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




                 IMPROVING FEDERAL CONSUMER PROTECTION
                    IN FINANCIAL SERVICES--CONSUMER
                       AND INDUSTRY PERSPECTIVES

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             July 25, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-55


















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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:
    July 25, 2007................................................     1
Appendix:
    July 25, 2007................................................    31

                               WITNESSES
                        Wednesday, July 25, 2007

Gaberlavage, George, Director, Policy Research & Development, 
  Consumer and State Affairs, Public Policy Institute, AARP......     9
Gonzalez, Raul, Legislative Director, National Council of La Raza     7
Johnson, Arthur C., Vice President, American Bankers Association, 
  and Chairman and Chief Executive Officer, United Bank of 
  Michigan.......................................................    10
Plunkett, Travis B., Legislative Director, Consumer Federation of 
  America........................................................     5
Sivon, James C., Partner, Barnett, Sivon & Natter PC.............    12

                                APPENDIX

Prepared statements:
    Gaberlavage, George..........................................    74
    Gonzalez, Raul...............................................    67
    Johnson, Arthur C............................................    81
    Plunkett, Travis B...........................................    32
    Sivon, James C...............................................   100

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    Statement of the National Association of Realtors............   111

























 
                       IMPROVING FEDERAL CONSUMER
                        PROTECTION IN FINANCIAL
                        SERVICES--CONSUMER AND
                         INDUSTRY PERSPECTIVES

                              ----------                              


                        Wednesday, July 25, 2007

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Present: Representatives Frank, Miller of North Carolina, 
Scott, Green, Cleaver, Klein, Perlmutter; Gillmor, Neugebauer, 
McHenry, and Bachmann.
    The Chairman. We will begin the hearing. I thank the 
witnesses for appearing.
    This hearing is one in a series of hearings on the question 
of what does consumer protection look like in the banking area, 
in particular after preemption.
    As I have said before, there are some of us who wish that 
the preemption had not happened. I do. I also wish that I did 
not get more tired at my age than I did 30 years ago and that I 
could eat more and not gain weight. I have found it unwise to 
act on the latter two of these, and we are having a hearing 
today because it would not be wise to act on the first of them 
either.
    The preemption is not going away. If and when there were to 
be a change in the political climate in which it might be that 
you could repeal it, we could very well be in a situation, and 
I am inclined to think we would be, where enough eggs have been 
scrambled so that unscrambling them would be difficult.
    I would tell you that those who want to preserve the 
preemption should join in our effort to make sure that 
preemption comes with adequate consumer protection.
    In a couple of years, frankly, if the presidency changes 
hands, and there is still a feeling that the Federal bank 
regulators having preempted State laws do not themselves have 
enough in terms of authority and resources and will to do 
consumer protection, then the preemption will be called into 
question.
    I do not think that is the preferred option. The preferred 
option is to say okay, here is where we are, let's spend the 
next year or so working this out. I must say I am convinced 
from conversations that the current set of tools and resources 
that the Federal bank regulators have were configured in an era 
in which the assumption was that there was a lot of State 
consumer regulation going on as well. There is now, for 
national banks, virtually no State consumer regulation, 
certainly none that is specific to those banks.
    It is not a matter of anyone's fault; it is just that there 
has been a change. We had one set of circumstances, and now we 
have another.
    Part of the issue, and what I am going to ask people to 
address, is that the Federal Reserve has the authority under 
the Federal Trade Commission Act to spell out unfair and 
deceptive practices.
    Both the Comptroller of the Currency and the Chairman of 
the Federal Deposit Insurance Corporation have said--these are 
not consumer groups but two Federal regulatory agencies--they 
would like their own authority to deal with unfair and 
deceptive practices under the Federal Trade Commission Act 
spelled out.
    The Federal Reserve has said no, they do not want to do 
that. They think it should be done on a case-by-case basis. 
There are problems when you are doing things case-by-case, but 
I do not want to be punitive. We certainly are not looking for 
a regime in which we lock up a lot more people.
    The total absence of any negative sanctions almost 
guarantees that you will not have effective enforcement. It 
really is not enough for consumer enforcement if the rule is 
okay, whenever you do something wrong, we will tell you to stop 
doing it. There needs to be some incentive to stop doing it 
before you start doing it.
    Absent penalties, that cannot be done. If you are in a 
case-by-case situation under basic precepts of American law, 
which we all support, that becomes harder to do. You do not 
penalize someone for doing something when there was some 
ambiguity about whether he or she had the right to do it.
    In the absence of some rules spelled out, you have a harder 
time enforcing when appropriate. It does seem to me that people 
ought to know what the rules are.
    Again, both the OCC and the FDIC have said they would like 
to have those rules spelled out. I know the Office of Thrift 
Supervision, which shares the preemption with the OCC, has in 
fact spelled out some rules.
    Apparently Congress, in some combination of moods, gave the 
independent power to the OTS, but said that the OCC and the 
FDIC had to ask the Fed. That is a result for which no rational 
explanation is even conceivable, much less likely.
    I do not know what we collectively were thinking when we 
did that. Probably nothing. Probably we were busy with 
something else. That is what happens in large, comprehensive 
legislation. That is why we have oversight.
    My strong view now is that something should be done 
legislatively to correct that. I do not understand why the OTS 
should have its own rules spelled out, but the OCC and the FDIC 
should not.
    There are a lot of questions, questions about whether or 
not the States are involved. The States have a good deal of 
expertise in regulation here. We have met with State attorneys 
general and State bank supervisors. There is also the 
enforcement power at the State consumer level. You have 
attorney general enforcement power. It is not clear now who can 
go to court, and if that is appropriate.
    Let me close by saying that this is an issue on which we 
invite all of you to help us. The goal here is to come up with 
a rational and fair scheme of consumer protection.
    I believe, as many of you know, and I think we have 
demonstrated, in consumer protection and a good understanding 
of the importance of financial institutions being able to 
perform their intermediation role, if those are wholly 
compatible. Our job is to come up with a better system than we 
have now, not because anybody individually did something wrong, 
but because the preemption makes that necessary.
    I will just take 10 more seconds in probably a vain effort 
to try and explain to the press that my repeated criticism over 
the recent year-and-a-half of the Federal Reserve for not using 
its authority has not primarily been aimed at their authority 
under the Home Equity Protection Act. It has been under the 
Federal Trade Commission Act.
    It is as if some in the financial press cannot write about 
more than one subject at a time, or cannot think about more 
than one subject at a time.
    When we talk about consumer protection, we are not talking 
only about subprime mortgages. Indeed, we will probably be 
doing something particular and special for subprime mortgages.
    This is about the broader general question of consumer 
protection involving a whole range of issues. It is that the 
Federal Reserve has simply told us they are not interested in 
using that authority, and that we probably, at the end of these 
hearings, are going to want to put it somewhere else, but that 
is something we will wait to hear from you on.
    I will now call on the ranking member.
    Mr. Gillmor. Thank you, Mr. Chairman. Ranking Member Bachus 
could not be here and asked me to sit in for him temporarily, 
and to read a statement from him, but I also want to echo what 
you said, Mr. Chairman.
    There are a number of areas the committee has been looking 
at, and will be looking at, in the consumer area, not just 
subprime but credit cards, overdraft fees, and a number of 
other areas.
    A statement from Ranking Member Bachus is as follows:
    ``Thank you, Chairman Frank, for holding this important 
hearing on improving consumer protections in financial 
services. In light of the Supreme Court's recent decision in 
the Wachovia v. Watters case, it is important that this 
committee re-examine the legal framework as it affects 
consumers of financial products and services.
    ``U.S. financial systems set the gold standard for 
economies around the world. Thanks to innovations ranging from 
credit cards to Internet banking, American consumers have more 
choices and options available to them than ever before.
    ``While these innovations have helped fuel a period of 
unprecedented economic growth, not all consumers have 
benefitted. For the financially illiterate, more choices can 
mean greater opportunities to make bad decisions.
    ``This has underscored the importance of developing 
strategies that will empower consumers by providing them with 
the information and the tools they need to protect themselves.
    ``The agencies have begun making a number of strides in 
enhancing regulatory cooperation, including the recent 
Memorandum of Understanding between the OCC and the Conference 
of State Banking Supervisors, to facilitate prompt referral of 
consumer complaints to the Federal or State agency with the 
regulatory authority to obtain redress for the consumer.
    ``Other constructive initiatives in this regard include the 
new Web site that the OCC has developed for consumers to lodge 
complaints and the announcement last week by Federal agencies 
and State regulators that they will collaborate on an 
innovative pilot project to conduct targeted consumer 
protection compliance reviews of selected non-depository 
lenders with significant subprime mortgage operations.
    ``Even with these developments, it is my belief that there 
may be areas where legislative action is necessary. For 
example, in light of recent problems in the subprime market, it 
has become clear that we need a national registry and licensing 
system for mortgage originators so that the bad actors do not 
move from State to State victimizing consumers with impunity.
    ``The legislation I introduced 2 weeks ago with Congressmen 
Gillmor and Price, members of the committee, would establish 
such a system. Promoting accountability and professionalism 
among mortgage originators and addressing a gap in the current 
regulatory framework.
    ``Mr. Chairman, I look forward to hearing the perspective 
of our witnesses on this and other consumer protection issues, 
and I thank you for holding today's hearing.''
    Mr. Gillmor. I yield back.
    The Chairman. The gentleman from Texas.
    Mr. Green. Thank you, Mr. Chairman. I especially thank you, 
Mr. Chairman, for framing the issues for us. I always try to 
get here on time because I benefit from your framing of the 
issues.
    I am honored today to be here to hear the perspectives from 
both the consumers as well as the industry as it relates to 
these issues: Unfair, deceptive financial practices and the 
regulators' ability to deal with them; the addressing of 
complaints and how we can improve the complaint process; and 
the role of the State regulatory agencies and the enforcement 
agencies.
    If I could, I would just like to say this. One of the 
things that kind of fascinated me when I had an opportunity to 
review the materials is the notion that there may be some means 
of according one-stop-shopping to consumers, so that consumers 
might have just one number or one place, one agency, that they 
can initiate their concerns, and from there, can go to many 
other places, a multiplicity of other places, of course.
    I think consumers are so inundated with materials now, so 
much comes to us through the mail, e-mail, that it would be a 
great benefit for us to focus on this and see if it is 
achievable, such that consumers might better benefit from what 
is available to them.
    Many consumers are just not aware of what is available, the 
methodology, the process. I think this may be a good thing for 
the average consumer. I look forward to hearing testimony on 
it.
    Having said that, Mr. Chairman, I will have to leave. I 
have another hearing, so I will be in and out. I do look 
forward to this. I thank you again, Mr. Chairman, and the 
ranking member, of course, and I yield back the balance of my 
time.
    The Chairman. Are there any further opening statements?
    If not, we will go to the witnesses. We will begin with 
Travis Plunkett, who is the legislative director of the 
Consumer Federation of America.

STATEMENT OF TRAVIS B. PLUNKETT, LEGISLATIVE DIRECTOR, CONSUMER 
                     FEDERATION OF AMERICA

    Mr. Plunkett. Good morning, Chairman Frank, and 
Representative Gillmor. My name is Travis Plunkett, and I am 
the legislative director at the Consumer Federation of America. 
I am speaking today on behalf of six national consumer 
organizations with tens of millions of members.
    I commend the committee for its diligence in examining this 
important question about how to better protect consumers in the 
financial services marketplace, especially using Federal 
regulatory authority.
    As Mr. Gillmor mentioned, the elephant in the living room 
is the Supreme Court's Watters decision, which is the 
culmination of efforts by the Office of the Comptroller of the 
Currency to cut off the States' abilities to protect consumers 
of national banks.
    These preemptive efforts over a number of years have harmed 
consumers, because while the States' regulatory efforts have 
been far from perfect in many respects, and the committee has 
highlighted some of those imperfections, States traditionally 
have had the experience, the regulatory infrastructure, the 
willingness to experiment, and the desire to protect consumers.
    Unfortunately, the OCC and some of the other Federal 
banking regulators are lacking in each of those areas.
    Our recommendation is for the committee to continue to 
examine Representative Gutierrez's legislation that would 
restore in some modest ways the States' abilities to protect 
consumers who purchase financial services from the national 
banks.
    In looking at the Federal regulatory scheme, we encourage 
you to look at the detailed examples I have in our testimony of 
the failure by Federal agencies to protect consumers beyond the 
mortgage lending arena.
    This committee, rightly so, has spent a lot of time in 
looking at failures to regulate at the State and the Federal 
level regarding subprime mortgage lending.
    In my testimony, however, I also address failures in 
regards to credit card regulation, overdraft loans, the 
availability of deposits to consumers under the Check 21 law, 
Internet payday lending, unlawful garnishment of Social 
Security funds, and the manipulation of payment order of checks 
by national banks.
    The Subcommittee on Financial Institutions and Consumer 
Credit has examined problems with credit card regulation at 
length. They have spoken a lot about the Federal Reserve's new 
disclosure proposal regarding Regulation Z of the Truth In 
Lending Act.
    This proposal is helpful in some respects but it does 
nothing to stem many of the abusive practices the subcommittee 
has heard about: Interest rates that are assessed for virtually 
no reason that climb to over 30 percent; late fees when 
payments are not late; tricks that credit card issuers use to 
assess late fees when they are essentially paid on time; and a 
number of other problems in the credit card marketplace.
    Credit cards are Exhibit A as to why some Federal banking 
agencies have failed in their efforts to protect consumers. 
They have failed in areas where they have some jurisdiction to 
act right now.
    Regarding consumer assistance efforts, the OCC has 
trumpeted their consumer assistance group. What they say is 
they are vigilant in responding to consumer complaints. We 
could not disagree more.
    As Professor Art Wilmarth pointed out in testimony before 
the subcommittee, compared to other financial regulators, a 
much higher percentage of complaints filed with the OCC were 
closed because consumers either withdrew their complaints or 
commenced litigation. Meanwhile, the percentage of complaints 
in which the OCC found bank errors declined steadily, a strong 
indication that many consumers didn't find the OCC helpful.
    Just last week, the OCC rolled out with much fanfare a new 
consumer assistance Web site. We find the Web site to be 
lacking in several areas. It is very discouraging in many 
respects regarding complaints consumers may have about banks, 
for instance, regarding the practice of clearing checks from 
the smallest amount to the largest check in order to increase 
bounced check fee income.
    In at least one case, this Web site does not provide 
complete information to consumers about their legal rights 
regarding disputes if a product is purchased with a credit 
card.
    One of the most difficult problems the committee is going 
to face when examining these problems is the culture of 
coziness that exists between some banking agencies--I am 
exempting the FDIC here--and the regulated institutions.
    There are a number of underlying reasons for this, which we 
address in our testimony. Let me just mention a few.
    First, the OCC and the OTS in particular are funded 
virtually entirely by assessments from regulated banks. A large 
portion of that funding comes from a fairly small number of 
banks.
    Second, there is an over reliance on the examination 
process as opposed to enforcement, which means the process is 
not transparent and accountable.
    I will summarize here because my time is up. I would urge 
you to look at the recommendations that we have for making the 
regulatory process more independent and for addressing the 
underlying problems I mentioned. In particular, we encourage 
the committee to look at giving the Federal Trade Commission 
the authority to bring enforcement actions against national 
banks and thrifts for unfair and deceptive practices, and 
giving it concurrent and independent rule making authority over 
all matters covered by the FTC Act.
    Unlike the banking agencies, the FTC has no responsibility 
to protect the profitability of the financial institutions that 
they regulate; its sole job is to focus on consumer protection.
    Thank you very much.
    [The prepared statement of Mr. Plunkett can be found on 
page 32 of the appendix.]
    Mr. Miller of North Carolina. [presiding] Thank you.
    Mr. Gonzalez, for 5 minutes.

  STATEMENT OF RAUL GONZALEZ, LEGISLATIVE DIRECTOR, NATIONAL 
                       COUNCIL OF LA RAZA

    Mr. Gonzalez. Thank you very much. Thank you to the 
committee for holding this hearing and inviting us to 
participate.
    My name is Raul Gonzalez, and I am the legislative director 
at the National Council of La Raza. What I would like to do 
today is talk about our Latinos and the credit card market and 
provide some broad recommendations for expanding access to 
affordable credit to Latinos and shifting the balance of power 
back into the hands of consumers.
    NCLR has worked to improve the opportunities for Hispanics 
in the United States since 1968. Part of our mission includes 
advancing policies that enable Latinos to build and maintain 
assets and wealth.
    With regard to credit cards, we have begun conducting 
research on obtaining firsthand accounts from our community on 
their experiences with credit cards and doing other policy 
analyses.
    For example, last summer, we held a roundtable discussion 
which included individuals who collect complaints regarding 
credit cards. We heard lots of complaints related to the high 
cost of fees associated with using credit cards and Latinos 
also filed numerous complaints about the difficulty in 
evaluating credit card offers and finding a card with desirable 
terms.
    We also released an issues brief entitled, ``Latino Credit 
Card Use: Debt Trap or Ticket to Prosperity?'' In this paper, 
we described disparities in credit card use and in the 
application of penalty rates and fees on Latino credit card 
accounts.
    I would like to briefly discuss key issues for Latinos in 
the credit card market. These include unmanageable debt, credit 
card scams, and hidden policies that result in revolving debt.
    NCLR operates a national home ownership network which has 
gotten tens of thousands of Hispanics into home ownership. 
Every year, we interface with folks who are unable to go 
through the process because they have unmanageable debt.
    It is clear the unmanageable debt that they have that 
precludes them from home ownership also makes them vulnerable 
to obtaining credit cards with unfair and high APRs, and this 
makes it difficult for them to climb into the American middle 
class.
    In addition to unmanageable debt, we are hearing from the 
community that several credit card related scams have been 
targeted to Latino consumers. These scams include fraudulent 
credit repair services, affinity credit card scams, and fake 
credit cards sold to consumers.
    With regard to industry policies and practices, we know 
that many low-income Latino consumers are unaware of harmful 
policies such as universal default and double billing for 
purchases made abroad.
    They also do not understand the relationship between the 
minimum payment requirement on the credit cards and their 
credit card balance.
    For Latinos, access to affordable credit has become 
increasingly critical as they hope to gain access to the middle 
class.
    As you debate how to address abusive credit card policies 
and practices, we ask that you consider the experiences of low-
income Latino families.
    On the one hand, Latinos are becoming more integrated into 
the financial fabric of the country. They are using credit 
cards more and more. On the other hand, they are using credit 
cards to pay for their basic needs, and they are also acquiring 
debt.
    There are several challenges that make it difficult for 
Latinos to access the credit card system and build credit, 
including using credit cards to pay for their basics.
    According to one survey, 39 percent of Latinos reported 
basic living expenses and 30 percent reported medical expenses 
as contributing to household debt. They are using their credit 
cards to pay for these.
    A second challenge is the difficulty that Latinos 
experience getting into the credit card system; 22 percent of 
Hispanic borrowers have no credit score and many others have a 
very thin file. The methods to evaluate creditworthiness make 
it difficult for these individuals to obtain a credit card with 
a fair APR.
    Latinos are more likely than whites to pay interest rates 
which exceed 20 percent as a result of this. As a result, 
Latinos are not just in a vulnerable position with regard to 
credit cards, but they are also in a vulnerable position with 
regard to other debt they have, including their homes.
    In addressing credit card reforms, policymakers should 
begin by banning harmful industry policies and practices. This 
would include universal default, changing term provisions, 
deceptive monthly minimum payment requirements, double billing 
on purchases made abroad, mandatory arbitration and the 
inflation and application of fees.
    We also believe that policymakers should improve the system 
for collecting and reporting on consumer complaints.
    There is an enormous opportunity for law makers and 
industry leaders to integrate Latinos into the mainstream 
financial system. This committee should move forward to enact 
legislation that shifts the balance of power back into the 
hands of consumers, including focusing on financial counseling.
    We applaud the committee for holding this hearing and look 
forward to working with you on this legislation. I would be 
happy to answer any questions. Thank you.
    [The prepared statement of Mr. Gonzalez can be found on 
page 67 of the appendix.]
    Mr. Miller of North Carolina. Thank you, Mr. Gonzalez.
    Mr. Gaberlavage, for 5 minutes.

 STATEMENT OF GEORGE GABERLAVAGE, DIRECTOR, POLICY RESEARCH & 
    DEVELOPMENT, CONSUMER AND STATE AFFAIRS, PUBLIC POLICY 
                        INSTITUTE, AARP

    Mr. Gaberlavage. Thank you, Mr. Chairman, Representative 
Gillmor, and members of the committee, for the opportunity to 
testify on this important matter.
    A major priority for AARP is to assist Americans in 
accumulating and effectively managing adequate retirement 
assets. Key to achieving this goal is helping individuals 
better manage financial decisions and protecting consumers from 
financial fraud and abuse that can erode retirement savings and 
financial resources.
    The recent meltdown in the subprime mortgage market, rising 
levels of foreclosures and credit card debt, increasing bank 
fees and questionable practices, and a steady erosion of State 
authority to protect consumers have brought us here today.
    Consider a few statistics: One out of every five families 
with a subprime mortgage is expected to lose their home to 
foreclosure. Last year, Americans paid over $89 billion in 
credit card fees, interest, and other charges, and consumers 
paid over $17.5 billion in overdraft fees last year, an 
increase of 75 percent from 2 years ago.
    Add to this list the cost to consumers of fraudulent demand 
drafts used to access consumer bank accounts, unequal treatment 
of debits and credits to checking accounts under Check 21 
provisions, and unauthorized garnishment of Social Security and 
other Federal benefits, and it is clear why so many consumers 
find themselves in financial difficulty.
    Over the course of the last several decades, the 
effectiveness of the regulatory system has eroded as the State 
role in credit regulation has been preempted and the Federal 
Government has declined to fill the gap.
    In order to turn the tide, there are a number of 
substantial hurdles in the current Federal system that will 
first have to be overcome. These include an emphasis on safety 
and soundness regulation, potentially at the expense of 
consumer protection; a reliance on examinations in case-by-case 
actions rather than rule making and enforcement; slow action by 
regulators in the face of overwhelming evidence of a problem; 
and dependence on disclosure rather than substantive regulation 
to protect consumers.
    Today, Congress has a very real opportunity to enact 
meaningful reforms that will minimize abusive practices and 
institutionalize reform so that progress continues when the 
current spotlight dims.
    Among AARP's legislative recommendations are the following: 
First, authorize the Federal Trade Commission to bring 
enforcement actions against national banks and thrifts for 
unfair or deceptive practices. Given the FTC concurrent and 
independent authority over national banks for all matters 
covered by the FTC Act.
    Second, allow States to enforce the Federal lending laws 
and Federal unfair or deceptive practice provisions of the FTC 
Act against national banks.
    Third, as discussed more fully in our written statement, 
adopt meaningful Federal reforms on a wide range of consumer 
issues including credit cards, overdraft and other bank fees, 
and subprime lending.
    Fourth, put in place real opportunities for consumer 
redress in the wake of abusive practices.
    Finally, establish an effective centralized complaint 
reporting and resolution mechanism.
    At the same time, we encourage Congress to integrate as 
fully as possible the States as partners in the effort to 
restore fairness to consumers in the financial marketplace.
    Experience shows that States have been leaders in finding 
innovative solutions to the types of problems we are discussing 
today.
    In closing, we urge Congress to do all that it can to 
ensure that Federal and State regulators and enforcement 
officials are given the tools they need to adequately protect 
consumers from the abuses we are witnessing today, and those 
that will emerge in the future.
    Thank you.
    [The prepared statement of Mr. Gaberlavage can be found on 
page 74 of the appendix.]
    The Chairman. Thank you. We will hear from Arthur Johnson 
on behalf of the American Bankers Association, who is here to 
testify on matters he is discussing with Members of Congress 
these days.
    Mr. Johnson?

   STATEMENT OF ARTHUR C. JOHNSON, VICE PRESIDENT, AMERICAN 
BANKERS ASSOCIATION, AND CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 
                    UNITED BANK OF MICHIGAN

    Mr. Johnson. Thank you. Chairman Frank, Representative 
Gillmor, and members of the committee, my name is Art Johnson, 
and I am chairman and CEO of United Bank of Michigan, and I 
also serve as vice chairman of the American Bankers 
Association.
    I would like to thank you for the opportunity to present 
ABA's views on how to best protect consumers in light of the 
recent Supreme Court decision in Watters v. Wachovia. That 
decision settled the question of who has jurisdiction over the 
operational subsidies of national banks and was the latest in a 
long line of court decisions supporting the dual banking 
system.
    As requested, today we will be focusing on regulatory 
structures to protect consumers today and not on specific 
products or practices.
    ABA believes that the dual banking system is the best 
framework to ensure a balanced legal and regulatory environment 
for the efficient and effective enforcement of consumer 
protection laws.
    We believe that the division of responsibility among State 
banking agencies, State law enforcement, and Federal regulators 
is appropriate, with each agency able to focus its resources on 
institutions within its primary jurisdiction.
    While State law enforcement authorities naturally share 
concern about consumer protection, we believe the bank 
regulators are in the best position to achieve this objective 
through a vast array of supervisory and remedial options 
available to them. Moreover, due to frequent examination and 
access to a bank's books, regulators have a more complete 
picture of any bank and are in a better position to stop 
problems early and choose appropriate corrective measures.
    I would note that States face real issues arising from the 
institutions within their primary jurisdiction that demand 
their attention and enforcement resources.
    As was noted repeatedly at the hearing before this 
committee just a few weeks ago, many of the problems in the 
subprime area, for example, have arisen in institutions outside 
the enforcement jurisdiction of Federal bank regulators.
    With a clear division of authority, redundant supervision 
and enforcement can be avoided. It is, however, appropriate for 
these entities to coordinate their efforts to protect consumers 
as they have recently done through information sharing 
agreements, parallel examinations, and referrals of customer 
complaints to the appropriate regulator.
    In short, after the Watters decision, we can stop working 
at cross purposes and focus instead on cooperating among 
different agencies with the common purpose of ensuring that 
customers are treated fairly.
    This cooperation is further evidenced in the Federal system 
by providing extensive and uniform protection for consumers 
through interagency exam procedures.
    In addition, each Federal agency has implemented a consumer 
complaint process to address any claims of unfair or deceptive 
practices. However, only the Federal Reserve Board, the OTS, 
and the NCUA have explicit authority to make rules under 
Federal unfair and deceptive acts and practices, or the UDAP 
law; the OCC and the FDIC do not.
    To address this anomaly, we support vesting all of the 
Federal banking agencies with UDAP rule writing authority to be 
exercised jointly. Only through joint authority can we ensure 
that the UDAP law is uniformly enforced.
    However, in exercising this authority, it is important to 
target unfair or deceptive practices and not target products 
that may otherwise benefit consumers.
    Before closing, I want to emphasize how seriously bankers 
take their responsibilities to treat our customers fairly. Take 
my bank, for example. We have a compliance training program 
that is required for all of our employees, not just our 
compliance officer.
    In addition, compliance management plays a role in every 
aspect of our bank that touches our customers. Our directors 
hold our employees accountable for meeting their obligations. 
This is especially true for our compliance officer, who in the 
case of our bank, just happens to be my son.
    The important thing to realize is that our bank is typical 
of thousands of others that invest heavily in a compliance 
culture, each with dedicated compliance professionals who take 
great pride in ensuring that consumers in the dual banking 
system are being treated fairly.
    I like to say that compliance is everyone's business, 
because each time we serve a customer, we have an opportunity 
to show our respect for them and that we deserve their trust 
and their business. This is the cornerstone of successful 
banking.
    Thank you for this opportunity. I would be happy to answer 
any questions that you may have.
    [The prepared statement of Mr. Johnson can be found on page 
81 of the appendix.]
    The Chairman. Thank you. Next is Jim Sivon, who is a 
partner at Barnett, Sivon & Natter.

 STATEMENT OF JAMES C. SIVON, PARTNER, BARNETT, SIVON & NATTER 
                               PC

    Mr. Sivon. Chairman Frank, Congressman Gillmor, and members 
of the committee, my name is Jim Sivon, and I am a partner in 
the Washington, D.C., law firm of Barnett, Sivon & Natter.
    I appreciate the opportunity to appear today to discuss 
consumer protection issues following the decision in Watters v. 
Wachovia.
    In order to highlight those issues, I have organized my 
statement from the beginning of a consumer credit transaction 
to the end of a transaction.
    At the beginning of a credit transaction, the best 
protected consumer is an educated consumer. Financial literacy 
has been the focus of a significant amount of attention in 
recent years, yet more needs to be done.
    The solution to this challenge, in my opinion, is to 
incorporate financial literacy into our public school systems. 
A few States have done this. The Federal Government and the 
financial services industry should work together to make this 
opportunity available nationwide.
    The disclosure of key terms and conditions is the next step 
in the credit process. Disclosure is an important consumer 
safeguard. However, in order for disclosures to work properly, 
they must be clear and understandable.
    The Federal banking agencies have started to make use of 
consumer testing in the development of new model disclosure 
forms. Such testing should continue and disclosures that are 
unnecessary or counterproductive should be eliminated.
    Congress also should resist the temptation to mandate 
detailed disclosure regimes; detailed statutes can result in 
overly complex disclosures.
    After selecting a particular financial product, a consumer 
is concerned about the protections that apply. We have a 
national consumer credit system, but all consumers do not enjoy 
the same level of protection.
    The recent problems in the mortgage market illustrate the 
limitations of the current system.
    The Federal banking agencies have responded to those 
problems with two separate advisories on mortgage lending 
practices. Those advisories, however, apply only to Federal 
lenders, not to State licensed lenders. While efforts are 
underway within the States to impose similar requirements, 
nothing guarantees that all States will adopt them.
    As a result, consumers that obtain a loan from a federally 
regulated lender will receive one level of protection and 
consumers who receive a loan from a State lender receive a 
different level of protection. This not only deprives consumers 
of comparable protection but allows institutions to engage in 
regulatory arbitrage based on consumer protection standards.
    Consumers of financial products should receive the same 
protections regardless of the type of lender that provides the 
product or the jurisdiction in which the product is delivered. 
Uniform national consumer protection standards would meet this 
goal.
    Federal preemption is a key part of that approach. However, 
I would agree with Chairman Frank's opening comments that to 
work properly, such a system does require robust Federal 
standards.
    Today, national banks and Federal thrifts are subject to a 
number of consumer protection standards. Yet, we may have 
reached the point where additional safeguards are appropriate.
    Both the Federal Trade Commission Act and the Home 
Ownership Equity Protection Act authorize the Federal banking 
agencies to define and prohibit acts or practices that are 
unfair or deceptive. It now appears that the Federal Reserve 
Board soon will propose revisions to its HOEPA rule to address 
unfair and deceptive acts or practices in the mortgage market.
    I would recommend that any such rule apply to all lenders. 
Further, I would recommend that any rule based upon the FTC Act 
be issued jointly by the Federal banking agencies in 
consultation with the FTC. Joint rule making would ensure that 
such a rule is uniform.
    After a consumer acquires a financial product, the consumer 
naturally expects that product to perform as advertised. Yet, 
consumers do not always appreciate the legal distinctions 
between different types of lenders and may not be sure where to 
turn to assistance.
    Consistent with Congressman Green's opening comments, I 
would urge the Federal banking agencies to establish a 
centralized system for consumer complaints and referrals under 
the auspices of the Federal Financial Institutions Examination 
Council.
    Enforcement actions are an ultimate form of consumer 
protection. Policymakers should seek to balance the use of 
enforcement resources to ensure that consumers are adequately 
protected.
    During the recent problems in the mortgage market, lenders 
of all types engaged in questionable practices. The 
institutions that have gone bankrupt because of their practices 
were State licensed and supervised. This suggests that State 
supervisory resources were inadequate or not adequately 
utilized.
    In a natural allocation of supervisory resources, Federal 
regulators should be responsible for federally chartered 
lenders and State authorities should be responsible for State 
licensed lenders.
    The final step in the consumer credit process is funding. 
This is not so much an issue for consumers as it is a policy 
dilemma. Perhaps the best way to address this is to work 
closely with lenders and investors to develop an approach that 
balances reasonable accountability with continued liquidity.
    Thank you again for the opportunity to appear today. I 
would be happy to respond to any questions.
    [The prepared statement of Mr. Sivon can be found on page 
100 of the appendix.]
    The Chairman. I will begin, and I appreciate the responses. 
Mr. Plunkett, your whole statement will go into the record, so 
the list of the organizations on whose behalf you are 
testifying will be clear.
    I was an original sponsor of the effort to overturn the 
preemption. Without asking anyone to give up that ultimate 
goal, I do think we need to move forward from where we are.
    I want to focus on two questions: Rule making authority and 
enforcement authority. They are linked. Let me start with rule 
making authority.
    Mr. Johnson and Mr. Sivon, I think you both referenced a 
joint rule making authority involving all the bank regulators 
and the FTC. I will tell you what the problem is.
    In the Fair and Accurate Credit Transaction Act, we found 
the problem, namely, if you are a consumer who gets your credit 
report and you find on that credit report a negative report 
about something where you were not in fact at fault, report of 
a transaction where the store had agreed you should not owe 
them the money, or the product was defective, or you were 
double billed, or whatever, there is literally now no way for 
you to contest that. Literally, no way, except to ask the 
retailer to say, ``mea culpa''. They are not good at that.
    We mandated in the Act, which I think we passed in 2003, 
that the FTC and the bank regulatory agencies should work 
together--the bank regulatory agencies plus the National Credit 
Union Administration should come together and promulgate a set 
of procedures whereby consumers could challenge these 
inaccurate reports.
    We had a hearing on that. What they said was well, we are 
still working on it. Frankly, giving all of those regulatory 
bodies the mandate jointly to come up with rules with nobody 
having more power than anybody else to impose them is the 
functional equivalent of recreating today's United States 
Senate.
    You get a very well meaning and elegant institution 
incapable of action. I must tell you, it is not the fault of 
any individual. You have seven agencies. They are busy 
agencies. That one does not work, to me.
    In this situation, by the way, I am going to be proposing 
when we come back that we give the authority to the Federal 
Trade Commission by itself with a duty to consult with and get 
comments from the other agencies.
    That is on the specific question of the right to contest 
information in a credit report. Now, I do think we need to 
spell out more authority, I believe, on unfair and deceptive 
practices. The current situation is not good either for the 
consumers or the regulated institutions.
    One earlier Comptroller had said to me, well, we can do 
what we need to do because we have the mandate to protect 
safety and soundness. I asked for that to be explained. The 
answer was well, if a bank is being unfair to its customers, 
that could impugn safety and soundness. It could. It could 
also, unfortunately, enhance the safety and soundness. 
Sometimes there is money in not being nice to people.
    The notion that any unfair credit practice will cause 
reputational risk is not, unfortunately, the case. That would 
be self-enforcing.
    I think we need to propose some regulatory authority, some 
rule making authority beyond what we have. I do agree that we 
do not want everyone to have his or her own.
    We are talking now about rule writing; enforcement is a 
separate issue. I understand the banking organizations' 
concerns if we invite the FTC in on enforcement.
    For rule writing, we have two agencies now that have 
enforcement responsibilities but do not yet have rules spelled 
out because of the Federal Reserve's refusal to write them. 
They were the ones given the authority--the OCC and the FDIC, 
both of the major regulators.
    What about from the rule writing now, not the enforcement, 
leave that aside, asking the OCC--not asking--directing the OCC 
and the FDIC to come together with a set of rules and a codicil 
to that, directing also maybe that the OTS join in, so that we 
have one set of rules for the OTS, the FDIC, and the OCC.
    We have an OTS set of rules that they have just 
promulgated. What are your comments on directing the OCC and 
the FDIC together to come up with a set of rules?
    Let me start with Mr. Sivon.
    Mr. Sivon. If there is an opportunity for the agencies to 
work together and come up with a common rule so that it is 
uniform--
    The Chairman. It is not a question of opportunity. I am 
talking about what we tell them to do.
    Mr. Sivon. Yes, of course.
    The Chairman. A common set of rules spelling out unfair and 
deceptive practices.
    Mr. Sivon. Yes. I think that is what I was endorsing in my 
comment, that they have a joint rule making authority. I was a 
little confused in some of your comments about the 
disadvantages of joint rule making.
    The Chairman. Seven is disadvantageous, too. Six. The OTS, 
the OCC, the FDIC, the Federal Reserve, the National Credit 
Union Administration, and the Federal Trade Commission. That 
appears to go beyond the number of people who will come 
together and get everything done. That is what we did in the 
FACT Act; two is very different than six.
    Mr. Sivon. I was going to note that there certainly are 
instances where the Federal banking agencies have worked 
cooperatively on joint rules in the CRA area, FCRA privacy.
    The Chairman. Yes, that worked well. I agree. Frankly, the 
Federal Reserve has already demonstrated a reluctance to act in 
this area. I think if you add the others to the Federal 
Reserve, which has already said they do not think there is any 
need for spelling out unfair and deceptive, you just continue 
to give them the veto.
    When they testified, the Comptroller and the Chairman of 
the Federal Deposit Insurance Commission both said that they 
would like these rules spelled out. They think it would be 
better. The Federal Reserve said ``no.''
    I do not think it makes sense to put all three of them in. 
I think the two other agencies, that would make sense.
    Mr. Johnson?
    Mr. Johnson. Let me try to give you a little perspective 
from where I come from in Grand Rapids, Michigan. We do 
business in an area where we compete with every type of 
chartered depository institution. We also compete in the 
lending business with many non-depository lenders.
    It is not good for any lender to be able to be in a 
situation where they can have a competitive advantage over 
someone else because they have less of a burden to be compliant 
in the way they do business.
    While I am not really from Washington and certainly do not 
know my way around here, even the part about the deals with my 
industry--
    The Chairman. We have been speaking English here for quite 
some time, Mr. Johnson. I think you will find it far less 
inaccessible than you appear to believe.
    Mr. Johnson. Thank you. I really believe that given the 
opportunity for the joint rule making to work, so that there is 
not a disparity out there on the street between consumer 
protections is really the right thing.
    Just the same way that our regulators always get our 
attention when we are not being perhaps as proactive as we 
might be on any element of our business, I would suspect that 
you have the attention of the regulators.
    The Chairman. That simply is not true. The Federal Reserve 
has had this authority for I do not know how many years, and 
they just recently told us, ``We are not going to use it.'' 
Let's not pretend. In Michigan, do they pretend things? You say 
you are not used to Washington.
    Here in Washington, where people have had the authority for 
many years and say, ``We are not going to use it,'' I take them 
at their word. The Federal Reserve has said they are not going 
to use that authority; they do not think it should be done.
    The OCC and the FDIC say it should. I do agree it would be 
better to do it jointly. That is what I am talking about. Then 
the question would be, would you have us rescind the authority 
of the OTS and make them un-do what they did and then join in a 
joint effort? They just went off on their own. It's statutory. 
It is not their fault that they had that statutory authority.
    Mr. Johnson. You are really getting a bit beyond my--
    The Chairman. I appreciate it. I do agree with you that you 
are at a disadvantage vis-a-vis the unregulated, and that is 
why, in some areas, the answer is to take sensible regulation 
that you are under and apply it to them, particularly in 
subprime. I agree.
    If only regulated depository institutions made mortgage 
loans, we would not now be in the subprime crisis. Regulation 
has avoided, in a sensible pro-growth way, the abuses that came 
from the absence of regulation.
    Any other comments on the joint OCC/FDIC?
    Mr. Plunkett. Mr. Chairman, I agree with your notion that 
the Fed has not acted and we need to look at alternatives and 
certainly creating a little more regulatory competition to 
allow those two agencies to write rules, in my opinion, could 
not hurt.
    I am speaking for the Consumer Federation here. I am not 
sure that some of the organizations that have signed onto this 
testimony would agree with that notion.
    The Chairman. I want to separate that from FTC enforcement. 
The question is writing the rules. They could be in the same 
place. They could be altogether.
    Mr. Plunkett. I have a ``but'' though, Mr. Chairman. We 
urge concurrent authority, rule writing authority, for the FTC 
as well, simply because the culture at the Agency at least 
provides for the possibility of more independent enforcement.
    At the OCC in particular, I am not sure you have 
independent enforcement, given the factors that I have 
outlined.
    If they had rule writing authority, given what they have 
done in other areas, I do not think that they would move 
aggressively to protect consumers. We need to look at ways to 
make the rule writing process more independent.
    Our idea is to bring the FTC in. I am not sure that 
shifting the rule writing authority without changing the 
culture and particularly at the OCC is going to make--
    The Chairman. You get to a certain number of institutions 
and you are mandating nothing.
    Mr. Plunkett. Here is an idea. In the Military Lending Act, 
which deals with payday loans and other loans to Service 
members, the Department of Defense was made the lead agency in 
writing the rules. They were required to consult with the 
banking agencies, but it was made clear that they were the 
lead.
    On specific laws, you make a particular agency the lead, 
hopefully, and then the fall back is if the other agencies do 
not collaborate, that agency has the rule writing authority.
    The Chairman. I appreciate it. I am going to end my 
questioning now. With the FACT Act, we should do that, I 
believe, with the Federal Trade Commission. In the other case, 
we gave it to the Federal Reserve. I just have to say that they 
are very able and distinguished people at the Federal Reserve, 
but in choosing between making world economic policy and 
resolving consumer disputes, world economic policy seems to win 
every time in terms of attention.
    The gentleman from Ohio.
    Mr. Gillmor. Thank you, Mr. Chairman. I have a couple of 
questions. First, for our witness from AARP, you talked about 
the problems of Federal preemption in a negative way vis-a-vis 
consumer protection. I want your comments on this.
    I think in one area, exactly the opposite is true, and that 
is in the subprime area. The testimony we have had is that 
there have been almost no problems in subprime in the federally 
regulated banks and savings and loans. There have been 
horrendous problems with mortgage brokers at the State level, 
lenders regulated by the States, and that is where the problems 
have come.
    I have introduced a bill with Representatives Bachus and 
Price which would mandate that the States go to a license or 
registration program for brokers and originators to provide 
that level of protection and if they do not, then HUD would 
step in and do it.
    That would be an area of Federal preemption. I just want to 
have your thoughts on that legislation.
    Mr. Gaberlavage. I think the licensing issue is a very 
important one, Congressman. We would like to take a look at 
your legislation. I do not think by any means the situation at 
the State level is perfect. We have worked very hard at the 
State level, particularly on predatory lending, to improve both 
the laws and the enforcement at that level.
    We definitely would like to take a look at what you are 
proposing.
    Mr. Gillmor. Okay. Mr. Sivon, you talked about the need for 
clear and understandable disclosures. I certainly agree with 
that. You now have some consumer testing and focus groups that 
are being used to improve disclosures.
    Is there an area where the disclosures really are 
understandable to the consumer? For example, if anybody has 
taken out a mortgage recently, and you look at all the 
disclosures you have there, it is so voluminous. I doubt if 
there is 1 in 10,000 mortgagors who read that disclosure. You 
have huge disclosure that really is meaningless because it is 
no disclosure.
    There are a lot of people that think we would be a lot 
better off to go to less disclosure and make the disclosure 
that took place meaningful.
    In that context, let me ask you this from an attorney's 
point of view, is there a litigation risk to the person making 
the disclosure by providing a simple disclosure as opposed to 
all that complexity, because they are going to get sued if they 
did not have a particular sentence in there?
    If you could just comment on that problem, and how to solve 
it.
    Mr. Sivon. Of course. As a general matter, the policy of 
having disclosures, I think, is a very solid policy and it has 
worked well. You are absolutely right that in certain 
instances, it seems we have reached a point where disclosures 
can become overly complex and confusing. Some rationalization 
of that and the use of consumer testing that the agencies have 
undertaken, I think, makes a great deal of sense.
    On the litigation side, the thing the committee might want 
to consider is as disclosures are being designed, and the 
agencies are given the authority to develop models, that there 
could be safe harbors for institutions from that type of 
litigation risk, that if they adhere to the particular model, 
then that litigation risk would not arise.
    Mr. Gillmor. How would you do that? Would you have the 
regulator or the legislative body set out and say if you 
disclose ``A,'' ``B,'' and ``C,'' then you have a safe harbor?
    Mr. Sivon. It would probably have to be through 
legislation.
    Mr. Gillmor. Let me ask Mr. Gonzalez, you talked about 
Latinos being subject to various credit card schemes. Is it any 
bigger problem for Latinos compared to anybody else who might 
fall in the same social/economic category as a Latino, and if 
so, why would that be?
    Mr. Gonzalez. We have seen that Latinos are more likely to 
be targeted for credit card scams, in part because they are 
less likely to be accessing the mainstream financial 
institutions that give individuals, even low-income 
individuals, the opportunity to kind of measure whether or not 
a credit card offer is false.
    If you do not have access to banking services, and you are 
getting credit card offers from what may look like a banking 
service but is not, then you are more likely to fall for these.
    They are also targeted for affinity scams, which for 
example, could be something related to a particular community 
that looks like it is an actual credit card but is not a credit 
card.
    Because of lack of exposure to the financial system, and 
also lack of financial counseling and other issues that could 
improve financial savvy, they are more likely to be targeted.
    Mr. Gillmor. One more question. Mr. Gonzalez, you talked 
about while these consumers do not know what they are getting 
into and the need for education, and I agree with you on that, 
we had in the subprime area--I had a conference of lenders, 
regulators and consumer groups from Ohio talk about the 
subprime problems we had there.
    I was surprised that the consensus that came out of the 
group was that the most single most important thing we could do 
would be to have greater education--that those who had 
counseling did not have foreclosures.
    If we agree on the concept that consumer education is good, 
my question to you is, how would you effectively deliver that 
education to consumers? How do you do it?
    Mr. Gonzalez. Sure. We have a network of about 70 home 
ownership counseling community based organizations that provide 
home ownership counseling. In some cases, they counsel people 
out of moving towards home ownership because they are not ready 
for it and are more likely to default.
    In our network, we have fewer defaults because of that. 
What we find to be effective, not just for Latinos, our 
networks are not just Latinos, is one-on-one counseling. Even 
if you receive the education with relation to what are your 
rights or what you should be looking for, without counseling, 
if you are new to the financial services market, including 
mortgages and credit cards, you still may make the wrong 
choices based on your situation.
    People want to access credit cards because they view it as 
a way to build a credit score. They may make choices that are 
not the best for them because of the situation they are in and 
counseling in the community based organizations that are close 
to where their community is, where they live and with whom they 
have built trust, has been the most effective way to keep 
people from home ownership default.
    We view it as a great opportunity to build on that, to make 
sure that people are not getting into unmanageable debt.
    Mr. Green. [presiding] Thank you, sir. The gentleman's time 
has expired. I now recognize myself for 5 minutes.
    Mr. Gaberlavage. Mr. Chairman, can I make a comment on Mr. 
Gillmor's issue of disclosures?
    Mr. Green. Yes.
    Mr. Gaberlavage. It is important, what the disclosure says 
and how it is written is very important, but also the context 
and the timing of when it is given is critical. It is not just 
what it says. There is a whole slew of behavioral science that 
has been done on consumer decisionmaking that shows, 
particularly in these mortgage situations where people are 
adverse to short term losses, that they will go for these loans 
that promise them that they will not have to put a lot of money 
up front, but in the long term, they are bad for them.
    We really need to take that into account, as well as the 
understandability of the disclosure.
    Mr. Green. Thank you for your comments, sir.
    I did not thank the entire panel when I gave my opening 
statement earlier. I do want to thank you for coming in and 
testifying. I had the privilege of testifying once before 
Congress and I remember I prepared for weeks to give about a 5-
minute statement. I understand what you do and what you go 
through. I thank you.
    My issue will be the one of one-stop-shopping. I really 
would like some input from you as to how this can become a 
reality, if at all possible.
    I understand that it will not be a panacea because you have 
too many institutions that you are working with and there are 
so many elements in the equation that it may be difficult to 
get a handle on all of them.
    How can we have one point of contact for the consumer? The 
consumer is the most important part of all this and we all 
agree. How can we have one point of contact for the consumer so 
that the consumer can get an issue resolved by the appropriate 
agency, not necessarily at the point of contact. The point of 
contact will become the genesis of the process. The revelations 
will be in the multiplicity of agencies that will have 
enforcement authority, that we do not plan to eliminate.
    How do we get to the point where we can give the consumer 
good information about the entry point, the alpha of the 
process, such that the omega can be ultimately achieved?
    Who would like to help me with this?
    Mr. Plunkett. I will give you some thoughts to start with, 
if you would like.
    Mr. Green. Yes, sir. Thank you. I will start left to right, 
and we will hear from everyone, and hopefully my time will not 
expire.
    Mr. Plunkett. It is a good idea, and you put your finger on 
the issue, that the quality of the information that is 
provided, the advice that is provided, is high. As I just 
pointed out about the OCC's new Web site, that does not appear 
to be the case.
    An obvious point here is to make sure that the effort is 
well-financed. Put the agencies under tight timelines to work 
together because on many occasions, they have shown an 
incredible ability to take simple tasks and drag them out for 
years and years.
    Not too tight, of course. You want it well done. They need 
to have specific deadlines they have to meet.
    Third, have a process in place to review the information 
and advice that is provided. The OCC's consumer assistance 
group has been heavily criticized for not helping consumers 
resolve complaints. They say they view themselves as a neutral 
arbiter. In many cases, if you look at the information they 
provide, they appear to be defending the practices of national 
banks.
    You need a process in place to make sure that the advice 
that is being provided is actually helping people, and then 
monitor it closely.
    Mr. Green. Thank you. Mr. Gonzalez?
    Mr. Gonzalez. Thank you. This is an area where we are just 
now beginning to look at how the agencies should be brought 
together to ensure there is information that consumers can 
actually use.
    We believe that currently getting the answers to your 
questions or even filing a complaint is a scavenger hunt for 
consumers, particularly from low-income communities, who can 
become frustrated with the process.
    We are looking into what are the best ways to get there. 
This is a big issue for our community. We will get back to the 
committee when we are able to complete that analysis.
    Mr. Green. Thank you. Mr. Gaberlavage?
    Mr. Gaberlavage. I would agree with the previous comments. 
Also, I would add that our surveys show that the public is 
really not very aware of who to go to, and particularly, 
Government agencies rank very low, except for State AGs seem to 
have attention of older consumers.
    I think publicizing it has to be a key. Also, possibly 
working through community organizations and making that known 
to people, particularly in minority communities.
    In a previous job I had at AARP, I ran a campaign to inform 
people about electronic transfer and direct deposit. It is very 
important to work through community organizations, and possibly 
I wonder whether State agencies could be included in this in 
some way, too.
    The proposal on the form that the agencies are working on 
now is good in the sense that it will provide uniform data that 
can be analyzed. That is very important.
    Mr. Green. Thank you. Mr. Johnson?
    Mr. Johnson. I know we are running out of time here, and I 
have more than 6 seconds worth to say.
    I would like to tell you a little bit about how we handle 
this sort of thing in our bank because it might give us a key 
to how we can do it in a broader area.
    What we do when there is a complaint or even a question 
that is posed in person or on the phone by one of our customers 
to one of our bankers, the key to resolving that question or 
getting the right answer to that question or resolving that 
complaint is for that first point of contact to take ownership 
of this problem.
    In many instances, we are able to just physically walk that 
person over to the other banker who has the answer to their 
question or who can help them work through their complaint.
    I recognize that we cannot physically walk all of the 
complainants around the country to the right person, but that 
is something that works for us with the 120-some people we have 
working for us.
    I think the key is for that first point of contact to take 
ownership and for them to know and to help that customer 
determine who the next place is that they should be going to 
with a high degree of accuracy.
    One of the most frustrating things any of us can experience 
is when we are on a help line some place and we have to talk to 
five or six people before we get to the right one.
    If we can have that initial point of contact take ownership 
of that problem and figuratively walk the complainant to the 
right place, and that as has been suggested, that is going to 
take the participation of all the players for that to work, but 
I think the OCC and their Web site has been a good start, but 
it is just that, a good start.
    Mr. Green. Thank you very much. My time has expired, Mr. 
Sivon. What I will do is yield. Will you allow me 10 seconds or 
so for Mr. Sivon?
    Mr. McHenry. Of course.
    Mr. Sivon. Thank you very much. I would like to respond. I 
think we should acknowledge that the Federal banking agencies 
have taken some positive steps in this area. They all have 
consumer complaint procedures and systems in place.
    The OCC and OTS also have entered into some agreements with 
the States on information sharing on complaints.
    I do think it should be taken to another level. The 
mechanism that I would recommend that the committee explore is 
the Federal Financial Institutions Examination Council.
    All the Federal banking agencies sit on that body and last 
year, Congress amended the FFIEC to include a representative of 
State banking authorities. There you have an entity in which 
the Federal banking authorities and the States can sit down and 
ideally collectively come up with the type of system that you 
are talking about that could be an one stop shop for consumers.
    Mr. Green. Thank you. At this time, I recognize Mr. McHenry 
for 5 minutes.
    Mr. McHenry. I thank my good friend. This has been a very 
informative panel. I want to start where I think we have some 
consensus here across this panel. In some way, shape, or form, 
each of your written testimony mentions this.
    Mr. Plunkett begins actually in what you said before the 
committee, much less what you have added in your testimony, you 
said the process is not transparent. When offering credit, 
consumers are not aware of all the details upon which they are 
signing this document, this very complex legal document.
    I agree with you. I very much agree with you that generally 
speaking, whether it is A to Z in lending, in particular, 
mortgage lending right now, the process is not transparent.
    Should it be at least part of our focus to ensure that the 
regulations are written in a clear English style so that 
perhaps on one page, people can understand the key components 
of what they are signing rather than a multi-page document 
written in fine print to actually beyond that, have a 
supplement to it that says clearly and concisely what the key 
terms are for the transaction they are undertaking?
    If we could just start with Mr. Plunkett, if you could just 
briefly comment on that.
    Mr. Plunkett. Sure. I actually agree with you that better 
disclosure is helpful. When I was talking about the process, I 
was talking about the regulatory process, the focus on 
supervision over enforcement.
    It is a secretive process. Consumers have a hard time 
getting a handle on it, what the problems are with the 
regulatory institutions that are being supervised.
    Mr. McHenry. You would concur that transparency in the 
actual lending process and the transaction process for the 
consumer needs to be clearer?
    Mr. Plunkett. Necessary. You are right. You cannot provide 
too much information. It is not sufficient, however, if 
products that are deceptive or abusive are still available, it 
really does not help the consumer much if you tell them they 
are going to be over charged or pay a fee that is not 
reasonable. You also need to have some protections in place.
    Mr. McHenry. Beyond protections, try to get an area of 
consensus.
    Mr. Plunkett. Better disclosure.
    Mr. McHenry. Mr. Gonzalez?
    Mr. Gonzalez. Yes. We would agree that there needs to be 
more transparency, obviously. One focus might be in places 
where there has been trouble with people, where the lack of 
transparency has led to ongoing debt, such as the double 
billing for purchases made abroad, or people not understanding 
the minimum payments.
    It would be very helpful to have plain English descriptions 
of the terms. They should be clearly headed so people 
understand them. They should not be scattered throughout the 
disclosure document. Also, there should be a focus on things 
that could get consumers in trouble.
    Mr. McHenry. Thank you.
    Mr. Gaberlavage. We would agree that the disclosure needs 
to be much improved. One of our litigators says that they think 
that the disclosure should be written on bright pink paper. I 
do not know what color you like. I think one of the problems, I 
agree with Travis, that it is the practices.
    Mr. McHenry. Thank you.
    Mr. Gaberlavage. And the timing. Timing of when they are 
given.
    Mr. McHenry. Mr. Johnson?
    Mr. Johnson. Yes, I think clearly effective disclosure, 
which is what we are talking about here, and which Mr. Gillmor 
mentioned as well, is something that we should really all agree 
on. Getting to there and what exactly that means is perhaps 
more complex.
    We would be more than happy to work with the committee and 
the regulators to get there.
    Mr. McHenry. Mr. Sivon?
    Mr. Sivon. Same answer. I think disclosure is one of the 
most important consumer safeguards, so having effective and 
timely, I agree with the comment on proper timing, that it is 
important.
    Mr. McHenry. I want to go beyond this. There is a 
discussion about the FTC being a better protector of the 
consumer.
    Mr. Johnson, are you a state regulated bank or a federally 
regulated bank?
    Mr. Johnson. State regulated.
    Mr. McHenry. How many separate regulators oversee your 
bank?
    Mr. Johnson. We are a State non-member bank, which means we 
are regulated by the Office of Financial and Insurance Services 
in the State of Michigan, part of a Department of Commerce, and 
the FDIC is our Federal bank regulator.
    Mr. McHenry. For the discussion here about the FTC being 
the better regulator, what is fascinating to me is you have, 
through the OCC, roughly 1,800 full time bank examiners out in 
the institutions monitoring, some on a daily basis, others on a 
regular basis--basically 1,800 bank examiners that examine 
1,850 banks.
    What is fascinating to me is that you have an almost one-
to-one ratio between examiners and institutions. You have some 
very large institutions that may have a number of examiners in 
them.
    What many of you are testifying, Mr. Gonzalez, Mr. Plunkett 
and Mr. Sivon, in particular, is that the FTC would be the 
better protector of consumers. I think what is important in 
this discussion is what is the FTC capable of doing?
    This committee does not have oversight over the FTC. FTC 
employs 1,074 people; the OCC employs 1,800 examiners.
    It is a very different notion. OCC employs somewhere over 
3,000 people in its entirety. The FTC only employs roughly 
1,000 people. What you want to do is add all these new 
institutions in an area in which the FTC does not have any 
existing knowledge of, and say they are a better protector of 
the consumer.
    I cannot quite understand why you believe the FTC would 
actually take on minute details within financial institutions 
when we all know the FTC largely focuses on high profile cases 
that actually can have a ripple effect across the economy.
    Mr. Plunkett, Mr. Gonzalez, Mr. Sivon, I would love to have 
your response. Mr. Sivon is anxious.
    Mr. Sivon. Just because I want to disassociate myself. I 
did not testify to that effect. I do not agree that they should 
be active in an enforcement role against nationally chartered 
banks or federally chartered thrifts. If I gave that 
impression, it was not my intent.
    Mr. McHenry. My apologies.
    Mr. Plunkett. This is our recommendation to deal with the 
underlying problem I mentioned, which is a pretty clearly 
established lack of independence, in particular, at the OCC, 
from the regulated institutions.
    You have two issues in bringing the Federal Trade 
Commission in. One is unfair and deceptive acts and practices' 
authority, which I think they would have existing staffing to 
deal with, and clearly, experience to deal with.
    It is not true that they do not have anything to do with 
banking regulation. Right now, they are charged with regulating 
some aspects of banking laws related to non-banking entities. 
For instance, credit cards offered by retail establishments and 
not through banks. Well, actually through banks, but not under 
the auspices of those banks.
    Already you have some split authority between the banking 
regulators and the FTC, and this is our best recommendation in 
how to bring a more independent, certainly not perfect, but 
more independent agency into the process.
    They would need additional funding if concurrent rule 
making authority was granted to bring on additional staff.
    Mr. McHenry. Do you have any cost estimates?
    Mr. Plunkett. No.
    Mr. McHenry. Mr. Gonzalez?
    Mr. Gonzalez. We actually did not include this 
recommendation in our testimony. We have not actually done the 
analysis on which would be the better regulating agency.
    Mr. McHenry. Thank you.
    The Chairman. The gentleman from Missouri.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Mr. Johnson and Mr. Sivon, both of you mentioned financial 
literacy as perhaps a way to deal with the subprime and 
predatory lending practices. One of you suggested we may want 
to try to create in schools a financial literacy program.
    While I agree partially with that, what would you say to 
this? The most unproductive schools tend to be in the areas 
where subprime and predatory lenders are most ravenous. Do you 
get the point I am making? You are saying let's put it in 
schools. The schools that do not work seem to be in the same 
areas.
    Mr. Sivon. I would not profess to have any expertise in the 
area of education. It just struck me in preparing for this 
testimony and as I thought about financial literacy that the 
place to achieve it best would be in the school system.
    It is a complex issue to drive it down to the school system 
given the nature of the way schools are governed today in our 
State based structure.
    I do think it makes a great deal of sense and would solve a 
lot of this problem.
    Mr. Johnson. Yes, I agree. You make a very good point 
about--I would stretch the point a little further to say that 
in most school systems, public or private, the teachers who are 
there, while they are very well-trained teachers, are not in 
and of themselves prepared to do the financial literacy 
education piece today.
    That is something that I think the industry and the 
regulators can help with. I was talking before the hearing 
started with Congressman Green about a program that our bank 
participates in as well as many, many ABA member banks, and a 
program that Mr. Green participated in back in his district.
    It is called National Teach Children to Save Day. We go 
into schools and start the process of here is what you do to 
save. Here is what the difference between a want and a need is. 
This is at very low elementary levels all the way up. The 
methods differ for grade, as you might expect.
    Beyond the schools, we have an awful lot of adults out 
there who are not in the school system any more who also need 
education.
    Mr. Cleaver. That is what I wanted to deal with now, and 
maybe Mr. Plunkett and Mr. Gonzalez, although any of you can 
respond to this, one of my points of intolerance is people 
speeding through school zones. The signs are always clear. You 
are supposed to slow down when you go through a school zone 
because these are vulnerable pedestrians.
    Do we all agree?
    [Witnesses nodding affirmatively.]
    Mr. Cleaver. When we find that there are specific areas 
that are targeted, Mr. Gonzalez has already mentioned it for 
Latinos, but it is also African Americans and to a lesser 
degree lower income whites. Those are the areas that are 
targeted by the predatory lenders.
    Would you support a slowing down with regard to--these are 
vulnerable borrowers. That you slow down when you are going 
through those areas? In other words, when we see that an area 
is being targeted, what are the negatives in requiring that 
before a loan is made in these areas, that you have to do A, B 
and C, you have to go through some kind of educational process?
    I am not talking about 2 or 3 years. I am talking about to 
make sure they understand what is going on.
    If we slow down to protect vulnerable kids, why do we not 
slow down to protect vulnerable borrowers?
    Mr. Gonzalez?
    Mr. Gonzalez. We would agree that we have to approach 
subprime lending with caution. On the other hand, we need to 
make sure that people who are in these areas that are ready to 
enter the market and to build their credit and to enter home 
ownership have a process to do that.
    Through our home ownership counseling network, which puts 
people through a rigorous robust process, which for some people 
it means counseling them out of making this choice, we have 
slowed down the process, but not with the intention of keeping 
people out of home ownership, but with the intention of keeping 
them in home ownership and making sure they keep their homes.
    Mr. Cleaver. What if the lending institutions had to do it 
as well? La Raza does it as one of its many programs, which I 
am familiar with. I think it is one of the better things going. 
You cannot touch everyone because everybody is not going to 
make themselves available.
    Mr. Gonzalez. Right. Details matter with that. I would be 
concerned that some bigger lenders might decide not to enter 
that.
    Mr. Cleaver. Are you familiar with the Voting Rights Act?
    Mr. Gonzalez. Yes.
    Mr. Cleaver. What triggers the Federal involvement with 
regard to the Voting Rights Act is if the voter registration 
drops beneath a certain level, then Federal registrars are sent 
into the area. I think this is a problem significant enough 
that if we see that loans drop beneath a certain level, I think 
that in itself ought to attract Federal involvement.
    Mr. Gaberlavage. I think literacy is important but I think 
this problem is beyond literacy. In many of the low-income and 
minority communities, you have older persons who try to get a 
loan because they need some cash flow to pay some bills and 
things, and not only did they not get the money, but they are 
losing their home, their primary asset. What happens to them in 
retirement? Most of these people do not have pensions. What 
happens to them in their old age?
    We need some action on some of the practices that are 
occurring in these communities and stop, slow down through 
better regulation and stopping some of these practices that are 
preying on people, particularly for the older population.
    The financial system is very good at marketing. It is 
sophisticated. It is pinpoint, it is accurate. They can tell 
you, oh, your CD is expiring or it is maturing, and then there 
have been cases where banks have marketed specifically to older 
persons whose CDs were expiring and they marketed variable 
annuities to them.
    Fortunately, one of our regulators in Massachusetts, I 
think, stopped this practice from occurring. These were 
inappropriate investments.
    It is very good at that, but when the consumer has a 
problem, particularly in all of these areas, then the response 
is uneven. The authority of the agencies that are charged with 
protecting the consumer is uneven. It should be that no matter 
what door a consumer goes through, whether it is a bank, a 
credit union, or a thrift, whatever it is, that the protection 
should be equivalent and it should be effective.
    I think that is what we should aim for, and that would 
really be--it is great to have literacy, but starting in 
elementary school or something is not going to solve this 
problem of whole communities losing their equity.
    Mr. Cleaver. Thank you.
    Mr. Plunkett. Congressman, when looking at particular 
problems in say, minority communities, some of the legislative 
proposals that your committee has looked at and that a number 
of members have co-sponsored, do deal with specific practices 
that have a particularly negative effect in those communities, 
such as lending without adequate consideration of the ability 
to repay, which has been shown in minority neighborhoods in 
particular to be a serious problem, because many people are 
getting loans at high interest rates when they could qualify 
for better terms.
    That is one way to approach the problem as well.
    Mr. Cleaver. Thank you.
    The Chairman. I will just add that the problem of people 
getting old without regard to their ability to pay, I believe, 
has been greatly enabled by securitization.
    Your ability to make a loan without being concerned with 
someone's ability to pay is enhanced if you are not the person 
they have to pay. I think that is what securitization has done.
    The gentleman from Colorado.
    Mr. Perlmutter. Mr. Chairman, that was a good lead into 
what I wanted to say. First, I am sorry that we do not have 
more members here. We have had a lot of hearings on this 
subject, and this has been the best panel I think we have had 
period, just because you are all on the ground. You are 
worrying about both kind of the individual banker piece of this 
to the individual consumer.
    I just want to thank you all for your testimony today.
    The chairman hit on something, and Mr. Johnson, you were 
sort of talking about this. There is this huge distance now 
between the borrower and the banker in many cases.
    You do not have the personal banker any more and that 
relationship has sort of evaporated in many instances where you 
call me up and you say, Mr. Perlmutter, you know, are you sure 
you really want to borrow this money, or this is happening with 
your account. You do not have that relationship as much as you 
used to.
    It is not that I want to go back 50 years, but I think that 
is just something we have to deal with as Members of Congress.
    Some of the comments about the over disclosure piece, and 
Representative Gillmor was asking about this. There are so many 
products available that if you try to disclose about all these 
different products, you have a book to read.
    We have two policies that I think we have to consider, and 
we may have gone too far with them. It is not a question of 
compliance. I think virtually all the banks and the credit card 
companies and everybody else are complying.
    The policy issue is have we pushed the goal of home 
ownership so far that we allow one percent mortgages to get you 
into your house and it fails, so it is a policy issue on home 
ownership, and a policy issue on credit.
    Have we extended credit so far with every little product 
possible and with some Wharton MBA in the background coming up 
with a new product, but also a new fee attached to that 
product, that people cannot keep up.
    I just think the materials you all provided, your testimony 
today, was excellent. I am not sure what the answer is. I can 
tell you the polling we have done and the people that I have 
talked to, it is Iraq, immigration, health care and credit 
cards. That is it.
    The credit cards, they are mad just because the fees just 
continue to mount up generally.
    I do not mean just to give you a speech here. The issue is 
that the bank or the lending institution has two things on its 
side. It has time and education. If you have the education, you 
usually do not have the time to worry about the fees that you 
are getting charged. If you have the time, you generally do not 
have the education.
    I have said this in other instances. You all have helped me 
kind of put my arms around this subject. It is sort of a 
distance between the banker and the borrower. It is this over 
disclosure because there is so many products, and the question 
is do we, as a Congress, want to start limiting the extension 
of credit, limiting home ownership or not.
    If we do not, then we are going to continue to have these 
kinds of things, and that may be the price you pay.
    I do not have any questions. I just wanted to vent.
    Thank you very much. Mr. Chairman, I just want to 
congratulate you on putting this panel together. They are the 
best I have heard on this subject.
    The Chairman. I appreciate that. I am reminded to include 
in the record, if there is no objection, a statement entitled, 
``Improving Federal Consumer Protection'' from the National 
Association of Realtors.
    There being no objection, it is so ordered.
    I know this encountered some skepticism but sometimes 
congressional committees have hearings because we want to know 
things. That is not usually why we have hearings. Sometimes, it 
is. Today was a good example.
    I thank all the witnesses. This was thoughtful testimony 
from people engaged with the issue. I hope you feel the time 
was well spent.
    When we return from the recess in September, we will be 
legislating, I believe, in some of these areas. There are 
three. The narrowest issue, which is the subprime one, where I 
believe we need some legislation.
    There is the broader question of consumer protection after 
preemption, and there is also the again narrow question of 
creating a consumer right to contest bad credit information.
    This one, it seems to be the consumer groups and the 
financial institutions are somewhat aligned in their interest 
because what happens is the typical dispute here is between the 
consumer and the point of sale, and the financial institution 
is caught in the middle. The entity that did the sale is 
telling you they owe us the money and the consumer says, I do 
not owe you the money, and you are the collectors.
    What we want to put in place is a mechanism to cut you out 
of that loop and let the debate happen where it should happen.
    At any rate, I agree with the gentleman from Colorado. This 
has been a very useful hearing. I thank all the witnesses. We 
will be in considerable touch.
    [Whereupon, at 11:38 a.m., the hearing was adjourned.]






                            A P P E N D I X



                             July 25, 2007



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