen, but there are people who 
did get credit and did get homes that are still paying for 
those homes who got them in the subprime market who wouldn't 
have gotten them in any other market. We have to remember that, 
too, because those people deserve to have a home as well.
    Mr. Clay. What is your opinion about the creation of a 
financial services product safety commission.
    Ms. Majoras. I think I agree with my colleague Ms. Bair 
that I think we ought to try to work this out with what we 
have. There is no question that we all have different 
jurisdiction and so forth, but we all, in some piece, have the 
consumer protection aspect here. And we know where consumers 
are being harmed and so we ought to be able to attack it with 
what we have. And if we don't come through on that, then I 
wouldn't blame you for considering something else, but I think 
we should start with that.
    Mr. Clay. Yes, sir.
    Mr. Polakoff. Congressman, there was a recently publicized 
supervisory action taken by OTS against the Federal Savings 
Bank for--we could characterize it as unfair or deceptive or 
aggressive underwriting to take advantage of borrowers. And 
when we pursued the action, we briefed the other Federal 
banking agency sitting at the table. And I am convinced if they 
would have seen a similar situation they would have taken 
equally aggressive supervisory action. So I believe when we 
find predatory practices, which is entirely different than 
lending to the subprime community, when we find it we take 
appropriate action and we communicate amongst ourselves to 
ensure that there is some sort of level or horizontal analysis.
    Mr. Clay. No matter who the perpetrator is?
    Mr. Polakoff. If it is within our institutional 
jurisdiction, we will take action regardless of the 
perpetrator.
    Mr. Clay. Yes, sir.
    Mr. Antonakes. Congressman, we license mortgage lenders and 
mortgage brokers in Massachusetts, and they are not 
unregulated. We conducted over 400 exams last year that 
resulted in over 100 enforcement actions, 3,700 enforcement 
actions by all the States combined against lenders and brokers 
collectively. We continue to do work here, we need to do more 
work here as well, and we need to work with our Federal 
counterparts. The idea brought up by Comptroller Dugan, to 
coordinate our examinations of lenders and brokers, is 
something I broached 3 months ago, because you can't look at 
broker network solely. Certainly sales and marketing practices 
of brokers are a concern that needs to be dealt with. But you 
also have to look at the internal controls and underwriting 
processes that took place at nonbank as well as bank subprime 
lenders. And then you also have to look at the funding 
structure and also what is going on in the secondary market as 
well. I think disclosure needs to be improved. We support the 
Federal Reserve using their broad rulemaking authority whereas 
we have attempted to deal with the issue with individual State 
predatory lending laws, including my own in Massachusetts, 
which has only been somewhat successful because not everyone 
complies with them. And then also in Massachusetts an attempt 
to deal--
    The Chairman. You can finish the sentence.
    Mr. Antonakes. I would just say trying to deal with the 
issue now, as well as in the future, we have set up a hotline 
where anyone who is having foreclosure problems can contact us. 
We feel that 400 calls in 6 weeks time, trying to refer them to 
reputable counseling agencies and also work directly with their 
lenders and also mediations as well.
    Mr. Clay. I thank the chairman and the panel for the 
indulgence.
    The Chairman. The gentleman from North Carolina.
    Mr. McHenry. Thank you, Mr. Chairman. I am from North 
Carolina, and the North Carolina anti-predatory lending law 
that has been vaunted here in the halls of Congress is a 
wonderful thing that needs to be expanded to the national 
level, that somehow it had this fabulous effect in North 
Carolina. In the Sunday Charlotte Observer, they have a large 
expose that they are continuing, a long series about the 
fallouts and the foreclosure rate in North Carolina and that 
this vaunted anti-predatory lending law has actually had an 
adverse effect in the market. And it sort of brings to mind 
something, Mr. Dugan. There is this discussion here in 
Washington by consumer advocates that our Federal law isn't 
sufficient, that we are not doing enough to protect the public. 
Yet when we get into the details about bad lending practices, 
predatory lending practices, it seems that--well, it is 
apparent that this is not primarily an issue by federally 
regulated institutions. We have seen the main abuses occur 
through State regulated institutions. Is that a fair 
assessment?
    Mr. Dugan. I think it is a fair assessment, and I am not 
just saying that because I am a Federal regulator. I think, in 
a brief filed by the attorneys general, 46 out of the 50 
attorneys general agreed that the real predatory lending 
practices were not taking place in regulated insured depository 
institutions or their subsidiaries. Those tend to be State 
chartered companies, some of which have some ties to Federal 
regulators, but many of which do not. And just last year, over 
50 percent of subprime originations were in completely 
nonfederally regulated markets. Not all of those are bad loans, 
but some of the problems we have seen, and the more egregious 
ones I think, it is fair to say have been at those 
institutions.
    Mr. Miller. If I can just jump in here.
    Mr. McHenry. If I may finish here. I only have a set amount 
of time.
    Mr. Miller. But you raise some issues directed towards us.
    Mr. McHenry. I appreciate that, and thank you so much, but 
I will get to you in a second. I have a follow-up to him, and 
this is actually my time, respectfully, sir. But to continue 
that thought, would that indicate that we need to create 
another Federal law? Do we need to go further with our Federal 
law or is it kind of adequate? Should the focus be changing the 
State-by-State regulations of those State regulated 
institutions? Would that be a reasonable conclusion?
    Mr. Dugan. I think there are some things that occur in both 
markets in the subprime area, and that is why the Federal 
regulators got together, as we can do pretty quickly, to issue 
proposed guidance in that area. The question is, how do you get 
those same kinds of standards to apply to the exclusively State 
regulated entities. And that takes action by the States and 
CSBS has committed to go down a path of going State by State to 
do that. If that works, that may address the problem. If it 
does not, that is when people are considering other measures to 
get a national standard, whether it is a regulation by the 
Federal Reserve, which has its own set of issues, or a 
congressional law.
    But the first place that we are looking is guidance by the 
Federal regulators jointly to be with companion guidance to 
follow by the States. Of course the question is, you have to 
have uniform application in the States. It is not enough just 
to say you are going to do it, you have to do it. But that is 
the first place that we are looking.
    Mr. McHenry. What is the Federal Reserve's perspective on 
this? I know they have taken some action.
    Mr. Kroszner. Well, it is certainly very important for us 
to coordinate with the States, and it is important for the 
States to have sufficient resources to be able to deal with the 
issues that they need to deal with with respect to institutions 
outside of the Federal regulatory purview. And so we try as 
much as possible to cooperate with them.
    Exactly as Comptroller Dugan had said, in working up, for 
example, the nontraditional mortgage guidance that we issued 
last year, we have worked very closely with the States. We have 
even sent Federal Reserve staff members to testify before 
various State legislatures to try to convince the States that 
they should adopt the same types of guidance, same types of 
regulation. Some States are able to do that without 
legislation. And we have had, I think, a lot of cooperative 
success on nontraditional mortgage guidance, and we will be 
working exactly the same with the subprime mortgage guidance 
that should be coming out.
    Mr. McHenry. My time has expired. And if I may just, Mr. 
Chairman, to Mr. Antonakes. There is this disparity between the 
amount of bank examiners and oversight that we have. And we 
have about 1,800 bank examiners for about 1,850 federally 
regulated financial institutions. There is a great disparity 
about the number of State regulated, State bank examiners 
versus the number of State banks. Do you think we have enough 
in the way there? And when he finishes up, Mr. Miller, if you 
want to chime in. You seem anxious to do that.
    Mr. Miller. I am waiting patiently, as long as I get my 
turn.
    Mr. McHenry. Welcome to Congress. Mr. Antonakes.
    Mr. Antonakes. I can speak for my State that we have 
adequate resources to fulfill our responsibilities, and I think 
it is up to the individual States to make sure in their own 
discussions with their administration and their legislatures 
that they have what they need to do the job. I would only add 
that we have been supportive of the process for the 
nontraditional guidance. I would suggest if that takes place 
within the confines of the FDIC where we can participate, it is 
a far better process. We don't have to wait for the Federal 
action to be done. We can do it in companion, in part of that 
actual process, and not be locked out of the actual rulemaking 
process.
    Mr. Miller. The chairman sort of gave the recommendation 
early not to have finger pointings on what happened, and it was 
a good recommendation that I followed so far. But there have 
been repeated statements that most of the loans came from State 
regulated places in the subprime area a number of times. And 
with some uniformity in questions from the minority side, 
although not Mr. Bachus, it has come up a number of times. So 
let me just say this, that there is responsibility at the State 
and Federal level for the subprime crisis. National banks 
certainly had some involvement throughout the whole process, 
including in the securitization and in the purchasing of the 
loans. There is responsibility to go all the way around. The 
only thing I would point out is that Steve's agencies and the 
attorneys general were working very hard in this area and 
accomplished a significant amount of good despite what 
happened. We were much more active than our Federal 
counterparts, is what I would leave you with.
    In terms of North Carolina, I would be interested in what 
the paper is saying on your statute. There have been other 
studies that show that your predatory lending statute has 
worked very well, that it hasn't dried up credit. And indeed 
the Ameriquest case, Ameriquest left North Carolina for an 
extended period of time as a result of that statute. And the 
abuse that they directed throughout the country was much less 
in North Carolina because of your statute.
    The Chairman. The gentleman from North Carolina.
    Mr. Watt. Thank you. To get the view from that side, and 
you get the view from this side of North Carolina, my 
assessment is much, much more similar to the one that Mr. 
Miller has outlined. And I don't think it does us any good to 
engage in this kind of activity, pointing at each other and 
casting blame here. My experience is that there is enough blame 
to go around for the subprime debacles at every level. And 
despite the fact that North Carolina has a fairly aggressive 
predatory lending statute, even that doesn't stop unsavory 
lenders who are engaging in the business and trying to make a 
quick buck. And then there are the subprime lenders that I 
still, even after a series of hearings, haven't been able to 
figure out who regulates. The ones that are subsidiaries of 
national banks at some level, but somehow have some kind of 
shield between them and the regulators, I haven't quite figured 
that out yet.
    So I am not even going to try to engage in this debate with 
my colleague from North Carolina. I won't even read the story 
that he read quite like he read it, but that is a subject for 
another day.
    What I would like to know is from my friend from the Fed, I 
was pretty abusive to the Fed the other day at the credit card 
hearing, but there is one suggestion here that OCC has made, 
Ms. Bair has made on behalf of the FDIC, that there needs to be 
joint rulemaking authority. OCC, FDIC is not currently 
authorized to do some things that the Fed and maybe the FTC are 
authorized to do. And they I think, for the first time, I have 
heard them affirmatively say Congress ought to expand that 
authority.
    What is your view and what is the Fed's view on that, if 
you would?
    Mr. Kroszner. Thank you. That is a very important question. 
One thing I think that is very important to realize is that the 
enforcement authority is there regardless of whether there is a 
particular rule.
    Mr. Watt. We are talking about joint rulemaking. You can 
only enforce rules that the Fed will make, and I can tell you 
that there were a lot of unhappy people in the room when we 
were talking about credit cards, when we were talking about the 
rules that you all have made or the lack of rules that you all 
have made. And there is some dissatisfaction with the lack of 
rules that you all have made. So I am going to get to the 
enforcement question if my time doesn't run out, but I want to 
know, does the Fed have a position on what is being advocated 
on giving the OCC and the FDIC joint rulemaking authority 
within this area?
    Mr. Kroszner. The Federal Reserve Board has not formally 
discussed this issue, so we have no formal position.
    Mr. Watt. Are you all planning to take up that issue? Would 
you encourage them to take it up at your next meeting and let 
us have your formal position on it? I think we finally got the 
formal position of the other regulators that are sitting beside 
you. They have kind of told us that off-the-record, but I think 
from my perspective, this is the first time I have heard it in 
a public hearing venue where they aggressively said, give us 
this joint rulemaking authority. So it would be nice to hear 
from you.
    Now, second, on the enforcement issue, I am wondering, Mr. 
Miller, if the Feds got the regulatory authority under Watters 
now to basically have absolute authority to make the rules, 
what implications does that have for enforcement of those rules 
that are made at the State level by attorneys general even 
though the rules that are being enforced are articulated at the 
Federal level? Do you have that authority and could I have the 
opposite view or the other view on that, maybe it is not the 
opposite view, on whether maybe something needs to be more 
aggressively done to make it clear that even when you all make 
the rules for Federal regulated institutions the States still 
have the authority to enforce those rules?
    Mr. Miller. In some limited areas, but important areas like 
telemarketing rules, when the FTC does telemarketing rules the 
States have the authority to enforce that. And in a subprime 
area to give us the authority to enforce the Federal rules, I 
think, would make a lot of sense for all the reasons that we 
have mentioned, including the resources. I would offer one sort 
of caution about joint rules. I think that it is important to 
give the OCC rulemaking and the FDIC in deceptive and unfair 
practices, but if you give all the agencies jointly the rules, 
then--
    Mr. Watt. I probably misstated that. I am actually 
advocating for exactly what you are saying, but then having 
them get together and hopefully do it jointly, but giving them 
each one independent authority to do it.
    Mr. Miller. That would be the way to do it, and have them 
consult, of course, and try to work together. But otherwise you 
could get into stalemate and lowest common denominator, and I 
don't think you want to go there.
    Mr. Watt. Just to get the other side on the enforcement 
issue from Mr. Dugan and Ms. Bair.
    Mr. Dugan. I think there is a statutory prohibition on 
unfair and deceptive practices that we are talking about, and 
we can take enforcement actions just under that without a 
Federal Reserve rule with respect to that. That is something 
that we kind of pioneered among all the agencies.
    Mr. Watt. I am only talking about State.
    Mr. Dugan. On that count, when the Federal Reserve issues a 
rule under this that applies to lenders, it applies to all 
lenders, not just bank lenders. To the extent it applies to 
nonbank lenders you do need an enforcement mechanism. I believe 
that, I think this is right, that the State attorneys general 
already have that authority to enforce that rule if a rule is 
written. I believe that is correct.
    I am sorry, that is only with respect to HOEPA, which is 
the high cost loan thing. To the extent that is not provided 
here, I think it would be a useful thing to do.
    Mr. Watt. Thank you very much, Mr. Chairman.
    The Chairman. Would that have to be statutory?
    Mr. Dugan. I think it would have to be statutory.
    The Chairman. To the extent that we have touched on things 
where you think we would need a statutory change to fix things 
up, follow up with us and let us know.
    The gentleman from Georgia.
    Mr. Scott. Thank you, Mr. Chairman. Much has been said. 
This has been a very, very informative and a very, very good 
hearing. But we have a serious problem of lack of faith and 
confidence of the financial consumer being protected. We have 
soaring foreclosure rates, we have subprime lending, predatory 
lending, and deceptive credit card practices. And nowhere is 
that more impacted than those at the lower end of the economic 
scheme, which makes it all the more serious. And so while some 
will argue that the State is in control, or it is the Federal, 
these poor people are out there just looking for help, they are 
looking for protection. So I think that we need to establish 
certain facts. I think one is, without question, State 
regulators are in need of clear and concise explanations of 
what their role in regulating should be and will be in the near 
future, and how State and Federal authorities can work together 
to ensure above all else that there is protection of the 
financial consumer.
    And with that as a premise, I think we need to ask some 
questions about the infrastructure at work here between the 
Federal and the State level. I would like to ask a series of 
questions and maybe get some quick answers because my time is 
short. The first thing is, in your opinion, and any one of you 
can answer these, or if two can chime in with quick answers, I 
would appreciate it greatly. First of all, should Federal 
banking law bar States from regulating the activities of State 
chartered subsidiaries of national banks?
    Mr. Dugan. The answer from the OCC is yes, and the Supreme 
Court just agreed with that position.
    Mr. Polakoff. And the answer from the OTS is yes.
    Mr. Scott. What do you believe should be the appropriate 
scope of the National Banking Act?
    Mr. Dugan. I think the scope should be to the activity, all 
activities in national banks, both from the safety and 
soundness and the consumer protection side of what they do.
    Mr. Scott. Do you believe that State regulation of national 
banks helps or hurts the consumer?
    Mr. Dugan. I guess what I would say is that it is 
duplicative, and it would be a better use of resources to have 
States focus on the place where they can bring the most 
attention to things that aren't otherwise done, and that we 
should be held accountable to do what we need to do at national 
banks.
    Mr. Miller. I dissent of course. I think that the States 
and the Feds both doing it in this important area is the best 
of both worlds and is the kind of federalism and checks and 
balances that our Founding Fathers intended for this kind of 
situation.
    Mr. Scott. You know, I agree with you, Mr. Miller. I love 
history, and perhaps one of the most fascinating chapters of 
American history is the layout of our financial systems and the 
checks and balances that basically the architect of which was 
Alexander Hamilton, who made it very clear to us and has yet in 
my opinion to receive the proper credit that he rightfully 
deserves. But with that, if Hamilton were here, I think he 
would ask this question: How much deference should be given to 
a Federal agency's determination that their regulations preempt 
State law?
    Mr. Miller. I think that obviously there should be some 
deference, some considerable deference. I think the exception, 
though, would be with the OCC and the OTS who are competing 
with the States for bank charters, that when that competition 
continues, and certainly the temptation or the implication is 
that we are going to go easier on you than they will, so come 
with us, and then put a different hat on and say, okay, we 
preempt the States. That is not a good situation. So I think 
because of the existence of that situation, the deference to 
those two agencies should be diminished or indeed eliminated.
    Mr. Polakoff. If I could offer two thoughts for your 
consideration. The first is that preemptions are a rather 
fascinating discussion, and recently there have been three 
States that have actually preempted their city or county 
ordinances. So preemption exists at each level, sir.
    The second is that, at OTS, when we are asked for a local 
opinion on a preemption issue, we do share that legal opinion 
with CSBS and with the affected States. I am not suggesting 
that we are asking for an equal contribution, but I do want to 
share with you that we do share that before finalizing our 
opinion.
    Mr. Scott. Thank you very much. I have one other point 
here. I have heard from my consumer groups in the State of 
Georgia. The State of Georgia has been a leader in the Nation 
of foreclosure preemption. You name the abuse, you name a need 
for protection for financial consumers, and my State of 
Georgia, unfortunately, is the poster child for that. And many 
of the folks back home argue that Federal regulators cannot 
adequately police consumer protections that they have worked to 
promote. Is that a fair statement?
    Mr. Dugan. I don't think it is a fair statement with 
respect to national banks. But of course we cannot promote 
consumer protections with the places where predatory lending is 
most in evidence. And it is not in the national banking system, 
it is not in insured depositories, it is outside of them. And 
we don't have any jurisdiction over that. That is absolutely 
true.
    Mr. Scott. And then I have constituents on the other side, 
national banks for example. They complain that they shouldn't 
have to spend the money or time complying with both Federal 
regulations and the rules of the various States in which they 
conduct their business.
    Mr. Dugan. Well, I think that is the essence of the dual 
banking system and that is the essence of the national banking 
system historically, going back to the very strong advocate of 
a national bank charter, which was Alexander Hamilton, which is 
that a set of uniform rules that apply to nationally chartered 
banks is the system that Congress set up to be and the reason 
why it has gotten the kind of deference it has gotten in the 
courts over the years. That is the principle.
    Mr. Scott. Finally, Mr. Chairman, if I may, just to 
conclude, do you believe supervision over national banks and 
their subsidiaries is adequate to ensuring financial customers 
are being treated fairly? This is especially as a crisis in the 
subprime lending market, and foreclosure numbers across the 
country are not foreseen as letting up any time soon given the 
crisis.
    Mr. Dugan. I do believe we have the resources. We are not 
perfect. The banks we supervise are not perfect. But I believe 
our record on those subprime loans that you are talking about 
is a strong one.
    Mr. Scott. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Texas.
    Mr. Green. Thank you, Mr. Chairman. And as usual, Mr. 
Chairman, you have provided great oracularity in helping us to 
better understand these issues. I believe that the perception 
exists in the minds of many consumers, a great number I might 
add, that they are being, to use a highly technical term, 
``ripped off'' by some of these fees, fees that are noninterest 
income. They believe they are being ripped off. And Chairwoman 
Bair, on page 3 of your statement, starting in the second 
paragraph, a few lines down, you indicate that fee based 
overdraft protection programs typically charge customers at 
least $20 to $35 for each overdraft. Depending on the size of 
the overdraft and length of time for repayment, the effective 
annual percentage rate can exceed 1,000 percent. And then you 
go on to indicate in the next paragraph that last year insured 
institutions obtained 42.2 percent of their net operating 
revenue from noninterest income. At some point someone might 
conclude that this is rapacious and that it is invidious and 
that something more than a notice is appropriate.
    The truth is that a disclosure of an invidious practice, 
while it would disclose it, it won't eliminate it, and it won't 
obviate it. You just tell the person that if you do a certain 
thing you will have this practice to contend with. And it seems 
to me that at some point we have to try to end some of these 
rapacious and invidious practices.
    Let me just cite one or two maybe. The ranking member 
talked about the overdraft problem. You cash the check and you 
make a deposit at the same time you are cashing a check or 
writing and having the check honored. The deposit does not have 
the same rate of speed with reference to becoming a part of the 
system that the check that you have written seems to 
matriculate through the system. Credit cards, and perhaps I 
should ask this question before I make a statement of fact, so 
let me ask. If I charge something on a charge card and right 
immediately after charging decide that I don't want it, and I 
return it and get a credit to my account, is it true or not 
true that the credit may take longer to reach my account than 
the charge?
    Mr. Polakoff. Congressman, I could offer from a personal 
perspective that while it may take longer, there is not an 
obligation to pay the amount of the expected credit.
    Mr. Green. I understand. But consumers are of the opinion 
that these things ought to move at about the same rate of 
speed. If you take my money on day one, perhaps I ought to get 
credit on day one, especially if I hand it back to you right 
after I have made the charge. I charge, I give it right back, 
the charge hits my account, but the credit shows up some days 
later. These kinds of practices are, I think, what is causing 
the consumer to think that some of us are not fulfilling our 
obligations to protect them. Universal defaults, double cycle 
billing, these things are repugnant to the consumer. And while 
I hope that we can cure them with notices, I am not sure that 
notices alone are sufficient.
    One more comment. Mr. Miller, I really admire your 
optimism. You talk about folks getting together and working it 
out. There are two great powers, many great powers, but there 
are two that I will speak of in the universe. One is ``way 
power,'' the ability to find a way. The other is willpower. 
Many times we can see the way, but we can't find the will, and 
I am hopeful that the will will manifest itself, because if we 
do have the will, and I am convinced that this august body can 
find a way.
    So my question is this: Having said all of this, do you 
find any--is there any practice that is rapacious, repugnant, 
and invidious to the extent that there ought to be some rule 
that would alter it? And I have cited a few. So why don't we 
start with the Fed.
    Mr. Kroszner. Certainly it is very important to protect 
consumers and to make them feel that they are being dealt with 
fairly and to make sure that they are dealt with fairly. I 
certainly agree with that. And one of the rules--
    Mr. Green. May I just intercede? And I would beg that you 
accept my interceding for just a moment. Could you kindly start 
out with yes or no? That way I will know what you really said, 
because sometimes when folks finish, I don't know whether they 
have said yes or no. So could you start with yes or no and then 
give me all the explanation you would like within about a 10-
second period of time?
    Mr. Kroszner. Yes. Under HOEPA, we have undertaken a rule 
against loan flipping, which we thought was unfair and 
deceptive and inappropriate, and so we prohibited that 
practice. Tomorrow I will be holding a hearing where we are 
going to be discussing other potential practices that we would 
consider for a prohibition.
    Mr. Green. Mr. Dugan?
    Mr. Dugan. Yes, there are. We have had to take action 
against some of these. You know, we don't have the rulemaking 
authority. But just to give you one example, in the area of 
secured credit cards, we saw a practice where people were 
charging the amount of the security to the card, and as a 
result, there was nothing left for the consumer to borrow. And 
that would be the kind of practice that we certainly would 
think rises to the level of something that just shouldn't 
happen.
    Ms. Bair. Yes, exploding ARMs. These payment-shock 
mortgages that people have no realistic chance of repaying, are 
what the Subprime Mortgage Guidance is all about, getting rid 
of those.
    Also, I think regarding fee-based bounce protection, we are 
undergoing a careful review of that practice. That product is 
used chronically. It is extremely high-priced, and we want to 
do more fact-finding about how customers are using it.
    Ms. Majoras. Sure. The FTC, we have lots of cases alleging 
that facts were deceptive or that they were unfair in the 
financial services area. We had one recently in which the 
mortgage lenders were providing all sorts of terms to Spanish-
speaking consumers in Spanish, but then changing the terms and 
giving them documents in English that they couldn't read that 
had wholly different terms for the mortgages. So, yes, of 
course there are practices, and we attack them regularly.
    Mr. Polakoff. Congressman, absolutely. Our 2005 guidance on 
overdraft protection is a perfect example where it is 
unacceptable for a consumer to go to an ATM and ask for the 
available balance and have included in that the overdraft 
protection amount without any notice of the charge associated 
with accessing that.
    Mr. Green. My final question is, to what extent were these 
corrections published?
    Mr. Dugan. Ours was published.
    Mr. Kroszner. We issued a formal rule.
    Ms. Bair. Yes. For subprime mortgages, again, we have 
imposed very public formal enforcement actions, and also the 
Subprime Mortgage Guidance obviously is public.
    Ms. Majoras. We filed a case in court and issued a press 
release and the like.
    Mr. Green. Thank you, Mr. Chairman. I yield back the 
balance of my time.
    Mr. Cleaver. [presiding] The Chair now recognizes the 
gentleman from California, Mr. Sherman.
    Mr. Sherman. Thank you.
    Comptroller, if the OCC determined, either by rule or 
interpretation, that realistic brokerage is a permissible 
activity for national banks, would you then view State real 
estate licensing laws as either obstructing, conditioning, 
impairing, or interfering with national banks' ability to 
engage in such activity, and then go on to preempt those State 
licensing laws?
    Mr. Dugan. Mr. Sherman, we have no such rule in our book to 
permit real estate brokerage and I have no intention of doing 
so as long as I am Comptroller.
    Mr. Sherman. That pretty much puts that question to rest.
    We need consumer protection. We need more of it than we 
have now. If we have the States do it, then a lot of people who 
live in States where they get inadequate consumer protection, a 
few will live in States where consumer protection is so intense 
that it interferes with business and raises costs, and the 
whole country will suffer, because we benefit from an efficient 
national economy. In fact, this union was formed perhaps more 
than for any other purpose to give us the benefits of living in 
the world's first common market where companies could do 
business across State lines and now across the continent.
    We could act through the Federal agencies. I think you have 
some prodding here today, but there is more for you to do. Or 
finally, we could pass laws through this committee. They are 
subject to possible veto, and they are also subject to a 
congressional schedule that is now being drawn out on the 
Floor. I don't know how good we would be at writing good 
consumer protection if we do it on 3 hours' sleep, which 
appears like it is going to be the norm for a while here in 
Congress.
    My hope, therefore, is that the agencies represented here 
move forward with consumer protection, and there are two kinds 
of consumer protection. One is disclosure, where it provides 
good information, is always helpful. And the other is when you 
prohibit an activity, and the problem there is--I will give you 
an example. Let us say you have a group of subprime borrowers, 
and they can't qualify for anything but the really tough 
subprime loan. If those loans tend to have a one-fifth default 
rate, you would say, my God, what kind of lender is making 
those loans? We have to stop that. But if you stop it, then you 
have stopped--for every foreclosure you have stopped, you have 
stopped four people from ever owning a home.
    So I don't know what the default rate is. If you aim to 
tell those financial institutions that you regulate to aim for 
a 1 percent default rate, a lot of people aren't going to be 
able to own homes. If you allow them to make such loans on such 
extreme circumstances that they have a 50 percent default rate, 
first they are going to go bankrupt, but second, we don't want 
to see those kinds of loans made.
    As a disclosure, we have these credit cards out there, and 
the statement tells me what my annual percentage rate is, and 
it tells me what my minimum payment is. Should we by law or 
regulation require that it say, Mr. Sherman, if you choose to 
make the minimum payment, even if you don't use this credit 
card for any future purchases, it will take you ``X'' years to 
pay us off, and in addition to paying us the ``X'' dollars that 
you owe, that we were going to add ``Y'' dollars of interest?
    Now, I realize people continue to use their credit cards, 
but would it be helpful to American consumers if we knew if I 
have this balance at the current interest rate, eliminating the 
effect of any teaser rates, this genuine effective rate, and I 
choose just to make those minimum payments, what am I in for 
both in terms of how long am I going to be making those 
payments, and the total amount of interest I am going to pay? I 
will let anybody respond to that.
    Mr. Kroszner. Certainly our proposal that was discussed in 
the subcommittee of this committee a week ago tries to address 
exactly that issue. One of the things that we did is we talked 
to real consumers and asked them, what do you need to know? 
What do you want to know? What is going to be helpful to you? 
And then when we have those answers, tried to put that together 
in a way that was useful to them, and then asked them, well, is 
this helpful? Can you understand that?
    And so our proposal is getting at exactly these kinds of 
issues, and as part of our proposal, we have discussed 
disclosing precisely that type of information. We are now in a 
comment period, so we are very open to comments from consumers, 
and from other parties who might tell us how useful that is and 
how to improve that.
    Mr. Sherman. And I hope in the limited time that one of the 
things you put forward to consumers was a little table: If you 
make the minimum payments, this is how long it is going to 
take, this is the total amount you are going to pay, and this 
amount is going to be your interest, and this is your 
principal.
    I do have a quick question on home lending, and that is, we 
have seen home mortgages make the people who would never 
qualify to be able to pay the fully indexed adjusted amount. So 
it is somebody that says, oh, yes, you can qualify for a 
$500,000 mortgage because you can afford to make $2,000-a-month 
payments, and that is all you are going to have to make for the 
first 6 months or a year, at which point it goes to double that 
payment. Are the financial institutions that each of you 
regulate allowed to regard a borrower as qualified based upon 
the teaser rate and not based upon whether they qualify to make 
the fully indexed payments that will come about in--and I 
realize they only come about if the index doesn't drop, but 
assuming the index stays the same.
    Mr. Kroszner. This is precisely the issue that we have put 
out in our notice of proposed rulemaking on subprime mortgages. 
And we have gotten comments in, and the agencies are working 
together to finalize that rule. I think when we looked at the 
comments--or we are looking at the comments, and we certainly 
can't prejudge where we are going to be, I believe there is a 
lot of support for--
    Mr. Sherman. Isn't this a basic issue of bank solvency? If 
they go around loaning $500,000 to somebody who can only afford 
to make $2,000-a-month payments, and they say, well, that is a 
good-performing loan because we got the $2,000 last month, do 
you guys--my time--do you guys call that a performing, 
qualified, good asset loan?
    Mr. Kroszner. We have always taken safety and soundness 
very seriously and looked at the underwriting standards that 
are regulating institutions' views. I think the key is making 
sure that all institutions use similar types of of high-quality 
underwriting standards.
    And just to address the previous question, it is precisely 
the table that you described that is in our proposal on credit 
cards. So I think we have tried to address both of the 
concerns.
    Mr. Sherman. Thank you for the credit card answer. 
Hopefully, for the record, you can provide a somewhat better 
answer on the home mortgage issue, and I will yield back.
    Mr. Cleaver. Thank you.
    The Chair now recognizes the gentleman from Minnesota.
    Mr. Ellison. Mr. Dugan, in the Watters case, basically, the 
Supreme Court construed the National Banking Act, and 
essentially, you know, the Act vested nationally chartered 
banks with certain powers and, ``all such incidental powers as 
are necessary to carry out the business of banking.'' But 
within the statute, doesn't it also say that there are certain 
exceptions that are carved out under the Act, and if the 
Congress wants to regulate in those exceptions, that they 
certainly can, right?
    Mr. Dugan. Congress can--we are a creature of Congress. You 
can change the National Bank Act in any way that you see fit.
    Mr. Ellison. Yes. So I guess my question is this: In the 
area of--I mean, I know what the decision says and all, but in 
the area of consumer protection, don't you think having more 
eyes on the problem to protect consumers would augment the 
Fed's work in terms of looking out for the consumer?
    Mr. Dugan. As I said earlier in my testimony, I believe 
that if we had an unlimited number of resources, and an 
unlimited number of staff to have 2 sets of eyes, 3 sets of 
eyes, 10 sets of eyes, would obviously put more compliance on 
an institution, but we don't.
    Mr. Ellison. I know that, but let me just say this. If the 
States were allowed to help protect consumers as it relates to 
Federal banks or State-Chartered subsidiaries of Federal banks, 
that would mean you would have more eyes to protect consumers, 
isn't that--
    Mr. Dugan. To me what makes the most sense is these are 
very heavily regulated institutions that we regulate, and we 
believe we should be held accountable for that. That is what we 
spend our resources on.
    Mr. Ellison. Right.
    Mr. Dugan. To duplicate that effort to me doesn't make any 
sense.
    Mr. Ellison. Sure. Let me ask you the question this way 
then. You know, there are banking practices by national banks 
and State charters that are owned by Federal banks that have 
been called into question to date; isn't that right?
    Mr. Dugan. Certainly.
    Mr. Ellison. Yes. And as a matter of fact, I think you said 
that--and maybe I got this wrong, but I thought you said that 
the Fed maybe was--I am not sure of the time period. I think it 
was last year--had like 200 formal actions and 200 informal 
actions. Did I get that right?
    Mr. Dugan. I said the OCC.
    Mr. Ellison. The OCC.
    Mr. Dugan. 200 over a 5-year period.
    Mr. Ellison. My mistake. I misidentified the Agency. But we 
are on the same page. That doesn't seem like a lot to me, given 
so many of the things that I have been hearing about from my 
constituents.
    Mr. Dugan. Well, all of what I said was--this is a very 
good example. There are many actions that we take that never 
arise to even an informal action, particularly in something 
that we call ``matters requiring attention,'' and that is where 
we first alert bank management of a problem because we are 
supervising them and we are in there. We see it. We have a 
problem. You need to fix it. And there were, over the same 
period, about 1,500 matters requiring attention.
    Mr. Ellison. This is over a 5-year period?
    Mr. Dugan. A 5-year period on consumer-related issues only.
    Mr. Ellison. Fifty States?
    Mr. Dugan. It is the national banking system, yes.
    Mr. Ellison. Plus the territories?
    Mr. Dugan. Yes.
    Mr. Ellison. I can even see how that is not that many.
    Anyway, let me ask Attorney General Miller about this. Do 
you feel that there is room for the States to regulate in the 
areas that were precluded by the Watters decision? I mean, do 
you feel like you could help the citizens of your State 
notwithstanding Watters?
    Mr. Miller. We could help our citizens a lot. The States, 
the attorneys general, the banking superintendents, have a lot 
of expertise, have a lot of resources to contribute here. You 
know, it is particularly difficult when there is a State-
chartered institution that is sheltered from our authority or a 
State law that we are prohibited from enforcing. It just 
doesn't make any sense at all.
    Mr. Ellison. For example, if a national bank or a State-
chartered bank that is a national subsidiary had a credit card 
section, and they were doing things like, I don't know, double-
cycle billing, universal default, pay to pay, all the stuff we 
have been talking about, you can't touch them; is that right?
    Mr. Miller. That appears to be the case. And, you know, the 
credit card complaint is the poster complaint for this whole 
issue, and the whole--why this context that we have gotten into 
doesn't make sense. And we will handle that individual 
complaint at the local level makes just so much sense.
    Mr. Ellison. We live in a country that has negative 
savings; people are relying on credit cards to make it. They 
are at a competitive disadvantage with the banks, and yet their 
own State that they live in is without the power to do anything 
for them.
    Mr. Miller. That is the dilemma, and that is why it doesn't 
make sense.
    Mr. Ellison. Let me ask you this question, Mr. Miller. The 
argument goes something like this: We don't want the States to 
have their own--to be able to regulate in this area or to 
enforce in this area because it would drive up the cost of 
doing business because it would cost the national banks money, 
and, I guess, lawyers, to comply with these various States. So 
if this is essentially a cost-saving measure, why don't we see 
the costs of lending practices going down? You would think they 
would be lower. You would think we would have really cheap 
money in America.
    Do you have any thoughts on this subject? Could I at least 
get an answer, Mr. Chairman? I mean, you know, one could argue 
that the cost of money is pretty high because there is only--
you know, when you look at some of the practices we have been 
talking about today.
    Mr. Miller. I think you can draw that conclusion.
    The other thing is that, you know, we are a large, complex, 
efficient country. And, you know, today banks and institutions 
know how to, in a cost-effective way, efficiently comply with 
the whole set of rules and regulations. That is not really what 
we are talking about. We are really talking about the authority 
question, between States and Federal. We are not talking about 
cost here.
    Mr. Ellison. Mr. Chairman, unanimous consent for 30 
seconds?
    Mr. Cleaver. Yes, please.
    Mr. Ellison. Now let me ask you, if the national banks and 
the State subsidiaries that are owned by those national banks, 
if we really should--I mean, do you think we should be seeing 
cost savings as a result of the national scheme? And in your 
view, are we seeing the benefits of what should be a cheaper, 
more cost-effective system, or have we simply given certain 
banks sort of a free hand and fewer people to hold them 
accountable, and, therefore, they are in more of a monopoly 
position and can charge consumers higher prices because there 
is fewer people watching them; is that possible?
    Mr. Miller. I suppose that is possible. I guess what I am 
saying is that obviously we are not seeing lower charges, and 
that is either because there really isn't a cost saving by 
going to the national system, or if the advocates are right, 
there is additional profit. But I think it is really a question 
of power and authority and how we treat consumers. I have said, 
though, that, you know, I respect the Supreme Court decision. I 
have to live with it. The chairman said earlier, I think, 
correctly--
    Mr. Ellison. I don't.
    Mr. Miller. Yes. I mean, you can change it. But the 
chairman said earlier, the prospects of changing aren't so 
great. So, you know, what do we do now?
    And, you know, one of the things I talked about is that 
seven of us really work together, use our powers in the 
subprimary. We all have power; we have retained power there. 
And, you know, we just have this enormous opportunity to change 
that system, particularly with bad actors out, relatively good 
actors remaining, those with national--with reputational 
interests remaining, and having that incentive--some pain being 
felt including by the investors and the public knowing this is 
a problem.
    Going forward, if the seven of us really work together 
sincerely and practically, as the two of us at the end of the 
table have worked together for the last 5 years, we could have 
a much, much better subprime market.
    Mr. Cleaver. Thank you.
    The Chair recognizes the gentleman from Ohio, who has 
worked on this issue in the Ohio Legislature, Mr. Wilson.
    Mr. Wilson. Thank you, Mr. Chairman.
    Ladies and gentlemen, I am fully aware this has been a 
long, long time, so I will be brief. However, I have made some 
observations, and I appreciate the seven of you being here, and 
so I will just ask my question in this way.
    One of the things that came out today to me is that there 
are some--we need to work on connecting the dots, be that State 
or Federal, how we can ask the FTC to step up, the Feds, 
Federal Reserve, and what we can do with the OCC? I think a lot 
of questions, Mr. Dugan, were directed to you for some obvious 
reasons. So without saying anything negative, I really thought 
that Attorney General Miller had some really good observations 
in his testimony and saying what things we need to do.
    My question would be--and I would like to go through the 
seven, and just give me a brief response--is what can we do on 
the congressional level to help you connect the dots to put 
this together so that we can make a better situation for the 
people in America and certainly for those in Ohio? If I could.
    Mr. Cleaver. We are going to ask all of you to answer the 
question and give the Reader's Digest version.
    Mr. Kroszner. The Reader's Digest version is you actually 
already have taken a very important first step in including the 
Conference of State Banks Supervisors in the FFIEC, the FFIEC 
Act. So they are participating, and it is making it easier for 
us to coordinate.
    Mr. Wilson. Thank you.
    Mr. Dugan. We made four suggestions. And for Congress one 
would be to give joint rulemaking authority for unfair and 
deceptive practices. We also think that when regulators write 
rules that other regulators have to enforce or implement, that 
they should be consulted as part of that process. I think that 
gets very much to your connect the dots kind of thought. And 
then I think that Congress should require that these consumer 
protection regulations be updated on a regular basis, that they 
sometimes can go too long without being reviewed, and that 
causes problems for consumers over time. And then lastly--and 
this isn't a congressional thing, but it was something that was 
raised earlier. I think we all need to get together to adopt a 
centralized way of handling consumer complaints so they don't 
get confused about who is a national bank, who is a savings 
association, etc.
    Mr. Wilson. Thank you.
    Ms. Bair. Yes. I think you have hit the nail on the head. 
As I said in my testimony, we need uniform, consistent, across-
the-board protections. I have called again for national 
standards to address abuses in subprime mortgage lending at 
both bank and nonbank lenders.
    We would like the ability to write rules regarding unfair 
and deceptive practices. We need to expand the ability and the 
authority of State bank supervisors, as well as State attorneys 
general and others who are involved in regulating nonbank 
providers, to enforce the existing Federal protections.
    And finally, although financial education is not a panacea, 
I do think there is an opportunity for Congress to fund more 
financial education in public schools in their core curricula. 
In the longer term, I think that would help.
    Ms. Majoras. I think the crux of the matter is to decide 
what we want to do with the nonbank lenders who are the major 
participants in the subprime market. They are currently not 
regulated at the Federal level. So I think that is one decision 
that needs to be made.
    Second, we think that mortgage disclosures based on a study 
we have just released are inadequate, and we think we should 
look at that.
    And finally, if you are going to revise the FTC Act, it is 
one thing to give others more authority, and I don't have an 
opinion on it. That is up to them what they need. But if you 
change our standard and our enabling statute, remember that the 
FTC enforces in broad swaths of the economy, not just this, and 
that would change it for everything.
    So I do hope we can work together with those who are making 
such proposals because, of course, we use that statute every 
day all day, and we know what it can do and what it can't do. 
Thank you.
    Mr. Wilson. Thank you.
    Mr. Polakoff. Congressman, the Reader's Digest version, 
three issues. The FFIEC, which is a very effective tool for all 
of us. There is a consumer forum, I think the Comptroller 
mentioned it earlier, headed by Treasury, and I believe 
virtually all of us at the table, including CSBS, and the FTC, 
and the banking regulators, sit at that forum and have very 
robust discussions, and I think that would--they are the two 
most critical aspects.
    The last is I would commend CSBS and ask them to remain 
vigilant. Right now only 70 percent of the banks have adopted 
the nontraditional mortgage guidance. CSBS is very active in 
getting other departments to enact that guidance, and I think 
that is critical.
    Mr. Wilson. Thank you.
    Mr. Miller. One of the great roles of Congress is 
oversight. I think the most important thing you could do is 
hold the seven of us, our feet to the fire, make sure we fully 
and fairly and effectively use our powers, and make sure we 
work together to protect consumers.
    Mr. Wilson. Thank you.
    Mr. Antonakes. Well, presuming overturning the decision 
isn't an option, we would speak for the FFIEC on an expanding 
role and have joint rulemaking through the FFIEC. We think we 
are just one of six parties, but we think we bring extensive 
consumer experience.
    Mr. Wilson. Thank you. And if I may, Mr. Chairman, in my 
opening statement, I said what I really felt our issues were, 
and the fact that it is not all bank-related, certainly that 
most is not. But this has been very helpful to me, and having 
sat through this just last year in Ohio, we have a lot of work 
to do, and we truly want to be able to bring all seven of you 
together in looking at how we can improve on the States and the 
Federal level. So I look forward to working with you in the 
future.
    Thank you, Mr. Chairman.
    Mr. Cleaver. Let me express appreciation to all of you. Ms. 
Bair, you have spent quite a bit of time with us over the last 
few weeks, and we appreciate you coming and being responsive, 
as you always have been.
    The Congress was in session until about 2 a.m., so you have 
seen the hearty Members today, and we feel very strongly about 
this. I think the chairman expressed at the opening of the 
hearing that this was designed for us to learn, and so I think 
that, in fact, has happened. Some Members may want to ask 
additional questions, and if they do, they will do it in 
writing. And without objection, the hearing record will remain 
open for 30 days for members to submit any additional questions 
to the witnesses, and to place their responses in the record.
    If there are no requests to speak, this hearing is 
adjourned.
    [Whereupon, at 1:30 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             June 13, 2007
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