[Senate Hearing 110-928]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-928

 
                  NOMINATIONS OF: RANDALL S. KROSZNER,
                 ELIZABETH A. DUKE, AND LARRY A. KLANE

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                                   ON

                            nominations of:

  Randall S. Kroszner, of New Jersey, to be a Member of the Board of 
                   Governors, Federal Reserve System

                               __________

    Elizabeth A. Duke, of Virginia, to be a Member of the Board of 
                   Governors, Federal Reserve System

                               __________

  Larry A. Klane, of the District of Columbia, to be a Member of the 
               Board of Governors, Federal Reserve System

                               __________

                        THURSDAY, AUGUST 2, 2007

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware           CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey          JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
SHERROD BROWN, Ohio                  JOHN E. SUNUNU, New Hampshire
ROBERT P. CASEY, Pennsylvania        ELIZABETH DOLE, North Carolina
JON TESTER, Montana                  MEL MARTINEZ, Florida

                      Shawn Maher, Staff Director
        William D. Duhnke, Republican Staff Director and Counsel
                       Aaron D. Klein, Economist
                       Dean V. Shahinian, Counsel
                       Lynsey Graham Rea, Counsel
               Joseph L. Hepp, Professional Staff Member
          Peggy R. Kuhn, Republican Senior Financial Economist
                    Andrew Olmem, Republican Counsel
   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
                          Jim Crowell, Editor


                            C O N T E N T S



                              ----------                              

                        THURSDAY, AUGUST 2, 2007

                                                                   Page

Opening statement of Chairman Dodd...............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     3
    Senator Bunning..............................................     5
    Senator Allard...............................................     5
    Senator Casey................................................    25

                               WITNESSES

Randall S. Kroszner, of New Jersey, to be a Member of the Board 
  of Governors, Federal Reserve System...........................     7
    Prepared statement...........................................    50
    Biographical sketch of nominee...............................    53
    Response to written questions of:
        Senator Dodd.............................................    88
        Senator Casey............................................   104
        Senator Schumer..........................................   109
        Senator Menendez.........................................   112
        Senator Akaka............................................   118
Elizabeth A. Duke, of Virginia, to be a Member of the Board of 
  Governors, Federal Reserve System..............................     8
    Prepared statement...........................................    67
    Biographical sketch of nominee...............................    69
    Response to written questions of:
        Senator Dodd.............................................   121
        Senator Casey............................................   130
        Senator Menendez.........................................   134
        Senator Akaka............................................   136
Larry A. Klane, of the District of Columbia, to be a Member of 
  the Board of Governors, Federal Reserve System.................     9
    Prepared statement...........................................    79
    Biographical sketch of nominee...............................    81
    Response to written questions of:
        Senator Dodd.............................................   137
        Senator Casey............................................   144
        Senator Schumer..........................................   146
        Senator Menendez.........................................   148
        Senator Akaka............................................   151


                            NOMINATIONS OF:

                  RANDALL S. KROSZNER, OF NEW JERSEY,

               TO BE A MEMBER OF THE BOARD OF GOVERNORS,

                        FEDERAL RESERVE SYSTEM;

                    ELIZABETH A. DUKE, OF VIRGINIA,

               TO BE A MEMBER OF THE BOARD OF GOVERNORS,

                        FEDERAL RESERVE SYSTEM;

              LARRY A. KLANE, OF THE DISTRICT OF COLUMBIA,

               TO BE A MEMBER OF THE BOARD OF GOVERNORS,

                         FEDERAL RESERVE SYSTEM

                              ----------                              


                        THURSDAY, AUGUST 2, 2007

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 9:45 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Christopher J. Dodd (Chairman 
of the Committee) presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The Committee will come to order. My 
apologies to all of you this morning for--they are doing an 
experiment, I guess, or test on constitutionality this morning. 
Not a good excuse but, nonetheless, that is reason I am a few 
minutes late, and I apologize to my colleagues and to the 
witnesses and to your families.
    Let me make an opening statement, if I can, and then I will 
be turning to my colleague from Alabama, the Ranking Member, 
and any other Members who wish to make some opening statements 
here. We will then swear in the witnesses and hear your 
testimony, and then we will raise some questions with you.
    First of all, I am pleased to welcome all of you here this 
morning. Today the Committee will meet in open session to hear 
from Dr. Randall Kroszner, Ms. Elizabeth Duke, and Mr. Larry 
Klane, who have been nominated to the Federal Reserve Board of 
Governors.
    One of the most important and influential nominations that 
we consider in this Committee is that of a Governor of the 
Federal Reserve Board. The seven Federal Governors are the only 
individuals appointed by the President of the United States and 
confirmed by the U.S. Senate who have a voice in our Nation's 
monetary policy. The Governors are responsible for upholding 
the Fed's dual mandate: to promote employment and achieve price 
stability. Fulfilling this mandate creates the conditions 
necessary for our economy to grow and for every American to 
have an opportunity to participate in the shared prosperity of 
our Nation.
    The role of the Fed is critical not just in setting 
monetary policy; it also serves as a regulator of the safety 
and soundness of our largest lending institutions and, very 
significantly, as a regulator and enforcer of the laws passed 
by the U.S. Congress and signed by the President to protect 
consumers and ensure that they have an opportunity to 
participate and succeed in the American economy.
    The duties of the Fed are no less important than the Fed's 
monetary policy responsibilities. In fact, given the depth of 
experience that the Fed's current Governors have in monetary 
policy, issues of consumer protection and bank supervision are 
of particular importance with respect to the nominees that we 
have before us today.
    It is for all of these reasons that the Fed Governors 
should be of the highest caliber and quality to serve our 
Nation. The position of Governor also requires substantial 
political independence. In establishing the Federal Reserve, 
the Congress created a system in which each Fed Governor's seat 
has a fixed 14-year term. I know some of my colleagues wish 
that the Founders had thought of us in that way. Governors at 
the Fed enjoy the third longest term given to any appointee in 
the Federal Government, beyond only the lifetime appointment 
awarded to Federal judges and the 15-year term given to the 
Comptroller General.
    Of the nominees, Dr. Kroszner has been nominated to fill a 
full 14-year term. The others have been nominated to partial 
terms of years. All of the nominees have indicated in their 
questionnaires that, if confirmed, they intend to serve their 
full terms. Given the length of these terms, a nominee to the 
Federal Reserve Board of Governors requires careful 
deliberation and very thoughtful consideration.
    In closing, I want to return to the importance of the Fed's 
role as an agency charged by the Congress with many important 
consumer protection functions, particularly with respect to 
subprime lending and credit cards. I have not been shy about 
expressing my view that the Fed's actions have been 
unsatisfactory in my view over the past several years in that 
regard, and I look forward to exploring this area, among 
others, with our witnesses today.
    Before I turn to my colleague, the Ranking Member, I will 
briefly introduce the nominees.
    Dr. Randall Kroszner assumed the role of Governor of the 
Federal Reserve Board on March 1, 2006. His current term 
expires on January 31, 2008, and he has been nominated to serve 
a new 14-year term expiring February 1, 2022.
    I got to tell you, Doctor, when I was thinking about that 
number, I have a 5-year-old daughter, and she will be a junior 
in college when that is over with. It gives a dimension to this 
that I cannot imagine her being in that position, but that is 
how long a time we are talking about here with your nomination 
and the consideration of the Senate.
    Dr. Kroszner previously served on President Bush's Council 
of Economic Advisers from 2001 to 2003 and has a distinguished 
background. I would note he was educated at Brown University, 
where my brother-in-law--in fact, a good part of my sister's 
family are there. They have strong connections to Brown 
University as well.
    Elizabeth Duke has been nominated to fill a term--let me 
ask you, first of all, Doctor, your family members are here. I 
know you have some, I think, with you here today. Would you 
care to introduce them? We would like to welcome them to the 
Committee.
    Mr. Kroszner. Yes, please. I have my mother, Helen 
Kroszner, and my niece, Kimberly Kroszner, with us here.
    Chairman Dodd. Well, thank you for joining us here this 
morning. Nice to have you with us.
    Elizabeth Duke has been nominated to fill a term which 
expires January 31, 2012. Ms. Duke is Senior Executive Vice 
President and Chief Operating Officer for Towne Bank in 
Virginia. Ms. Duke also served as the Chair of the American 
Bankers Association--I believe the first woman to do so, if I 
am correct--from September 2004 through September 2005 and in 
doing so was the first woman to chair the ABA. And I wonder if 
you have any family members here, Ms. Duke, you would like to 
introduce.
    Ms. Duke. Yes, I do. My two sisters and my two nieces.
    Chairman Dodd. Where are they here? Right there. Thank you. 
You got the front row seats here. Good. Nice to have you with 
us this morning.
    Mr. Larry Klane has been nominated to fill a term ending 
January 31, 2010. Mr. Klane is currently the President of 
Capital One Global Financial Services. Again, do you have any 
family here, Mr. Klane?
    Mr. Klane. I do. Behind me is my wife, Polly, who is 
carrying a child that we expect in roughly 2 months.
    Chairman Dodd. Congratulations.
    Mr. Klane. Thank you. With her are her folks, Alecne and 
Jack.
    Chairman Dodd. Great.
    Mr. Klane. I also have my father, and if you do not mind, I 
would just like to mention someone who is not here, and that is 
my mother, who passed away 3 weeks ago and for whom we are 
having a memorial service tomorrow. She is with us in spirit.
    Chairman Dodd. You bet she is. She may have some questions 
for you, in fact.
    Mr. Klane. She asked many during her life.
    Chairman Dodd. I am sure she did.
    [Laughter.]
    In fact, I think you can hear her right now. Anyway, let me 
recognize my colleague from Alabama, Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman, for scheduling 
this hearing.
    This panel of nominees will have very important 
responsibilities, as Chairman Dodd has mentioned. The Federal 
Reserve must implement sound monetary policy, ensure the 
vitality and viability of our Nation's financial institutions 
and payment system, and maintain financial stability.
    During Chairman Bernanke's appearance before this Committee 
in July, we had a full discussion of the Nation's economic 
performance and risk factors on the horizon. Although we have 
seen the stock market waver in the past few days, the economy 
is performing well with strong GDP growth.
    We also continue to enjoy a low unemployment rate, both 
historically and relative to other industrialized nations. The 
risk of inflation, not slow growth, remains the predominant 
concern as we continue to see a rise in energy and food prices.
    During Chairman Bernanke's appearance last month, we also 
had an extended discussion of the Federal Reserve's recent 
activities that Senator Dodd brought up relating to subprime 
mortgage lending because you are not only the central bank, you 
are a bank regulator, as you well know. I remain concerned that 
the weaknesses in the subprime market may have broader systemic 
consequences. We have been told that the problem is largely 
isolated and contained, but I am concerned that it may not be. 
I will be particularly interested in hearing your views on the 
scope of the problem today and how the Federal Reserve will 
monitor and manage the situation going forward.
    The Federal Reserve Board also faces the challenge of 
implementing significant new capital requirements for our 
banking system. Chairman Dodd and I are pleased that the 
banking regulators, all of them, were able to reach a consensus 
on final regulations to implement Basel II. On this Committee 
we will continue to monitor this process as the new standards 
go into effect.
    The three nominees, Mr. Chairman, before this Committee 
this morning all bring specific expertise and insights to the 
Board, a lot of balance. Governor Kroszner has already done so 
for the past year and a half. Elizabeth Duke and Larry Klane 
will bring valuable insights to the Board given their broad 
experience in the banking and financial services industry. 
These talents will be particularly helpful as the Federal 
Reserve works to address the issues that I cited earlier.
    I am pleased that the President has sent forward this panel 
of nominees, and I look forward, Mr. Chairman, to working with 
you and other Members of this Committee to get these 
nominations to the floor and get them confirmed so they can go 
to work.
    I do want to say one thing about Governor Kroszner. This is 
your third appearance, third nomination hearing before this 
Committee. In February of 2006, the Committee confirmed you to 
the position that you currently hold, member of the Board of 
Governors of the Federal Reserve. In November of 2001, the 
Committee here, the Banking Committee, considered your 
nomination as a member of the Council of Economic Advisers 
favorably. The Senate confirmed you for this position, and you 
served the Council through July of 2003, when you went back to 
the Fed. So the 14-year term is a long time, but that is why we 
set it up for you to be independent. I wish we had 14-year 
terms.
    Thank you, Mr. Chairman.
    Chairman Dodd. Before I turn to Senator Bunning, I just 
want to underscore the point that Senator Shelby has raised. I 
could not help but notice this morning, Richard, two headlines: 
``U.S. Crisis Sends World Markets Tumbling,'' and then in the 
Financial Times, ``German Subprime Lender Is Bailed Out Here.'' 
So for those who think this problem has been contained, again, 
just watching what is happening--all of us would hope it had 
been contained, but clearly it is not at this point here.
    And so this is a matter the Fed has got to take very, very 
seriously, and let me turn to Senator Bunning.

                STATEMENT OF SENATOR JIM BUNNING

    Senator Bunning. Thank you, Mr. Chairman. I am glad we are 
holding this hearing, and I hope that we can soon hold a markup 
on these nominees.
    When the current vacancies came up last year, I made it 
clear to the Fed that I thought those seats should be filled 
with people with real-world experience in banking. In fact, I 
wish more seats were filled with folks with real-world 
experience and less from academia. Naturally, I am pleased that 
the President sent us two nominees with extensive experience in 
the marketplace. I have been critical of the Fed in the past 
for going too far in interest rates actions. Part of the reason 
the Fed went too far was because the room was filled with 
academics, not considering the impact their actions would have 
on industry and individuals. I am confident that the 
perspective these nominees will bring to the Fed will only 
improve Fed policy and decisionmaking.
    Mr. Chairman, you and I have been critical of the Fed's 
handling of the housing boom and bust. Many Members of this 
Committee agree that the Fed was asleep at the switch as 
lenders got more and more irresponsible. Only after we 
pressured the Fed to act did they rein in the worst of the 
nontraditional and subprime lending practices.
    The Fed has started taking action, and it was clear from 
our hearing with Chairman Bernanke 2 weeks ago that the Fed 
would take further steps. It is especially important for people 
with industry experience to be on the Board while new 
regulations are under consideration.
    As I tell all nominees to the Fed, I told these three when 
they visited me that it was important for them to speak up and 
speak their minds in the meetings. Too often in the past, the 
Fed has been dominated by a single voice. Chairman Bernanke has 
been much better than his predecessor, and I expect that will 
continue. I believe these nominees will make sure that they are 
heard when they need to be.
    Again, Mr. Chairman, I hope that we can quickly move these 
nominees through the Committee and through to the floor. I look 
forward to hearing from our nominees and their testimony.
    Chairman Dodd. Thank you, Senator.
    Senator Allard.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Mr. Chairman, thank you for holding today's 
hearing. As always, I appreciate the opportunity to hear from 
nominees, and I welcome them to the Banking Committee, along 
with you.
    Today we will be considering the nominations of three 
highly qualified individuals to be Members of the Board of 
Governors of the Federal Reserve System. I have had the 
opportunity to sit down and meet with all three and believe 
that they will bring a great deal of real-world experience to 
the Board of Governors.
    First, I would like to welcome and comment on the 
nomination of Larry Klane. Besides from being born in my State 
of Colorado, Mr. Klane will bring an expertise of consumer and 
small business credit to the Fed. As an executive of Capital 
One, Mr. Klane will be a valuable asset to the Fed as it 
considers how to better ensure that consumers understand their 
credit card bills and the terms of their credit card agreements 
and mortgage loans.
    Next, I would like to turn to the nomination of Elizabeth 
Duke. Ms. Duke is a former Chairman of the American Bankers 
Association and now the chief operating officer of Towne Bank 
in Hampton Roads, Virginia. Along with Mr. Klane, Ms. Duke will 
bring her 20-plus years of banking experience to the Federal 
Reserve Board of Governors, which is dominated by academia.
    Finally, I would like to welcome Dr. Randall Kroszner back 
before the Committee. As we are all aware, Dr. Kroszner is 
already a Governor who was appointed to fill an unexpired term. 
I look forward to continuing to work with him and the Fed in 
the future.
    In closing, I would encourage all the nominees to become 
familiar with the Government Performance and Results Act, which 
has been named PART Assessment by the administration. The 
Results Act is a key tool in giving agencies the focus and 
vision to carry out effective and efficient programs. I would 
exhort the nominees to become familiar with the appropriate 
strategic plans, annual performance plans, annual 
accountability reports, and financial statements. If properly 
utilized, they can help you achieve success in meeting your 
mission. I would also point out to you that you can look at how 
your agencies are performing if you look under Expectmore.gov. 
Or it might be .com, but it will get you there.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much.
    I am going to ask the witnesses to stand and raise their 
right hands and be sworn. Do you swear or affirm that the 
testimony you are about to give is the truth, the whole truth, 
and nothing but the truth, so help you God?
    Mr. Kroszner. I do.
    Ms. Duke. I do.
    Mr. Klane. I do.
    Chairman Dodd. And do you agree to appear and testify 
before any duly constituted Committee of the U.S. Senate?
    Mr. Kroszner. I do.
    Ms. Duke. I do.
    Mr. Klane. I do.
    Chairman Dodd. I thank you very much.
    Dr. Kroszner, we will begin with you and your opening 
statement, and I would just say to you and to all of the 
witnesses and our colleagues here, any corroborating or 
supporting evidence you want to add will all be included in the 
record.

 STATEMENT OF RANDALL S. KROSZNER, MEMBER-DESIGNATE, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Kroszner. Thank you very much. Chairman Dodd, Senator 
Shelby, and Members of the Committee, I am very pleased to have 
the opportunity to appear before you today as a nominee to 
serve a new term on the Board of Governors of the Federal 
Reserve System. I am honored that President Bush has nominated 
me to serve another term on the Board. If confirmed by the 
Senate, I will work to the best of my abilities to fulfill the 
significant responsibilities of this office.
    During the last quarter century, the Federal Reserve has 
achieved much success in reducing and stabilizing inflation and 
inflation expectations. This success has helped to contribute 
to a tendency for the fluctuations in employment and output to 
be lower than in the past and a reduction in the frequency and 
severity of recessions. If confirmed, I would continue to work 
with Chairman Bernanke and the other members of the Federal 
Open Market Committee--the FOMC--to continue to underscore the 
role of long-term price stability in achieving prosperity and 
maximum employment.
    The Federal Reserve also has a fundamental responsibility 
to consumers and users of the banking and financial system. 
Discriminatory or abusive lending practices should not be 
tolerated, and the privacy of individuals and their financial 
data must be protected. Since I joined the Federal Reserve, we 
have undertaken a number of initiatives to better protect and 
to better inform consumers. These include: issuing guidance on 
nontraditional mortgage products and on subprime mortgages and 
improving our collaboration with the State banking supervisors; 
launching a pilot project in collaboration with other Federal 
agencies and State regulators to examine non-depository lenders 
for compliance with consumer regulations; improving disclosures 
for privacy notices and credit cards; improving the handbook on 
adjustable rate mortgages that creditors are required to give 
to all adjustable rate mortgage applicants, and committing to 
propose new rules before the end of the year to require that 
lenders provide other mortgage disclosures more quickly and to 
improve mortgage loan advertisements; undertaking a series of 
hearings, including one that I chaired in June, to assess the 
impact of specific practices in the mortgage market; and 
committing to propose new rules exercising our authority to ban 
unfair or deceptive practices under the Home Ownership and 
Equity Protection Act. If confirmed, I will continue to place 
the highest priority on protecting consumers while ensuring 
that creditors continue to provide credit responsibly.
    An important part of my research as an economics professor 
at the University of Chicago, and my practical policy work as a 
member of the Council of Economic Advisers, was devoted to 
banking and financial regulation as well as banking and 
financial crises. The safety and soundness of the U.S. banking 
system and U.S. payments system is critical to achieving 
economic growth, maximum employment, and general economic 
stability, and the Federal Reserve works closely with other 
Federal regulators and international regulators to achieve this 
goal. The Federal Reserve also has an important role to play in 
responding to and mitigating the impact of financial crises and 
shocks. If confirmed, I would continue to work vigorously to 
protect and promote the safety and soundness of the system.
    Thank you once again for holding this hearing, and I look 
forward to your questions.
    Chairman Dodd. Thank you very much.
    Ms. Duke.

  STATEMENT OF ELIZABETH A. DUKE, MEMBER-DESIGNATE, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Ms. Duke. Thank you, Chairman Dodd, Senator Shelby, Members 
of the Committee. It is an honor to come before you today as a 
nominee for the Federal Reserve Board of Governors. I am 
grateful to President Bush for nominating me and to you for 
holding this hearing to consider my nomination.
    For most of my 32 years in banking, I worked for State 
member community banks. Our primary Federal regulator was the 
Federal Reserve. We cleared our checks, initiated our wires, 
and safe-kept our securities with the Federal Reserve Bank of 
Richmond. And I served as a director of the Richmond Fed. So I 
come to you with a full appreciation of the responsibility 
entrusted to a Federal Reserve Governor. If I am confirmed, I 
promise to bring everything that is in me, every day, to 
fulfill the trust you will be putting in me.
    My experience with monetary policy comes from being 
impacted by it. I learned my first painful lesson about 
inflation and monetary policy when the national prime rate went 
from 8 percent to 21 percent. Our small business customers 
couldn't have survived, so we actually created our own lower 
prime and learned to live with it. Later, I worked through 
recessions and expansions with those same customers. With these 
experiences in mind, I strongly support the dual mandate 
Congress has given the Federal Reserve of pursuing both stable 
prices and maximum employment.
    In addition to monetary policy, the Federal Reserve is 
charged with the safety and soundness of the financial system. 
I weathered the banking and thrift crisis and wrote my checks 
to the FDIC to restore the fund. In more than 25 years of 
teaching, I have taught probably more than 3,000 bankers and 
bank examiners the basics of sound banking practices. The 
importance of safety and soundness in our banking system is a 
part of my DNA, and I think it is the most important experience 
that I could bring to the Federal Reserve.
    The Fed has sole responsibility for consumer protection 
regulations governing regulated and non-regulated financial 
service providers. I look forward to reviewing the comments, 
research, and work already underway with respect to subprime 
lending regulations and guidance.
    And I believe I can bring some relevant experience to the 
process. I worked with the Virginia banking commission when 
they were first given responsibility for supervision of nonbank 
mortgage lenders after the collapse of one of the most 
predatory lenders I have ever seen.
    As Chairman of the American Bankers Association, I worked 
with bankers and regulators in all States on numerous 
regulatory matters. I don't believe we can solve the subprime 
issue without cooperation and coordination across the full 
spectrum of regulation, supervision, and enforcement of all 
mortgage loan participants. I would welcome the opportunity to 
lead such an effort.
    The role of the Federal Reserve in our Nation's payment 
system doesn't have the headline cachet of monetary policy or 
consumer regulation, yet I believe it has every bit as much of 
an impact on the everyday lives of the American consumer. We 
are in the midst of a payment revolution with evolving 
technology and the passage of Check 21. I would hope to be 
actively involved with the payment infrastructure as well as 
modernization of the rules and regulations governing payments.
    Finally, service on the Federal Reserve Board would feed my 
passion for financial education. I have been in the classroom, 
raised money to teach the teachers, conducted awareness media 
tours, and lobbied for curriculum changes. All of our work on 
consumer disclosure will be in vain if we don't raise a 
generation of consumers who can use those disclosures to make 
good financial choices.
    Thank you for allowing me this time. I look forward to your 
questions.
    Chairman Dodd. Thank you, Ms. Duke.
    Mr. Klane.

    STATEMENT OF LARRY A. KLANE, MEMBER-DESIGNATE, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Klane. Chairman Dodd, Senator Shelby, and Members of 
the Committee, I am honored to appear before you today as a 
nominee to serve as a member of the Board of Governors of the 
Federal Reserve and would like to thank you for scheduling this 
hearing. I also want to thank the President for his confidence 
in nominating me for the position. If confirmed by the Senate, 
I look forward to working with the other Board members to 
fulfill the full range of objectives that Congress has 
established for the Federal Reserve. It has been a lifelong 
personal goal for me to enter public service, and I can think 
of no better place to contribute than the Board of Governors.
    I have spent 25 years working in business, finance, and 
banking. For the past 14 years, I have devoted my career to 
financial services, including 7 years in wholesale financial 
services and the capital markets at The Bankers Trust Company 
and its acquirer, Deutsche Bank. I have spent the past 7 years 
in consumer and small business lending, principally in the 
United States, but also in Canada and Europe.
    As President of Capital One's Global Financial Services 
Division, I currently serve roughly 10 million consumers and 
small businesses, and I have been the President of our Federal 
Savings Bank and am currently the Chairman of our bank in the 
United Kingdom.
    Let me turn briefly to a couple of specific areas of 
responsibility at the Federal Reserve Board. In Chairman 
Bernanke's recent testimony on monetary policy, he devoted 
substantial attention to consumer protection matters, and I 
would like to underscore the importance of this element of the 
Board's responsibilities by beginning there. As a banking 
practitioner, I have gained firsthand knowledge of consumers 
and their financial needs and, if confirmed, I would bring my 
energy, focus, and experience to vigorously fulfilling the 
Fed's consumer protection responsibilities.
    In addition to protecting consumers through guidance, 
rulemaking, and supervisory focus, I would also strongly 
support the Federal Reserve's longstanding commitment to 
financial literacy. In connection with my service on the Board 
of America's Promise--a nonprofit organization dedicated to 
improving the lives of America's children--I have seen the 
power of education, including financial education. The Federal 
Reserve also has responsibility for the stability of America's 
financial system as well as for the direct supervision of many 
financial institutions and all bank holding companies. My 
experience with a broad array of banking regulators in the 
United States and abroad has shown me firsthand the importance 
of good supervision--not only for maintaining sound financial 
institutions, but also for protecting consumers.
    The Federal Reserve also oversees the smooth functioning of 
the payments system. In recently reading the testimony of Fed 
nominees who came before this Committee following the tragedy 
of 9/11, one particularly appreciates this aspect of the 
Federal Reserve's duties. With technology, business, and other 
developments impacting the U.S. payments system, this is an 
area of continued importance.
    Of course, a central--if not the central--responsibility of 
the Federal Reserve is the pursuit of sound monetary policy. 
Congress has given the Fed a ``dual mandate'' of maximum 
employment and price stability and, if confirmed, I would 
approach monetary policy firmly within this framework.
    In conclusion, Mr. Chairman and Members of the Committee, 
if confirmed to the Board of Governors, my objective would be 
to use my experience in banking and business to help the 
Federal Reserve execute the broad responsibilities that 
Congress has set before it. I thank you for your consideration 
and look forward to your questions.
    Chairman Dodd. Well, thank you, the three of you. I 
appreciate your statements, and what I am going to do is have a 
clock on for--there are four of us here, so I will put 10 
minutes up. I will not hold anybody to it rigidly, but that way 
we each get an idea, and it should be an adequate time to at 
least start the questioning. And if more Members show up, we 
may reduce that in the second round to a little less than that 
to make sure we get some opportunity to respond.
    Let me begin. I was taken with all of your opening 
statements. They are, very smartly, brief, which is always good 
advice, I suppose, at moments like this. But I noted in all 
three testimonies, all three statements, the reference to the 
importance of the responsibility to consumers and the users of 
the banking and financial systems, and how, Doctor, you talked 
about discriminatory and abusive lending practices should not 
be tolerated, the privacy of the individual and their financial 
data must be protected. Ms. Duke, I think you--or, Mr. Klane, 
rather, you talked about Chairman Bernanke's statement to 
underscore the importance of the element of the Board's 
responsibilities in consumer protection matters, and, Ms. Duke, 
you talked about the Fed has the sole responsibility for 
consumer protection regulations governing regulated and non-
regulated financial service providers.
    I thank all three of you for highlighting that particular 
importance, and I would like to at least begin my questioning 
with you regarding these matters, because it has been a matter 
of concern. As you have heard from Senator Bunning and others, 
with the passage of the HOEPA bill back in 1994, a long time 
went on before the Fed assumed its responsibility under that 
legislation, which was not a voluntary request on the part of 
the U.S. Congress for the Fed to assume a major responsibility 
in protecting consumers from the very practices that you have 
identified in your opening statements here. In fact, it was not 
until, of course, this problem began to emerge in a public way 
that the Fed has begun to respond with guidance and more 
recently with the hearings on the rulemaking function and 
authority. And let me just say I am pleased that, in fact, 
Chairman Bernanke's testimony here just a few days ago talked 
about the speed with which they hope to promulgate these rules, 
a comment period so that we can have some response. That is 
little solace to those who are going through this today in a 
sense, who have lost their homes or find themselves in 
financial ruin here because there was not a better cop on the 
beat to make a difference in their lives. And certainly I 
accept the notion that there is a certain amount of speculation 
involved in this matter here. I do not know exactly to what 
extent, but certainly I recognize that is part of it, but I 
think also all of us recognize that an awful lot of it here was 
rather underhanded activity, in a way, on the part of some 
people here that it caused this situation to emerge.
    So I am going to begin asking you about these questions 
here because they are extremely important to me. I know they 
are important to Senator Shelby and Senator Bunning. All of us 
on this Committee care very much about what is happening.
    I would, first of all, ask you whether or not--just as a 
general proposition here, I showed you the headline in the 
Financial Times and the story here. What is your view on this? 
Do you believe this problem has been contained? I mean, there 
has been some suggestion in informal conversation out of the 
Fed that the problem has been contained. And yet all the 
evidence we are seeing is to the contrary. Where do you stand 
on that question, Doctor? Has this problem been contained or 
not contained, in your view?
    Mr. Kroszner. Well, certainly you are exactly right that 
there are a lot of challenges in this market. There are a lot 
of families and households that are feeling pain--who face the 
prospect of losing their homes--and that is something that can 
be a real tragedy. The Fed needs to respond to that, and I 
think we have been responding to that.
    Chairman Dodd. I have a suggestion. Three and a half years 
ago, the Fed staff had information that this was a problem that 
was emerging. Three and a half years ago. And yet, you know, 
here is the bill sitting there and not much happening here at 
all.
    Mr. Kroszner. The Fed actually did, with the other 
regulators, issue guidance in 1999 and an expanded guidance in 
2001 concerning subprime mortgages, and then we also went ahead 
in 2005 and 2006 with the nontraditional mortgage guidance, as 
well as more recently the subprime guidance. And so we are 
trying to reduce the pain, to keep people in their homes, 
because it makes sense both from the point of view of the 
individuals, from the point of view of the community, as well 
as from the point of view of the lenders and servicers in 
almost all circumstances.
    With respect to the broader implications, we are monitoring 
this very closely ourselves and in conjunction with our 
colleagues at the Securities and Exchange Commission, the other 
banking regulators, as well as banking regulators around the 
world, to look for signs of where the market is going.
    I think that at this stage the economic fundamentals are 
really unchanged from where Chairman Bernanke talked about them 
in this Committee about 2 weeks ago, and so we have not seen an 
effect on the broader real economy. But we are looking very, 
very carefully at that.
    With respect to individuals, they are going to continue to 
face challenges. I think this is going to be with us for some 
time, and that is why Chairman Bernanke announced that we 
really are going to be doing some important regulatory changes 
or at least proposing those by the end of the year.
    Chairman Dodd. Should I conclude from your answer that it 
is not contained, in your view?
    Mr. Kroszner. Well, with respect to the macro economy, the 
real economy does not yet seem to be affected by this. With 
respect to individuals and their families, I think we are going 
to be seeing more delinquencies and we are going to be seeing 
more foreclosures.
    Chairman Dodd. So it is not contained.
    Mr. Kroszner. With respect to the individuals, yes.
    Chairman Dodd. Ms. Duke.
    Ms. Duke. I think the problems in the credit market, 
unfortunately I do have some experience with trouble debt, and 
that specific issue will probably get a lot worse before it 
gets better. What worries me now, having been through a trouble 
debt situation before, is that with these loans now having been 
sliced and diced and ending up in various different places, 
they are being serviced by various entities who may themselves 
be experiencing some stress. And so I am not sure really what 
is going to happen to the collection processes of these loans.
    A lot has been made of the foreclosure rates. As a lender, 
foreclosure is the last step, and at that point, from the 
standpoint of the lender, you have actually lost the battle 
there. Where we really need to step in is earlier than that.
    So while I agree, I do not think that the subprime issues 
have impacted the overall economy, the day-to-day functioning 
of the economy, what worries me is the very specific situation 
of a borrower who, for whatever reason, is in a loan that they 
cannot pay and not sure what to do, where to do it. I think 
some of the things that we will need to take a look at are 
finding a trusted third-party intermediary. It has been my 
experience that a borrower in trouble, the last person they 
want to talk to is the lender They need someone to bring 
information to bear as to what the options might be to get 
through this, and also in some cases some liquidity to provide 
as a bridge to get from one piece of financing to another.
    Chairman Dodd. Well, I appreciate your answer on that, and 
I will turn to you in a second, Mr. Klane, on this. You know, 
looking here at nominees to this very important Board here, in 
a sense a dose of good reality here, I mean, the slowdown in 
growth of real GDP has clearly been affected by this matter. 
The idea somehow these are segregated issues here that do not 
affect the larger economic picture of the country is troubling. 
And I want you to be very straightforward. I know you have all 
been coached to be careful about what you say here, but we are 
looking for some important guidance from the people who are 
going to be sitting here making very important decisions. And 
the suggestion that somehow what is happening in the housing 
market is not affecting real growth in GDP I find rather 
breathtaking.
    Mr. Klane, let me ask you if you have an opinion on this.
    Mr. Klane. Frankly, Senator Dodd, I share your----
    Chairman Dodd. You have got to bring your mike closer to 
you. Is it on? There you go.
    Mr. Klane. Is that good?
    Chairman Dodd. Yes.
    Mr. Klane. Chairman Dodd, I share your concern across the 
subprime mortgage issues that you have outlined in a number of 
dimensions: first is the question of how we got to where we 
are; second is the difficulty for human beings and their 
families who are caught in the situation as well as their 
communities, which suffer during these times; and then, third, 
what it means for the economy as a whole--whether it is Bear 
Stearns' hedge funds that can no longer support themselves 
because of investments in CDOs that find their roots in 
subprime mortgages, or the headlines which you shared with us.
    Going forward, if confirmed, I would put my full energy 
against the commitments that the Federal Reserve has made in 
order to take all of the arrows in the regulatory quiver to 
protect consumers with respect to, for example, rulemaking 
under the Home Equity Protection Act. I would jump into these 
issues vigorously, with all of my energy.
    I applaud, by the way, this Committee and you for bringing 
together significant home mortgage originators and servicers to 
create a series of principles in order to help families, as 
best they can, work through the foreclosure process. I 
undoubtedly think that we will see some more worsening before 
it gets better. I also applaud the compassion that underlies 
that effort and the compassion that underlies the work of the 
Federal Reserve and the Reserve banks as they engage 
communities around the country, as Ms. Duke commented, to 
encourage people in trouble to feel more free to reach out to 
the lenders before it is too late, and hopefully to work things 
out. I know the Federal Reserve and the SEC have clarified some 
accounting rules that would otherwise get in the way of 
servicers helping people work out of troubled loans that were 
part of securitizations. I applaud these efforts and, if 
confirmed, would continue to work to help households with 
troubled loans and their communities.
    I would also join the Board with a concern around whether 
the subprime mortgage issues have broader impact on the economy 
and financial markets. I would be as vigilant as possible and 
take, together with the rest of the Board, whatever actions 
would be deemed necessary, depending on how things unfold.
    Chairman Dodd. Let me ask you, Senator Menendez in a March 
22nd hearing we had on this subject matter here--Roger Cole, 
who is the Director of the Division of Banking Supervision and 
Regulation, was testifying. Senator Menendez asked him the 
following question--he said as to why the Federal Reserve Board 
seems to have done so little as the subprime crisis was 
building, Mr. Cole said, ``I will say''--and I am quoting him 
here. ``I will say that given what we know now, yes, we could 
have done more.''
    What I want to know from all of you very quickly, if you 
can here, is: One, do you agree with Mr. Cole that the Fed and 
other regulators could have done more, in your view today as 
you stand before us here, sit before us? And, second, to point 
out that for years the Fed had begun to act, there were people 
drawing attention to the problem, and do you believe the Fed 
acted in a timely fashion? On both those questions, Doctor, do 
you want to----
    Mr. Kroszner. Well, I think it is very difficult to make 
policy with 20/20 hindsight. As I mentioned before, the banking 
agencies together issued subprime mortgage guidance in 1999, 
expanded in 2001, in 2005, and 2006 the non-traditional 
mortgage guidance; and this year the new subprime guidance has 
come out.
    I think we have undertaken a lot of actions with respect to 
the individual banks and institutions that we do regulate. 
Something that I think is very important to recall is that our 
regulatory ambit is relatively contained. The enforcement 
powers and supervisory powers we have are only over depository 
institutions. Many of the problems that have come up have been 
outside our direct enforcement and supervisory ambit. So it is 
very difficult to have gotten information from, or supervised 
or taken any actions against those who are outside what we 
regulate and supervise.
    Chairman Dodd. So your answer would be that you could not 
have done more and the Fed acted in a timely fashion? Is that 
how I read your answer?
    Mr. Kroszner. Well, as I had said, it is very difficult to 
make policy with 20/20 hindsight, but I think we were taking 
actions on these issues back in 1999, 2001----
    Chairman Dodd. I am not asking you to make policy. I am 
just asking you the question of whether or not you think the 
Fed acted in a timely fashion and could have done more, looking 
back.
    Mr. Kroszner. Looking back, I think we did undertake a lot 
of actions, and unfortunately a lot of the greatest challenges 
occurred outside what we could have done, outside where we 
could have had enforcement or supervision.
    Chairman Dodd. Ms. Duke, the same question.
    Ms. Duke. I think if you look at it in hindsight, clearly 
something different could have been done and had a different 
outcome. And I think this may be a good opportunity to look at 
the whole mortgage origination and delivery process across all 
originators.
    Chairman Dodd. Well, I agree with that. That is why we are 
here.
    Mr. Klane.
    Mr. Klane. I just want to start by noting the sources of 
the subprime problems are complex and go well beyond regulatory 
action or inaction. I would look forward to working with the 
Committee on all elements, including the complexity of so many 
different types of mortgage originators, the multiplicity of 
supervisory agencies, and the role of the securitization 
market. The model of mortgage origination is more complex than 
in the past.
    All that being said, sitting here with hindsight, I think 
we can say very clearly that if the Fed had acted somewhat 
earlier, we might have had to some extent a better outcome.
    Chairman Dodd. Thank you very much.
    Senator Shelby.
    Senator Shelby. I want to pick up on the same subject, 
subprime, because it is my understanding that a lot of the 
subprime loans, a lot of them in the future will be reset at a 
higher rate of interest. Now, if you have thousands and 
thousands--and we do--or billions and billions of dollars' 
worth of subprime loans where they pay nothing down to speak of 
and pay basically interest only for the first 2 years, and then 
they are going to reset those upward in 2 years; I see problems 
down the road, and most people that I have been in contact with 
have.
    Ms. Duke, you have been a president of a bank. You have 
been an executive of a bank. You went through the--you referred 
to it earlier, a lot of us did--21-percent prime. You remember 
that, obviously. A lot of us are concerned about the rating 
agencies here. I hope Senator Dodd will hold a hearing on this. 
We asked the SEC Chairman right here in this Committee the 
other day--because I introduced legislation to bring--and it 
had broad support--to bring competition to our rating agencies. 
We are concerned about conflicts of interest and things like 
that.
    How can you take--you know, the basic question: How can you 
take a bunch of questionable loans, bundle them together, and 
then sell them as securities and rate them investment grade, 
AAA at times, because you put a few things with them? Some of 
those, as we have seen some of our most reputable investment 
banks saying that some of those funds are basically worthless 
now.
    Does that trouble you as a former banker, having to work 
out problems on businesses and mortgage loans? You have had the 
experience.
    Ms. Duke. I have had the experience of working out troubled 
debt. I have had the experience of having that debt mount up a 
lot faster than anybody ever expected. But all of that 
experience was in the case of a lender face to face with the 
borrower. We still held those loans and----
    Senator Shelby. And these were sold, most of them were 
securitized.
    Ms. Duke [continuing]. That is the part that really 
concerns me, is identifying where those loans are right----
    Senator Shelby. Well, somebody is holding the risk there, 
are they not?
    Ms. Duke. Somebody is.
    Senator Shelby. I mean, you spread the risk. You pass it 
on. But somebody is holding that risk, and, gosh, I would hate 
to be the one holding some of that risk knowing that a lot of 
that stuff is going to be reset.
    Mr. Klane, you come out of the banking industry. You 
understand that well, and you understand risk. Somebody is 
going to eat those loans, aren't they?
    Mr. Klane. Well, I think we can see some of the 
implications of that in some of the hedge funds holding CDOs 
and CLOs already. You point out one of the areas of complexity 
that has caused some of these problems--and it is really not 
directly related to, by the way, consumer protection issues. 
You certainly raise a number of important points, and I think 
it also underscores the importance going forward of having 
underwriting criteria that take into account rate reset.
    Senator Shelby. I want to get into Basel II with you, and I 
will start with Dr. Kroszner. We are all concerned about 
capital standards here. We raised that many times, Senator 
Dodd, his predecessor Senator Sarbanes, everybody on this 
Banking Committee, Democrat and Republican. We had a good 
banking system.
    Several of us--Senator Dodd and I--have served on this 
Committee a long time, and we went through the thrift crisis 
right here. We do not want to go through that again in any way. 
Capital brings a cushion, and some of us are concerned where we 
are going with Basel II. Some of those models might work, and 
some of them might not work. I know that some of the big banks 
have told me personally that what is driving that is freeing up 
capital, you know, lowering capital.
    You will be a bank regulator. You will not be the only one, 
and we brought this up with the FDIC and Sheila Bair, the 
Chairman, and others. There is widespread concern. I hope it 
works. I know where you are today. We were glad to see what you 
did, you know, with the other banking regulators. But some of 
us have--we hope Basel II works. But we would hate to see 
problems come before this Committee for the taxpayer like we 
went through with the thrifts because we lowered capital 
standards.
    Do you want to comment on that?
    Mr. Kroszner. Certainly. First, I would like to thank 
Senator Dodd, Senator Shelby, and other Members of the 
Committee who were very helpful in making sure that we got to a 
good outcome, at least in principle, among the regulators to 
move ahead with modernization of the capital standards, the so-
called Basel II. I think it is very important from a safety and 
soundness point of view that we do move ahead with them because 
we must encourage modern risk management techniques.
    The traditional Basel I system was fine 25 years ago, but 
it is not appropriate today for our large institutions. And if 
regulation does not keep up, we will not be maintaining our 
duty to maintain the safety and soundness of the system.
    Basel II has very large numbers of belts and suspenders in 
it to ensure that capital will not fall inappropriately. The 
key----
    Senator Shelby. What do you mean by inappropriately?
    Mr. Kroszner. Relative to risk.
    Senator Shelby. Okay.
    Mr. Kroszner. And so Basel II was very helpful in giving 
incentives for banks and other financial institutions to reduce 
risk. Unfortunately, in the current system, Basel I, there are 
some perverse incentives that could lead banks to take on 
excess risk because the capital charges are not sensitive to 
risk. But moving to a more modern framework, we are giving the 
institutions the right incentive to try to reduce risk. I 
believe that there would be sufficient capital in the system to 
adjust for any of those risks.
    I would never, ever want to subject the financial system, 
the U.S. economy, or the taxpayer to the problems that happened 
in the savings and loan crisis. This is something that I have 
done a lot of research on and have, I think, a very strong 
paper trail on--that we need strong capital in order to have a 
safe and sound banking system. And I believe Basel II will be 
consistent with that, but it will also help us reduce risks in 
that system.
    Senator Shelby. How will this affect the small and medium-
size banks?
    Mr. Kroszner. Well, this is a very important consideration 
that has led us to agree to propose a so-called standardized 
approach for the smaller and medium-size banks, which is 
something that they had requested, and I think will improve the 
risk sensitivity, but also maintain sound capital for those 
institutions and maintain a level, competitive playing field.
    Senator Shelby. Ms. Duke, you come out of the small banks, 
but you also have come out of one of the big holding companies, 
too. If you were a CEO of a small bank in Portsmouth, Virginia, 
now, would you be concerned from Basel II or would you be 
concerned about capital standards? Would you be concerned that 
some of the big banks might have a competitive advantage over, 
say, a community bank?
    Ms. Duke. I think there are a lot of banks of all sizes who 
are wrestling with exactly those issues. Frankly, I think we 
wrestled with them when Basel I was being proposed, and I think 
we are going to have to get some experience with them. The 
concern of the smaller banks is that larger banks will be able 
to hold less capital and that that would make them more 
competitive.
    I suspect that the benefit of the risk management and risk 
measurement practices that are pioneered by the large banks 
with larger resources; will actually ultimately accrue also to 
the smaller banks.
    Senator Shelby. Mr. Klane.
    Mr. Klane. Well, I would like to say I am not expert on the 
technical aspects of the evolving Basel II Accord.
    Senator Shelby. But you have had a lot of experience in the 
banking industry.
    Mr. Klane. Yes, indeed, and I think that having a well-
capialized banking system lies at the very core of the creation 
of the Federal Reserve system. As a banker, I have seen the 
power of being well-capitalized, as opposed to the opposite.
    Senator Shelby. And there are days you are glad you had 
that capital.
    Mr. Klane. Capital is a very handy tool, and I appreciate 
your focus on it.
    Senator Shelby. Put it up there.
    [Laughter.]
    Mr. Klane. I would say that, per our earlier conversation, 
Senator Shelby, the financial system has taken on increasingly 
complex risks, such as the CDOs which have caused such concern. 
We need to ensure that banks and financial institutions 
understand the assets on their balance sheets and that they 
hold capital that is consistent with the risks of those 
assets----
    Senator Shelby. Let me stop you a minute. Who understands 
those complex rules--I mean, this bundling and what they mean 
and all this, the derivatives that come through it today? It is 
very important, Doctor, for the Fed to understand as a bank 
regulator, it is very important for the FDIC to do it, the 
Comptroller of the Currency, the other bank regulators. Am I 
right?
    Mr. Klane. It is absolutely important for them to 
understand it. It is certainly important for financial 
institutions who hold them to understand it. And it is 
important for the regulators to ensure that those financial 
institutions have appropriate risk management frameworks so 
that they can manage the risk that they are taking on daily.
    Senator Shelby. One thing that you and Ms. Duke you bring 
to the Federal Reserve Board of Governors is experience in the 
financial markets. Dr. Kroszner and others are academics. It is 
very important to have them, too, and a little balance. I 
commend the President for nominating you two.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you.
    Before turning to Senator Bunning, all of our guests here 
this morning in the Committee, of course, are distinguished, 
but I wanted to recognize Wade Henderson, who is CEO and 
President of the National Leadership Conference on Civil 
Rights, and we thank him for being here this morning and 
submitting some questions.
    Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman.
    Each of you were in my office, and we had meetings, and I 
stressed the importance of you being an independent voice and 
speaking up when you had something to say in one of the Fed 
meetings. It is especially important for you if you dissent to 
speak up. I mean if you have a reason to dissent. Obviously, 
dissent for the sake of dissenting is not what I am talking 
about. I am talking about if you disagree with the policy that 
is being discussed.
    Can I count on you? You know, it is easy to say before you 
are confirmed, but can I count on you? When I read the minutes 
of the Fed and I see no dissent and I see no disagreement, I am 
saying they have got a bunch of people over there that think 
the same all the time. And that is impossible because I know 
you have disagreements on policy. If you do not, there is 
something the matter.
    Can I count on you before I cast my vote on you to leave 
this Committee and go to the floor and then when I get to the 
floor, before I vote on your nomination? I want to be able to 
count on you to speak out, all of you.
    Mr. Kroszner. Definitely. I think if you were to poll the 
other members of the FOMC, they would certainly say that I have 
not been a shrinking violet either at the formal meetings or in 
informal discussions. That is a part of my background, is to 
speak up, to speak my mind, and if I disagree, to put those 
ideas forward. So you can count on me.
    Senator Bunning. Ms. Duke.
    Ms. Duke. Yes, sir. I think I have a history of speaking my 
mind, and----
    Senator Bunning. Yes, I would imagine you did.
    [Laughter.]
    Mr. Klane. Likewise, Senator, I would absolutely commit to 
bringing all of my points of view forward, and if I dissented, 
not of course just for the sake of dissenting, I would do so 
clearly and would move forward with what I thought was right.
    Senator Bunning. I am going to follow up on the Chairman 
and the Ranking Member on the subprime thing, because this is 
under my skin and under my craw, because this was on a prior 
Chairman's watch. The prior Chairman was kind of looked at as 
God Himself, and no one is God Himself. We all make mistakes. 
Believe me, I know from being here for 21 years how many 
mistakes I have made.
    The Fed has got to see in regulating banks what kind of 
securities and what kind of loans they are making to their 
customers, because by the time the Fed gets to look at the 
banking sheets and when they are regulating them, almost all of 
those loans have been bundled and sold off, and Standard & 
Poor's and Moody's and all the rating systems are rating that 
paper as AAA. And that is what has caused what we have in the 
subprime lending institutions right now. We have paper that is 
useless or worthless because the Fed did not look beyond the 
sheet.
    Now, I asked this question of Chairman Bernanke, and he 
said, ``We did not have any power to do that.'' And I said, 
``Well, you better have power to do it. You better look 
beyond,'' because all of a sudden now we have a crisis, or darn 
close to a crisis. I think it is a crisis. And I lived up here 
through the thrift mess, and we had numerous opportunities 
prior to the mess to clean it up. In fact, President Reagan 
offered a bill prior to the bailout of the thrifts, the year 
before, that was killed by certain Members of the House of 
Representatives because it was going to affect their States 
more dramatically.
    I am going to hold you responsible if you do not look 
beyond the balance sheets and look at what is going on in the 
banking system as far as loans. You, Ms. Duke, as a banker know 
exactly what kind of loans you have made to your customers on 
mortgages. And to accommodate someone for a $400,000 home with 
a mortgage that is not responsible--and that is all I can say, 
it is not responsible. You know, if you loan somebody money or 
if a mortgage company loans somebody money, that they know 5 
years from now that the interest rates may not be the same and 
it has been an interest-only mortgage and now they have got to 
adjust it, we are looking for trouble. So I am asking you to 
look beyond.
    Now, you are going to have to convince Chairman Bernanke 
because he does not think he has the power to look beyond. But 
you as three new members, or one being reappointed and two new 
members, you are going to have to look beyond the balance 
sheets of the banks you regulate to find out what kind of 
mortgages they are dealing with on a daily basis. And we have 
got to stop it because to get it better, we have to stop what 
is happening.
    I know that you have given guidelines and made rules and 
regulations, and hindsight is 20/20 always. But looking into 
the future, we have got to correct the problem.
    Can I count on you to do that? That is another thing, all 
three.
    Mr. Kroszner. Certainly, Senator. As I mentioned before, 
our supervisory and enforcement powers are limited to certain 
depository institutions, but we are now working much more 
closely with the States and with the Federal Trade Commission 
to deal with these problems, to share information, to share 
expertise.
    One of the initiatives that Chairman Bernanke mentioned in 
his testimony before you just a couple of weeks ago was an 
initiative we have spearheaded to work with the State 
supervisors, the Federal Trade Commission, and the other 
Federal banking regulators to do consumer compliance exams in 
non-depository institutions, to be able to reach mortgage 
brokers and finance companies, and to reach others that 
traditionally we had not been able to reach. I think that is 
one very important step. We are trying to get at exactly what 
you are talking about.
    More broadly, we have been working very closely with the 
States--and since I have been at the Fed, I think our 
relationship with the States is as close as it has ever been--
to get them to adopt guidance that we put out. We have had a 
lot of success in working with them to get that. So we are 
trying to expand the scope to be able to make sure that 
wherever the problems are in the system, we can reach out to 
them. And also, as the Chairman had mentioned in his testimony 
2 weeks ago, we expect to be proposing rules that, although not 
enforced by the Fed----
    Senator Bunning. Thank you. I have got a couple more 
questions I want to get in before my time runs out. Thank you 
very much.
    Ms. Duke, when you were Chairman of the American Bankers 
Association, you advocated for many policy positions that could 
come before you at the Fed. Will you be able to view those 
issues in an unbiased manner? And are there any policy 
decisions at the Fed that you think that you should not 
participate in?
    Ms. Duke. Yes, Senator, as Chairman of the American Bankers 
Association for at least 1 year, and for a couple years prior 
to that I was the primary spokesperson and the key listener for 
the association, and you will find that there are a number of 
statements that I have made on the record regarding various 
banking issues.
    The positions taken by the association were the result of a 
lot of discussion and a lot of investigation into various 
regulatory matters, and I think that experience would serve me 
well. But in making any decision as a Governor of the Federal 
Reserve, my only viewpoint would be that of public policy and 
the public interest.
    Senator Bunning. Thank you.
    Mr. Klane, I have got to ask you this one because it is 
very important to the foreign policy of this country. On 
Tuesday, Deutsche Bank announced that it had ended all 
contracts with clients in Iran. Given your experience in the 
management of the Deutsche Bank's Global Division, do you think 
the timing was appropriate? Should the bank have terminated 
their ties with Iran at an earlier date?
    Mr. Klane. Senator Bunning, let me say that when I was at 
Deutsche Bank and in the business that I ran, we had nothing to 
do with Iran. I am not really in a position to comment on the 
rules and regulations and the timing of Deutsche Bank's 
decisions. But I would say that with respect to my being on the 
Board of Governors, if confirmed, I would certainly do whatever 
was necessary to ensure that the institutions which the Federal 
Reserve supervises fully comply with U.S. laws and regulations.
    Senator Bunning. Do you think the Fed has a direct 
involvement in seeing what banks are dealing and not dealing in 
that manner?
    Mr. Klane. Most certainly for the institutions which it 
regulates.
    Senator Bunning. OK. Thank you very much, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Senator Allard.
    Senator Allard. Thank you, Mr. Chairman.
    I am going to change the subject. I have got a few things 
that other Members have not asked, and I will give you a chance 
to respond to those.
    Both former Chairman Greenspan and the current Chairman of 
the Fed Bernanke have expressed concerns about industrial loan 
corporations because they are exempt from the bank holding 
company and, therefore, not subject to the consolidated 
supervisory requirements that other banks and both bank holding 
companies are.
    Do you think corporate owners of ILCs should be brought 
under consolidated supervisory requirements to ensure safety 
and soundness? I will let each one of you respond to that, if 
you would like, please.
    Mr. Kroszner. I do think it is important to maintain the 
safety and soundness of the system that we have consolidated 
supervision of organizations that would be very heavily 
involved in the banking and payment system.
    Senator Allard. Do you want to answer my question more 
directly, as it applies to ILCs, industrial loan companies?
    Mr. Kroszner. I would say it would be the same for an ILC.
    Senator Allard. OK. Ms. Duke.
    Ms. Duke. I think the owners of any banking institution, 
including ILCs, whether it be a corporation or whatever, should 
have Federal supervision on a consolidated basis.
    Senator Allard. Mr. Klane.
    Mr. Klane. I completely agree.
    Senator Allard. OK. Now, the U.S. continues to have a low 
national savings rate, which contributes to our growing current 
account deficit. Again, Chairman Bernanke testified, ``To 
reduce its dependence on foreign capital, the U.S. should take 
action to increase its national savings rate.''
    What suggestions do you have for promoting savings and 
investment among Americans? Does anybody want to comment on 
that? Let me start with Mr. Klane, and then we will go back. 
Governor Kroszner, you always had to start things out, so we 
will give you the last word.
    Mr. Klane. Well, to underscore the importance of your 
point, I think long-term excessive deficits are not a good 
thing, and that increasing the U.S. savings rate over time 
would be good for us now and for future generations. 
Essentially we are borrowing today and will need to re-pay 
later. There is a private component to that, and there is a 
Government component to that. I would hope that we could make 
progress against both aspects of that.
    There are many public policy ideas that come before you and 
your colleagues in the House in order to orient Americans 
toward savings, and I am not here to advocate a particular one, 
but I think the general proposition is important. And I would 
also add that this is an area where general education and 
financial literacy can have a positive impact, not only for an 
individual's ability to look at disclosures, but also for 
broadly understanding their own level of savings and what it 
means for their retirement. This could have a very beneficial 
macroeconomic implication.
    Senator Allard. Ms. Duke.
    Ms. Duke. I am not sure I have an answer for how to improve 
the savings rate. I do think it is important. I do worry 
particularly on an individual basis with the level of savings, 
particularly for those of my generation, the baby boomers, the 
level of savings that will be available to fund retirement and 
that sort of thing.
    As a banker, I have on occasion promoted ideas that would 
encourage savings in banks, but I do not have an answer for 
that right at the moment.
    Senator Allard. Mr. Kroszner.
    Mr. Kroszner. It is certainly a very complicated issue to 
try to understand exactly how to get people to save more. I do 
not have any particular proposal to put forward today, but I do 
think it is important to think about the incentives in the tax 
system, because many analyses that have been done comparing the 
U.S. tax system with other countries suggests that there is 
more of a bias against savings with respect to the tax system 
in the U.S. than there is elsewhere. So I think looking at that 
and whether there are lessons to be learned from other 
countries for tax reform here could potentially be valuable.
    Senator Allard. I want to follow up with some questions on 
the subprime area. Most of the questions, as I have understood 
them, have focused on securitization and how those securities 
get rated and whatnot. But I am wondering if maybe the problem 
is more fundamental about that and that is our exotic loans 
that we kick out there.
    Do we need to do something to prevent exotic loans from 
happening? At one time in our banking system we did not have 
those, at least that I am aware of. And so do we need to do 
something about those exotic loans, or do we--maybe on a 
security we need to have some analysis made as to what 
percentage of the security is exotic loans. I would like to 
have you comment. Ms. Duke, you can go first this time.
    Ms. Duke. The securitization process has really given us a 
lot of benefits, and I worry that sometimes it sounds like we 
are opposed to securitization.
    Senator Allard. I agree, and I support that.
    Ms. Duke. It has given us a ton of benefits, and I think 
now we are seeing probably some of the difficulties in working 
through that.
    Senator Allard. So the question is----
    Ms. Duke. The exotic mortgages?
    Senator Allard. Yes, do we need to--somehow or other, on 
the analysis that maybe that information is already available, 
what percentage of the security is exotic.
    Ms. Duke. I don't know whether that--what percentage is 
available. I don't know whether they are actually packaged 
separately. Some of what are today considered to be exotic 
mortgages in the old world, the nontraditional mortgages, those 
were mortgages that were not made at all, with the exception 
in--directly in the banks, where there was the ability to look 
at the full set of circumstances surrounding the borrowing. And 
so I think there are occasions there are uses for particularly 
the low documentation loans, that sort of thing.
    Senator Allard. But, you know, you have to evaluate the use 
of it versus the benefits, and right now the benefits seem to 
be less than what anybody anticipated. And so I guess it serves 
us----
    Ms. Duke. Well, I think you are right. Any lender is going 
to have to evaluate what the likely losses are on the loan 
before they make the loan or invest in the mortgage.
    Senator Allard. But if we look at today's problem, lenders 
have not done a very good job in doing that.
    Ms. Duke. No, they have not.
    Senator Allard. So what do we do? If they do not do a very 
good job and really perform overall--when you look at it, maybe 
we do not allow for some of these exotic loans.
    Ms. Duke. I think the process is new enough that we have a 
lot to learn about that, and I suspect that there are very few 
of those loans being made right today.
    Senator Allard. Mr. Klane?
    Mr. Klane. Senator Allard, I think you raise related and 
important issues. The first issue concerns innovations. I think 
innovation in lending is a good thing for consumers. It is 
important, though, that these products not become so complex 
that a human being cannot understand them. This is a consumer 
protection and disclosure-related challenge. In addition, 
leading products should be underwritten appropriately and 
delivered to individuals that can afford them.
    These are very important issues, but in dealing with them, 
I would not want to squash innovation. Innovation has greatly 
benefitted many Americans in pursuing their dreams of, in this 
case, homeownership.
    The second part of your question concerns securities which 
commingle loans, some of which may be poorly underwritten and 
others well underwritten; they may contain ``exotic'' products, 
or they may be plain vanilla. I am not an SEC attorney, but I 
believe that is publically traded securitizations, there are 
certainly important disclosure obligations so that investors 
who buy them know what they are getting. These objections 
should be fully and vigorously enforced.
    I think it would be on the whole a bad outcome if all 
innovation in lending were somehow ceased. I think that would 
be a detriment to consumers.
    Senator Allard. Mr. Kroszner.
    Mr. Kroszner. I very much would underscore both what my 
colleagues have said about the importance and value of the 
securitization market for homeownership and having good, solid 
underwriting standards. As you know, we put out guidance last 
year on nontraditional mortgages--I think that is the same as 
you are talking about for some of the more exotic products--
because we wanted to make sure that if they were being used, 
the underwriting standards were appropriate for the person that 
was using them.
    So I think taking an approach of guidance this way and 
also, exactly as Ms. Duke had mentioned, the markets have also 
responded, are ways to deal with some of the challenges in this 
area.
    Senator Allard. A final question. My time is running out 
here. You are all familiar with the strategic plans, annual 
performance plans, annual accountability report, and financial 
statements of the Federal Reserve. Have you had a chance to 
look at those? Are you familiar with those?
    Ms. Duke. I have not.
    Senator Allard. OK. Let's put that aside. What do you 
consider to be the most important priorities and challenges 
facing the Fed as it strives to meet the needs of the American 
people? Mr. Klane.
    Mr. Klane. I think, as in my opening statement, there are 
at least four areas that I highlighted. It is hard to trade 
them all off, but obviously the sound pursuit of monetary 
policy, particularly in the current environment, is critical.
    I began my remarks with consumer protection, I think 
illustrating the importance and the urgency, really, at this 
point in time, of that element. The safety and stability of the 
payment system and continued sound supervision is important. 
And I would not at all dismiss the importance of maintaining a 
safe payment system in the context of changing technology and 
whether it is terrorism or money-laundering activities that 
affect it. We need to get all of these right, and I think these 
are all legitimately critical for the Federal Reserve Board.
    Senator Allard. Ms. Duke.
    Ms. Duke. I think I would agree on those and add to that 
the understanding and perhaps changes in the way we view this 
whole securitization process where there are entities that are 
now facing banking risks that are not indeed bankers.
    Senator Allard. Mr. Kroszner.
    Mr. Kroszner. Certainly maintaining the appropriate balance 
in the dual mandate, to make sure that we have maximum 
employment growth consistent with low and stable inflation, and 
ensuring that inflation expectations remain contained; second, 
as I had said in my opening statement, a fundamental 
responsibility to prevent discriminatory and abusive practices 
in lending; and, third, to ensure the broader stability of the 
banking and financial system.
    Senator Allard. I am one that pushes hard for a lot of 
accountability in our agencies. I do that by reviewing the PART 
program, which has been put out by the President, where they 
set goals and objectives that are measurable. And when you show 
up before any Committee that I might be on, you can usually 
count on the question relating to your agency because I want to 
know how it is performing. I am an appropriator and I serve on 
the Budget Committee. And I think it is important as Members of 
the Congress to focus on accountability and ways of measuring 
it. It helps us better justify to the taxpayer the need for the 
program or the need to eliminate the program because it is--
although I do not think they ever eliminate anything around 
here. But I do think that that is part of our responsibility, 
and you are liable to get some questions from me on that.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    We have been joined by Senator Casey. Senator, thank you 
for being here.

              STATEMENT OF SENATOR ROBERT P. CASEY

    Senator Casey. Mr. Chairman, thank you very much, and I 
appreciate the work that has gone into this hearing and for the 
witnesses who are here and for your service. We appreciate 
that.
    I am one of the sponsors, along with Senator Schumer and 
Senator Brown, of the Borrowers Protection Act, a lot of 
provisions in that legislation. One of them that I wanted to 
ask you about is lender liability. What we are trying to do 
with that act is to respond aggressively and in a timely way to 
the subprime crisis in America for a lot of families who were 
in many cases devastated by policies and practices which, 
frankly, should have been cracked down on a long time ago and 
by the failure of our system to allow people to have the kind 
of information that they need in a very clear and 
understandable way before they sign on the dotted line, so to 
speak.
    So one of the issues that we have focused on is lender 
liability, and I am very concerned about and disturbed by not 
only what has happened in the past up until now in terms of the 
inability of our regulatory apparatus to deal with this, but I 
am also concerned about the kind of dismissive or casual 
reference to the crisis right now, people saying it is 
contained, it is getting better, we are moving in the right 
direction. I do not have that sense at all, and for the 
families devastated, they cannot--you know, alleged containment 
or alleged better policy is not going to help them. And I am 
concerned about the families who are caught already in those 
mortgages that will be reset, but I am also concerned about 
families down the road who will be adversely impacted if we do 
not get this right.
    One of the issues, of course, is what happens with regard 
to lender liability, and I wanted to throw it out to any one of 
the three of you or all of you to comment on strategies to 
protect borrowers and, in particular, the aspect of lender 
liability. Maybe, Mr. Klane, if you could start, and we will go 
right to left.
    Mr. Klane. Well, Senator, I share your concern about the 
subprime mortgages situation from a number of the dimensions 
that you highlight, including just the sheer human cost for 
people who have, unfortunately, found themselves in a bad 
place.
    I think the question of protecting borrowers is important. 
I look forward to reviewing the bill, which I have not yet had 
a chance to. There are many ideas that have been put forth, 
including ideas by the Federal Reserve. I know the Federal 
Reserve is considering these ideas as they think about rule 
writing under HOEPA. I would look forward, if confirmed, to 
throwing my energy behind moving expeditiously in this area.
    With specific respect to lender liability, there are 
important--I am not a lawyer--but there are important 
liabilities that lenders currently have. I think part of what 
you are grappling with is how to extend that liability perhaps 
deeper into the securitization chain.
    It is an extremely complicated question. I have not devoted 
my career to focusing in on that particular one. Extending 
liability could well play a role in solving the situation. But, 
if so, it would have to be done in a way that did not eliminate 
the offering of credit or the vibrancy of the securitization 
markets. And I would look forward to helping find that right 
balance when learning more about the issue.
    Senator Casey. Thank you.
    Ms. Duke.
    Ms. Duke. Senator, I would share your concern, and there 
are a number of factors involved here. One is for the 
originators of mortgages, the original lenders of mortgages, 
and the questions would be, you know: What are the requirements 
for entry into that business? What sort of penalties can we 
enforce against that particular originator? And then the second 
piece is: If that loan is sold into the secondary market, what 
liability would attach to the assignee?
    The difficulty in assignee liability is that, first of all, 
it has to be absolutely evident from the file, anything that 
was a matter of judgment, subject to a matter of judgment after 
the fact would create additional risk and uncertainty and 
probably reduce the availability of credit in that marketplace.
    I think it might be helpful to look to the experience of 
some of the States because I know a number of States have 
grappled with this. Some States I think are very happy with 
their law. I know in Georgia they had strict assignee 
liability, and it actually reduced the availability of credit. 
I do not have the details of what the law was, but I think that 
would be a good place to look to see what issues caused that.
    Senator Casey. Thank you.
    Mr. Kroszner. I would very much agree that it is extremely 
valuable to use the States as a laboratory to see what can be 
effective and what is not, because we want to protect 
consumers, but we also want to make sure that responsible 
borrowers can still get credit to people who can use it 
responsibly.
    I think it is very clear that the challenges that many of 
America's families and households are facing now with respect 
to keeping their homes is one that is going to be with us and 
is probably going to continue to grow for some time. And so I 
sympathize with the view that it is very important to try to 
keep people in their homes, to deal with this issue, which is a 
very important issue.
    One of the things that we have done at the Federal Reserve 
is, with the other agencies, put out a very clear statement 
that lenders and servicers should work with borrowers to try to 
keep people in their homes, to try to restructure the loans to 
keep people there. It is for the benefit of the family, for the 
community, and in almost all cases for the benefit of the 
servicer.
    Senator Casey. Thank you, and even at the risk of 
redundancy, I know that Chairman Dodd and Ranking Member Shelby 
have been very concerned about this issue and have brought this 
issue to the fore in this Committee. And I appreciate the work 
they have done on this issue already.
    But just so we fully amplify this issue, I would ask each 
of you to submit for the record I guess two sets of testimony, 
really: one on the act, the Borrowers Protection Act, your own 
view on that and your analysis of it; and, second, maybe a more 
broader ranging written testimony regarding the subprime crisis 
and how to deal with it. I think that would help us in our 
deliberations.

                Response from Governor Randall Kroszner
        Let me begin by updating you on several recent actions by the 
        Federal Reserve in response to financial market developments. 
        As Chairman Bernanke recently noted, the Federal Reserve, in 
        cooperation with other federal agencies, is closely monitoring 
        these developments and has taken steps to increase liquidity in 
        the markets. In particular, changes to our discount window 
        program are designed to assure depository institutions of the 
        availability of a backstop source of liquidity so that concerns 
        about funding do not constrain them from extending credit and 
        making markets. Also, the Federal Open Market Committee has 
        stated that it is monitoring the situation and is prepared to 
        act as needed to mitigate the adverse effects on the economy 
        arising from the disruptions in financial markets.
        It is crucial to protect consumers from abusive practices while 
        continuing the flow of credit by responsible lenders into the 
        subprime mortgage market, and the Federal Reserve has been 
        active in addressing issues in the mortgage markets. Starting 
        in 1999, the Federal Reserve along with the other federal 
        supervisory agencies issued guidance related to subprime 
        mortgage lending practices and expanded guidance in 2001. In 
        December 2005, we and the other federal supervisory agencies 
        issued proposed Interagency Guidance on Nontraditional Mortgage 
        Product Risks, which was finalized in September 2006. The 
        guidance addresses the need for an institution to have 
        appropriate risk management practices and underwriting 
        standards, including an assessment of a borrower's ability to 
        repay the loan at the fully indexed rate, assuming a fully 
        amortizing repayment schedule, including any balances added 
        through negative amortization. The guidance details recommended 
        practices for lenders' consumer disclosures so that a borrower 
        receives clear, balanced and timely information. In May of this 
        year, the Federal Reserve and the other federal supervisory 
        agencies have also issued similar guidance for subprime 
        mortgages, stressing the same fundamental principles of prudent 
        underwriting and consumer protection.
        Various outreach and research efforts have deepened our 
        understanding of the issues and revealed that many of the most-
        worrisome practices are found in credit extensions by 
        nondepository lenders and brokers, many of which are outside 
        the supervisory scope of the federal banking agencies. To that 
        end, the Board and the other agencies coordinated with the 
        Conference of State Bank Supervisors (CSBS) on the two most 
        recent guidance documents to promote and encourage their rapid 
        adoption beyond federally supervised institutions. The CSBS 
        published nearly identical guidances and has urged the States 
        to implement them in order to ensure a more level playing field 
        in the mortgage market and provide consistent protection of 
        consumers.
        In addition, the Federal Reserve has launched a cooperative 
        pilot project with the CSBS, the Office of Thrift Supervision, 
        the Federal Trade Commission, and the American Association of 
        Residential Mortgage Regulators aimed at expanding consumer 
        protection compliance reviews at selected nondepository lenders 
        with significant subprime mortgage operations. As part of this 
        effort, the Board will examine nonbank subsidiaries of bank 
        holding companies for compliance with federal consumer 
        protection laws, including the Home Ownership and Equity 
        Protection Act (HOEPA). The other partners in the project will 
        conduct similar reviews of nondepository subsidiaries of thrift 
        holding companies, independent mortgage lending companies, and 
        mortgage brokers doing business with these entities. The 
        partner agencies intend to share information about the 
        examinations, review the lessons learned, and seek additional 
        ways to cooperate to ensure effective and consistent 
        supervision of these entities. At the conclusion of the 
        reviews, the agencies will analyze the results and determine 
        whether the project is to be continued and, if so, what the 
        focus of future reviews will be.
        In April of this year, the Board and other federal financial 
        institutions regulatory agencies issued a statement to 
        encourage supervised institutions to work constructively with 
        residential borrowers who are financially unable to make their 
        contractual payment obligations on their home loans. Last week, 
        the Board, the other federal financial regulatory agencies, and 
        the CSBS issued a statement encouraging federally regulated 
        financial institutions and state-supervised entities that 
        service securitized residential mortgages to review the 
        governing documents for securitization trusts to determine the 
        full extent of their authority to identify borrowers at risk of 
        default and pursue appropriate loss mitigation strategies 
        designed to preserve homeownership.
        I share your concerns about the subprime mortgage market and 
        the need to consider actions to stop abuses while preserving 
        access to credit for all borrowers. Your proposed legislation 
        (the Borrower's Protection Act, S. 1299) addresses some of the 
        issues the Board has focused on that may require regulation 
        under the Home Ownership and Equity Protection Act (HOEPA). 
        Those issues include:

            Prepayment penalties,

            Failure to require escrows for taxes and insurance,

            Stated income and low-documentation lending, and

            Failure to give adequate consideration to a 
        borrower's ability to repay a loan.

        In June of this year, I chaired a public hearing at the Board 
        to gather information about how we might use our HOEPA 
        rulemaking authority to address concerns about these loan terms 
        and features. In addition to testimony, the Board received 
        approximately 100 comment letters from the public in response 
        to the topics discussed at the hearing. Board staff are 
        analyzing these letters and the testimony to formulate 
        recommendations for action to the Board. In addition, the Board 
        continues to seek input from consumer and industry groups, the 
        Federal Reserve's Consumer Advisory Council, our fellow 
        regulators, and others who may have useful insights about 
        mortgage lending practices. The Board plans to issue proposed 
        rules under its HOEPA authority before the end of the year.
        I am also pleased to serve as the Federal Reserve's 
        representative on the board of directors of NeighborWorks 
        America, which has a program to encourage borrowers facing 
        mortgage payment difficulties to seek help by making early 
        contact with their lenders, servicers, or trusted counselors. 
        NeighborWorks' Center for Foreclosure Prevention recently 
        launched a national advertising campaign to raise awareness 
        about its 24-hour national hotline that connects struggling 
        borrowers with homeownership counselors. Since the launch of 
        the campaign this past June, the daily call volume has 
        increased almost two-fold from 1,000 to almost 2,000 calls a 
        day.
                                ------                                


                      Response from Larry A. Klane

Reflections on S. 1299
        The proposed Borrower's Protection Act of 2007 addresses many 
        elements of the mortgage market that may have contributed to 
        the current problems, particularly in the subprime mortgage 
        area. In particular, by addressing the duties of brokers and 
        the standards of care and underwriting of originators, the bill 
        centers on two critical issues. Without undertaking an 
        exhaustive analysis of the bill--which is outside my area of 
        expertise--I would, however, make the following points:
        Clarifying the role and responsibility of brokers--in this bill 
        as ``fiduciaries''--is something that could help consumers 
        understand their relationship with these entities. Clarifying 
        and increasing the level of loyalty and duty that the broker 
        provides to the borrower should put borrowers in a better 
        position to obtain appropriate mortgages.
        As the root of the subprime problem is that too many loans were 
        made to borrowers who could not ultimately afford them, 
        improved underwriting standards are clearly necessary. The 
        combination of legislation, good regulation, and market forces 
        needs to come together to ensure that loans are made on the 
        reasonable basis that a borrower can repay the loan. I would 
        also note that strengthening the duties of the broker, as the 
        bill does, may preserve a broader array of consumer choice than 
        by pre-defining ``affordability.''
        While clear disclosures enable a fiduciary to fulfill its duty, 
        the bill does not explicitly raise the issue of disclosures to 
        borrowers. I want to emphasize the importance of disclosures 
        and clear documentation so that borrowers can understand and 
        evaluate the products being considered.
``How to deal with the Subprime Crisis''
        The problems in the subprime mortgage market have many far-
        reaching implications for individual households and 
        communities. The central problem is that too many subprime 
        loans were made to borrowers who could not ultimately afford 
        them. Any solution to this problem will need to address at 
        least two issues: first, helping existing subprime borrowers 
        and communities cope as well as possible with today's 
        situation, and second, creating structural elements to help 
        avoid this problem in the future.
        With regard to the first issue, existing lenders and servicers 
        need, and should be encouraged, to help troubled borrowers to 
        the fullest extent they can. This requires adequate human 
        resources to assist troubled borrowers, and it requires 
        troubled borrowers to communicate with their lenders long 
        before foreclosure is imminent. I support all of the efforts to 
        encourage both of these actions. In this regard, the Federal 
        Reserve Banks, community groups, and financial institutions 
        each have an important role to play in assisting troubled 
        borrowers. I also support the SEC's recent efforts to clarify 
        that where these mortgages are part of a securitization, 
        servicers can make best efforts to modify loans without 
        jeopardizing the treatment of the securitization.
        Creating a more permanent structural solution to avoid a 
        recurrence of problems going forward is a multifaceted 
        challenge. While there are many components, here are a number 
        of issues that I believe are important to address in the 
        subprime mortgage market:

            The fragmented nature of the mortgage broker 
        industry creates challenges both in regulatory oversight and in 
        enforcing standards. Many consumers do not understand that the 
        broker has no fiduciary duty toward them.

            Loans must be reasonably affordable to the 
        borrower. Unaffordable loans should not be made.

            Financially educated consumers are essential to a 
        well-functioning market. Too many current borrowers were not 
        adequately prepared to understand the complexity and 
        appropriateness of their loans' terms.

            Consumer disclosures on mortgage loans should be 
        strengthened and clarified so mortgage brokers can make wise 
        and informed choices.

        While subprime borrowers must be adequately protected, overall 
        success includes reputable lenders willing to extend credit and 
        who have the required expertise in the full credit spectrum. 
        Any solution must be careful to create an environment where 
        reputable institutions are willing to participate in the market 
        and to innovate in order to create products that offer choice 
        to consumers.
                                 ______
                                 
                      Response from Elizabeth Duke
        I share your concern about sub-prime loans and about current 
        conditions in the mortgage market. The discussions held in this 
        nomination hearing have only intensified my desire to delve 
        more deeply into the issues and use my experience as a small 
        business lender to help formulate changes that will have long 
        term benefit for homeownership and the mortgage market in this 
        country.
        I would like to start with some observations about sub-prime 
        lending generally and then comment on your bill.
        First, I would like to emphasize that the growth of the 
        secondary market--with non-traditional lenders making non-
        traditional loans--has resulted in higher levels of home 
        ownership and an opportunity for building wealth in segments of 
        the population that were closed out of traditional mortgage 
        lending. So our challenge here is to reduce the cost in terms 
        of financial difficulty and foreclosure while preserving 
        flexibility and opportunity with mortgage products in the 
        future.
        Chairman Bernanke has discussed with this committee the Federal 
        Reserve's intention to propose rulemaking under HOEPA later 
        this year. New regulations are a good first step, but we must 
        also look to the enforcement of those regulations. We should 
        encourage the joint state and federal regulatory discussions 
        and pilot programs already underway to achieve this end.
        Although banks are participants in the mortgage market, the 
        market has expanded well beyond insured financial institutions. 
        I think it is time to review the entire mortgage marketplace 
        including prime, jumbo, alt-A as well as non-traditional 
        mortgages. It is important that we consider all the players and 
        all the regulators in the marketplace to ensure uniformity 
        across the full spectrum of originators, loan servicers, rating 
        agencies and investors.
        As the mortgage market expanded rapidly in recent years, 
        competition led to breakdowns in risk assessment and risk 
        pricing. Now, concerns about credit risk have caused liquidity 
        to dry up. Consequently, very few loans with high risk features 
        are being made today. Innovation in mortgage lending over the 
        last few years has created loan structures and terms with which 
        there was little experience when the loans were made. In 
        designing the mortgage products of the future, statistical 
        studies of the contribution of various risk features to actual 
        credit loss will be quite helpful to all in assessing and 
        pricing risk. Use of the Federal Reserve research capability to 
        dissect the decisions and conditions that led us to this state 
        could identify changes that can prevent a recurrence.
        Stemming the tide of foreclosures may be the most pressing and 
        the most difficult problem of the day. Foreclosure is the 
        highest cost loan resolution option for the borrower, the 
        lender, and the community. Successful loan work-outs require 
        good communication between the borrower and the lender, and we 
        should do everything possible to facilitate this, including 
        support of trusted third party intermediaries. Workouts also 
        require flexibility to match modifications to individual 
        borrower circumstances. To this end, we should continue to 
        investigate any legal, accounting or structural impediments to 
        loan modifications. And we should be supportive of flexibility 
        and creativity in providing responsible lending to fund 
        restructured loans. We should recognize, however, some 
        foreclosures will need to take place. In cases where there is 
        no possibility of workout, the lender should be able to take 
        responsibility for the property, including taxes and 
        maintenance. The lender will also have the greatest incentive 
        to re-sell the property so it can be reoccupied and the 
        recovered funds can be invested in new loans.
        Your legislation recognizes the immediacy of the current 
        foreclosure problems and indicates the willingness of Congress 
        to provide assistance to state, local and community based 
        groups. Just as all real estate markets are local, so are real 
        estate problems. It will take the commitment of many on the 
        front lines supported by state and federal governments to 
        resolve each loan individually. One way to make more private 
        funds available might be to designate the circumstances under 
        which refinance assistance could qualify for CRA credit.
        Legislation governing mortgage standards and practices must be 
        evaluated in light of the balance between consumer protection 
        and credit availability. As lenders are increasingly separated 
        from originators and borrowers, they will be unwilling to 
        assume risks they can neither assess nor control. In evaluating 
        the balance, I would look to the experience of the states that 
        have already enacted similar legislation. And I would hope we 
        would undertake the study of the full mortgage market that I 
        proposed above and use the information from such a study to 
        guide our regulatory changes impacting this important part of 
        our economy.

    I wanted to move to another issue, the question of referral 
of cases to the Department of Justice under the Equal Credit 
Opportunity Act Amendments of 1976. Here is the record just 
since 2001 in this administration. Since 2001, the Fed has made 
the following referrals: in 2001, the Fed made one referral; in 
2002, six referrals; in 2003, zero referrals; in 2004, three 
referrals; in 2005, two referrals; in 2006, five. So literally 
in those years, in those 6 years, just a handful of referrals. 
And I would ask you to comment on that because one of the 
problems that we often encounter in Government--and I saw this 
in State government, and I have seen a little bit of it in my 
short time in Washington--is it is great to have a law, it is 
great to have a statute or a law and regulations in an agency 
and a budget and all the trappings of what Government can do to 
regulate and to enforce the law. But sometimes when you look 
back at enforcement statistics or, in this case, referral data, 
it tells you a lot about--sometimes it does not really matter 
if the agency or the administration or the public official who 
is running that agency, if that person or that administration, 
so to speak, is not fully committed to the detail in the 
statute to make such referrals, it does not matter whether or 
not you have the power to refer.
    I would ask you to comment on that because you are asking 
for confirmation and you are asking for power, and that is the 
privilege that we all have to exercise that power. I want to 
know how you are going to exercise the power to refer matters 
to the Department of Justice and how you make that 
determination.
    Mr. Klane. Senator Casey, I first of all want to say that 
supporting and enforcing our country's fair lending laws is an 
absolute, critical centerpiece of both the Fed's 
responsibilities and good supervision. I would take this 
responsibility, if confirmed, with the utmost of seriousness.
    I cannot comment on, of course, the Fed's historic record 
or their judgment on individual cases. I can say as a 
practitioning banker two things: one is that in the business 
areas that I am responsible for, I take fair lending laws very 
seriously. Second, I would also say as one supervised by the 
Federal Reserve, I have felt a rather vigorous energy against 
this area. And while I cannot comment on the overall pattern of 
referrals, I can give you at least some assurance that I have 
seen them very actively involved. And I would not hesitate as a 
board member for one moment if, based on fact and good 
analysis, an institution showed a pattern of discrimination, to 
do whatever the law required us to do, including referring it 
to the Department of Justice.
    Senator Casey. Thank you.
    Ms. Duke.
    Ms. Duke. I am not sure I have much to add to that. I have 
been supervised by both the Federal Reserve and the FDIC, and I 
can also attest to their energy in pursuing fair lending and 
examining specific files looking for evidence, patterns of any 
sort of discrimination. And I think that is entirely 
appropriate, and I think that is something that would be our 
responsibility to oversee the supervisory process, to review 
the reporting, and to review the reports of the exams.
    Senator Casey. Do those numbers seem low? I know I am out 
of time. I mean, these are national numbers. This is not one 
community or one State. These are--what is your sense of that?
    Chairman Dodd. You are not out of time. You can continue.
    Ms. Duke. I am not sure that I can comment as far as 
whether or not they seem low. I would say, you know, perhaps 
they might in terms of a big statistical number, but, frankly, 
all of the banks that I am familiar with are putting a lot of 
time and energy into themselves policing what is going on on 
the front lines of the banks. And so I would be surprised if 
there is widespread violation among those banks, because I know 
the amount of resources that are going on inside the banks in 
order to prevent any problems from occurring.
    Senator Casey. Thank you.
    Doctor.
    Mr. Kroszner. I think following on what Ms. Duke has said, 
we have tried in our regulatory, supervisory, and compliance 
processes to be proactive, to ask whether something may not be 
appropriate, and to take remediary action before something 
becomes a systematic pattern or practice. That is why I would 
not overemphasize the particular number of actual referrals 
because a lot of compliance activity does not actually get to 
the referral level.
    But with respect to referrals, as Sandy Braunstein, the 
head of our Consumer and Community Affairs Division, had 
testified before Congress recently just in the first 6 months 
of 2007, we have already made five referrals. So we are active 
in this area, but I would not want to put too much emphasis 
just on the particular numbers because there is a lot of 
remediation that goes on in advance, not only by the Federal 
Reserve, but by the other regulators also.
    Senator Casey. Thank you. It may be lead to more questions 
later, but being a first-year Senator, when you get 2 minutes 
and 47 seconds extra, that is pretty good stuff. Thank you, Mr. 
Chairman.
    [Laughter.]
    Senator Shelby. That is what you call a ``kind Chairman.''
    Chairman Dodd. It will cost you at some point.
    [Laughter.]
    No. In fact, I wanted you to know, Senator, we set that 
time, but before you arrived, I had said this is a loose number 
here. There are not that many of us here.
    And I should point out, by the way, that I want the 
witnesses to know that the fact that there are not as many 
members here is not an indication of their lack of interest. 
But with so many other commitments, wrapping up here in the 
last few days here before the August break, there are 
Committees meeting trying to get legislation out, as well as 
matters on the floor. And I am going to leave the record open 
for several days because I am sure they will have questions 
from both the minority and the majority here. And I would urge 
you to respond to those in an appropriate fashion and time so 
we can have the benefit of your answers to those questions.
    Let me turn to Senator Shelby. I have an additional line of 
questioning I want to follow. We do not really need the clock 
on at this point. Why don't we just conduct this a little more 
informally.
    Senator Shelby. Thank you, Mr. Chairman. I just have an 
observation.
    Dr. Kroszner, you are a member of the Board of Governors. 
You have written extensively. We were very impressed with your 
published articles dealing with finance and monetary policy and 
the economy and so forth.
    It would be my understanding that as Members of the Fed--
and since you are on the Fed--that your top responsibility 
should be price stability, you know, a goal of trying to keep 
our currency strong, trying to make sure that inflation does 
not erode the foundation of our monetary system and destroy our 
economy.
    So I know that Chairman Greenspan and Chairman Bernanke 
have indicated that here, and before that, Senator Dodd and I 
go back a while to Dr. Volcker. You know, so important.
    How important to you as a member of the Fed now and a 
future member of the Fed is price stability, as far as your 
responsibility at the Fed?
    Mr. Kroszner. I think it is crucial to fulfilling our dual 
mandate, because I think the best way to achieve maximum 
employment growth is through low and stable inflation.
    Senator Shelby. That is right.
    Mr. Kroszner. So if we can keep inflation expectations 
contained, if we can keep actual inflation contained, that is a 
very good environment for business people and individuals to be 
making decisions that will maximize prosperity and their 
welfare.
    Senator Shelby. And at times, as a member of the Board of 
Governors of the Federal Reserve, all three of you will have to 
make some tough decisions. I referred to Dr. Volcker, and Ms. 
Duke alluded to that earlier. We were here when interest 
rates--prime went to 21 percent. Is that correct?
    Ms. Duke. Yes, sir.
    Senator Shelby. And there was a crisis in this country, but 
the inflation was rampant. The Fed had to choke it off the best 
they can, and it is not easily done. The best thing is to not 
let inflation get away from you. Is that correct, Dr. Kroszner?
    Mr. Kroszner. Definitely, and this is why we take a very, 
very serious look at inflation, where it is now and also where 
it is going. Because we want to make sure that the path of 
inflation is one that is well contained, the path of inflation 
expectations of what people think is going to happen to 
inflation is contained, because it affects individual's 
business behavior. And we know from research and data from 
around the world that a low and stable environment is the best 
way to maximize prosperity.
    Senator Shelby. You know, you have been nominated to a 14-
year term, the maximum term on the Fed. I think that is one 
reason when we created the Federal Reserve, to make the Fed 
independent so you, all three of you, can make the tough 
decision without regard to the political whims of the moment. 
And I believe you will make them. I think you have to make 
them.
    I wish you well, and I look forward to supporting your 
nominations. I hope Senator Dodd will schedule a markup as soon 
as possible, and we will get you to the Fed and get you to work 
there.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator, as well.
    Let me, if I can, we received some--and we will continue to 
receive correspondence regarding the nominations. I mentioned 
the presence of Wade Henderson, who is here in the room. We 
received a letter from the Leadership Conference on Civil 
Rights, which says that even though it has been aware of the 
prevalence of unfair and deceptive loans for several years, the 
Fed has inexcusably failed to invoke its HOEPA authority in a 
way that would have protected homeowners. And just that point 
that I raised in the first line of questioning is a matter of 
deep concern to me regarding the fact this legislation was 
passed in 1994, and almost nothing happened with it. And so I 
appreciate it.
    There is a line of questioning I want to follow up here 
that relates again to the subprime, and then I have some 
questions as well. This is not the only subject matter, but 
this is a looming economic issue. And, Doctor, you are on the 
Fed today, and obviously with the two nominees before us and 
given the length of service and the importance of this question 
and how the Fed is going to respond to this is a matter of deep 
concern to people all across this country. I cannot go anywhere 
without this issue being raised, as you might expect, anywhere 
in the country, the concerns about it and what has happened.
    I spoke yesterday with a number of mortgage bankers around 
the country just to solicit their opinions as to what they 
thought was happening and what solutions might lay out there 
for us to try and deal with what has--the seizing up of credit 
that is really getting rather dramatic here and could have 
very, very serious implications. That was their opinion, by the 
way, and many of them almost virtually universally in talking 
to people in various parts around the country, from the Far 
West to the Midwest and East that I spoke with.
    We held hearings in this Committee on the problems of the 
subprime market, and they raised some serious concerns about 
the incentive structures. I want to talk about the incentive 
structures in here because they worry me and trouble me because 
they seem to be having a dual set of standards regarding parts 
of our population. I am very worried about that being the case.
    For example, mortgage brokers originate about 75 percent of 
subprime mortgages. They make their money on fees called 
``yield spread premiums,'' which I am sure all three of you are 
very familiar with here. The higher the interest rate they get 
a borrower to take, the higher their fees--a direct correlation 
between the two. Moreover, the more loan volume they generate, 
the more fees they generate as well here.
    The problem is that these yield spreads lead to higher 
interest rates for borrowers, higher interest rates lead to 
prepayment penalties, which are included in the subprime area, 
and as lenders are forced to lock in their higher yield. This 
is a widespread problem. While almost no prime loans have 
prepayment penalties, nearly all subprime loans include them as 
part of their packages.
    I wanted to ask all three of you here, beginning with you, 
Dr. Kroszner, I want to hear how you would address this. I 
think there ought to be a standard here that applies with some 
universality here because it seems to have built into it almost 
designed burdens here that make it clearly the subprime 
market--which, by the way, maybe I should have said this 
earlier, and I am pretty confident I am speaking for almost 
everybody here--I think that is true. Certainly I feel very 
strongly that this is a very, very important element, the 
subprime market in our country. The idea of homeownership and 
the value of the wealth creation associated with that, the 
improvements of neighborhoods and communities, I directly 
correlate to the ability of people to have an equity interest 
in their own home. Nothing does a better job, in my view, to 
stabilize communities and neighborhoods than homeownership. And 
it has been a goal going back to the Truman administration and 
talking about the importance of this. It has been embraced, by 
and large, on a bipartisan basis over the years.
    We also know that if you have one foreclosure in a fragile 
neighborhood, one foreclosure out of an entire one-eighth of a 
mile, which is roughly what a city block is here, the value of 
every other home--every other home in that neighborhood--
declines by $3,000 to $5,000, with one foreclosure. So the 
ripple effects of this are profound and serious, in my view.
    I want to know why we should not here, if we are going to 
have a subprime market, recognize we are going to be extending 
credit to people who are fragile--at least that is the idea in 
terms of their ability economically to address all of these. 
Why are we making it more burdensome for them? And why are we 
allowing brokers out there, in effect, to charge fees in a 
sense or collect fees based on the interest rates they are able 
to sell to people who are less well informed in terms of these 
matters and then have prepayment penalties, of course, which 
even increase the burden financially, thus increasing the 
likelihood of foreclosure, thus increasing the likelihood of 
the very problems we are trying to address? And why shouldn't 
the Fed, I ask the question, take the position here of banning 
prepayment penalties here and have a different system by which 
brokers earn their fees?
    Mr. Kroszner. Well, Senator, I couldn't agree with you more 
about the importance of this problem. There are hundreds of 
thousands of families and households who are facing the 
potential loss of their home, and as I mentioned in my response 
to Senator Casey, that number is probably going to be 
increasing over time. So this is a very, very important problem 
that I know the Chairman and every member of the Federal 
Reserve Board takes extremely seriously.
    I am also very glad that you focused on the issue of 
incentives because, as an economist, I really think of things 
in terms of incentives. I think that is exactly the right way 
to think about things. What were the incentives in the market? 
How can we improve incentives to make sure that responsible 
lenders can continue to provide credit to responsible borrowers 
in this market without having a seizing of credit, without 
choking that credit off?
    As you know, in the subprime mortgage guidance that we just 
put out, we have proposed a 60-day grace period so that there 
would be a minimum of 60 days, a minimum of 2 months, before a 
reset in an adjustable rate mortgage comes. That person would 
not have to pay prepayment penalties and would be able to 
arrange for alternative financing.
    One of the things that we looked at in great detail in the 
HOEPA hearing that I held on June 14th was exactly this issue 
of prepayment penalties. Different States have different 
regulation of them. As I had mentioned before, I think looking 
at the data that have come from the States to understand the 
implications of various restrictions on prepayment penalties 
are important, and this is one of the areas that we are looking 
very seriously at under our HOEPA authority.
    And so I agree that what we can do with the HOEPA 
authority, that we do expect to propose rules by the end of the 
year, to be able to set standards that will apply to all 
brokers to make sure that there are appropriate underwriting 
standards, to think about practices such as prepayment 
penalties, whether they are appropriate or not, and in what 
cases they are not appropriate.
    Chairman Dodd. Let me just share some data with you here, 
and this is from the Home Mortgage Disclosure Act data. The 
Home Mortgage Disclosure Act and the data collection under that 
act found some very serious disparities--alarming disparities, 
in my view--in the incidence of higher-priced subprime lending 
for African Americans and Hispanics in this country. The 2005 
data shows that 54.7 percent of African American borrowers and 
46.1 percent of Hispanic borrowers got high-priced loans when 
buying a home compared to 17.2 percent of non-Hispanic and non-
African American.
    In the Fed's analysis of the data, significant racial and 
ethnic differences remained unexplained even after accounting 
for other information. Reported in the Home Mortgage Disclosure 
Act's data, the Fed found that borrower-related factors 
accounted for only about one-fifth of the disparity.
    Now, in my view, this reveals some very significant 
problems in our mortgage system, a problem that is almost 
certainly reflected in other parts of the financial services 
sector.
    I wonder if you are as alarmed as I am about this data, 
which shows here the disparity in higher-priced mortgages here 
within that community. And I want to know specifically as a 
member of the Board, would you support the elimination of 
prepayment penalties for people in that area? And what ideas 
specifically do you have to change the relationship on how 
brokers collect fees? If they are going to get them based on 
getting higher rates from people, it seems to me that ought not 
to be the consideration in determining whether or not or what 
fee a borrower pays here. Too many of them hold themselves out 
as mentors, as you and I know. You have seen their website, 
which I talked about at earlier hearings, where one of the 
first questions you are asked is tell that borrower you are his 
mentor or her mentor, in a sense. The idea they are mentors, of 
course, is ridiculous. They are not the mentor. They are not 
the advisor. They are out there trying to get those loans here.
    So I want to know with some specificity here, this is very, 
very important to me, to have some assurance and some sense of 
security that if a person is going to be on that Board for 14 
years, how are we going to deal with this issue and whether or 
not you embrace the same view I do here that these ideas are 
just wrong, and they are dangerous, in my view, what it means 
for our country.
    Mr. Kroszner. I very much agree that it is extremely 
important to protect people in these markets, and we have to 
protect them against abusive practices. And exactly as you said 
before, there are incentives in the market that I do not think 
many borrowers are aware of because I do not think that we have 
sufficient disclosure to the borrowers about some of these 
practices.
    I think many borrowers think exactly as you describe, that 
the particular broker may be acting in their interest, but that 
is not in many cases the case. They are acting in the interest 
of maximizing their profits, which, as you said, may be related 
to charging the borrower more, not getting the best deal for 
the borrower.
    So I think one important thing that we need to do is make 
the consumers more aware of who is the broker working for and 
the incentives that the broker----
    Chairman Dodd. Doesn't it need to go beyond disclosure, 
though, in your view? I know you advocate disclosure. I do not 
disagree. Disclosure is very important. I do not minimize your 
point on that. I agree with you totally. But it seems to me 
that more than disclosure is required. Shouldn't the broker 
have to declare either I am the agent for the lender or I am 
the agent for the borrower here, it seems me.
    Mr. Kroszner. Well, I do not want to get into the details 
of exactly what to----
    Chairman Dodd. Well, I do. I do.
    Mr. Kroszner [continuing]. Disclose.
    Chairman Dodd. I am interested in details on this.
    Mr. Kroszner. Certainly, these are exactly the kinds of 
things that we are looking at in developing our HOEPA rules, 
and we are still reviewing those. That is why I do not want to 
commit to particular details. But obviously thinking about 
exactly these kinds of issues, about disclosing who is the 
person working for and what those incentives are. And I 
completely agree with you about thinking about the role of 
prepayment penalties. This is exactly what we were discussing 
at the HOEPA hearing. What kind of incentives do they create? 
Are they something, as some people have argued, that can help 
to reduce costs to borrowers, or are they something that really 
are abusive or abusively used against borrowers?
    So that is why we are looking at the data from the 
individual States which have different regulations, talking 
with consumer groups, talking with a number of others to try to 
understand how best to respond to this problem. Because as you 
said, we do not want credit to seize up. We want to make sure 
that the American dream can still be reached by many, many 
people who may not have the same length of credit histories or 
may have more fragile credit histories. So we want to make sure 
that responsible lending continues there, but we want to 
prevent abusive practices.
    Chairman Dodd. Let me come back to that.
    Ms. Duke, I will not repeat the questions. You have got a 
flavor of where I come out on this thing here. It is very 
important to me here. These are long terms here on the Federal 
Reserve. This is going to be a major issue, and I want to get 
some sense of where you are on these issues.
    Ms. Duke. Senator, I agree with you about the concern, and 
it is something that I am a little frustrated about, in that 
right now I only can answer this question in the light of my 
own experience.
    Chairman Dodd. I agree.
    Ms. Duke. I am anxious to get to the point--would be 
anxious to have available to me the research capability of the 
Federal Reserve. I think also the reserve bank structure, which 
goes into all parts of our country, is another great asset of 
the Fed in order to really examine the entire process.
    Chairman Dodd. Do these numbers I cited to you here 
regarding people who are getting high-priced loans, the 
disparity, does that concern you?
    Ms. Duke. It concerns me, and it concerned me when those 
numbers first came out. And, again, I would very much like to 
delve into the research and information on all of the various 
reasons why those numbers would be different, whether they are 
in the origination structure, whether they are in the incentive 
structure, whether they are in the way that companies market 
mortgage loans. I would really like to have the chance to take 
a look at all of those----
    Chairman Dodd. How about prepayment penalties? How do you 
feel about that?
    Ms. Duke. On prepayment penalties, I agree with the 
guidance that a borrower should have a period of time before a 
rate changes in order to make a decision to do something 
different. My familiarity with prepayment penalties in the past 
has historically been when the lender had made a rate 
commitment to the borrower and wanted to make sure that that 
money stayed invested for a given period of time.
    Chairman Dodd. Why is there a distinction----
    Ms. Duke. But in a situation where the price is changing--
--
    Chairman Dodd. For a prime loan, you do not have prepayment 
penalties.
    Ms. Duke. Right.
    Chairman Dodd. A subprime you do. Why the distinction?
    Ms. Duke. I do not know.
    Chairman Dodd. Well, you have been in this--you chaired the 
ABA. You must have some idea.
    Ms. Duke. I do not know why the prepayment penalties have--
--
    Chairman Dodd. Dr. Kroszner, why would you have a 
distinction between a prime and a subprime loan and requiring a 
prepayment penalty for the subprime and not for the prime?
    Mr. Kroszner. My understanding is--and I certainly do not 
speak with certainty on this--is because of concerns about 
rapid prepayment of some of these types of instruments, to be 
able to get what some people have argued, to get lower interest 
rates, to be able to securitize them, the prepayment penalties 
were helpful to be able to get them into the securities, to be 
able to get them out to the market. But I have not evaluated 
that.
    Chairman Dodd. Doesn't it seem inherently contradictory? A 
subprime borrower is a borrower who does not qualify for a 
prime loan, so obviously their financial situation is more 
fragile. So we are going to have a prepayment penalty on them 
here, thus increasing the more difficult problem of meeting 
their obligations. It seems to me just to be counterintuitive 
unless you have some other purpose in mind here that you would 
have that distinction between a prime loan and a subprime loan.
    Mr. Kroszner. What some people have argued--and, again, I 
have not evaluated this--is that there may be more frequency of 
prepayments, more frequency of moving from one home to another, 
and so this provides some form of protection for the people who 
are buying the securitized mortgages, and so that allows a 
lower initial interest rate to be provided.
    I have not evaluated that argument, so I do not know how 
important or extensive that is.
    Chairman Dodd. Let me ask Mr. Klane. I have been focusing 
here, but you have heard my line of questioning here. Why don't 
you respond to what I have been raising?
    Mr. Klane. Chairman Dodd, let me build on two important 
things that you said, if I may. The first has to do with the 
importance of the issue. I want to provide some perspective on 
the issue, from where I sit, that is not often introduced, but 
underscores this Committee's concern.
    Sometimes we think of the subprime population as a marginal 
element of the United States, and I did a little research on 
the topic. There is no bright-line definition of a ``subprime 
borrower.'' And a subprime borrower is different from a 
subprime loan. Within financial institutions and regulators, a 
good starting point is to define a subprime borrower as someone 
who has a FICO score, Fair Isaac--it is a credit score--of 660 
and below. That is just a starting point, and there is lots of 
grayness. And I asked the question: What percent of people in 
America have 660 FICO scores and below? The answer to that 
question is 30 percent.
    In the housing market, sometimes loans with FICO scores of 
620 and below are considered subprime. Again, these are gray 
areas. There is 20 percent of Americans with FICO scores of 620 
and below.
    But if you think of either number, 20 or 30 percent of our 
population that is affected and captured in the scope of, the 
spirit of the conversation, I think it underscores why it 
affects so many of the constituencies and communities that all 
of you serve and that we as bankers serve. And I just want to 
say, as part of my record, how significant I think that is, 
just as a sheer piece of the American public.
    The second topic concerns the fragmentation of the mortgage 
banking system, which makes actually fixing it very difficult. 
There is no one regulator, no one bullet, I believe, that will 
fix it. But it is fragmentation--75 percent of volume generated 
by brokers, virtually none of whom would be supervised directly 
by an institution like the Fed--that gives particularly 
important weight to the rule-writing capabilities under HOEPA, 
which do have an advantage of affecting all participants in the 
mortgage market, whether or not the Federal Reserve directly 
supervises them.
    So I think the focus that you have encouraged and that the 
Fed is now showing by its commitment to rule writing under 
HOEPA is important to create a national standard. Of course, 
because it affects everyone, it needs to be done with care. You 
do not want to create more harm than good. But I think a 
national standard against a very fragmented, problematic area 
is a good start.
    I have looked at the letter from the Leadership Conference 
on Civil Rights, and I think there are very many important 
elements of concern that are raised there. I think there are 
legitimate concerns with the use of prepayment penalties, for 
that matter. That being said, I would also want to throw 
myself, if confirmed, into this debate. I would want to benefit 
from a much broader conversation that I could have as an 
individual consumer or from my own personal banking experience, 
to work with the Committee and the other Governors to come up 
with a good, strong, appropriate set of rules which would cover 
and include prepayment penalties as appropriate.
    Chairman Dodd. There are two areas here--and Senator Shelby 
has talked about one of them in particular, and I agree with 
him on it, and that is the credit rating agency and the broker 
side. If I had to pick two areas, it seems to me, that the 
Committee ought to be looking at potentially and legislatively, 
as well as really examining what more--and we just, of course, 
dealt with the credit rating agencies about a year ago here--
thanks to Senator Shelby, by the way, who pursued that 
aggressively. Looking back at it, maybe now that we know more, 
maybe we should have done more in a sense, and I don't know 
whether he agrees with that at all or not, but it is something 
I want to look at.
    Senator Shelby. Competition.
    Chairman Dodd. Well, something out there. The fees driven 
again, anecdotally, I am told--and I would not want to suggest 
this is based on any empirical data, but anecdotally, when you 
get--someone suggested to me the other day that as much as 60 
percent of the fees collected by the credit rating agencies 
have come specifically from the secondary mortgage market. And 
if that is true lately here, then you wonder how these AAA 
ratings occurred here. The obvious question arises, whether or 
not the fees were driving the conclusions on rates.
    Now, again, it is anecdotal. I am not suggesting that is 
some data we collected here on the Committee that I would 
require, but there is enough people out there talking about it 
that it raises some very legitimate concerns.
    Before I turn to Senator Shelby, and then I have some 
additional questions here, let me ask you, because in my 
conversations with a lot of these mortgage bankers around the 
country, soliciting their sort of opinions on various things, 
several have suggested--and I probably ought to address this to 
you, Doctor, although the rest of you can comment on it as 
well. Several have suggested that the seizing up here warrants 
allowing the--that Fannie and Freddie should play a helpful 
role at this particular juncture in restoring the flow of 
credit to the sector. Obviously, there are consumer issues that 
need to be addressed, and we are dealing with GSEs, and we have 
got to deal with that legislation. But the idea that Fannie and 
Freddie would be able to have some credit flow into this market 
might do something right now to deal with what you have 
described and I have described as seizing up, and they 
described yesterday.
    Now, again, this was their conclusions here. I just want to 
share with you in my conversations yesterday what several of 
them said to me they thought might be a valuable move to be 
made at this particular point. What is your reaction to that?
    Mr. Kroszner. Well, obviously that is a very important 
issue that is part of the GSE debate as to what is the 
particular role of the GSEs and how can they be focused on 
providing affordable housing. So I think that is certainly 
something to seriously consider, what sort of role they could 
play.
    Chairman Dodd. I know that. I am talking about right now 
whether or not, you know, encouraging, having the 
administration encouraging--I realize we have got some 
legislation to deal overall with GSEs, but right now, given the 
role that Freddie and Fannie can play here about having them 
have extend some additional credit here to lighten up or to at 
least release some of the seizure.
    Mr. Kroszner. Well, there may be some issues with respect 
to the particular rules and regulations that they are operating 
under, and so I want to say only with respect to that that they 
have to be consistent with the regulations that are there. But 
if they could be helpful in this area, I think it would be very 
valuable----
    Chairman Dodd. Do you think they could be?
    Mr. Kroszner [continuing]. To focus them on this mission. 
There has been some debate about what the legal requirements 
and restrictions are on their portfolio.
    Chairman Dodd. I just want to know what do you think.
    Mr. Kroszner. I think it could be helpful to have them 
focus on affordable housing more than they have been.
    Chairman Dodd. Do any of you have any opinion on this? Ms. 
Duke or Mr. Klane? No? OK.
    Senator Shelby.
    Senator Shelby. I want to get back to subprime because I 
think subprime loans in the markets are very important. Very 
important. It has always been my understanding--I used to do 
some of this--that you price risk. You price risk. You have 
prime loans. You have investment grade this and bonds. You are 
pricing risk, are you not, in a sense?
    Mr. Kroszner. Definitely.
    Senator Shelby. And you cannot take risk out of a market. 
There is always going to be risk.
    I think that you, as the Fed, as a regulator, ought to do 
everything you can, and the other agencies, to make sure that 
fraud and sharp dealings and all this kind of stuff, taking 
advantage of people, is eliminated as much as we can. Senator 
Dodd and I are very much interested in that. But I do not think 
you can take risk out of the marketplace, and when people 
borrow money, that is a risk for all of us, whether we have a 
high credit rating and a lot of income or marginal. We have 
promoted homeownership, and we think that is very important in 
this country. In some areas, maybe we have overpromoted it. I 
do not know that. It is a question that some of your academic 
friends will be studying because that is important, too, and 
where we come down on that or not.
    As far as prepayment penalties, Senator Dodd, I know myself 
personally and I knew professionally that in a lot of 
commercial loans where they sell these--they securitize, that 
they have prepayment penalties because they are selling those 
bonds based on that this will be a certain payout.
    Am I correct on that, Ms. Duke?
    Ms. Duke. Yes.
    Senator Shelby. So the subprime market is not the only area 
where you have prepayment penalties. I have seen a lot of very 
high-priced loans--I mean, not risky loans with a good interest 
rate that have prepayment penalties. Haven't you?
    Ms. Duke. Yes.
    Senator Shelby. OK. But I think there ought to be fairness 
out there in the market. I agree with Senator Dodd on that, and 
you as a regulator too ought to look at that because we need to 
cut that out. We do not need a marketplace where people are 
taken advantage of or the risks are not fully explained and the 
people that are doing that maybe have incentives the wrong way.
    Incentives make the market work, and without incentives, 
the market will never work. But I guess there are incentives 
and then there are incentives. And how do we get there?
    Senator Dodd, that is all I have.
    Chairman Dodd. Well, thank you, Senator Shelby, and I 
appreciate that point on the prepayment penalties. My point was 
we do not have them in prime and we do in subprime, and that is 
my concern here. I understand the----
    Senator Shelby. Excuse me a minute. We do have prepayment 
penalties in prime loans--I mean, in very quality blue-chip 
loans. I know we do.
    Ms. Duke. On the commercial side.
    Chairman Dodd. Commercial side.
    Senator Shelby. That is right.
    Chairman Dodd. But not in the mortgage area. That is my 
point here.
    Senator Shelby. OK.
    Chairman Dodd. It is the very constituency that is, 
arguably, more fragile, or they would not be in the subprime. 
Yes, that is my point here. Again, we are dealing with a 
constituency here that the fact they are subprime lender, we 
automatically--that is a recognition that they are in a more 
delicate position financially than others. And so my concern is 
here that we are adding--well, I have made the point. It is 
adding to their financial burden at a time we are trying to 
keep them in--it is one thing to get a person in a house. If 
you cannot keep them in there, then, of course, the ripple 
effects are what concern me here, which becomes very, very 
valuable.
    Let me, if I can, raise just a few other questions, if I 
can. Ms. Duke, as Chairwoman of the American Bankers 
Association, you wrote a regular column for the ABA journal, 
and you wrote a column entitled ``Singing the Regulatory 
Blues,'' in which you discuss Sarbanes-Oxley, the FACT Act, the 
PATRIOT Act, the Gramm-Leach-Bliley Act, and you stated, and I 
quote, ``The goal, as Jane Byrne, the Center's Director, put 
it, is to roll back regulation.'' But what specific regulations 
do you think ought to be rolled back?
    Ms. Duke. Senator, there is not any one particular 
regulation that causes the burden in banking. It is the 
combination of all of the regulation. I would really talk about 
two examples. One would be the BSA regulations, which there the 
issue with the banks is as much the uncertainty of some of the 
requirements as it is the specifics of the requirements.
    The other area I would highlight would be in the payments 
area. The payment system has changed over the years, and as 
each new form of payment came through, whether it was ATMs or 
debit cards, now Check 21, each one carries with it its own set 
of regulations and its own process for collection, its own 
process for return. And when you put all of those together, it 
is very difficult from the banking side to really predict what 
the impact of that regulation is going to be on any given 
payment, much less from the consumer side, and in some cases 
they do not even know where the payment--what path that payment 
has taken.
    And so when we talk about regulatory burden, it is the sum 
total of that burden more than it is any specific regulation.
    Chairman Dodd. I appreciate that. I am not going to argue 
with you, obviously, but this is something we ought to look at 
all the time here to determine whether or not things we have 
done are doing the job we want them do. I just get concerned 
when you--we sweep with the broad brush in here without some 
specificity.
    So it might be helpful to the Committee that you give us 
maybe some additional ideas in response to the written 
questions in this area. I would be interested in knowing. I am 
not trying to pin you down here, in this kind of a setting 
here, to those specifics. But in the next few weeks if you 
would let us know specifically what you have in mind, I would 
be appreciative.
    Ms. Duke. Senator, if I could, none of that would preclude 
me, as a regulator, from proposing and enforcing a new 
regulation whenever it was warranted.

        I would first like to recognize the ongoing efforts of many to 
        reduce and streamline our existing regulatory framework. The 
        regulatory agencies have been engaged individually and 
        collaboratively in reviewing existing regulations. This 
        committee put much thought and effort into the regulatory 
        relief bill that passed last year. The SEC and PCAOB have been 
        engaged in an ongoing effort to reduce the burden of Sarbanes-
        Oxley Section 404 while retaining investor protection. I doubt 
        that a year passes without at least one hearing in this 
        committee related to regulatory burden.
        And I would like to reiterate my earlier pledge that if I am 
        confirmed, nothing would preclude me from proposing, enforcing 
        or voting in favor of any regulation.
        The cost of regulatory compliance has concerned bankers for as 
        long as I have been in banking. It would be an easy fix if we 
        could all point to one especially burdensome regulation as the 
        source of the problem. Unfortunately, it is the sum of many 
        different regulations that create the overall burden. When I 
        was a community banker, I thought small banks had the true 
        burden because we had such limited resources. When FDICA 
        passed, the number of implementing regulations exceeded the 
        number of employees in my bank by 2. When I was with larger 
        banks, I realized that the compliance task was equally 
        difficult, primarily due to operational complexity and long 
        lines of communication.
        Numerous studies have attempted to quantify regulatory 
        compliance costs. However, in recent years, the discussion has 
        turned from purely cost to regulatory risk and uncertainty. 
        I'll offer a few examples.
        Smaller banks, in particular, struggled with Sarbanes-Oxley 
        Section 404 compliance. And many who were not required to 
        comply under the law felt examiner pressure to comply anyway.
        The expanded anti-money laundering responsibilities created by 
        the Patriot Act have elevated regulatory risk. All banks are 
        committed to detecting and reporting suspicious activity, but 
        few banks are certain they know how to do so adequately. One 
        area where banks are particularly uncertain is in the servicing 
        of money service businesses. As business types are identified 
        as high risk, banks that feel unable to monitor the risk at a 
        reasonable cost are stopping service to those businesses.
        Finally, I mentioned payment system regulation in my testimony. 
        Electronic payments are coming of age, surpassing paper 
        payments in the last few years as the payment of choice. Check 
        21 and ACH conversion promise to accelerate this change. As 
        each payment method has evolved, so has its body of regulation. 
        The result is a complicated tangle of forward collection and 
        return rules and timetables. If they are confusing to bankers, 
        they must be even more confusing to consumers. The Federal 
        Reserve System is at the heart of the payment system in this 
        country. If confirmed, I would like to devote time to studying 
        the regulations and procedures surrounding payments with the 
        goal of proposing changes that would make the payment system 
        more efficient, understandable and predictable.

    Chairman Dodd. I appreciate you saying that, as well. That 
is not a bad comment to make at this point.
    Mr. Klane, you were just talking here about the FICO 
standards here in terms of people's creditworthiness. I note 
here, and let me ask you the question and have you respond to 
it.
    Capital One has come under some scrutiny and received some 
criticism for refusing to report consumers' credit limits on 
their credit cards, which can artificially depress, some argue, 
customer's FICO scores. This issue rose during the Committee's 
consideration of the Fair Credit Reporting Act reauthorization. 
Critics allege that Capital One was gaming the system by 
deliberately depressing the consumers' credit scores to gain 
competitive advantage by making its own customers appear to be 
greater credit risks and therefore less likely to receive 
marketing offers with more favorable terms from competitors.
    In June of this year the U.S. District Court for South 
Carolina allowed a lawsuit which alleged that the credit 
bureau's violation of the Fair Credit Reporting Act for failing 
to obtain that information to proceed.
    As I understand it last month the company announced that it 
would be reversing its policies in this regard. Critics raise 
concern about this practice in light of the cross-marketing 
practices, arguing that the company benefited from marketing 
products such as its home equity lines of credit to its 
customers who scores the company had depressed.
    I wonder if you might share with us any involvement you had 
in establishing? Why did Capital One decide to change its 
credit limit reporting? Do you believe that critics who suggest 
that a failure to report credit limits do depress consumers' 
credit scoring? Are they wrong in doing so? And what do you 
believe its effect on consumers for failing to report their 
credit limits? And should the Board consider prohibiting this 
practice?
    There is a lot of questions there and we will repeat them 
if you want.
    Mr. Klane. No thank you.
    First of all, let me say that I do not run Capital One's 
domestic credit card business. So in that regard, it is very 
difficult for me to comment on practices in a very particular 
area, let alone a singular practice.
    And of course, I am not here to represent Capital One. I 
am, of course, here as a private citizen looking to perform 
public service in the context of the responsibilities that 
Congress has laid out to the Federal Reserve Board. I would be 
very honored to do so.
    As you rightly note, Capital One as an institution, I also 
learned, has changed its policy with respect to this. The 
rationale for having done this practice, as I understand it--
again I am not responsible for the policy--had less to do with 
the items listed in the accusation than a belief that the 
credit line is a sensitive piece of information and the 
interplay between credit risk and credit line assignment is a 
legitimate competitive issue to be kept proprietary. The value 
of that I am not here to establish.
    In any case, taking all of these points into account, the 
institution decided, as you note, to change its policy. And 
therefore, it is no longer a current issue. But I do not have 
responsibility for that unit, Senator.
    Chairman Dodd. Should the Board, in your view, would you 
recommend as a member of the Board supporting prohibiting this 
kind of a practice from occurring?
    Mr. Klane. I would approach all of the questions that come 
to the Board with absolute integrity and objectivity and in 
order to fulfill the mandate set before it, always keeping in 
mind the point of view of the public interest.
    There are many practices, we have discussed many today, in 
mortgage which are not good practices. I would look forward to 
the opportunity, if confirmed to the Board, to take stock of 
the particular practice that you have highlighted, which I am 
not an expert on, as well as others and determine what 
regulatory perspective--whether rule writing, guidance, or 
supervisory influence--would be appropriate. I would take that 
as a very important element of being on the Board.
    Frankly, I think that my experience in banking, knowledge 
of consumers in a practical way, complements the existing Board 
expertise. I can assure you the consciousness with which I 
bring consumer interest with the roughly 10 million small 
businesses and consumers that I serve is very, very important. 
And I think it would be helpful to the Board's overall 
deliberation. In any case, my energy would very much be against 
these type of issues.
    Chairman Dodd. I am informed by my staff here that--and 
they raise the issue here and I will raise it with you--that as 
I understood it, you did run the home-equity loan shop at 
Capital One.
    Mr. Klane. I run Capital One Home Loans but that is not----
    Chairman Dodd. Their point is that--which did the cross-
marketing and therefore benefitted from the withholding of the 
information. How do you respond to that?
    Mr. Klane. Capital One Home Loans markets to Capital One 
customers. Capital One Home Loans also markets to the general 
public through advertising and other ways. All consumers who 
wish to apply for a loan have access to it.
    Chairman Dodd. But if, in fact, their credit rating under 
FICO were such that competitors would be less interested in 
them as customers is that not--aren't you advantaged to some 
degree as a result?
    Mr. Klane. I do not see why that would be the case, 
Senator.
    Chairman Dodd. Let me raise the issue quickly with you, as 
well, about Regulation Z, and again to you, Doctor, as well. I 
have been impressed that over the last number of months, as a 
result of the work of Senator Shelby and myself and others 
here, and having hearings on the credit card industry and some 
of their practices that some have changed, clearly. The 
universal default, double cycle billing, a number of other 
matters here have--major companies have changed, anyway.
    Obviously, I have a concern that these things can move back 
and forth, depending on where people are and a position to have 
some influence on these practices. My concern is that once 
those who care about these elements are no longer in a position 
to do much about it, the practices can return unless there are 
some clear rules.
    I am told that there are some $20 billion in fees that have 
increased in the last 20 years in the credit card industry as a 
result of additional provisions that have been added to this. 
Again, I am a great advocate of credit cards. Do not 
misunderstand me. I think they are a wonderful and very helpful 
to a lot of people.
    But I have been very concerned about again capturing and 
holding people. There was a story the other day, I do not know 
if you saw this thing, Dick, where some guy had 2,000 credit 
cards shipped to him. Obviously a rare case but nonetheless 
some indication of the consumer frustration with this issue and 
what happens.
    So I would be interested if you have any comments or ideas 
on the credit card, the Regulation Z area, and the decision by 
the Board to take up this matter? And specifically what 
suggestions you would make to the Board to prohibit certain 
activities, which again I point out are being stopped by major 
companies, the ones who allow for minimum monthly payments, 
obviously.
    Mr. Klane. If I may, while I do not run Capitol One's U.S. 
credit card division, I am very aware of the broader set of 
issues.
    I would also like to start out by saying that I share, as a 
consumer and as a broad industry participant, the very 
legitimate concerns that this Committee and others have had 
with respect to practices throughout lending but including 
credit cards. I see a number of practices there that I would 
regard as bad practices.
    I would say there is some important progress being made and 
I point to two things, both of which you have referred to, 
Senator. One is this Committee itself, just by bringing focus 
on the issue, has given some incentive--we have spoken about 
incentive structures--to a number of issuers to change 
practices I think for the better of the consumer. I would 
applaud the work of you and the Committee in that regard.
    With respect to Reg Z and truth in lending, this is the 
first revision since, I believe, 1981. The world has changed 
tremendously since that point in time. I have been rather 
impressed with the ambition, and to some extent of the length, 
of the change in the disclosure regime. Of course, it is in a 
comment period now. I am very encouraged by the Federal 
Reserve's work there.
    I also want to emphasize one element that I think is quite 
right-minded. And that is they have adopted a consumer 
perspective. I have worked in consumer finance for many years. 
And it is quite extraordinary, on the altar of doing something 
clearer for the consumer, how much gets done that is unclear or 
burdensome in its structure or length. Of course, Senator 
Schumer, came forward years ago with the concept of a ``Schumer 
box.''
    The Federal Reserve has done consumer research to actually 
see how consumers absorb information and what is the most 
important information. That spirit is reflected in Reg Z. I 
think that is a great direction.
    If confirmed to the Board, I would be very eager to apply 
my experience to absorbing the comments that are being received 
and putting out final guidance, final rules. Also, I would note 
this is just one of three parts of the Truth-in-Lending 
revision. This is the revolving open-ended credit part. We 
still have fixed term loans that is installment loans to see. I 
believe they will also be approaching mortgage lending.
    I agree that disclosure is an enormously important element. 
Well disclosed practices can help lead to a free and vibrant 
market, which can yield great outcomes for consumers. But it 
may not be enough and certain practices in and of themselves 
might be just bad and legitimately banned. That goes far beyond 
disclosure, something that has to be taken with great care 
because you can, to my earlier comment, potentially do more 
harm than good.
    But I would like to say to you and Senator Shelby and the 
rest of the Committee that if confirmed to the Board I do not 
walk in with some religious belief that disclosure is the end 
of what needs to be done in all lending, let alone credit 
cards. If certain practices should or ought to be banned, upon 
reflection, receiving comments, that would yield good and 
better outcomes, I would certainly, as a Board member, be open 
to that Senator.
    Chairman Dodd. Let me, because we have only about 10 
minutes left on a vote here and I have had you sitting here for 
a long time already this morning. You said something that 
provokes a question that I will ask you and then have you 
submit an answer to us here.
    I mentioned two practices. You suggested, at least I heard 
you suggest, there may be additional practices than the ones I 
have mentioned, the universal default and double cycle billing, 
that run that, in your mind, as ones that are offensive or 
wrong and should probably be banned or treated differently than 
they presently are.
    I would be very interested in having you expand on that 
answer, if you think there are additional areas that would 
certainly warrant our attention, whether it is disclosure or 
some further action necessary. I would be interested in that.
    Mr. Klane. I would be delighted to.

        I would like to highlight two specific practices and two more 
        general areas in credit card lending where I have concerns.
        On the specific practices, as we discussed in the hearing, I 
        share the Committee's concern with ``universal default'' and 
        double-cycle billing. It is encouraging that a number of 
        issuers who engaged in these practices have recently changed 
        their approach, but to the extent some industry participants 
        continue these practices, I remain concerned.
        In addition, I believe that current credit card disclosures are 
        not adequate. This is the first of the two more general areas I 
        want to address. The complexity of current disclosures, along 
        with the difficulty in using them to focus on the most 
        consumer-relevant terms and conditions, leave consumers 
        inadequately equipped to make informed choices among products 
        and issuers. Disclosures must be made clearer and more 
        consumer-relevant. In this regard, I am highly encouraged by 
        the on-going work of the Federal Reserve in its efforts to 
        revise Regulation Z. The use of consumer focus groups and the 
        explicit effort to create simpler and more comprehensible 
        disclosures is a strong step in the right direction. These 
        proposed regulations are out for public comment, and I look 
        forward to the Federal Reserve's finalizing them. Once they are 
        final, we will be able to judge, after some experience, whether 
        further adjustments, amendments, or expansions need to be made.
        My second general area of my concern is penalty repricing of 
        accounts, which occurs when a customer breaks one or more of 
        the rules embodied in the credit card contract's terms and 
        conditions. While it is legitimate in general for an issuer to 
        be able to change the price of credit on open-ended lines to 
        customers who demonstrate higher levels of riskiness through 
        such rule breaks, I am concerned about:

            insufficient disclosures and/or notices to 
        consumers on repricing actions (e.g., initially when receiving 
        the card, at the moment of rule break, and at the moment of 
        repricing);

            the inclusion of multiple repricing rules that can 
        be triggered by a single infraction; and

            the options available to consumers who have 
        experienced repricing (e.g., the ability to return to the prior 
        rate based on good performance over time or the ability to pay 
        off the existing balance at the prior rate over some time 
        frame).

          The Federal Reserve's proposed revisions to Regulation Z, 
        including the 45-day notice provision, address some aspects of 
        the concerns I have outlined. However, the general area of 
        repricing deserves continued attention to ensure that consumers 
        are adequately protected and able to make good decisions on 
        their use of credit cards.

    The weight of what is on my mind is the disclosures that--
--
    Chairman Dodd. One of the things that concerns me here is 
the amount of consumer debt in the country. We are talking 
about, I think if my members are right here, someone mentioned 
the other day, I think I saw this, something $9,300 is the 
average revolving debt of a household in the United States. And 
that is mostly credit card debt, I presume here.
    And of course, a savings rate that is negative in the 
country, at a time when we ought to be incentivizing savings, 
it seems to me, and trying to do what we can to reduce the 
level of consumer debt.
    Much of it is, of course--and today, with the bankruptcy 
laws having been changed, the ability for people to find some 
relief and move on here is obviously making life much more 
difficult for people.
    Quickly, Dr. Kroszner, do you have any--I want to know what 
your reaction to this is?
    Mr. Kroszner. I think very much along the lines of what my 
colleague, Mr. Klane, has said--one of the things that we have 
really tried to do is make disclosure effective. This is a 
basic principle I have been teaching in business school for 16 
years to do some basic consumer testing.
    We have a great responsibility that you have given us to 
regulate disclosure. I do not think we had used that as 
effectively as we could have in the past because we had not 
asked consumers what is useful to them, what do they need to 
know, what is helpful to them.
    So we have really tried to get at that. And I think the new 
proposal that we have out there which much more clearly 
explains penalty rates, much more clearly explains what 
potential things could happen as they have different credit 
events.
    And in addition and importantly, give them 45 days to be 
able to search for an alternative credit card or alternative 
source of credit, if they are going to be facing some sort of 
penalty rate, is something that will be very helpful in making 
it much less likely for some of these practices to come back.
    Chairman Dodd. Very good. Any further questions?
    Senator Shelby. No.
    Chairman Dodd. I have kept you a long time here. Again, I 
appreciate your willingness to serve. Let me say I think that 
is very, very important and I congratulate you on being 
nominated. It is a high honor, obviously.
    As I pointed out earlier, these are terms of office that 
are only exceeded by Federal judges and the Comptroller 
General--not that the both of you are necessarily having the 
length of term that Dr. Kroszner is being offered here with a 
14-year term. But obviously, tremendously important.
    The Federal Reserve Board's influence on the ability of our 
economy to grow and to expand and to create opportunity for 
people is just so very important. Obviously these issues we 
have talked about here, there are many other issues to talk 
about when discussing the role of the Fed. But the ones that 
are so important to many Americans today, the issue of subprime 
lending and what happens with credit cards and the like has 
obviously provoked a lot of questions here today because of the 
importance of those issues.
    And so I thank you for your willingness to serve. I commend 
you for that. That is admirable in my view and we do not 
celebrate public service enough, in my view, in this country. 
And so I thank you for doing that.
    Senator Shelby. Senator Dodd, since they are all here, we 
know that tomorrow we will be getting out of here and we will 
be back the day after Labor Day, I guess. But do you have any 
idea when you might hold a markup on these nominations?
    Chairman Dodd. No, not yet.
    Committee adjourned. Thank you.
    [Whereupon, at 12:02 p.m., the hearing was adjourned.]
    [Prepared statements, biographical sketches of the 
nominees, and responses to written questions supplied for the 
record follows:]

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RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN DODD FROM RANDALL S. 
                            KROSZNER

Q.1. Dr. Kroszner, at your confirmation hearing on August 2nd I 
asked you about the possibility of a spillover from the 
problems in the subprime market into the market in general and 
the broader economy. You responded: ``I think that at this 
stage the economic fundamentals are really unchanged from where 
Chairman Bernanke talked about them here in this Committee 
about 2 weeks ago, and so we have not seen an effect on the 
broader real economy.'' Five days later you voted at the FOMC 
meeting to keep interest rates constant and voted for a 
statement that did not directly mention the house market and 
reiterated that the Fed's primary concern was inflation, not 
slow economic growth.
    Two days later the market began a serious decline which 
caused the Fed's Federal Open Market Committee, on which you 
serve, to issue the following statement: ``Financial market 
conditions have deteriorated, and tighter credit conditions and 
increased uncertainty have the potential to restrain economic 
growth going forward. . . . To promote the restoration of 
orderly conditions in financial markets, the Federal Reserve 
Board approved temporary changes to its primary credit discount 
window facility.'' The FOMC also acted to reduce interest rates 
at the discount window by 50 basis points. You voted in favor 
of the action and statements. Dr. Kroszner can you explain your 
testimony on August 2nd with your votes on August 17th? What 
changed between your testimony and the Federal Reserve's 
statements?

A.1. Financial market conditions have been volatile since early 
summer and at times markets have been under significant strain. 
Those strains eventually became sufficiently intense that the 
Federal Reserve concluded that they posed a significant risk to 
economic growth.
    Let me provide additional background. The statement 
released after the August 7, 2007, FOMC meeting noted that 
``Financial markets have been volatile in recent weeks, credit 
conditions have become tighter for some households and 
businesses, and the housing correction is ongoing.'' The 
statement went on to note that, partly as a result of these 
developments, ``. . . the downside risks to growth have 
increased somewhat.'' However, the minutes of that meeting 
indicated that, while the downside risks to growth had 
increased, ``. . . Committee members again agreed that 
maintaining the existing stance of policy at this meeting was 
likely to be consistent with the overall economy expanding at a 
moderate pace over coming quarters and inflation pressures 
moderating over time.'' In the days following the August 7 
meeting, conditions in financial markets deteriorated swiftly 
and sharply. Conditions in various money markets both in the 
United States and abroad became impaired, with overnight and 
term interest rates moving up sharply. Conditions in secondary 
mortgage markets also worsened, with adverse implications for 
mortgage credit availability, and various other financial 
markets also deteriorated. In light of these developments, the 
FOMC issued the statement referenced in the question. In 
addition, the Federal Reserve took a number of additional 
actions in mid-August to increase the availability of 
liquidity. More recently, the Federal Reserve reduced the 
target federal funds rate and the primary credit discount rate 
by \1/2\ percentage point each on September 18, 2007. As noted 
in the associated statement, those actions were ``intended to 
help forestall some of the adverse effects on the broader 
economy that might otherwise arise from the disruptions in 
financial markets and to promote moderate growth over time.'' 
Most recently, the FOMC reduced both the funds rate and the 
primary credit rate a further \1/4\ percentage point to ``help 
forestall some of the adverse effects on the broader economy 
that might otherwise arise from the disruptions in financial 
markets. . . .''

Q.2. Do you still believe that we have not seen an effect on 
the broader economy from the problems in subprime mortgages? If 
so, how do you explain the market problems that led to the 
Fed's action? If not, how could your statement before this 
Committee at your nomination hearing be proven incorrect so 
quickly?

A.2. Since the time of my appearance before the Committee in 
early August, we have received a great deal of additional 
economic data about macroeconomic activity, and the impact of 
the problems in subprime mortgages is still uncertain; for 
example, real economic growth in the third quarter was 
estimated to be 3.9 percent and the economy added 166,000 jobs 
in October. Stresses continue in parts of the mortgage and 
financial markets, however, and we will continue to assess the 
potential effects on broader economic prospects.
    Still, around the second week in August--about a week 
following my testimony before your Committee--conditions in 
financial markets deteriorated sharply further. That 
deterioration caused the Federal Reserve to reappraise the 
macroeconomic situation and led the Federal Open Market 
Committee to issue a statement on August 17 with the assessment 
that the downside risks to growth had increased appreciably. At 
its meeting on September 18, the Committee judged that 
macroeconomic developments warranted a half-percentage-point 
reduction in the federal funds rate, consistent with the 
pursuit of the price stability and maximum sustainable 
employment. In his remarks at the Federal Reserve Bank of 
Kansas City's Economic Symposium on August 31, Chairman 
Bernanke described the developments that had taken place in 
financial markets in the immediately preceding weeks. A notable 
aspect of those developments has been the speed with which they 
have occurred. In response, the Federal Reserve has acted 
promptly and forcefully.

Q.3. Dr. Kroszner, can you share with the Committee your views 
on the separation between banking and commerce? Specifically, 
what are your views on Industrial Loan Companies?

A.3. Congress has, for a variety of reasons, sought to maintain 
a separation between banking and commerce in the United States. 
And there is no doubt that our financial system remains the 
envy of the world--competitive, innovative, and resilient. 
Nevertheless, the question of whether continuing the nation's 
policy on the mixing of banking and commerce might help or 
hinder the U.S. financial system and economy as we move further 
into the 21st century seems worthy of consideration.
    A large body of economic research discusses and attempts to 
quantify the costs and benefits associated with mixing banking 
and commerce. Most of this research deals with bank ownership 
of commercial firms rather than commercial ownership of banks. 
In addition, much of the existing empirical research is based 
upon the experiences of other countries, whose financial 
markets, legal institutions and corporate cultures, which have 
developed over the course of centuries, are often quite 
different from those in the United States. As a result, this 
research has limited value in terms of predicting the likely 
effects of permitting greater mixing of banking and commerce in 
the United States. Furthermore, the existing literature does 
not provide a clear consensus as to whether the overall 
benefits associated with greater mixing of banking and commerce 
outweigh the costs.
    While the literature on this issue is mixed, it is clear 
that permitting broad mixing of banking and commerce would be a 
significant shift in policy and one that could have significant 
structural implications for the financial markets and the 
economy. That is why I believe it is important for Congress to 
fully consider both the benefits and costs of mixing of banking 
and commerce before making any major changes in this area. It 
is also one of the reasons why I and my fellow Board members 
have urged Congress to review the exemption in current law that 
permits any type of firm, including a commercial firm, to 
acquire an FDIC-insured industrial loan company (ILC). The 
continued growth in both the number and size of ILCs controlled 
by commercial firms under this special exception threatens to 
remove from Congress the important decision on whether broad 
mixing of banking and commerce should, or should not, be 
permitted. The special exception for ILCs in current law also 
has the potential to undermine other important policy 
objectives established by Congress, such as the proper 
supervisory and regulatory framework for organizations that 
control an insured bank in the United States and for foreign 
banks that seek to enter the banking business in the United 
States.

Q.4. Dr. Kroszner, in response to a question at your 
confirmation hearing on your conduct at FOMC meetings you said: 
``I think if you were to poll the other members of the FOMC, I 
think they would certainly say that I have not been a shrinking 
violet either at the formal meetings or in informal 
discussions.'' However, you have never cast a vote in dissent 
of an FOMC action during your time on as a Fed Governor. Can 
you give the Committee several examples of times that you were 
not a `shrinking violet'? Specifically, on what occasions do 
you think your opinion moved the consensus of the Board to a 
different outcome?

A.4. At the University of Chicago, where I have been a 
professor for many years, it becomes second-nature to state 
one's views clearly, forcefully, and to the extent possible 
supported with empirical evidence. I have fully brought this 
approach to my activity at the Board and the FOMC. I am active 
in the discussions with the Chairman and with other members of 
the Board and FOMC both prior to the meetings and during the 
FOMC meetings themselves. Although it would not be appropriate 
to describe the specifics from such discussions, since they are 
intended to be confidential, I believe that such interactions 
have helped to shape policy decisions and the manner in which 
those decisions have been communicated. In particular, given my 
role as chair of the oversight committee on banking supervision 
and regulation, I provide assessments of the banking and 
financial services industries that I believe other members of 
the FOMC find valuable in reaching their decisions. While it's 
not possible to know whether any member's comments have changed 
a consensus opinion, I have no doubt that my comments have been 
helpful to my fellow committee members and helped inform the 
consensus eventually reached.

Q.5. Dr. Kroszner, in response to a question at your 
confirmation hearing on tax policy you stated, ``I do think it 
is important to think about the incentives in the tax system, 
because many analyses that have been done comparing the U.S. 
tax system with other countries suggests that there is more of 
a bias against savings with respect to the tax system in the 
U.S. than there is elsewhere. So I think looking at that and 
looking at if there are lessons from other countries that can 
be learned for tax reform here could potentially be valuable.'' 
Can you please elaborate on this point and inform the Committee 
which tax policies you think the U.S. should consider adopting 
from other nations? In your analysis can you please include a 
rough estimate of the net fiscal impact of these tax changes on 
gross federal revenue?

A.5. Recent reports by the Department of the Treasury (Business 
Taxation and Global Competitiveness, 2007) and by the 
Congressional Budget Office (Corporate Income Tax Rates: 
International Comparisons, 2005) have shown that the United 
States has the second highest statutory corporate tax rate 
among both the G7 and the OECD countries. If the international 
comparison is performed using ``effective'' corporate tax rates 
(for equity-financed investment) the United States ranks as the 
fourth highest among both the G7 and the OECD countries. 
(``Effective'' corporate tax rates take account of additional 
features of corporate tax structures--particularly depreciation 
allowances--along with statutory corporate tax rates.) Even 
though the ranking of the United States is less unfavorable on 
an ``effective'' tax basis, many economists have suggested that 
the U.S. corporate tax structure be improved to encourage 
investment and raise the after-tax return to saving.
    Overall (that is, taking account of both corporate and 
individual taxes), the United States relies more heavily on 
income taxes and less on consumption-based taxes than do most 
OECD countries (OECD, Fundamental Tax Reform: An International 
Perspective, 2005). Some studies suggest that shifting the mix 
of taxes toward consumption-based taxes could increase national 
saving (see, for example, JCT, Tax Modeling Project and 1997 
Tax Symposium Papers). Other studies point to ways in which 
even an income-based (as opposed to a consumption-based) system 
could be made to be more encouraging of saving (see, for 
example, Treasury, A Summary of the Dynamic Analysis of the Tax 
Reform Options Prepared for the President's Advisory Panel on 
Federal Tax Reform, 2006).
    Ultimately, the effect of changes in the structure of the 
tax system on revenue collections would depend on the details 
of the policy change. Generally speaking, any framework could 
be designed to raise revenues relative to the status quo, to be 
revenue-neutral, or to reduce revenues, depending on the 
setting of key parameters such as tax rates and what is 
included in the tax base.

Q.6. Dr. Kroszner you served on the President's Council of 
Economic Advisors from 2001 through 2003. During your service 
you were involved in advising the President on many economic 
policies, including those that lead to the basis for many of 
the Bush tax cuts. Do you favor making the Bush tax cuts 
permanent? Do you believe that the estate tax should be 
permanently repealed? Do you think that the Bush tax cuts of 
2003 increased or decreased total federal revenue?

A.6. As a member of the Federal Reserve Board, I have avoided 
taking a position on specific questions of fiscal policy and 
have instead attempted to articulate the principles that I 
think most economists would agree are important for the long-
term health of the economy and for helping fiscal policy to 
contribute as much as possible to that health. With regard to 
taxes, I subscribe entirely to the following principles laid 
out by Chairman Bernanke earlier this year in testimony before 
the House Budget Committee (February 28, 2007):

        In the end, the fundamental decision that the Congress, the 
        Administration, and the American people must confront is how 
        large a share of the nation's economic resources to devote to 
        federal government programs, including transfer programs such 
        as Social Security, Medicare, and Medicaid. Crucially, whatever 
        size of government is chosen, tax rates must ultimately be set 
        at a level sufficient to achieve an appropriate balance of 
        spending and revenues in the long run. Thus, members of the 
        Congress who put special emphasis on keeping tax rates low must 
        accept that low tax rates can be sustained only if outlays, 
        including those on entitlements, are kept low as well. 
        Likewise, members who favor a more expansive role of the 
        government, including relatively more-generous benefits 
        payments, must recognize the burden imposed by the additional 
        taxes needed to pay for the higher spending, a burden that 
        includes not only the resources transferred from the private 
        sector but also any adverse economic incentives associated with 
        higher tax rates.

    The consensus view among economists is that tax cuts reduce 
revenue, on net. These effects are smaller than simple, 
``static'' calculations would indicate because tax reductions 
stimulate additional economic activity. However, even though 
some of the revenue that would be shown as lost under a static 
calculation is recouped, not all of it is.

Q.7. Dr. Kroszner, in your appearance before the Committee, you 
stated that you are a strong believer in the Fed's dual mandate 
for maximum employment and price stability. Are there 
approximate figures for the nation's unemployment rate and 
inflation rate that match what you believe to be maximum 
employment and price stability? If so, can you share what those 
are?

A.7. I have avoided giving an estimate of the sustainable level 
of the unemployment rate. There are two main reasons for my 
reluctance to take that step. First, economic theory strongly 
suggests--and empirical evidence corroborates--that the 
sustainable level of the unemployment rate is not constant over 
time, but is influenced by a variety of forces at work in the 
economy. For example, during the late 1990s, when the 
underlying or structural rate of productivity growth was 
picking up, the evidence suggests that a lower level of 
unemployment could be sustained, for a time, consistent with 
stable inflation. Because the sustainable unemployment rate is 
influenced by other factors, the Federal Reserve must always be 
alert to changes in such factors and must communicate to the 
public that it does not regard the sustainable rate of 
unemployment as a constant but as something that must be 
inferred, that likely changes over time, and that can be 
estimated at any given moment only with considerable 
imprecision. Articulating a specific estimate would risk 
suggesting that the sustainable rate of unemployment is a 
constant and is precisely knowable, neither of which is true. 
The second reason not to give an estimate of this variable is 
that such an estimate might be misconstrued as a commitment to 
achieving that specific rate of unemployment. In fact, one of 
the most important lessons of the past thirty years or so is 
that while central banks can and should work hard to smooth the 
fluctuations in real activity and to achieve high levels of 
employment, they should not pre-commit to delivering on 
specified levels of the unemployment rate. Central banks must 
accept whatever sustainable unemployment rate the economy 
generates, and must optimize the conduct of their policy given 
that circumstance; no matter how much they might like to do so, 
they cannot deliver a lower unemployment rate over the 
intermediate-to-long run without causing the economy to 
overheat and, thus, inflation pressures to build. An inflation 
objective is, in principle, quite different, because it can be 
chosen and deliberately pursued, and the central bank can be 
held accountable for failure to achieve it on average, over 
time. There are serious arguments on both sides of whether the 
Federal Reserve should articulate a specific numerical 
inflation objective. Because, as you know, those arguments are 
currently under discussion by the Federal Open Market 
Committee, I think it best for me not to express a view on the 
issue.

Q.8. Dr. Kroszner can you inform the Committee of any periods 
in American history where you believe that maximum employment 
was not being reached or that price stability was not achieved? 
During those periods, what actions do you believe the Fed 
should have undertaken to achieve its mandate?

A.8. For a long period of time beginning around the mid-1960s 
and ending earlier this decade, price stability was not 
achieved. The consensus view of macroeconomists is that prior 
to 1979, the Federal Reserve ran a monetary policy that was too 
expansionary and that allowed the inflation rate to rise to 
very damaging levels. Beginning under Chairman Volcker, the Fed 
then had to engage in a long-term effort to bring inflation 
down to levels consistent with a functional definition of price 
stability. Similarly, during periods of recession and the 
immediate aftermath thereof, maximum employment has not been 
achieved. At all times, under the dual mandate given to the 
Federal Reserve by the Congress, the Fed must strike a balance 
between the two legs of its dual mandate. Empirical evidence 
consistently shows that since the early-to-mid-1980s, the Fed 
has systematically reacted to economic weakness by running a 
more expansionary policy than would otherwise be appropriate, 
and has reacted to high inflation by running a more restrictive 
policy than would otherwise be appropriate. This systematic 
behavior has been an important underlying component of the much 
more successful conduct of policy since 1979 than during the 
period before then.

Q.9. Dr. Kroszner at your confirmation hearing, you discussed 
the State's role in consumer protection, stating: ``I would 
very much agree that it is extremely valuable to use the States 
as a laboratory to see what can be effective and what is not 
effective, because we want to protect consumers, but we also 
want to make sure that responsible borrowers can still get 
credit to people who can use it responsibly.'' Given this 
position, do you agree or disagree with the policy of 
preemption that the OCC has undertaken?

A.9. The principle of preemption is a judicial doctrine that is 
grounded in the Supremacy Clause of the U.S. Constitution. 
Ultimately, whether a state law is preempted by a federal law 
turns on whether Congress, in enacting the federal law, 
intended the federal law to supersede and preempt the state 
law. The Supreme Court has developed several standards for 
assisting the courts in determining whether Congress expressly 
or implicitly intended a federal law to preempt a state law. 
Recently, the Supreme Court reviewed certain aspects of the 
preemption rules issued by the Office of the Comptroller of the 
Currency and found that these rules were consistent with 
Congress' intent in enacting the National Bank Act. Because 
preemption ultimately involves questions of Congressional 
intent and application of the legal principles established by 
the Supreme Court under the Supremacy Clause, I believe the 
issue of whether a federal law or a federal agency's rules 
preempt state law is one that is best addressed by the Congress 
and the courts.

Q.10. Dr. Kroszner, when asked about the low number of referral 
of cases by the Fed to the Department of Justice under the 
Equal Credit Opportunity Act Amendments of 1976, during the 
height of the subprime mortgage market problems over the past 
few years, you stated: ``Just in 2007, just in the first 6 
months, we have already had five referrals. So we are active in 
this area.'' Do you believe that in the first half of 2007 
there were only 5 cases in America that merited referral to the 
Justice Department? Do you believe the same to be true in 2006 
when the Fed only referred five cases for the entire year? If 
not, can you please explain to the Committee why the Fed has 
referred such few cases?
    During your time as Governor, you have taken a lead role in 
the areas of consumer protection and the mortgage market. What 
has been the resource allocation within the Fed to consumer 
protection and specifically to referring cases under the Equal 
Credit Opportunity Act Amendments of 1976? What has been the 
change in the resources allocated to this issue over the last 
five years (please provide this information on an annual 
basis).

A.10. The Federal Reserve has a long-standing commitment to 
ensuring that every bank it supervises complies fully with the 
federal fair lending laws, namely the Equal Credit Opportunity 
Act (ECOA) and the Fair Housing Act. Fair lending is an 
integral part of every consumer compliance examination we 
conduct. When conducting fair lending examinations, our 
consumer compliance examiners perform two distinct functions. 
First, examiners evaluate the bank's overall fair lending 
compliance program. In essence, examiners make sure that 
management is committed to fair lending and has put in place 
the appropriate systems, policies, and staff to prevent 
violations. If an institution's staff or systems fall short, 
examiners direct the institution to take corrective action. 
Second, examiners determine if the bank has violated the fair 
lending laws. To that end, they review lending policies and 
practices to make sure they are not discriminatory. Examiners 
also test the institution's actual lending record for specific 
types of discrimination, such as underwriting discrimination in 
consumer loans, or pricing discrimination in mortgage or 
automobile lending.
    Because the Federal Reserve requires the state-member banks 
it supervises to devote significant resources to fair lending 
and because we examine them routinely for fair lending 
compliance, we expect fair lending violations--especially those 
involving a pattern or practice of discrimination--to be rare 
among the banks we supervise. Our experience has been that such 
violations are indeed rare, but when they occur, we do not 
hesitate to take strong action. If we have reason to believe 
that there is a pattern or practice of discrimination under 
ECOA, the Board has a statutory responsibility under that Act 
to refer the matter to Department of Justice (DOJ), which 
reviews the referral and decides if further investigation is 
warranted. A DOJ investigation may result in a public civil 
enforcement action or settlement. As I mentioned in my 
testimony, in the first six months of this year alone, we 
referred five institutions after concluding that we had reason 
to believe that they had engaged in a pattern or practice of 
discrimination. Last year, we referred four institutions. If a 
fair lending violation does not constitute a pattern or 
practice, the Federal Reserve makes sure that the bank remedies 
it. From 2004 through 2006, we cited approximately sixty banks 
for such violations involving discrimination on a prohibited 
basis under ECOA. Our fair lending findings and referrals only 
pertain to the banks that we supervise, which are a subset of 
the overall market. Thus, our findings of fair lending 
violations are not a measure of the number of fair lending 
violations in the entire market.
    You also ask about the resources dedicated to consumer 
protection over the past five years. As of June 30, 2007, the 
Federal Reserve Banks employed 287 professional personnel 
dedicated to consumer compliance supervision. The number of 
staff dedicated to consumer compliance supervision varies over 
time in response to changes in the number and complexity of 
state member banks that we supervise. Note that since 2002, the 
number of state member banks, including large complex banks, 
has generally declined. In 2002, there were 950 state member 
banks and of those 18 had over $1 billion in assets. In June 
2006, there were 888 state member banks and of those 8 had over 
$1 billion in assets.
    The following is a table showing the number of professional 
personnel, including examiners, dedicated to consumer 
compliance supervision at the Reserve Banks since 2002. 
Consumer compliance examiners assess compliance with fair 
lending, as well as other consumer protection statutes. Thus, 
it is not possible to separately measure staffing dedicated to 
the referral of matters under the Equal Credit Opportunity Act.

                                                 RESERVE BANK STAFFING DEDICATED TO CONSUMER COMPLIANCE
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     December 2002    December 2003    December 2004    December 2005    December 2006      June 2007
--------------------------------------------------------------------------------------------------------------------------------------------------------
Staff.............................................              300              292              279              269              274              287
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In addition to Reserve Bank staffing, the Board has a Fair 
Lending Enforcement Section, which brings additional expertise 
to the examination process and ensures that fair lending laws 
are enforced consistently and rigorously throughout the Federal 
Reserve System. Many other Board staff members, such as 
oversight analysts and attorneys, also regularly work on fair 
lending matters.

Q.11. Dr. Kroszner, at your confirmation hearing you stated: 
``I think the best way to achieve maximum employment growth is 
through low and stable inflation.'' Do you believe that the Fed 
should implement an explicit target (or target range) for 
inflation to best achieve this goal?

A.11. As I noted earlier, there are serious arguments on both 
sides of this question. Because, as you know, those arguments 
are currently under discussion by the Federal Open Market 
Committee, I think it best for me not to express a view on the 
issue.

Q.12. Dr. Kroszner, at your confirmation hearing you discussed 
the value of low inflation, concluding: ``we know from research 
and data from around the world that a low and stable 
environment is the best way to maximize prosperity.'' Over the 
last five years the American economy has enjoyed a period or 
remarkably low and stable inflation. Do you believe that the 
economy has maximized prosperity over the last five years?

A.12. I believe that, by pursuing the dual mandate of price 
stability and maximum sustainable employment, the Federal 
Reserve did indeed maximize its contribution to general 
prosperity during the past five years. Indeed, over the last 
five years, the growth of real GDP in the United States 
averaged 2.9 percent at an annual rate. More generally, the 
U.S. economy demonstrated remarkable resilience in the past 
several years in the face of very substantial shocks including 
the tragic attacks on 9/11, corporate governance scandals, 
financial crises in Latin America, and huge swings in the price 
of imported crude oil. I have no doubt that the Fed's policy of 
maintaining low and stable inflation helped support this 
resilience.

Q.13. Dr. Kroszner, at your confirmation hearing I was very 
pleased that you agreed with me in a question about practices 
in the subprime mortgage market when you stated: ``it is 
extremely important to protect people in these markets, and we 
have to protect them against abusive practices.'' What specific 
abusive practices do you think the Fed has failed to protect 
individuals against?

A.13. When the Board saw problems in the parts of the market we 
supervise and examine, we took strong action by issuing 
guidance with other regulators. We first issued guidance on 
subprime lending in 1999 and again in 2001. When problems 
surfaced concerning nontraditional mortgages, we issued 
guidance on those. The guidance addressed both underwriting and 
consumer protection principles, including marketing practices. 
Then we immediately turned our attention to the subprime 
markets, especially the hybrid arms, developing substantially 
similar guidance for those markets. The guidance addressed 
several issues, including underwriting standards used to 
qualify borrowers for subprime hybrid ARMs.
    We share the concerns of Congress that certain lending 
practices may have led to the problems we are seeing in the 
subprime market today. We plan to propose rules under our HOEPA 
authority by the end of this year that would apply to subprime 
loans offered by all mortgage lenders. We are looking closely 
at practices such as prepayment penalties, failure to offer 
escrow accounts for taxes and insurance, stated-income and low-
documentation lending, and the failure to give adequate 
consideration to a borrower's ability to repay. I chaired a 
full day hearing in June on these practices that yielded 
valuable insight from both industry and consumer groups. The 
Board also solicited written comments from the public on the 
practices discussed at the hearing. The Board received nearly 
100 comment letters, and staff is closely examining the issues 
raised and discussing possible remedies.

Q.14. Dr. Kroszner, at your confirmation hearing, we discussed 
the question of why there are pre-payment penalties for 
subprime residential mortgages but not for prime residential 
mortgages. At the hearing, you stated: ``What some people have 
argued--and, again, I have not evaluates this--is that there 
may be more frequency of prepayments, more frequency of moving 
from one home to another, and so this provides some form of 
protection for the people who are buying the securitized 
mortgages, and so that allows a lower initial interest rate to 
be provided. I have not evaluated that argument, so I do not 
know how important or extensive that is.'' Why have you not 
evaluated the prepayment issue given your service as the HOEPA 
point person for the Fed over the past 18 months?
    Can you please provide the Committee with your evaluation 
of this argument? Do you believe that pre-payment penalties are 
appropriate for subprime mortgages and not for prime mortgages? 
Do they constitute one of the abusive practices that you 
mentioned at the hearing or do they not?

A.14. We are still evaluating the hearing testimony and comment 
letters on prepayment penalties in order to determine the 
appropriate regulatory response. In addition, we have had 
meetings with a number of participants involved in mortgage 
lending to assess the potential utility of prepayment penalties 
and the costs they impose on consumers. These are very 
difficult issues to resolve; however, I anticipate that we will 
propose rules to address abuses in the subprime market by the 
end of this year.

Q.15. Dr. Kroszner, how do you explain the Federal Reserve's 
findings from the HMDA data that in 2005, 54.7% of African-
American borrowers and 46.1% of Hispanic borrowers got high-
priced loans when buying a home compared to 17.2% of non-
Hispanic whites?

A.15. The 2005 HMDA data show substantial differences across 
racial and ethnic groups in the incidence of higher-priced 
lending. Accounting for a variety of individual 
characteristics, however, can substantially reduce the 
differences. Nonetheless, these disparities raise important 
questions, and I share the concern they may result in part from 
illegal discrimination. It is not possible to determine whether 
a lender has violated fair lending laws from HMDA data alone, 
however, because the data do not include many factors that 
lenders routinely use to set loan prices, such as credit scores 
and loan-to-value ratios. Thus, when the Federal Reserve 
conducts an examination of a lender's pricing, examiners obtain 
additional information to determine whether any pricing 
disparity by race or ethnicity is fully attributable to 
legitimate factors, or whether any portion of the pricing 
disparity may be the result of illegal discrimination.
Q.16. In the Fed's analysis of the data, significant racial and 
ethnic differences remained unexplained even after accounting 
for other information reported in the HMDA data. The Fed found 
that borrower-related factors accounted for only about one-
fifth of the disparity. Do you believe that there is racial 
discrimination in the mortgage market? If so, how do we root it 
out of the system? What specific additional steps should the 
Fed undertake to do so? If you do not believe that there is 
racial discrimination, how do you explain these racial 
disparities?

A.16. I believe aggressive enforcement of fair lending laws can 
help root out illegal discrimination. To that end, the Federal 
Reserve is committed to rigorously enforcing the fair lending 
laws, and we recently referred two nationwide mortgage lenders 
to the DOJ because we found evidence that Hispanic and African-
American borrowers paid more for their loans than did 
comparable white borrowers.
    These referrals resulted from a process of targeted reviews 
of institutions for pricing discrimination that the Federal 
Reserve initiated when the HMDA pricing data first became 
available in 2005. We developed, and continue to refine, a HMDA 
data analysis program that identifies institutions with 
statistically significant pricing disparities by race or 
ethnicity. Because HMDA data lack many factors that lenders 
routinely use to make credit decisions and set loan prices, 
such as information about the borrower's creditworthiness and 
loan-to-value ratios, HMDA disparities alone cannot be used to 
determine whether a lender discriminates. Thus, we analyze HMDA 
data in conjunction with other supervisory information to 
evaluate a lender's risk for discrimination.
    For the 2005 HMDA pricing data, Federal Reserve examiners 
performed a pricing discrimination risk assessment for each 
institution that we identified through our HMDA data analysis. 
These risk assessments incorporated not just the institution's 
HMDA data, but also the strength of the institution's fair 
lending compliance program, our past supervisory experience 
with the institution, consumer complaints against the 
institution, and the presence of fair lending risk factors such 
as discretionary pricing. Based on these comprehensive 
assessments, we determined which institutions would receive a 
targeted pricing review. Depending on the examination schedule, 
the targeted pricing review could occur as part of the 
institution's next examination, or outside the usual 
supervisory cycle. We have already initiated this same review 
process based on our analysis for the 2006 HMDA data.

Q.17. Dr. Kroszner, we discussed the role that the GSE's play 
in the housing market at your confirmation hearing. I 
specifically asked about the role that Freddie and Fannie ``can 
play here about having them have extend some additional credit 
here to lighten up or to at least release some of the 
seizure.'' You responded that: ``I think it could be helpful to 
have them focus on affordable housing more than they have 
been.'' Does that response mean that you believe that OFHEO 
should allow the GSEs to, consistent with safety and soundness 
and proper consumer protection practices expand their portfolio 
holdings in subprime mortgages during this period of market 
turmoil?

A.17. We encourage the GSEs (Fannie Mae and Freddie Mac) to 
help refinance subprime mortgages and securitize these 
mortgages to the fullest extent allowed by their charters. 
However, the GSEs do not need to expand their portfolios to do 
so. Fannie Mae and Freddie Mac currently hold hundreds of 
billions of dollars of their own mortgage securities in their 
portfolios; these could be readily sold to provide the 
financial wherewithal to fund new mortgages directly if they 
wish to do so. Moreover, the substantial repayment of mortgages 
currently held in their portfolios also gives them considerable 
room for holding additional subprime mortgage assets without 
expanding the size of their portfolios. Finally, the GSEs' 
ability to securitize mortgages is not constrained by the size 
of their portfolios, and they should be encouraged to actively 
securitize subprime mortgages to the extent allowed by their 
charters. In the longer run, I believe that we should focus the 
GSEs' portfolios on affordable housing in the manner suggested 
by Chairman Bernanke in his speech in March 2007. In this way, 
the GSEs' portfolios would have a clear and focused public 
purpose, and the systemic risks associated with these 
portfolios would be more limited.

Q.18. Dr. Kroszner, during your time as a member of the Board 
of Governors you have dealt extensively with the negotiations 
regarding the updating of the BASEL bank capital standards. It 
was my understanding that the agencies had a commitment to act 
on the Basel II and Basel IA approaches in tandem. Now that the 
standardized option will take the place of Basel IA, can you 
assure us that that the proposed rule for the standardized 
approach will be issued at the same time that the final rule on 
the advanced approach is issued to preserve the commitment to 
keep the new capital rules for large banks and all the other 
banks moving forward in tandem?

A.18. As indicated in the interagency press release on July 20, 
2007, the agencies have agreed to proceed promptly to issue a 
proposed rule that would provide all non-core banks with the 
option to adopt a standardized approach. As you noted, this new 
proposal will replace the earlier issued Basel IA proposal. The 
press release stated the agencies' intention that the proposed 
standardized option would be finalized before core banks begin 
the first transition period year--the first opportunity for 
which is early 2009. It is important that banks intending to 
adopt the Basel II advanced approaches at the first opportunity 
have sufficient lead time to develop appropriate internal 
systems and carry out an effective parallel run. It also is 
important for agency examination staffs to have time to assess 
bank systems before early 2009. The agencies have just issued 
the final rule related to the advanced approach and substantial 
progress has been made on drafting the standardized proposal. 
The agencies have a firm commitment to move expeditiously to 
issue the standardized proposal, and I very much support that 
commitment. Thus, I anticipate that the two rules--Basel II 
advanced and standardized--would go into effect at the same 
time in early 2009.

Q.19. During the current credit crunch in the mortgage markets, 
there have been a number of reports of problems in the market 
for MBS issued by Freddie Mac and Fannie Mae, in addition to 
the subprime and jumbo markets. For example, Dow Jones 
Newswires reported on August 16, 2007, that prices on ``some of 
the highest-quality mortgage bonds are plummeting . . . largely 
because they're available to trade.'' It appears that investors 
may be selling these GSE MBS in large numbers in order to raise 
funds to cover collateral calls for subprime securities. 
Ironically, it is the fact that the GSE MBS have retained their 
credit quality that makes it possible to sell them in these 
difficult times when liquidity for other mortgage assets has 
largely evaporated. Nonetheless, the fact that so much of this 
paper is reportedly being sold may be resulting in some 
problems in this market, including increased spreads that may 
result in higher costs for homeowners. Are these reports 
accurate? Has the Federal Reserve seen increased selling of 
GSE-issued MBS? If so, what has been the impact in the 
marketplace?

A.19. Relative to other forms of mortgage securities, the 
market for GSE-issued MBS has generally remained stable 
throughout the recent mortgage market difficulties. While 
spreads have widened somewhat, they have remained well below 
their recent historical highs. Moreover, this market has 
generally functioned smoothly. Mortgages that have been 
securitized by GSEs are well-accepted in the secondary market 
because they come with GSE-provided guarantees of financial 
performance, which in turn are unquestioned largely because 
market participants appear convinced that GSE commitments are 
backed by the full faith and credit of the U.S. government--the 
letter of the law and the protestations of government officials 
notwithstanding. Presumably, market participants believe that, 
in the event of a GSE failure, the government would have no 
practical alternative but to come to the rescue.

Q.20. If Fannie Mae and Freddie Mac were allowed to purchase 
their MBS, would that help maintain prices for those 
securities? if so, would that, in turn, make it easier for 
other entities to raise money by selling their GSE MBS?

A.20. Generally, Fannie Mae and Freddie Mac's securities trade 
in a world-wide market of highly rated securities, and the 
prices of these securities are unaffected by the GSEs' 
portfolio actions. Moreover, entities holding GSE MBS have had 
little problem selling their holdings if they wish. During the 
recent mortgage market difficulties, the prices of the GSE 
securities have been largely unaffected when compared to the 
price movements of other securities, even though the GSEs were 
constrained in their purchases of their own MBS by the 
portfolio caps. Thus, allowing Fannie Mae and Freddie Mac to 
purchase their own MBS has the effect of enhancing their 
profitability, but does not seem to have substantial effect on 
the market prices for MBS issued by the GSEs. GSE 
securitization efforts provide ample liquidity for the GSE-
guaranteed MBS market and there is little need to expand the 
GSEs' portfolio purchases of their own MBS.

Q.21. The Federal Reserve has never exercised its authority 
under the FTC Act to promulgate a regulation on unfair or 
deceptive acts and practices. You have said that you think it 
is more appropriate to address these problems on a case-by-case 
basis. Please explain your views in this area?

A.21. Because the Board and the other banking agencies can 
enforce the FTC Act in particular cases and issue supervisory 
guidance, the need for rules was not clear. A determination of 
unfairness or deception depends heavily on the facts of an 
individual case. Therefore, we believe that using our 
enforcement authority and issuing guidance are effective tools 
in dealing with unfair or deceptive practices. The Federal 
Reserve and the other banking agencies have used their broad 
authority to enforce the FTC Act against the institutions they 
supervise to prevent unfair or deceptive acts or practices. 
Also, the Board and the FDIC have jointly issued guidance and 
``best practices'' for the institutions they supervise. The OCC 
has also issued guidance concerning potentially unfair or 
deceptive practices. Nonetheless, the Board will continue to 
assess whether there are unfair or deceptive practices that are 
appropriately addressed by adopting rules of general 
applicability under the FTC Act or other consumer protection 
laws.

Q.22. A recent American Banker article (``The Fed's Record on 
Abusive Loans,'' August, 29, 2007), points out that the ``Fed 
has never taken an enforcement action related to unfair and 
deceptive practices,'' whereas other banking regulators have 
taken action 29 times in the past seven years. Please explain 
the lack of action in this area on the part of the Federal 
Reserve?

A.22. In conducting examinations and addressing consumer 
complaints, the Federal Reserve considers whether the practices 
of the institutions we supervise are potentially unfair or 
deceptive. Examiners generally are able to address any 
potential violations they find through the supervisory process, 
which is not public. We have generally found this approach to 
be effective in preventing unfair or deceptive practices.

Q.23. As you know, only the Federal Reserve, the Office of 
Thrift Supervision, and the National Credit Union 
Administration currently have the authority to promulgate a 
rule dealing with unfair or deceptive acts or practices. In 
your view, should the other agencies be given the same 
authority? Please explain your reasoning.

A.23. As we have noted, the practical difficulty in writing 
rules of broad applicability is that a practice may be unfair 
in some circumstances but not in others. Finding that a 
practice is unfair or deceptive is heavily dependent on the 
facts and circumstances. That is why the FTC has also preferred 
the same case-by-case enforcement approach that the Board, the 
OTS and the NCUA have followed. If other agencies have 
rulewriting authority under the FTC Act, they will face the 
same challenge.
    In addition, the FTC Act authorizes the Board to write 
rules for all banks, which ensures consistency. If Congress 
were to authorize the OCC and FDIC to write rules, we would 
recommend that there be a mechanism for ensuring that all 
banks, as well as thrifts and credit unions, are subject to the 
same standards. We would also encourage the FTC and NCUA to 
adopt similar rules for nonbank lenders and federal credit 
unions, respectively.

Q.24. The Committee recently passed legislation to improve the 
regulation and transparency of the private educational loan 
market--the fastest growing segment in the $85 billion student 
loan market. Among the growing trends in the private student 
loan market is the practice of some lenders using non-
individual data--like a school's default and graduation rate--
in the underwriting used to establish the rate a student 
borrower is offered. It's a practice that is eerily reminiscent 
of mortgage ``redlining'', when mortgage rates and products 
were denied to people based on where they lived rather than 
their individual credit-worthiness. One of the ways Congress 
addressed mortgage redlining was through enactment of tough 
anti-discrimination laws and improving transparency of market 
practices in the form of HMDA (the Home Mortgage Disclosure 
Act), which the Federal Reserve oversees.
    Do you think HMDA has been an important tool to promote 
transparency? Do you think a disclosure, transparency regime 
for private student loans similar to HMDA is a more useful 
approach to addressing concerns about potential ``redlining'' 
in the private student loan market or do you believe we should 
prohibit the practice of underwriting based on factors such as 
the school one chooses to attend?

A.24. I believe that HMDA data have been an effective tool to 
increase transparency in the mortgage market. Determining 
whether a similar approach--or other legislation that would 
prohibit certain underwriting factors--would be appropriate in 
the student loan market would require a careful analysis of 
that market and a balancing of the potential benefits, risks, 
and costs of each approach.

Q.25. Dr. Kroszner in one of your academic articles you discuss 
in great details the pros and cons of the Investment Company 
Act of 1940. Barbara Roper of Consumer Federation of America 
has said ``The 1940 Act may be the most pro-investment piece of 
legislation ever enacted. It has made it possible for average 
Americans to participate in and profit from our markets. And 
that has supplied our equity markets with tremendous amounts of 
capital.'' I observe that investors hold more than $11 trillion 
of assets in the nation's mutual funds, indicating broad 
support.
    In your article, you conclude, and I quote--``the Act thus 
imposes costs on investors--and on modern corporate 
governance--without countervailing benefits to investors or to 
the functioning of the market generally'' Can you share with 
the Committee your thoughts on why the Investment Company Act 
of 1940 is bad policy?

A.25. The development of mutual funds for individual investors 
fostered by the Investment Company Act of 1940 has been of 
tremendous value to individuals. I definitely concur with 
Barbara Roper that mutual funds have helped to make ``it 
possible for average Americans to participate in and profit 
from our markets. And that has supplied our equity markets with 
tremendous amounts of capital.'' In my article, I was 
commenting on only one specific aspect of the 1940 Act, namely, 
whether the restrictions on ownership embodied in the Act can 
constrain ``the ability of institutions to discipline corporate 
management on behalf of households and other investors'' 
(quoting p. 48 of my article). The other aspects of the 1940 
Act that have helped to establish a vibrant and competitive 
mutual fund industry are to be applauded.

Q.26. Dr. Kroszner, you were a member of the Shadow Financial 
Regulatory Committee in 2005 when they made the following 
statement: ``The Committee believes that the PCAOB's basic 
functions ultimately should be transferred to the SEC.'' Why do 
you believe that the PCAOB's accounting oversight duties should 
be transferred back to the SEC, in light of the problems raised 
through the accounting crises that caused Congress to create 
the PCAOB only 5 years ago?

A.26. The credibility and accuracy of financial reports are 
crucial to the proper functioning of capital markets. It is 
thus important for Congress to have focused attention on these 
issues in light of the corporate governance scandals in 2001 
and 2002. I believe it is valuable to continue to emphasize the 
necessity of high standards in auditing. The PCAOB is designed 
for, and making, constructive contributions towards that 
important purpose. With Mark Olson, my former colleague from 
the Federal Reserve Board, as the chair of the PCAOB, I know 
that it is in good hands. Over the long run, Congress can 
consider whether ultimately the PCAOB functions are most 
effectively and efficiently undertaken through a separate 
entity or within the SEC.

Q.27. Dr. Kroszner, you testified on behalf of the United 
States as an expert witness in a case before the United States 
Court of Federal Claims involving Citizens Federal Bank. The 
D.C. Circuit issued an opinion captioned Citizens Federal Bank 
v. United States which included comments critical of your 
expert testimony and indicated in multiple instances that you 
lacked some basic information regarding matters on which you 
rendered opinions. For example, the Court wrote: ``Professor 
Kroszner's opinion on the regulators' attitude toward parent 
company debt is, in the Court's view, entitled to very little 
weight in light of limited understanding of the regulatory 
structure and atmosphere to which Citizens [a thrift] was 
subject.''
    What was your reaction to the Court's opinion? Do you think 
your testimony in this case, and the judge's finding that your 
viewpoint carried `little weight in light of [your] limited 
understanding of the regulatory structure' has any bearing to 
your ability to be a Fed Governor, particularly given your 
portfolio at the Fed of bank supervision and regulation?

A.27. I have been undertaking research, teaching, and 
consulting related to banking and financial supervision and 
regulation for more than fifteen years and have published 
numerous articles on these topics in both academic and 
practicioner journals. In this opinion, I believe the Court is 
referring to specific facts and circumstances of a particular 
institution involved in the case. In another case also before 
the United States Court of Federal Claims, American Capital 
Corporation v. United States, I also testified as an expert 
witness on behalf of the United States, and the Court's two 
opinions in that case suggest that the Court did put much 
weight on the testimony I provided. I believe my breadth of 
both practical and academic experience related to banking 
supervision and regulation has been very valuable to my 
portfolio at the Fed, which includes chairing the Board 
committee that oversees our division of banking supervision and 
regulation.

Q.28. Dr. Kroszner in your academic work you focused on issues 
of bank regulation in developing countries, you made the 
following conclusion: ``An explicit central bank may not be 
needed, but rather mechanisms to provide added liquidity, 
perhaps through the clearing system, in times of trouble.'' Can 
you explain this finding and what implications it has for 
developing countries that are considering establishing a 
central bank? Under what circumstances would you recommend 
against a nation establishing a central bank?

A.28. As you noted, I made that statement in the context of 
academic research on monetary and financial structure and 
regulation, and consequently I was focusing only on particular 
aspects of the relevant issues. The questions of whether a 
nation should establish a central bank, and if so what form the 
central bank should take, are quite complicated. The answers 
depend on a wide variety of factors, such as the size of the 
economy and the financial system; the openness of the economy; 
the degree of integration it has achieved with a larger 
economy--perhaps a neighbor or close trading partner; and 
whether it has adequate political, legal, and social 
institutions to support the establishment and ongoing operation 
of an independent national central bank. Appropriate bank 
supervision, with strong tools, is needed for economies even 
where the decision has been made not to have a national 
currency and, hence, a national central bank.
                                ------                                --
----


RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY FROM RANDALL S. 
                            KROSZNER

Q.1. Earlier this year Chairman Dodd sent a letter to the 
Federal Reserve Chairman, Mr. Bernanke, asking him to act on 
the Fed's authority and duty under HOEPA (The Home Ownership 
and Equity Protection Act) of 1994 to address predatory loans. 
We asked him to do three things:

      Require all mortgage originators to evaluate a 
borrower's ability to repay prior to making a mortgage loan and 
that the Fed create a presumption that a loan that requires a 
borrower to pay more than 50 percent of his or her income to 
cover the cost of principal, interest, taxes, and insurance is 
not a sustainable loan and fails to meet this test;

      Designate the failure to escrow taxes and 
insurance as an unfair and deceptive practice;

      Restrict the use of low- and no-documentation 
loans.

    Do you support the Fed taking each of these three actions?

A.1. I chaired a Federal Reserve hearing in June 2007 to gather 
information on these and other practices and concerns in the 
subprime mortgage market from both industry and consumer 
groups. Specifically, in that hearing, we examined the failure 
to give adequate consideration to a borrower's ability to 
repay, the failure to offer escrow accounts for taxes and 
insurance, stated-income and low-documentation lending, as well 
as prepayment penalties. The Board also solicited written 
comments from the public on the practices discussed at the 
hearing. The Board received nearly 100 comment letters, and 
staff is closely examining the issues raised and discussing 
possible remedies. For example, failure to escrow for taxes and 
insurance can lead to a situation akin to payment shock for 
borrowers if the borrower did not understand or fully 
anticipate the cost of taxes and insurance that the borrower 
must pay. It is a common practice for these payments to be 
escrowed in the prime markets, and I see no reason that escrows 
should not be standard practice in the subprime markets too.
    We are reviewing the testimony from the hearing and the 
public comment letters received in connection with the hearing. 
Chairman Bernanke has said that he expects we will issue 
proposed rules by the end of the year. It would be premature 
for me to comment on the precise content of the proposed rules 
or to express a view in support of any particular action at 
this juncture

Q.2. A central goal of HOEPA is equity protection. Given the 
decline in homeownership rates among African-Americans over the 
past few years, and given the equity stripping that we have 
seen in the subprime mortgage market: Has the Federal Reserve 
done everything in its power to protect the home ownership and 
equity of these consumers? What, if anything, can be done 
differently?

A.2. We have taken action on several fronts to address concerns 
about abusive subprime lending. Regarding equity loss among 
African-American communities, the Federal Reserve has a long-
standing commitment to ensuring that every bank it supervises 
complies fully with the federal fair lending laws, namely the 
Equal Credit Opportunity Act (ECOA) and the Fair Housing Act. 
Fair lending is an integral part of every consumer compliance 
examination we conduct. We recently referred two nationwide 
mortgage lenders to the Department of Justice because we found 
evidence that Hispanic and African-American borrowers paid more 
for their loans than comparable white borrowers. And for these 
and all consumers, we are planning to propose rules under HOEPA 
later this year, to address concerns about abuses in the 
subprime mortgage market.

Q.3. Congress is considering a number of measures to address 
some of the abuses in mortgage lending, including the 
Borrower's Protection Act. That bill would establish lender 
liability for the actions of associate appraisers and brokers. 
Do you support establishing that liability?

A.3. Whether it is appropriate to hold a lender liable for the 
acts of brokers and appraisers--who are essentially independent 
contractors--raises many issues, including whether lenders are 
in a position to perform due diligence to guard against undue 
risk of liability.
    Other actions can be taken to address broker abuses. Many 
states are strengthening their licensing requirements and 
oversight of brokers in response to the problems in the 
subprime market. The Conference of State Bank Supervisors 
(CSBS) will be looking at the activities of brokers as part of 
a pilot program with the Federal Reserve and other agencies to 
look at the actions of non-bank subsidiaries of bank holding 
companies with significant subprime mortgage lending 
operations. The CSBS also has developed a nationwide 
registration and licensing system for all mortgage brokers and 
loan originators not affiliated with depository institutions, 
to help limit the ability of bad actors to move to a new state, 
and to continue engaging in irresponsible practices there, 
after having run afoul of regulators in their old states.
    Independence in the appraisal process is essential to 
ensuring that pressure is not placed on an appraiser to render 
a particular collateral value to enable a loan to be made. With 
respect to appraisers, the reform measures adopted pursuant to 
the Financial Institutions Reform, Recovery and Enforcement Act 
of 1989 led to an improvement in the quality of appraisals. The 
states all have in place programs for the licensing and 
certification of appraisers, based on national standards. The 
Federal Reserve and the other federal banking agencies have 
appraisal regulations and guidelines that cover the real estate 
lending activity of federally regulated institutions. Through 
recent guidance, the Federal Reserve and the other agencies 
have stressed the importance of quality appraisals and, in 
particular, independence in the appraisal process from the 
individual who originates the mortgage.

Q.4. There is a great deal of data on mortgage lending from the 
Home Mortgage Disclosure Act. That data show unexplained racial 
disparities in mortgage lending, including interest rates and 
costs. Would you support using these data to identify banks and 
lenders with unexplained disparities, racial or otherwise, as a 
reason at the very least to open an investigation of those 
lenders?

A.4. Because HMDA data lack many factors that lenders routinely 
use to make credit decisions and set loan prices, such as 
information about the borrower's creditworthiness and loan-to-
value ratio, we analyze HMDA data in conjunction with other 
supervisory information to evaluate a lender's risk for 
discrimination. The Federal Reserve developed, and continues to 
refine, a HMDA data analysis program that identifies 
institutions with statistically significant pricing disparities 
by race or ethnicity. Each institution identified by our HMDA 
analysis program is carefully assessed for pricing 
discrimination risk, based on its HMDA data, as well as the 
strength of its fair lending compliance program, our past 
supervisory experience with the institution, consumer 
complaints against the institution, and the presence of fair 
lending risk factors such as discretionary pricing. Based on 
these comprehensive assessments, we determined which 
institutions should receive a targeted pricing review. During a 
targeted pricing review, the Federal Reserve collects 
additional information, including potential pricing factors 
that are not available in the HMDA data, to determine whether 
any pricing disparity by race or ethnicity is fully 
attributable to legitimate factors, or whether any portion of 
the pricing disparity may be attributable to illegal 
discrimination.

Q.5. Two of you have worked for banks and governor Kroszner has 
been on the Federal Reserve Board for the past year. In your 
opinion, is it possible for banks or lenders to provide people 
with too much credit, so much that their financial situation is 
actually harmed?

A.5. While this is a possibility, a lender that continuously 
provides credit at levels that result in financial harm to 
borrowers, such as the loss of a borrower's home, will not 
remain a viable entity in the long term. The recent closure of 
numerous subprime lenders illustrate the fact that imprudent 
underwriting and unwarranted layering of risk can lead to 
excessive delinquencies, losses, erosion of capital and, 
ultimately, business failure. Therefore, the lender's 
assessment of a borrower's ability to repay, as the recent 
interagency mortgage guidance emphasizes, is a fundamental 
ingredient in prudent underwriting standards.

Q.6. Have banks in the recent past been extending too much 
credit to consumers and if so, what should regulators do about 
that?

A.6. Perspective gained from the passage of time will be 
beneficial in making the final determination of recent market 
events. Regulators have to strike the right balance between 
exercising their supervisory authority and encouraging banks to 
extend credit. Ultimately, regulators are responsible for 
promoting a healthy banking system in which banks have 
appropriate risk-management practices and consumers have access 
to credit.
    Supervisors have been very active in responding to recent 
changes in the lending environment. Due to concerns about the 
quality of underwriting, the agencies issued guidance with 
respect to nontraditional mortgage loans more than a year ago, 
and there has been guidance regarding subprime lending programs 
since 1999. These statements all discuss the importance of the 
assessment of the borrower's ability to repay.
    In addition, the CSBS has urged the states to adopt both 
the nontraditional mortgage guidance and the recent subprime 
mortgage lending guidance. To date, thirty-eight states have 
adopted the nontraditional mortgage guidance and thirty-one 
states have adopted the subprime guidance. Finally, the Board 
and the other agencies issued statements in April and September 
that encourage lenders and servicers to work constructively 
with borrowers who are in default or whose default is 
reasonably foreseeable.

Q.7. And should regulators look for ways to ensure that too 
much credit is not provided?

A.7. As discussed above, lenders have strong incentives to 
ensure that their underwriting remains prudent and does not 
result in unwarranted risk-taking. Additionally, excessive 
regulation can result in the unintended consequence of 
curtailing credit to otherwise creditworthy borrowers. 
Nevertheless, good banking supervision is vital to the health 
of banks. The Federal Reserve and the other agencies have a 
number of tools to address unsafe and unsound lending 
practices. Among them are the ability to issue guidance and 
regulation, when appropriate, and the bank examination process, 
which provides direct and timely feedback to supervised 
institutions regarding their credit policies and underwriting 
practices.

Q.8. Do you believe that yield spread premiums, which 
financially reward mortgage brokers for steering borrowers to 
higher rate loans than they might otherwise qualify for and 
prepayment penalties which trap borrowers in unfair loans, can 
distort competition?

A.8. Compensation for mortgage brokers that depend on yield 
spread premiums can give mortgage brokers incentives to guide 
borrowers to higher rate loans than would compensation not 
based on the loan rate. More effective disclosure of costs 
would allow borrowers to better evaluate competing mortgage 
products and improve their awareness of whether the broker has 
the incentives to act in the best interest of the borrower. In 
some circumstances, a borrower might benefit from a yield 
spread premium if, in return for a higher rate, the broker pays 
some or all of the closing costs. A yield spread premium raises 
the rate a consumer pays on his loan, although it may, as 
noted, be used in whole or part to help cover closing costs. 
When market interest rates decline, individuals with relatively 
high loan rates have a greater incentive to refinance. 
Prepayment penalties can reduce the benefit of refinancing if 
the length of time set for the expiration of the prepayment 
penalty is relatively long.

Q.9. Last Thursday the Leadership Council on Civil Rights 
called upon the FRB to intervene in the subprime crisis, 
specifically noting that it is ``glad that the nominees showed 
strong interest in getting rid of prepayment penalties and 
other abusive terms in subprime loans.'' What are you planning 
to do to combat the abusive practice of steering of borrowers 
(and specifically minorities) into loans that are more 
expensive than loans for which the borrowers could qualify?

A.9. Federal Reserve consumer compliance examiners use the 
Interagency Fair Lending Examination Procedures to detect 
disparate treatment, such as steering minority borrowers into 
more expensive loans. If an institution makes both prime and 
subprime loans for the same purpose, such as for home 
purchases, differences in the percentages of minority and non-
minority borrowers in various loan product categories are 
evaluated to determine whether they are significant and merit 
further review. If an institution has subprime mortgage 
subsidiaries or affiliates, examiners evaluate the various loan 
products offered, grouped by minority and non-minority 
borrowers, to determine if there are differences in the 
percentage of applications received by applicants in different 
groups at the institution compared to any of its subsidiaries 
or affiliates. Examiners also consider whether the institution 
has clear, objective standards for referring applicants to 
subsidiaries or affiliates, classifying applicants as ``prime'' 
or ``subprime,'' or deciding what kinds of alternative loan 
products should be offered or recommended to applicants. When 
conducting fair lending examinations, examiners may rely upon 
statistical analysis, report and loan file reviews, information 
learned from interviews conducted with bank staff and, when 
appropriate, third parties, as well as additional information 
obtained from the institution.
    I also note that the Federal Reserve, the Office of Thrift 
Supervision, the Federal Trade Commission, and state agencies 
represented by the CSBS and the American Association of 
Residential Mortgage Regulators, are cooperating in an 
innovative pilot project to conduct targeted consumer-
protection compliance reviews of selected non-depository 
lenders with significant subprime mortgage operations. The 
agencies plan to evaluate the risk-management practices used 
for ensuring compliance with state and federal consumer 
protection regulations and laws, including the Equal Credit 
Opportunity Act and the Federal Trade Commission Act. The 
collaborative state/federal pilot is scheduled to begin in the 
fourth quarter of this year and will focus on non-depository 
subsidiaries of bank and thrift holding companies, as well as 
mortgage brokers doing business with, or working for, these 
entities. Additionally, the states will conduct coordinated 
examinations of independent state-licensed subprime lenders and 
their associated mortgage brokers. The agencies will select a 
sample of entities under their respective supervisory or other 
authorities for review or investigation. Any violations 
identified, such as illegal steering, would be addressed by 
appropriate corrective or enforcement action.

Q.10. What are you planning to do, as LCCR requests, to ensure 
that the FRB ``uses [the keys to resolving the ongoing 
foreclosure crisis] as quickly as possible?''

A.10. We and the other federal financial regulators have issued 
guidance to financial institutions in April 2007 and to loan 
servicers in September 2007, urging them to work with borrowers 
to avoid foreclosure when possible. We have worked with other 
regulators to clarify accounting and tax issues that had the 
potential to hinder the workout process. We also are working 
closely with the CSBS to make similar efforts with respect to 
state-regulated institutions and servicers.

Q.11. What will you do to get rid of abusive terms and 
practices in the subprime market so that borrowers can remain 
in their homes and good, responsible lenders are not placed at 
a competitive disadvantage?

A.11. We plan to propose rules under HOEPA addressing unfair or 
deceptive practices in mortgage lending before the end of the 
year. The four practices discussed at our recent hearing--
prepayment penalties, failure to require escrows for taxes and 
insurance, stated income lending, and failure to consider 
repayment ability--are currently under review, and we have 
received about 100 public comments on those practices which are 
also under review. In addition, we expect to propose rules 
aimed at abuses in mortgage advertising. The proposed rules 
will also be aimed at ensuring the consumers get their mortgage 
disclosures at a time when the information is likely to be most 
useful to them.
                                ------                                50
 3 5 4 1.86


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM RANDALL 
                          S. KROSZNER

Q.1. The subprime mortgage market is collapsing, and I am 
concerned about what is happening to the real people that are 
at the human end of this crisis, many of whom were deceived by 
unscrupulous mortgage brokers into taking out a mortgage that 
they could never afford. In his testimony before this 
committee, Chairman Bernanke agreed with me that additional 
regulation of the mortgage broker industry is warranted in 
light of this crisis. The positions you have taken in the past 
on the regulatory role of the Federal Reserve suggest that you 
may not agree with Chairman Bernanke's views on the regulation 
of brokers.
    I have been fighting, along with Senators Brown and Casey, 
to pass federal legislation that would strengthen federal 
regulation of all mortgage brokers. We believe that inaction is 
too costly, for both consumers and the markets. Our bill would 
establish a fiduciary duty and good faith standards for 
mortgage brokers and other non-bank mortgage originators, 
require originators to underwrite loans at the fully indexed 
rate, and prohibit steering, among other things.
    While I recognize that you cannot take a position on a 
specific piece of legislation, do you agree with the principle 
that increased federal regulation and oversight of the mortgage 
broker industry is appropriate? What types of regulations would 
you support to advance the goals of the Federal Reserve?

A.1. Greater oversight and regulation of mortgage originators, 
including mortgage brokers, is an approach that has merit. A 
nationwide registration and licensing system for all mortgage 
loan originators would help limit the ability of bad actors to 
move to a new state after having run afoul of regulators in 
other states. The Conference of State Bank Supervisors and 
American Association of Residential Mortgage Regulators have a 
promising initiative to establish a national registry. It would 
be appropriate for any new legislation to ensure that all 
individual originators are included in the same nationwide 
registry.
    Promoting access to credit and to homeownership are 
important objectives, and the Board believes that responsible 
subprime mortgage lending can help advance both goals. 
Therefore, the Board believes it is extremely important to 
strike the right balance by seeking to protect consumers from 
predatory lending practices without restricting credit from 
responsible lenders to borrowers with shorter or lower-rated 
credit histories. For example, the Board is looking at whether 
it should issue a rule under HOEPA requiring a lender to 
evaluate the borrower's ability to repay a loan. It seems self-
evident that adequate consideration of repayment ability is 
necessary. However, our experience in crafting the recent 
interagency guidance on mortgage lending taught us that this 
principle is far easier to articulate in general terms than in 
detailed and objective rules stating which underwriting 
practices constitute ``adequate'' consideration. This is 
especially true for mortgage credit underwriting, which can 
depend on several pertinent consumer-specific factors. We are 
continuing to work on this and other issues, keeping in mind 
that any new rules must be specific enough so that creditors 
can determine whether their practices are in compliance because 
legal uncertainty could have the unintended effect of reducing 
credit options for creditworthy subprime borrowers. At the same 
time, rules must be flexible enough to allow creditors to 
consider the pertinent factors and individual circumstances of 
particular consumers and to innovate prudently and fairly.

Q.2.a. You recently chaired a hearing at the Federal Reserve 
examining the Board's authority to regulate the subprime 
lending industry under HOEPA. As you know, the Fed was heavily 
criticized for its failures to exercise its authority under 
HOEPA to regulate the industry. And I understand that you were 
responsible for HOEPA during your time at the Fed.
    What is your current view of the Fed's authority under 
HOEPA? Given the recent problems in the subprime mortgage 
industry, what steps do you personally plan to take in your 
role as Governor, should you be confirmed for the full term, to 
prevent these abuses from happening again in the future?

A.2.a. The Federal Reserve has responsibility under HOEPA to 
prohibit acts or practices in connection with mortgage loans 
that it finds unfair or deceptive, or designed to evade HOEPA. 
In June 2007, I chaired a hearing on how we should use this 
authority to address abuses in the mortgage market, including 
the subprime sector. The hearing yielded valuable insight from 
both industry and consumer groups. The Board also solicited 
written comments from the public on the practices discussed at 
the hearing. The Board received nearly 100 comment letters, and 
staff is closely examining the issues raised and discussing 
possible remedies. In addition, we expect to propose rules 
aimed at abuses in mortgage advertising. The proposed rules 
will also be aimed at ensuring the consumers get their mortgage 
disclosures at a time when the information is more likely to be 
most useful to them.

Q.2.b. Do you agree that the current problems in the subprime 
mortgage market are a result of a market failure? Do you 
believe that this market will be able to correct itself without 
additional regulation from the Fed and other regulators?

A.2.b. As you know, the market for subprime mortgages has 
adjusted sharply in recent months. Originators are employing 
tighter standards and some large lenders are pulling back from 
using independent brokers. Still, we must consider what we can 
learn from this episode to help prevent problems from 
recurring. Loan delinquencies have been boosted by loose 
underwriting standards in late 2005 and 2006 together with 
broader economic factors such as the deceleration in house 
prices. We are evaluating how improved disclosures, more 
effective enforcement of underwriting standards at lenders, and 
new rules could help prevent this situation from arising in the 
future. In deciding which actions to take, we will do what we 
can to prevent abuses without curtailing responsible subprime 
lending.

Q.3. You have written that you believe that TRIA, the Terrorism 
Risk Insurance Act of 2002, should not be extended. In a 2004 
editorial in the American Banker arguing against the original 
extension of TRIA, you wrote, ``Any federal intervention into 
terrorism insurance markets after 2005 should be limited to 
workers' compensation insurance and possible preemption of 
state mandates that property insurance policies include 
coverage for fire losses caused by terrorist attacks.'' Please 
explain why you believe that private insurance and reinsurance 
markets are sufficient to bear the risks of large-scale 
terrorist attacks. What do you propose as a solution if the 
private market cannot provide sufficient insurance to ensure 
continued construction and economic growth?

A.3. It is important to clearly define what constitutes 
``large-scale terrorist attacks.'' Unfortunately, the 
possibility exists of a catastrophic event so large that 
private markets and the private insurance industry would not be 
able to bear the associated losses. For events of that scale 
and beyond, government has a role to play. However, I believe 
that the private sector is capable of handling losses 
associated with smaller-scale events, and that for those risks, 
private markets and private institutions should be allowed 
maximal scope to operate and innovate. Indeed, it should be 
noted that under current law, the Terrorism Risk Insurance 
Extension Act, private insurers actually now bear a large 
amount of risk for terrorism attacks via their deductibles 
under the program, copayments beyond those deductibles, as well 
as the aggregate industry retention level, which is now close 
to $30 billion. Moreover, the study conducted last year by the 
President's Working Group on Financial Markets found that 
conditions in the terrorism insurance market have improved 
since 9/11, with take-up rates rising and premium rates 
declining, even as the industry's exposure to terrorism risk 
has increased over time under TRIA.
    In designing a strategy to manage terrorism risk, I believe 
that policymakers should explore options that facilitate the 
transfer of risk to private insurance markets and capital 
markets. For example, as I suggested in my 2004 editorial, 
modifications to the corporate tax code that reduce insurers' 
costs of holding the capital required to underwrite terrorism 
risk could be considered.
                                ------                                --
----


RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM RANDALL 
                          S. KROSZNER

                            Subprime Market

    As I have stated before, and expressed recently when 
Chairman Bernanke was before this Committee, I do not think the 
Fed's response to the subprime market has matched the severity 
of crisis at hand. I remain unconvinced that the Fed took every 
action possible when it could have. Had it used its authority, 
earlier, with more veracity, perhaps the subprime market would 
not be in the same place it is today.
Q.1. Do you think the response the Federal Reserve has taken 
has been an appropriate and sufficient response thus far to 
mitigate the decline of the subprime market?

A.1.  The Federal Reserve is responding to the decline in the 
subprime market. We are working to help those borrowers who are 
in distress and reviewing all of our options to help prevent 
problems from recurring. To help the borrowers who may be 
facing foreclosure, the Federal Reserve, along with other 
federal supervisory agencies, has issued two statements in 2007 
to encourage lenders and loan servicers to identify and contact 
borrowers who, with counseling and possible loan modifications, 
may be able to avoid delinquency or foreclosure. The community 
affairs offices of the twelve Reserve Banks have also provided 
significant leadership and assistance to foreclosure-prevention 
efforts.
    Prospectively, we are reviewing all of our options under 
the law to prevent these problems from recurring, while still 
preserving responsible subprime lending. In doing so, we 
recognize that some market adjustments are already underway as 
originators and investors have tightened lending standards. We 
issued principles-based guidance on underwriting and consumer 
protection standards for nontraditional mortgages in 2006 and 
for subprime mortgages in 2007. The guidances had a positive 
effect on the market, particularly with respect to 
nontraditional mortgage loans. Many institutions took steps to 
conform their policies and practices to the guidances even 
before they were finalized.
    We currently are reviewing Truth in Lending rules to 
improve disclosures. Improving disclosures, however, requires 
extensive consumer testing and trials, and it may take some 
time to do it right. In addition, we are committed to using our 
rulemaking authority under the Home Ownership and Equity 
Protection Act to propose additional consumer protections later 
this year. We held a public hearing in June and solicited 
comments from the industry and consumer groups. We are taking 
great care to address the abuses without unduly constraining 
responsible credit.

Q.2. You have had an integral role in overseeing the Federal 
Reserve's authority under HOEPA. Can you describe the extent of 
your involvement in developing the Federal Reserve's response 
to the subprime crisis?

A.2. I have been a member of the committee of the Board that 
oversees the Division of Consumer and Community Affairs (DCCA) 
since the summer of 2006 and have chaired the committee since 
March 2007. I also have been a member of the committee of the 
Board that oversees the Division of Banking Supervision & 
Regulation since I arrived at the Board in March 2006 and have 
chaired this committee since March 2007. When I arrived at the 
Board, the inter-agency proposal on guidance for non-
traditional mortgages had already been published (late December 
2005) and, as a committee member, I was engaged in responding 
to comments and shaping the final guidance. I then assumed the 
primary responsibility in early 2007 to work with the other 
federal banking agencies, in coordination with the CSBS, to 
develop the subprime guidance that the agencies put out for 
comment in early March 2007 and finalized in late June 2007. I 
participate in our triennial meetings of the Consumer Advisory 
Counsel where we have valuable dialogue and debates among 
industry participants and consumer representatives on a variety 
of consumer issues, including subprime mortgages. In June, I 
chaired a day-long HOEPA hearing involving a wide spectrum of 
participants to gather information about potentially unfair and 
deceptive practices in the subprime mortgages. In particular, 
we focused on four areas: prepayment penalties, low- and no-
documentation mortgages, failure to escrow for taxes and 
insurance, and the ability to repay. The information we 
obtained at that hearing and from the approximately 100 written 
comments that we subsequently received have been very helpful 
as the Board formulates additional rulemaking. I have been 
working very closely with the staff to develop these proposals, 
which we expect to issue in December.

Q.3. Do you think that, given the benefit of hindsight, the 
Federal Reserve could have done more to stem the fallout of the 
subprime market? Didn't we have a sense of how bad the subprime 
turmoil could be?

A.3. The Federal Reserve and other federal supervisory agencies 
have been providing principles-based guidance and supervisory 
oversight to the lenders that we supervise for many years. We 
first issued guidance on subprime lending in 1999 and again in 
2001. When problems surfaced concerning non-traditional 
mortgages in 2004, we issued guidance on those. We then 
developed guidance for subprime mortgages, especially for 
adjustable-rate products. We also created disclosures that 
lenders were required to provide to borrowers to help them 
better understand mortgage products. Still, many subprime 
adjustable-rate mortgages made in late 2005 and 2006 were 
originated with very high cumulative loan-to-value ratios and 
less documentation of borrower income, as loan performance 
stayed strong amid continued house price appreciation. The 
sharp deceleration of house prices since 2005 has left many of 
the more-recent borrowers with little or no home equity and has 
led to higher delinquencies. In this situation, some borrowers 
found that refinancing--the typical way for many subprime 
borrowers to avoid large scheduled interest rate resets--has 
been difficult or impossible and some borrowers (particularly 
owner-investors) may have found that walking away from their 
properties was the best option.

Q.4. You chaired a hearing on June 14th of this year that was 
the last of five hearings examining possible actions under 
HOEPA. What has the impact of those hearings been thus far? 
What results from those hearings can we expect?
    As we heard from Chairman Bernanke recently, he expects the 
Fed to propose additional rules under HOEPA later this year. 
Are you involved in developing additional action under HOEPA 
that the Fed may take or recommend? Can you describe what you 
expect those efforts to result in?

A.4.  As oversight Governor for the Division of Consumer and 
Community Affairs at the Federal Reserve, I am very involved in 
the HOEPA rulemaking. As you noted, I chaired the hearing on 
June 14, 2007, on issues related to subprime mortgages. The 
hearing gathered information on how the Board might use its 
rulemaking authority under HOEPA. We heard from representatives 
of consumer and community groups, state officials, lenders and 
mortgage brokers, as well as secondary market participants. 
These witnesses provided valuable information about certain 
practices prevalent in subprime lending, including stated 
income lending, prepayment penalties, failure to escrow for 
taxes and insurance, and making loans without assessing the 
borrower's ability to repay. I anticipate that the proposed 
rules we will issue in December are likely to address these 
issues.
    Earlier hearings held in 2006 have also provided valuable 
information which we have used in a number of ways. For 
example, the 2006 hearings indicated that consumers need better 
information about the risks of nontraditional mortgages such as 
interest only and payment option ARMs. The Board is committed 
to reviewing mortgage disclosures using consumer testing to 
make disclosures more useful to consumers; however, because 
testing takes time, in the short run the Board and OTS have 
updated the Consumer Handbook on Adjustable Rate Mortgages to 
include information about nontraditional mortgage products.

Q.5. Are other areas of the subprime crisis that the Fed has 
not yet addressed?

A.5. In addition to our HOEPA rulemaking, we are engaged in a 
rigorous review of the mortgage-related rules under Regulation 
Z, which implements the Truth in Lending Act (TILA). We intend 
to issue proposals before the end of the year to ban several 
deceptive advertising practices and require important consumer 
disclosures earlier in the mortgage process to better enable 
consumers to compare and shop among loan products.

Q.6. The majority of subprime loans are originated by mortgage 
brokers, yet the Federal Reserve has not yet cracked down on 
these abuses. Do you think this is an area the Federal Reserve 
should look at? Should the Federal Reserve do more to hold 
lenders responsible for abuses by the brokers who originate 
their loans?

A.6. The states are the primary regulators of the mortgage 
brokers they license, and they have promising initiatives 
underway to address concerns about mortgage brokers' 
activities. Many states are strengthening their licensing 
requirements and oversight of brokers in response to the 
problems in the subprime market. The Federal Reserve is working 
with the states where appropriate. For example, the Conference 
of State Bank Supervisors (CSBS) will be looking at the 
activities of brokers in our pilot program to look at the 
actions of non-bank subsidiaries of bank holding companies. The 
CSBS also has developed a nationwide registration and licensing 
system for mortgage brokers and mortgage originators not 
affiliated with depository institutions. Such a system should 
limit the ability of bad actors to move to a new state and to 
continue engaging in irresponsible practices there, after 
having run afoul of regulators in their old states.
    We and the other federal supervisory agencies do expect our 
institutions to have systems and controls in place for 
establishing and maintaining relationships with brokers and 
other third parties, including procedures for due diligence. 
Institutions are expected to have adequate oversight over third 
parties to monitor quality of originations and compliance with 
the institution's underwriting standards and applicable laws 
and regulations.
    Whether it is appropriate as a general matter to hold a 
lender liable for the acts of brokers--who are essentially 
independent contractors--raises many issues, including whether 
lenders are in a position to perform due diligence to guard 
against undue risk of liability.

                                  TRIA

    In 2004, you wrote an article in which you said, ``If 
Congress does decide to extend the Terrorism Risk Insurance 
Act, the program's scope should not be expanded, and the amount 
of losses that the private sector must bear before federal 
assistance kicks in should increase annually over the duration 
of any extension.'' Obviously, Congress did decide to extend 
TRIA, and as you know, we are currently grappling with the next 
steps for this legislation.

Q.7. Can you explain your current views on TRIA? Do you support 
further extensions of TRIA?

A.7. On the whole, my views on TRIA have not changed markedly 
since I wrote that article in 2004. In particular, I continue 
to oppose expansion of the role of the federal government in 
the terrorism insurance market, particularly for attacks using 
conventional materials. Indeed, last fall, the study conducted 
by the President's Working Group on Financial Markets reported 
that market conditions have improved since the terrorist 
attacks of 9/11, with take-up rates rising as premium rates 
have fallen. These improvements have occurred against the 
backdrop of the TRIA (and TRIEA), which has raised the private 
sector's level of exposure to terrorism losses over time; 
however, the continued federal involvement may have hindered 
the development of private market solutions during this time as 
well. In short, I would be more inclined to support temporary 
extensions of TRIA that reduce, rather than expand, the role of 
the federal government in the terrorism risk insurance market.

Q.8. How much of the burden do you think the private sector 
should bear for providing terrorism insurance? Do you think 
terrorism risk insurance is possible without government 
involvement?

A.8. Unfortunately, the possibility exists of a catastrophic 
event so large that private markets and the private insurance 
industry would not be able to bear the associated losses. For 
events of that scale and beyond, government has a role to play. 
However, I believe that the private sector is capable of 
handling losses associated with smaller-scale events, and that 
for those risks, private markets and private institutions 
should be allowed maximal scope to operate and innovate.

Q.9. Wouldn't you agree that short term authorizations lead to 
uncertainty and instability within the insurance market? What 
about the ripple effects, for example on real estate, housing, 
construction, mortgage-backed securities, etc?

A.9. Although short-term authorizations may lead to some 
uncertainty for commercial insurers and policyholders, I am not 
aware of evidence that they have significantly affected 
economic activity or the stability of financial markets.

                           Access to Capital

    Over the last few years, the Federal Reserve, the Small 
Business Administration and others have conducted studies that 
reveal minorities have unequal access to credit for small 
business development, even when factors such as credit history 
and net worth are comparable to non-minorities.

Q.10. In your opinion, in addition to promoting financial 
education, how can we improve ``access to capital'' for 
minority-owned businesses?

A.10. Minority-owned businesses play an important role in the 
growth and expansion of our economy. Many of the Federal 
Reserve Banks have targeted programs in support of minority and 
small business development. As one example, the Federal Reserve 
Bank of Boston in 2007 developed a program to address the need 
for small loans by small businesses. The Massachusetts Banking 
Partners Small Business Loan Program is a state-wide initiative 
in partnership with local banks to bring loans and technical 
assistance to small businesses that generally have twenty or 
fewer employees, are located in low- or moderate-income census 
tracts, or require small loans. To promote participation in the 
program by banks and businesses, the Community Affairs program 
at the Federal Reserve Bank of Boston hosted a series of forums 
across the state, published an article featuring the loan 
program and provided technical assistance to lenders.
    The Federal Reserve Bank of St. Louis also sponsored an 
initiative to foster entrepreneurship. Beginning with a survey 
of the local climate for entrepreneurial development, which was 
conducted in a number of cities including Arkadelphia, Tupelo 
and Memphis, the Bank has held forums and workshops to help 
entrepreneurs move their businesses to the next stage of 
development. The Bank also developed a resource guide and 
highlighted opportunities for entrepreneurs to access technical 
assistance and expertise.
    The Federal Reserve is also committed to supporting the 
growth and expansion of minority-owned depository institutions. 
Of the approximately 200 such institutions nationwide, 20 are 
supervised by the Federal Reserve. In August, I spoke at the 
Interagency Minority Depository Institutions National 
Conference which was hosted in Miami. At that time, I announced 
a new training and technical assistance program the Federal 
Reserve is launching to address the needs of minority 
institutions. The program will include workshops, self-directed 
educational programs, and a web-based resource and information 
center. The Board is partnering with the Federal Reserve Bank 
of Philadelphia in the development of this program, which will 
be launched on a pilot basis this fall. The full program will 
be launched in early 2008.

Q.11. What role can the Federal Reserve play to encourage 
institutions to engage in expanding access to capital, both for 
individuals and businesses?

A.11. The Federal Reserve Board and the twelve Federal Reserve 
Banks each have established Community Affairs Offices. The 
function of these offices is to promote community development 
and access to credit. Each of the Reserve Banks develops an 
understanding of the needs of the communities within their 
District, by conducting research and outreach. The data 
developed and information gathered are then published in 
various media and academic journals and magazine articles, as 
well as presented in workshops and forums which can help meet 
the informational needs of the financial institutions in the 
respective Districts. The data which is developed provides a 
framework for developing programs and services. Those 
informational products are designed to foster depository 
institutions' provision of credit and banking services to 
traditionally underserved markets, increase consumers' 
awareness of the benefits and risks of financial products and 
encourage development of new products, and promote among policy 
makers, community leaders and the private sector a better 
understanding of the practices, processes and resources that 
result in successful community development programs.
    For issues which cut across several Districts, the Reserve 
Banks may offer programs collaboratively. For example, in 2006 
the Reserve Banks developed a series of programs on the 
challenges of asset-building in low- and moderate-income 
communities. The Reserve Bank System also co-sponsored a 
research forum to feature academic research on issues related 
to asset building such as financial literacy, manufactured 
housing, public policy and savings products. This year, all 
twelve Reserve Banks are undertaking a project with the 
Brookings Institution, in which each Bank is conducting a case 
study of a targeted neighborhood with a high concentration of 
poverty. Those case studies will provide comparative data to 
help the Federal Reserve System understand better the provision 
of financial services in extremely low-income communities.

Q.12. What actions would you recommend the Federal Reserve take 
in this area?

A.12. See answer to 11 above.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR AKAKA FROM RANDALL S. 
                            KROSZNER

Q.1. Our modern, complex economy depends on the ability of 
consumers to make informed financial decisions. Without a 
sufficient understanding of economics and personal finance, 
individuals will not be able to appropriately manage their 
finances, evaluate credit opportunities, and successfully 
invest for long-term financial goals in an increasingly complex 
marketplace. What must be done to ensure that Americans have 
the knowledge and skills necessary to make informed financial 
decisions?

A.1. Consumers need to be well-informed in order to make 
decisions about the products and services that best suit their 
needs, particularly given the highly sophisticated and 
competitive financial services marketplace in the U.S. Informed 
consumers are essential to efficient market operations. 
Accordingly, the Federal Reserve has a long-standing commitment 
to promoting consumers' understanding of financial products and 
services. In addition to writing consumer protection rules and 
disclosure requirements to ensure consistency in the 
information that consumers receive when they obtain a loan or 
other banking service, we also publish numerous consumer 
information brochures that provide information about specific 
products that are available at no charge to the public by 
request or through our website at www.federalreserve.gov/
consumerinfo/default.htm.
    The Federal Reserve System also actively participates in 
various national, regional, and local initiatives to support 
financial education efforts. For example, Board staff advise 
the federal Financial Literacy and Education Commission, 
NeighborWorks America', and the JumpStart Coalition, 
while staff in the Community Affairs and Public Affairs Offices 
of the Federal Reserve Banks work with coalitions that include 
community organizations, youth education coalitions, and 
financial institutions to help further financial education. A 
listing of many of the Federal Reserve's offerings and recent 
activities in financial education can be found at 
www.federalreserveeducation.org, as well as in Chairman 
Bernanke's testimony on the topic in May 2006 at 
www.federalreserve.gov/newsevents/testimony/
bernanke20060523a.htm.
    Additionally, the Federal Reserve recognizes the value of 
expanding the body of research to increase the understanding of 
the effectiveness of financial education in general, as well as 
the efficacy of the various approaches to program design and 
delivery. Federal Reserve Board researchers have published 
studies on various aspects of financial education, several of 
which can be found at www.federalreserve.gov/research/staff/
hogarthjeannem.htm. In addition, the biennial Federal Reserve 
System Community Affairs Research Conference has highlighted 
research on the effectiveness and role financial literacy 
programs play. Further, the Federal Reserve has sought to 
create a clearinghouse of such research to ensure easy access 
to literature on the topic. These studies can be found under 
the Financial Education Center section of the Federal Reserve 
Bank of Chicago's Consumer and Economic Development Research & 
Information Center website at www.chicagofed.orgckedric/
cedric_index.cfm.

Q.2. Approximately 10 million households in the United States 
do not have accounts at mainstream financial institutions. 
Unfortunately, too many of these households depend on high-cost 
fringe financial services. They miss out on opportunities for 
saving, borrowing, and lower cost remittances found at credit 
unions and banks. What must be done to bring these households 
into mainstream financial institutions?

A.2. Many benefits can accrue to consumers by establishing a 
relationship with a depository institution, including potential 
cost savings and access to savings vehicles that non-bank 
financial service providers cannot provide. In addition, 
unbanked or underbanked populations may represent new market 
opportunities to depository institutions. The Federal Reserve 
has dedicated resources to engage in outreach, education, and 
technical assistance to help increase awareness of the 
challenges and opportunities in reaching the unbanked.
    The Federal Reserve System has undertaken initiatives to 
gain a better understanding of the unbanked and to highlight 
opportunities for depository institutions to reach out to this 
market through the financial education activities and programs 
offered by the Federal Reserve's Community Affairs Offices 
throughout the country. For example, the Federal Reserve Banks 
of Philadelphia and St. Louis are convening conferences in the 
coming months to discuss innovative strategies for reaching the 
unbanked and developing products that are responsive to their 
needs. Several Federal Reserve Banks have examined the 
challenges immigrant communities confront in accessing 
financial services through their publications, conferences, and 
research, including the Federal Reserve Banks of Boston, 
Chicago, and San Francisco. The Federal Reserve System engages 
in partnerships to help increase awareness of the issues and 
how they may differ in various markets. For example, the Board 
and several of the Federal Reserve Banks have recently worked 
with the Financial Literacy and Education Commission to develop 
a series of four regional workshops in Chicago; Edinburg, 
Texas; Seattle, and New York to address the challenges and 
opportunities in reaching the unbanked, as well as a forum on 
reaching and serving Asian communities. Given the importance of 
this issue, the Federal Reserve will continue to engage in 
efforts to bring unbanked consumers into mainstream financial 
institutions.

Q.3. I am deeply concerned that too many working families are 
taken advantage of by unscrupulous lenders through payday 
loans. What must be done to restrict payday loans and expand 
access to affordable, small loans?

A.3. As a member of the Federal Reserve Board, I support 
efforts to ensure that consumers, including working families, 
are not taken advantage of by unscrupulous lenders. None of the 
state member banks supervised by the Federal Reserve System 
engage in payday lending. Nonetheless, we have participated 
with the other federal supervisory agencies in issuing 
interagency guidelines that address matters related to payday 
lending. In addition, Board staff consulted extensively with 
the Department of Defense (DoD) when it developed a rule 
implementing the consumer protection provisions of section 670 
of the John Warner National Defense Authorization Act for 
Fiscal Year 2007, also known as the Talent Amendment, which was 
effective October 1, 2007. The final DoD rule contains 
limitations and requirements for payday loans, motor vehicle 
title loans, and tax refund anticipation loans extended to 
active duty service members or their dependents by any creditor 
engaged in the business of extending such credit and their 
assignees.
    The Federal Reserve works to expand access to affordable 
small loans in many ways. We encourage banks to expand access 
to affordable small loans through our supervision of banks 
pursuant to the Community Reinvestment Act (CRA). Guidance 
issued by the Federal Reserve Board and other supervisory 
agencies provides that making affordable small unsecured loans 
with reasonable terms will receive favorable consideration 
under the CRA. Further, the Federal Reserve System's Community 
Affairs staff continues to be involved in programs to help low-
and moderate-income consumers make better financial choices. 
Several of the Reserve Bank community affairs programs host 
roundtables, help convene or provide advisory services to 
groups educating consumers about the problems inherent in 
payday lending, and in some cases, promote alternatives.

Q.4. Too many working families have their Earned Income Tax 
Credit benefits needlessly reduced by high cost-refund 
anticipation loans (RALs). What must be done to restrict these 
predatory loans and encourage alternatives to RALs?

A.4. The Federal Reserve is actively involved in efforts to 
provide financial education and programs to help low- and 
moderate-income consumers make better choices, as explained in 
the previous answer. The Federal Reserve also engages in 
research that explores issues relating to consumers' use of 
financial services, including subprime loans and consumer 
literacy. Research providing information about the impact of 
credit products, policies and programs can be used in 
formulating future policies.
    With respect to the cost of credit, the Federal Reserve 
does not have the authority to set loan fees or interest rates, 
but we do develop and enforce the disclosure requirements 
relating to terms and cost associated with loans subject to 
Regulation Z, which implements the Truth in Lending Act. As 
noted, the Talent Amendment does include restrictions on tax 
refund anticipation loans, payday loans and motor vehicle title 
loans, as defined by DoD, extended to active duty service 
members or their dependents. The rule, which was issued by DoD 
after consultation with Federal Reserve Board and other 
agencies' staff, limits the amount that the creditor can charge 
in interest and fees, including charges imposed for single 
premium credit insurance and other ancillary products sold in 
connection with covered transactions.

Q.5. I am concerned that consumers are not provided with enough 
information about the long-term consequences of making only the 
minimum credit card payments. What must be done to ensure that 
consumers are adequately informed of the true cost of making 
only the minimum payment?

A.5. The Bankruptcy Abuse Prevention and Consumer Protection 
Act of 2005 (the ``Bankruptcy Act'') requires that creditors 
put on the periodic statement a toll-free telephone number to 
obtain an estimate of the time to repay if the consumer makes 
only minimum payments. The Act permits, but does not require, 
creditors to provide a more precise estimate based on the 
customer's actual account terms. In May 2007, the Board issued 
a proposed rule implementing the Bankruptcy Act. In the 
proposal, the Board recognized that the Act does not require an 
estimate based on actual account terms or placing the estimate 
on the periodic statement. Nonetheless, the Board strongly 
encouraged creditors to provide the actual repayment disclosure 
on periodic statements by creating incentives in the form of 
relief from other requirements. The Board also solicited 
comment on whether the Board should take other steps to provide 
incentives to creditors to use this approach. A recent study 
conducted by the GAO on minimum payments suggests that certain 
cardholders would find the actual repayment disclosure more 
helpful than the generic disclosures required by the Bankruptcy 
Act.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN DODD FROM ELIZABETH 
                            A. DUKE

Q.1. Ms. Duke, in your appearance before the Committee, you 
stated that you are a strong believer in the Fed's dual mandate 
for maximum employment and price stability. Are there 
approximate figures for the nation's unemployment rate and 
inflation rate that match what you believe to be maximum 
employment and price stability? If so, can you share what those 
are?

A.1. I do not have any specific unemployment rate in mind. I am 
not sure there is one specific number that would hold true 
under all conditions. When I was in school, I was taught that 
6% constituted full employment. Yet, we have seen employment 
rates substantially below 6% that did not seem to contribute to 
higher inflation. Many economists now believe the productivity 
growth rate impacts the rate of employment that can be 
sustained without leading to higher inflation. So the 
unemployment rate would need to be evaluated in the context of 
productivity growth and the overall strength of the economy.
    With respect to inflation, I would think the Fed's 
currently stated comfort range of 1-2% would be a proxy for 
price stability. I don't believe that zero inflation makes a 
reasonable objective as overshooting it could lead to 
deflation. And this range appears to have been successful in 
lowering long term inflation expectations in the marketplace. 
In my personal and business financial planning, I have used an 
expected long term inflation rate of 2-3% to make decisions. I 
believe my expectations are consistent with the market 
expectations that can be inferred from the pricing of TIPS 
securities.

Q.2. Ms. Duke, can you inform the Committee of any periods in 
American history where you believe that maximum employment was 
not being reached or that price stability was not achieved? 
During those periods, what actions do you believe the Fed 
should have undertaken to achieve its mandate?

A.2. Clearly, price stability was not achieved in the 1970s and 
early 1980s. Ultimately, the Fed did act to reduce the money 
supply, drive up interest rates and finally bring inflation 
down to the levels we enjoy today. However, it was an extremely 
painful process for consumers, businesses and the financial 
system. And, I suspect, it was a difficult time for the Fed as 
well.

Q.3. Ms. Duke, how do you explain the Federal Reserve's 
findings from the HMDA data that in 2005, 54.7% of African-
American borrowers and 46.1% of Hispanic borrowers got high-
priced loans when buying a home compared to 17.2% of non-
Hispanic whites?

A.3. I do not have a full explanation, but some of the 
differences may relate to information not included in the HMDA 
data. That said, I would fully support use of the Fed's 
analytical resources to try to uncover and quantify the reasons 
for the disparity. It is important to understand the causes in 
order to be able to change the outcome.

Q.4. In the Fed's analysis of the data, significant racial and 
ethnic differences remained unexplained even after accounting 
for other information reported in the HMDA data. The Fed found 
that borrower-related factors accounted for only about one-
fifth of the disparity. Do you believe that there is racial 
discrimination in the mortgage market? If so, how do we root it 
out of the system? What specific additional steps should the 
Fed undertake to do so? If you do not believe that there is 
racial discrimination, how do you explain these racial 
disparities?

A.4. Within the banks with which I have been associated, I have 
observed a high level of management attention, time, effort, 
money and resources invested in identifying and avoiding or 
eliminating potential racial discrimination. Underwriting and 
pricing decisions are increasingly based on statistical models 
that should be racially neutral. Regulators regularly conduct 
reviews and recommend improvements to bank processes and 
scoring systems. Most banks conduct internal reviews of their 
own HMDA data with particular emphasis on variations from 
norms. And regulators have been able to use the data to 
schedule targeted reviews of lending practices.
    It is deeply troubling that despite all this effort and 
attention, disparities in lending still exist. We need to 
continue to be vigilant in our efforts to eliminate all bias in 
lending. But I think we also need to investigate all other 
possible explanations for disparity. Because we cannot solve a 
problem unless we can accurately identify its cause.
    Some other factors that I have seen suggested as 
contributors would be:

      Differences in financial literacy and 
sophistication;

      Differences in creditworthiness not reflected in 
HMDA data;

      Differences in marketing methods and 
receptiveness to certain marketing practices; and

      Distrust of traditional banks.

    I am sure there are other possible factors. And I realize 
that some of these may prove ultimately to have no impact. But 
I think the issue is important enough that we should pursue all 
possible explanations in an all out effort to finally change 
the results.
    The Fed's role should be first as a vigilant regulator. The 
Fed should continue to actively monitor activities of banks 
under its supervision. It should continue to work with banks to 
further improve their own efforts. And, when the Fed finds 
evidence of illegal activity, it should promptly refer such 
cases to the Justice Department. Additionally, the Fed should 
use its research and data analysis capability to continue to 
work on diagnosing the possible contributing factors and 
potential solutions to this serious problem.

Q.5. Ms. Duke, do you think that the 2001 Bush tax cuts have 
resulted in an increase or decrease in real federal revenue?

A.5. I have neither the expertise nor the information to be 
able to answer this question.

Q.6 As you know, only the Federal Reserve, the Office of Thrift 
Supervision, and the National Credit Union Administration 
currently have the authority to promulgate a rule dealing with 
unfair or deceptive acts or practices. In your view, should the 
other agencies be given the same authority? Please explain your 
reasoning.

A.6. Your question appears to refer to rule-writing authorities 
under the Federal Trade Commission Act. I do not believe giving 
additional agencies rule-writing authority under this act will 
necessarily speed up the process of issuing sensible 
regulations or improve the effectiveness of the ultimate 
regulations.
    Under the FTC Act, four agencies--the Fed, OTS, NCUA, and 
the FTC--currently have authority to write rules that apply to 
a portion of the financial industry. Ideally, all lenders 
should be subject to the same regulations. The more entities 
there are writing rules separately, the greater the opportunity 
for entities engaged in a specific practice to ``charter shop'' 
those practices and undermine the regulation. If, on the other 
hand, other rule-writers were introduced, and all were required 
to issue the same rules, it could be harder, not easier, to 
achieve sensible rules of general applicability and these rules 
could be slower in coming.
    I believe it is preferable for the Federal Reserve to use 
other authorities it has, under the Home Ownership and Equity 
Protection Act, to write rules related to unfair or deceptive 
mortgage lending activities. Rules written under these 
authorities would apply to all mortgage lenders. As you know, 
Chairman Bernanke has pledged to issue proposed rules under 
these authorities for public comment later this year. I support 
that process.
    With respect to mortgage lending, I believe there is a much 
larger need to address the regulatory environment outside 
insured depository institutions than there is to redistribute 
the regulatory responsibilities within the regulatory structure 
governing insured depository institutions. More sub-prime loans 
have been originated outside the federal supervisory structure 
than inside it. Any regulation governing sub-prime lending will 
need to be accompanied by an effective supervision and 
enforcement regime.

Q.7. Ms. Duke, as you know the FOMC voted unanimously in its 
August meeting to keep Interest rates constant and in the 
accompanying statement that their ``predominant policy concern 
remains the risk that inflation will fail to moderate as 
expected.'' Over the next ten days, there were significant 
disruption in the equity and bond markets that caused the Fed 
to reverse course, cut the rate at the discount window by 50 
basis points and issue the following statement ten days after 
their August meeting: ``Financial market conditions have 
deteriorated, and tighter credit conditions and increased 
uncertainty have the potential to restrain economic growth 
going forward. In these circumstances, although recent data 
suggest that the economy has continued to expand at a moderate 
pace, the Federal Open Market Committee judges that the 
downside risks to growth have increased appreciably. The 
Committee is monitoring the situation and is prepared to act as 
needed to mitigate the adverse effects on the economy arising 
from the disruptions in financial markets.''
    Do you believe that the FOMC made a mistake at their 
original August meeting? Do you believe that the predominant 
policy concern remains the inflation in light of the events 
since the August meeting of the FOMC? If you had been a Fed 
Governor, what actions, if any, would you have taken that were 
different from those taken by the Fed Governors?

A.7. I don't believe anyone could have predicted the speed or 
the pervasiveness with which the credit markets dried up. I 
certainly don't believe anyone could have predicted the timing. 
And I don't believe anyone knows yet what the ultimate impact 
will be on the overall economy.
    The discount window is the most appropriate tool available 
for use in a credit/liquidity crunch. It was, in fact, designed 
to be used in the case of a run on a bank. In this case, the 
``run'' took place much more outside than inside the banking 
system. I don't think we know yet how effective the Fed tools 
will be outside the banking system. The lowering of the 
discount rate combined with relaxation of the terms, expansion 
of collateral eligibility, and generally welcoming banks to use 
the discount window all combined to bring some confidence back 
into the market.
    My primary concern, if I had been a Fed Governor during the 
last month, would be the gathering of as much information as 
possible on what impact turmoil in the financial markets was 
having on real economic activity.
    Based on my observations and understanding of the 
situation, I do think the Fed has acted appropriately in recent 
weeks:

Q.8. Ms. Duke, at your confirmation hearing you expressed 
concern over the state of some subprime borrowers, saying: 
``what worries me is the very specific situation of a borrower 
who, for whatever reason, is in a loan that they cannot pay and 
not sure what to do, where to do it. I think some of the things 
that we will need to take a look at are finding a trusted 
third-party intermediary.'' Can you please explain in more 
detail what policies about to be enacted address your concerns? 
Please include what role you think the Fed can and should play 
in those policies.

A.8. The keys to successful work-outs are early identification 
of the problem, accurate information and communication. Many 
borrowers, especially those in trouble, do not want to talk to 
the lender. They might not trust the lender or they might not 
understand the options available for work-out. And in today's 
web of investors and servicers, they might not even be able to 
find the right person. There are a number of state, local and 
community-based organizations devoted to financial counseling 
and, specifically, to the housing markets. They would be in a 
position to help these borrowers, but I am sure they find 
themselves even more under-funded and under-staffed than usual 
in today's environment. So any resources provided to these 
groups would be helpful.
    Any policies that would help borrowers identify these 
groups and encourage them to seek assistance would also be 
helpful. I have been horrified, however, to read of the scams 
perpetrated by criminals posing as debt assistance groups. 
Justice should be swift and penalties severe for that crime. We 
would need policies in place to ensure that the places we send 
borrowers for help have both expertise and the intent to 
actually help.
    Servicers, as the intermediaries between borrowers and 
investors, are going to play a key role in the resolution of 
current loan problems. Servicers will need the legal, financial 
and human resource capacity to resolve troubled debt 
restructures. The banking regulators have recently issued 
guidance encouraging bank servicers to anticipate and work 
toward successful loan restructures. But not all servicers are 
financial institutions or subject to the recent guidance. Some 
servicers may actually be in a better position to accept 
reduced principal payouts in satisfaction of loans than they 
are to modify the terms of the loans. Lenders willing to 
finance reduced payouts would speed the resolution of such 
cases. CRA and FHA programs could be used to entice lenders to 
make loans available. Care must be taken, however, to limit 
such assistance to cases where there is documented income 
sufficient to make the payments on a fixed rate loan, the 
borrower has a past history of responsible payments, and the 
property is a primary residence. I would also favor relief from 
taxes on debt forgiven on a primary residence.
    We have seen recently the warning signs that financially 
troubled servicers could actually increase the number of loans 
that result in adverse action against borrowers. We must ensure 
that payments made to servicers are recorded and forwarded 
promptly to lenders, insurers and taxing authorities. It will 
be time-consuming and, in some cases, impossible to reverse 
consequences to borrowers whose payments were not properly 
credited. It will be especially difficult to defend the 
requirement for escrow of taxes and insurance if those payments 
are not forwarded in a timely manner.
    The role of the Fed in this process would probably be 
limited to identification of barriers to loan work-outs such as 
servicer agreements and encouragement of banks to participate 
in workout lending, as in recent guidances issued by the Fed 
and others. Also, the Reserve Banks already maintain close ties 
to the local markets within their districts. Their knowledge of 
local market conditions, understanding of the loan workout 
process and existing community development activities could be 
very helpful across the country.

Q.9. Ms. Duke, you have been a very strong supporter of 
allowing banks to engage in real estate. You were quoted in a 
newspaper story that ``Buying a house is probably the largest 
financial transaction most people engage in. It makes sense 
that financial institutions be able to own the agencies that 
produce that transaction.'' Can you share some more detail as 
to why you hold this opinion?
A.9. The purchase of a home is the largest and most important 
financial transaction entered into by most individuals. Equity 
buildup in that home is the greatest contributor to the 
accumulated wealth of most individuals. The purchase and 
financing of a home are increasingly linked, both in the 
marketplace and in the consumer's mind. And brokerage is an 
intermediary activity. However, I have never advocated that 
banks be allowed to engage in the ownership or development of 
real estate.

Q.10. As a Fed Governor you would have the ability and 
responsibility to increase competition in many industries, 
provided they were to the benefit of consumers and would not 
risk the safety and soundness of the financial system. You were 
also quoted saying that allowing banks to enter into real 
estate would mean, and I quote--``more competitors, which means 
a better deal for the consumer.'' Is it your intention to 
advocate this position and others that you believe will benefit 
consumers, if you are appointed to the Fed Board of Governors?

A.10. I advocated that position as a banker and as Chairman of 
the American Bankers Association. If I am confirmed, I would 
not advocate this or any other position. If this decision came 
before me in my role as a Governor, I would decide it on the 
basis of the law. In this case, I believe Gramm-Leach-Bliley 
established a mechanism and criteria for such decisions. In any 
actions I took as a Governor, I would be guided by the 
responsibilities and authorities given to the Fed by Congress 
and by my best judgment of the public policy outcome, based on 
all of the evidence and public comments before me at the time.

Q.11. Ms. Duke, as Chairwoman of the American Bankers 
Association you wrote a regular column in the ABA Journal. You 
wrote a column entitled, ``Singing the Regulatory Blues'' in 
which you discussed Sarbanes-Oxley, the FACT Act, the Patriot 
Act and the GLB Act and stated, and I quote--``The goal, as 
John Byrne, the center's director, put it, is `to roll back 
regulation.''' Ms. Duke, what specific regulations do you think 
ought to be rolled back?

A.11. I would first like to recognize the ongoing efforts of 
many to reduce and streamline our existing regulatory 
framework. The regulatory agencies have been engaged 
individually and collaboratively in reviewing existing 
regulations. This committee put much thought and effort into 
the regulatory relief bill that passed last year. The SEC and 
PCAOB have been engaged in an ongoing effort to reduce the 
burden of Sarbanes-Oxley Section 404 while retaining investor 
protection. I doubt that a year passes without at least one 
hearing in this committee related to regulatory burden.
    And I would like to reiterate my earlier pledge that if I 
am confirmed, nothing would preclude me from proposing, 
enforcing or voting in favor of any regulation.
    The cost of regulatory compliance has concerned bankers for 
as long as I have been in banking. It would be an easy fix if 
we could all point to one especially burdensome regulation as 
the source of the problem. Unfortunately, it is the sum of many 
different regulations that create the overall burden. When I 
was a community banker, I thought small banks had the true 
burden because we had such limited resources. When FDICA 
passed, the number of implementing regulations exceeded the 
number of employees in my bank by 2. When I was with larger 
banks, I realized that the compliance task was equally 
difficult, primarily due to operational complexity and long 
lines of communication.
    Numerous studies have attempted to quantify regulatory 
compliance costs. However, in recent years, the discussion has 
turned from purely cost to regulatory risk and uncertainty. 
I'll offer a few examples.
    Smaller banks, in particular, struggled with Sarbanes-Oxley 
Section 404 compliance. And many who were not required to 
comply under the law felt examiner pressure to comply anyway.
    The expanded anti-money laundering responsibilities created 
by the Patriot Act have elevated regulatory risk. All banks are 
committed to detecting and reporting suspicious activity, but 
few banks are certain they know how to do so adequately. One 
area where banks are particularly uncertain is in the servicing 
of money service businesses. As business types are identified 
as high risk, banks that feel unable to monitor the risk at a 
reasonable cost are stopping service to those businesses.
    Finally, I mentioned payment system regulation in my 
testimony. Electronic payments are coming of age, surpassing 
paper payments in the last few years as the payment of choice. 
Check 21 and ACH conversion promise to accelerate this change. 
As each payment method has evolved, so has its body of 
regulation. The result is a complicated tangle of forward 
collection and return rules and timetables. If they are 
confusing to bankers, they must be even more confusing to 
consumers. The Federal Reserve System is at the heart of the 
payment system in this country. If confirmed, I would like to 
devote time to studying the regulations and procedures 
surrounding payments with the goal of proposing changes that 
would make the payment system more efficient, understandable 
and predictable.

Q.12. Ms. Duke, I understand that you were President of a 
thrift when the OTS decided to increase its exemption to $1 
billion for streamlined CRA compliance. Do you agree with the 
OTS's decision? Do you think the Fed should consider something 
similar?

A.12. I was not President of a thrift. When I was President of 
a community bank, I did ask the Fed on numerous occasions to 
consider increasing the bank size for streamlined CRA exams. I 
did so out of concern for the resources required to meet the 
documentation requirements of the large bank exam. (As it 
turned out, soon after the community bank where I was President 
passed the $250 million threshold, it was purchased by a $50 
billion bank.)

Q.13. Hedge funds perform an important role in the capital 
markets. Yet some have raised concerns about their potential 
impacts to pension funds and retirees. On February 22, 2007, 
the President's Working Group on Financial Markets, of which 
the Fed is a member, released a set of principles and 
guidelines ``to guide U.S. financial regulators as they address 
public policy issues associated with the rapid growth of 
private pools of capital, including hedge funds.'' The 
agreement concentrates on investor protection and systemic risk 
concerns. The PWG determined that additional regulation was not 
needed. A recent column in The Chicago Tribune stated: ``When 
the hedge fund Amaranth Advisors LLC flamed out last year after 
disastrous bets on energy prices, San Diego County's retirement 
fund was among those burned. Losses to its portfolio were 
estimated at $100 million . . . [This] has, however, raised 
concerns about the safety of retirement money and stirred 
debate on whether more oversight is needed.''
    Last October, the then Chief Economist of the IMF observed 
that ``a number of state pension funds were invested in a risky 
hedge fund like Amaranth. Diversification into such alternative 
investments can be a valuable component of an overall 
investment strategy, if it is carefully thought out. The 
problem is that all too often, it takes place as a form of 
herding and late in the game . . . when the good hedge- or 
commodity funds are closed to investment . . . new unseasoned 
hedge or commodity funds are started precisely to exploit the 
distorted incentives of the pension or insurance fund managers 
who queue like lemmings to dutifully place the public's money. 
Thus far losses from isolated failures have been washed away in 
diversified portfolios and the public has not noticed. Will 
this always continue?''
    How would you respond to these concerns? Do you agree with 
the PWG position that further regulation is not needed? Would 
you closely monitor the implementation of this guidance, 
working with the other PWG members, to preclude systemic 
problems from being caused by hedge funds?

A.13. I think the PWG brings together the right expertise and 
the right authority to monitor and make recommendations about 
the regulation of hedge funds and private equity. I do believe 
this market will continue to require close monitoring.
    I share the concern that the ``sophisticated investors'' 
may not turn out to be sophisticated enough. I actually sat on 
a university foundation investment committee when the question 
of investment in private equity was before us. We were being 
encouraged by the example of other foundations that were using 
private equity investments. My opinion was then, and is now, 
that the foundation shouldn't invest in anything it couldn't 
adequately monitor. I expect that conversation has been 
mirrored in foundation and pension board rooms around the 
country for years. While losses suffered by pension funds or 
foundations might not rise to the level of systemic risk, the 
losses might indeed require public policy action.

Q.14. The Committee recently passed legislation to improve the 
regulation and transparency of the private educational loan 
market--the fastest growing segment in the $85 billion student 
loan market. Among the growing trends in the private student 
loan market is the practice of some lenders using non-
individual data--like a school's default and graduation rate--
in the underwriting used to establish the rate a student 
borrower is offered. It's a practice that is eerily reminiscent 
of mortgage ``redlining'', when mortgage rates and products 
were denied to people based on where they lived rather than 
their individual creditworthiness. One of the ways Congress 
addressed mortgage redlining was through enactment of tough 
anti-discrimination laws and improving transparency of market 
practices in the form of HMDA (the Home Mortgage Disclosure 
Act), which the Federal Reserve oversees.
    Do you think HMDA has been an important tool to promote 
transparency?
    Do you think a disclosure, transparency regime for private 
student loans similar to HMDA is a more useful approach to 
addressing concerns about potential ``redlining'' in the 
private student loan market or do you believe we should 
prohibit the practice of underwriting based on factors such as 
the school one chooses to attend?

A.14. Most banks engage in real estate lending to some degree. 
HMDA data has made it possible to compare lending data across a 
wide spectrum of lenders. Also, the CRA assessment and 
examination process focuses on the geographic distribution of 
credit. The two have combined to eliminate geographic 
``redlining.''
    Student lending is a specialty business engaged in by a 
smaller number of institutions. It is difficult to comment on 
the potential effectiveness of HMDA-type reporting without 
knowing the data that would be collected and reported and the 
intended use of the data. If the purpose is to eliminate a 
specific practice, prohibiting the practice and enforcing the 
prohibition may be more effective than reporting.

Q.15. Ms. Duke you served as a Director at the Federal Reserve 
Bank of Richmond. During that time, you worked closely with 
Richmond Bank President Broaddus. Mr. Broaddus was known as one 
of the Fed's biggest inflation hawks. Do you share Mr. 
Broaddus's views and concerns about inflation? Are there any 
examples in which your thoughts on monetary policy differ and 
if so, can you please inform the Committee of the specifics of 
those instances?

A.15. I learned more from my three years on the Richmond Board 
than from any other experience in my professional life. I 
learned about economics, monetary policy, corporate governance 
and management. I learned from Mr. Broaddus, from my fellow 
Directors, and from the Richmond bank staff.
    At every meeting, the staff gave us a book of economic 
charts and an analysis of current economic conditions. Each 
Director gave a short presentation on observations from his or 
her industry or part of the district. Then we would discuss and 
vote on our recommendation for the discount rate. Mr. Broaddus 
would give us his opinions and his reasons for them, but I 
don't remember any specific comments. I only remember that we 
had lively discussions and that our votes were seldom 
unanimous.
    What I took away from it was not a particular bias. I 
learned that my job was to pay attention to the information I 
had, seek any information I needed, formulate and express my 
own opinion and vote my best judgment. That was my observation 
of the way Mr. Broaddus approached his lifetime of service to 
the Fed. And that is the expectation I would have of myself if 
confirmed as a Fed Governor.
                                ------                                --
----


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY FROM ELIZABETH 
                            A. DUKE

Q.1. Earlier this year, Chairman Dodd sent a letter to the 
Federal Reserve Chairman, Mr. Bernanke, asking him to act on 
the Fed's authority and duty under HOEPA (the Home Ownership 
and Equity Protection Act) of 1994 to address predatory loans. 
We asked him to do three things:

      Require all mortgage originators to evaluate a 
borrower's ability to repay prior to making a mortgage loan and 
that the Fed create a presumption that a loan that requires a 
borrower to pay more than 50 percent of his or her income to 
cover the cost of principal, interest, taxes, and insurance is 
not a sustainable loan and fails to meet this test;

      Designate the failure to escrow taxes and 
insurance as an unfair and deceptive practice;

      Restrict the use of low- and no-documentation 
loans.

    Do you support the Fed taking each of these three actions?

A.1. First, I would add to this list negative amortization 
loans. Negative amortization is dangerous to consumers and 
frequently misunderstood by them.
    That being said, as I reviewed this list of loan practices, 
I was able to identify at least one specific real borrower who, 
in my experience, had a loan request that legitimately needed 
the feature that would be prohibited. But the legitimate need 
and acceptable risk would only have been apparent with full 
knowledge of the borrower circumstances. In the past these 
borrowers would not have had access to traditional mortgage 
loans. They would have required tailored bank lending.
    What I don't know is whether the wholesale offering of 
loans with these features without detailed credit analysis is 
more often harmful than helpful to consumers. If, on balance, 
they are more harmful, the Fed should restrict them knowing 
that some borrowers will be unable to obtain credit.

Q.2. A central goal of HOEPA is equity protection. Given the 
decline in homeownership rates among African-Americans over the 
past few years, and given the equity stripping that we have 
seen in the subprime mortgage market: Has the Federal Reserve 
done everything in its power to protect the home ownership and 
equity of these consumers? What, if anything, can be done 
differently?

A.2. A number of equity stripping practices are currently 
prohibited. Any practice that has the effect of taking equity 
without providing any commensurate benefit to the consumer 
should be prohibited.

Q.3. Congress is considering a number of measures to address 
some of the abuses in mortgage lending, including the 
Borrower's Protection Act. That bill would establish lender 
liability for the actions of associate appraisers and brokers. 
Do you support establishing that liability?

A.3. Any provision that increases the lender liability will 
increase the lender risk, which raises the cost and reduces the 
availability of credit. Lender and assignee liability 
legislation must be carefully crafted to be sure the enhanced 
consumer protection is balanced with the cost and availability 
of credit. A review of actual experience in states where lender 
liability provisions have been enacted could help predict the 
outcome of such provisions.

Q.4. There is a great deal of data on mortgage lending from the 
Home Mortgage Disclosure Act. That data shows unexplained 
racial disparities in mortgage lending, including interest 
rates and costs. Would you support using this data to identify 
banks and lenders with unexplained disparities, racial or 
otherwise, as a reason at the very least to open an 
investigation of those lenders?

A.4. I would support such investigation. I believe the banking 
regulators do use HMDA data as a ``screen'' to target banks 
with significant disparities for enhanced fair lending exams. 
Many banks also perform internal investigations using their own 
data.

Q.5. Two of you have worked for banks and Governor Krozner has 
been on the Federal Reserve Board for the past year. In your 
opinion, is it possible for banks or lenders to provide people 
with too much credit, so much that their financial situation is 
actually harmed? Have banks in the recent past been extending 
too much credit to consumers and if so, what should regulators 
do about that? And should regulators look for ways to ensure 
that too much credit is not provided?

A.5. Bankruptcy statistics would certainly indicate that some 
individuals have been provided with too much credit. But this 
would be a very difficult area to regulate. It is hard to 
determine accurately in advance how much credit is too much for 
any individual. And consumers do not obtain all credit from a 
single source. In the past, banks have been criticized more 
often for not lending enough than for lending too much.

Q.6. Do you believe that yield spread premiums, which 
financially reward mortgage brokers for steering borrowers to 
higher rate loans than they might otherwise qualify for and 
prepayment penalties which trap borrowers in unfair loans, can 
distort competition?

A.6. Borrowers deserve to understand the terms and conditions 
of any loan being offered to them. If they are being placed 
into loans with terms worse than those they would qualify for 
in the competitive market, we should take the necessary actions 
to correct such a situation. In addition to specific practices 
such as yield spread premiums and prepayment penalties, I would 
look at advertising, promotion and the timing and adequacy of 
pricing disclosures.

Q.7. Last Thursday the Leadership Council on Civil Rights 
called upon the FRB to intervene in the subprime crisis, 
specifically noting that it is ``glad that the nominees showed 
strong interest in getting rid of prepayment penalties and 
other abusive terms in subprime loans.''
    What are you planning to do to combat the abusive practice 
of steering of borrowers (and specifically minorities) into 
loans that are more expensive than loans for which the 
borrowers could qualify?
    What are you planning to do, as LCCR requests, to ensure 
that the FRB ``uses [the keys to resolving the ongoing 
foreclosure crisis] as quickly as possible''?
    What will you do to get rid of abusive terms and practices 
in the subprime market so that borrowers can remain in their 
homes and good, responsible lenders are not placed at a 
competitive disadvantage?

A.7. I share your concern about sub-prime loans and about 
current conditions in the mortgage market. The discussions held 
in this nomination hearing have only intensified my desire to 
delve more deeply into the issues and use my experience as a 
small business lender to help formulate changes that will have 
long term benefit for homeownership and the mortgage market in 
this country.
    I would like to start with some observations about sub-
prime lending generally and then comment on your bill.
    First, I would like to emphasize that the growth of the 
secondary market--with non-traditional lenders making non-
traditional loans--has resulted in higher levels of home 
ownership and an opportunity for building wealth in segments of 
the population that were closed out of traditional mortgage 
lending. So our challenge here is to reduce the cost in terms 
of financial difficulty and foreclosure while preserving 
flexibility and opportunity with mortgage products in the 
future.
    Chairman Bernanke has discussed with this committee the 
Federal Reserve's intention to propose rulemaking under HOEPA 
later this year. New regulations are a good first step, but we 
must also look to the enforcement of those regulations. We 
should encourage the joint state and federal regulatory 
discussions and pilot programs already underway to achieve this 
end.
    Although banks are participants in the mortgage market, the 
market has expanded well beyond insured financial institutions. 
I think it is time to review the entire mortgage marketplace 
including prime, jumbo, alt-A as well as non-traditional 
mortgages. It is important that we consider all the players and 
all the regulators in the marketplace to ensure uniformity 
across the full spectrum of originators, loan servicers, rating 
agencies and investors.
    As the mortgage market expanded rapidly in recent years, 
competition led to breakdowns in risk assessment and risk 
pricing. Now, concerns about credit risk have caused liquidity 
to dry up. Consequently, very few loans with high risk features 
are being made today. Innovation in mortgage lending over the 
last few years has created loan structures and terms with which 
there was little experience when the loans were made. In 
designing the mortgage products of the future, statistical 
studies of the contribution of various risk features to actual 
credit loss will be quite helpful to all in assessing and 
pricing risk. Use of the Federal Reserve research capability to 
dissect the decisions and conditions that led us to this state 
could identify changes that can prevent a recurrence.
    Stemming the tide of foreclosures may be the most pressing 
and the most difficult problem of the day. Foreclosure is the 
highest cost loan resolution option for the borrower, the 
lender, and the community. Successful loan work-outs require 
good communication between the borrower and the lender, and we 
should do everything possible to facilitate this, including 
support of trusted third party intermediaries. Workouts also 
require flexibility to match modifications to individual 
borrower circumstances. To this end, we should continue to 
investigate any legal, accounting or structural impediments to 
loan modifications. And we should be supportive of flexibility 
and creativity in providing responsible lending to fund 
restructured loans. We should recognize, however, some 
foreclosures will need to take place. In cases where there is 
no possibility of workout, the lender should be able to take 
responsibility for the property, including taxes and 
maintenance. The lender will also have the greatest incentive 
to re-sell the property so it can be reoccupied and the 
recovered funds can be invested in new loans.
    Your legislation recognizes the immediacy of the current 
foreclosure problems and indicates the willingness of Congress 
to provide assistance to state, local and community based 
groups. Just as all real estate markets are local, so are real 
estate problems. It will take the commitment of many on the 
front lines supported by state and federal governments to 
resolve each loan individually. One way to make more private 
funds available might be to designate the circumstances under 
which refinance assistance could qualify for CRA credit.
    Legislation governing mortgage standards and practices must 
be evaluated in light of the balance between consumer 
protection and credit availability. As lenders are increasingly 
separated from originators and borrowers, they will be 
unwilling to assume risks they can neither assess nor control. 
In evaluating the balance, I would look to the experience of 
the states that have already enacted similar legislation. And I 
would hope we would undertake the study of the full mortgage 
market that I proposed above and use the information from such 
a study to guide our regulatory changes impacting this 
important part of our economy.
                                ------                                --
----


    RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM 
                       ELIZABETH A. DUKE

                                Subprime

Q.1. How would you characterize the Federal Reserve's actions 
in response to the subprime crisis? Do you think the Federal 
Reserve has taken adequate action?

A.1. I am responding to these questions assuming you are 
referring to the recent credit contraction started by concerns 
over sub-prime. I do think the Fed's actions so far have been 
appropriate.
    If you are referring to the Fed's actions regarding 
consumer protection, I think more action is needed and will be 
forthcoming.

Q.2. What do you think the role of the Federal Reserve should 
be for addressing crises in loan markets such as the subprime 
crash?

A.2. The Fed must stay focused on the dual mandate of full 
employment and stable prices. To the extent a credit 
contraction threatens the macroeconomy and real economic 
growth, the Fed might need to provide liquidity. In determining 
the amount of liquidity to provide, the Fed must weigh the 
relative risks to growth and inflation.

Q.3. Would you say the meltdown of the subprime market is 
contained at this point?

A.3. I don't think the participants in the sub-prime market 
have yet identified the magnitude of potential losses or where 
those losses are currently held. We do not yet know the extent 
to which problems in the housing market will spread to the 
economy as a whole.

Q.4. What would you recommend the Fed do moving forward to 
ensure that subprime market stabilizes?

A.4. I think the Fed is going to need to actively monitor all 
segments of the credit markets. Ultimately a reassessment and a 
repricing of risk is overdue. Institutions' losses resulting 
from reckless lending will go a long way toward ensuring such 
behavior and practices aren't repeated. And the part of the 
sub-prime market that ultimately emerges will likely be a much 
healthier market.

Q.5.  Are other areas of the subprime crisis that the Fed has 
not yet addressed?

A.5. The Fed is monitoring events closely. As events unfold, 
additional action may be needed. I believe the Fed will act as 
necessary.

                              Credit Cards

Q.6. Do you think unscrupulous practices by credit card issuers 
is prevalent enough to generate concern or that necessitate 
taking a closer look?

A.6. I think practices such as double cycle billing and 
universal default are unfair and deserve attention.

Q.7. How would you characterize the prevalence of certain 
practices by credit card issuers that appear to either be 
misleading or unfair? Is it a problem only among a few issuers, 
or a more widespread problem throughout the industry?

A.7. While some smaller institutions have small credit card 
portfolios, the business is scale intensive. The majority of 
the credit card market is concentrated in a small number of 
issuers. I would expect billing and pricing practices to be 
similarly concentrated.

Q.8. Do you have a position on legislation that would further 
regulate or limit some of these practices?

A.8. I do not have a position on any specific legislation.

Q.9. How do you view the role of the Federal Reserve in this 
area? Do you think the Federal Reserve is doing enough to 
improve disclosure and strengthen enforcement under TILA? Is 
there more to be done?

A.9.  I think the work done by the Fed recently on credit card 
disclosures should serve as a model of disclosure review. I was 
particularly pleased to see the Fed use consumer testing to 
determine the effectiveness of disclosures. I look forward to 
the continuation of this review of disclosures in closed-end 
lending and mortgage lending. In light of the current mortgage 
market, review of mortgage disclosures is probably more 
pressing than that of other closed-end credit.

                           Access to Capital

Q.10. Over the last few years, the Federal Reserve, the Small 
Business Administration and others have conducted studies that 
reveal minorities have unequal access to credit for small 
business development, even when factors such as credit history 
and net worth are comparable to non-minorities. In your 
opinion, in addition to promoting financial education, how can 
we improve ``access to capital'' for minority-owned businesses?

A.10. Many years ago, I participated in a study of credit 
access conducted by the Virginia Legislature. We found then 
that the greatest need was for venture capital and equity 
capital. Start-up and small businesses that did not qualify for 
traditional bank lending were primarily funded with personal 
credit (often credit cards) and support from friends and 
family. At the time, there were some experimental state and SBA 
programs aimed at the credit needs of micro businesses, but I 
don't know what the final results of those programs were.
    In the last several years, many banks have tried to improve 
the overall efficiency of lending to small businesses using 
lessons from the consumer lending process. However, businesses 
are much less uniform than consumers in their characteristics, 
need for and use of credit. And small business lending blends 
the experience of consumer lending with the experience of 
commercial lending. I think the level of success with such 
programs has been quite uneven.
    I haven't seen the studies you reference, but I think we 
are still evolving in our understanding of the best way to meet 
small business needs, including minority-owned businesses. I 
would be quite interested in any of the recommendations or 
conclusions from those studies.

Q.11. What role can the Federal Reserve play to encourage 
institutions to engage in expanding access to capital, both for 
individuals and businesses?

A.11. I think all the banking regulators should encourage 
efficient, responsible, unbiased lending to all segments of the 
market.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR AKAKA FROM ELIZABETH 
                            A. DUKE

Q.1. Our modern, complex economy depends on the ability of 
consumers to make informed financial decisions. Without a 
sufficient understanding of economics and personal finance, 
individuals will not be able to appropriately manage their 
finances, evaluate credit opportunities, and successfully 
invest for long-term financial goals in an increasingly complex 
marketplace. What must be done to ensure that Americans have 
the knowledge and skills necessary to make informed financial 
decisions?

A.1. We must teach these skills in K-12 education. We need to 
be sure we have adequately prepared the teachers to teach these 
subjects, and the requirements must be deeply imbedded in core 
curricula. And we must test for these skills in our proficiency 
exams. Many groups are anxious to provide materials and 
resources, but we will need to build the infrastructure to use 
the tools effectively.
    One of my favorite parts of my current job is serving as 
the executive sponsor for our management development program. 
In a few weeks, our young management associates will go into 
local high schools to participate in the ABA ``Get Smart About 
Credit'' program. They are extremely excited about the 
opportunity to talk about ``what they wished they had known 
before.'' We need to find and use every opportunity like this.

Q.2. Approximately 10 million households in the United States 
do not have accounts at mainstream financial institutions. 
Unfortunately, too many of these households depend on high-cost 
fringe financial services. They miss out on opportunities for 
saving, borrowing, and lower cost remittances found at credit 
unions and banks.
    What must be done to bring these households into mainstream 
financial institutions?

A.2. We need to tackle the reasons why these households do not 
use mainstream financial institutions. I believe some of those 
reasons would include:

      Inability to manage a bank account resulting in 
overdrafts and overdraft fees;

      Inability or reluctance to produce documentation 
needed to open an account; and

      Distrust of mainstream financial institutions.

Q.3. I am deeply concerned that too many working families are 
taken advantage of by unscrupulous lenders through payday 
loans. What must be done to restrict payday loans and expand 
access to affordable, small loans?

A.3. Numerous state and federal regulations, including the new 
Talent amendment regulations on military loans, restrict payday 
lending. Several banks are working with the FDIC on a pilot 
small loan program. Again, financial education would help 
consumers understand the expense of payday loans.

Q.4. Too many working families have their Earned Income Tax 
Credit benefits needlessly reduced by high cost-refund 
anticipation loans (RALs). What must be done to restrict these 
predatory loans and encourage alternatives to RALs?

A.4. We can restrict or eliminate the lending by restricting or 
eliminating the ability to use the refunds as collateral or by 
sending payments only to the taxpayer. It is difficult to 
restrict the allure of getting the money today rather than 
later.

Q.5. I am concerned that consumers are not provided with enough 
information about the long-term consequences of making only the 
minimum credit card payments.
    What must be done to ensure that consumers are adequately 
informed of the true cost of making only the minimum payment?

A.5. The proposed new TILA credit card disclosures contain some 
new disclosures related to the consequences of only making 
minimum credit card payments. We could require additional 
disclosures, but disclosure alone is a poor substitute for 
financial understanding. This is another area where financial 
education could significantly improve financial health.
                                ------                                --
----


 RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN DODD FROM LARRY A. 
                             KLANE

Q.1. Mr. Klane, at your confirmation hearing, you agreed to 
submit, in writing, a list of all credit card practices that 
you found abusive, in addition to universal default and double 
cycle billing. Please submit this list, and include what 
practices you think are clearly wrong, which merit further 
attention and whether it is disclosure, regulation or 
legislation that you believe is best suited to address the 
problem.

A.1. I would like to highlight two specific practices and two 
more general areas in credit card lending where I have 
concerns.
    On the specific practices, as we discussed in the hearing, 
I share the Committee's concern with ``universal default'' and 
double-cycle billing. It is encouraging that a number of 
issuers who engaged in these practices have recently changed 
their approach, but to the extent some industry participants 
continue these practices, I remain concerned.
    In addition, I believe that current credit card disclosures 
are not adequate. This is the first of the two more general 
areas I want to address. The complexity of current disclosures, 
along with the difficulty in using them to focus on the most 
consumer-relevant terms and conditions, leave consumers 
inadequately equipped to make informed choices among products 
and issuers. Disclosures must be made clearer and more 
consumer-relevant. In this regard, I am highly encouraged by 
the on-going work of the Federal Reserve in its efforts to 
revise Regulation Z. The use of consumer focus groups and the 
explicit effort to create simpler and more comprehensible 
disclosures is a strong step in the right direction. These 
proposed regulations are out for public comment, and I look 
forward to the Federal Reserve's finalizing them. Once they are 
final, we will be able to judge, after some experience, whether 
further adjustments, amendments, or expansions need to be made.
    My second general area of my concern is penalty repricing 
of accounts, which occurs when a customer breaks one or more of 
the rules embodied in the credit card contract's terms and 
conditions. While it is legitimate in general for an issuer to 
be able to change the price of credit on open-ended lines to 
customers who demonstrate higher levels of riskiness through 
such rule breaks, I am concerned about:

      Insufficient disclosures and/or notices to 
consumers on repricing actions (e.g., initially when receiving 
the card, at the moment of rule break, and at the moment of 
repricing);

      the inclusion of multiple repricing rules that 
can be triggered by a single infraction; and

      the options available to consumers who have 
experienced repricing (e.g., the ability to return to the prior 
rate based on good performance over time or the ability to pay 
off the existing balance at the prior rate over some time 
frame).

    The Federal Reserve's proposed revisions to Regulation Z, 
including the 45-day notice provision, address some aspects of 
the concerns I have outlined. However, the general area of 
repricing deserves continued attention to ensure that consumers 
are adequately protected and able to make good decisions on 
their use of credit cards.

Q.2. Mr. Klane, at your confirmation hearing I raised some 
questions associated with Capital One's practice of not 
reporting customers' credit limits to the credit reporting 
bureau. Specifically, I raised the question as to what the 
ramifications to consumers would be if that had the effect of 
lowering their FICO score. I asked you, ``But if, in fact, 
their credit rating under FICO were such that competitors would 
be less interested in them as customers is that not--aren't you 
advantaged to some degree as a result?'' You responded: ``I do 
not see why that would be the case, Senator.'' Can you please 
explain how a lower FICO score would not damage a consumer's 
ability to obtain a better interest rate? Can you also please 
explain how, if Capital One had proprietary information that 
allowed them to selectively market to consumers whose FICO 
scores appeared artificially lower to other lenders, how this 
would not be an advantage to Capital One? Finally, can you 
explain how that would not be a disadvantage to the consumer?

A.2. As mentioned at the confirmation hearing, I appear before 
the committee as a private citizen seeking to perform public 
service, not to represent Capital One. As I mentioned at the 
hearing, I was not engaged in Capital One's decisions 
concerning credit bureau reporting as I do not run the U.S. 
Credit Card business.
    That said, I would like to provide as much perspective on 
the question as possible. As you are aware, Capital One has 
recently begun to report credit lines for all of its customers. 
While the company continues to believe that this information 
has strategic risk management value of a proprietary nature, it 
recognized that the negative attention this practice has drawn 
from various external constituencies outweighed any benefits 
from keeping credit lines proprietary. Nevertheless, I would 
like to stress that the company's decision to withhold credit 
lines was driven by a desire to keep credit line information 
proprietary, not to deflate artificially individual customers' 
credit scores. Capital One has not sought, nor is it able, to 
unilaterally impact customers' credit scores negatively in this 
manner, nor is it able to selectively target individuals for 
non-competitive offers in the manner suggested. No legitimate 
business purpose would be served by that outcome, and there 
have been no marketing strategies or approaches I am aware of 
that tried to do so.
    FICO's methodology is proprietary, and thus no institution 
knows what, if any, impact its line reporting policy may have 
on their scoring models. Nevertheless, Capital One is not aware 
of any statistically valid or conclusive evidence supporting 
the contention that a single issuer's policy has, or could 
have, any such effect.
    Lower FICO scores impede all lenders' abilities to market 
to consumers, including Capital One's ability to increase 
customer's credit lines, offer them more competitive terms, or 
cross-sell mortgage, auto and other loan products to customers.

Q.3. Mr. Klane, can you share with the Committee your views on 
the separation between banking and commerce? Specifically, what 
are your views on Industrial Loan Companies?

A.3. There has long been a concern among legislators and 
regulators on the implications of mixing banking and commerce. 
Given the importance of a stable banking system and the 
existence of government deposit guarantees, special weight 
should be given to ensure that depositories remain safe and 
sound. Historically, there has been the view that this safety 
and soundness is easier to achieve by maintaining the 
separation between banking and commerce. If legislators were to 
allow a lesser degree of separation, then it would require a 
revised regulatory framework to ensure the safety and soundness 
of the depository institutions. This is true for Industrial 
Loan Companies as well as other charters that might in the 
future allow for a more ``mixed'' model. A clear and workable 
supervisory framework is a key element as Congress reassesses 
the appropriate degree of separation between banking and 
commerce.

Q.4. Mr. Klane, at your confirmation hearing I asked you and 
the other nominees: ``whether or not you think the Fed acted in 
a timely fashion and could have done more, looking back.'' You 
responded: ``All that being said, I think sitting here, with 
hindsight, I think we can say very clearly that if the Fed had 
acted somewhat earlier, we might have had to some extent a 
better outcome.'' Can you please elaborate on what actions the 
Fed should have taken that would have provided a better 
outcome? Can you please include in your answer when you believe 
those actions should have taken place?

A.4. Because I have not been on the Board, I have not been 
privy to the information and analysis that was available at the 
time. Policy needs to be made at the line of scrimmage, with 
only the available data at the time--so hindsight has important 
limitations. That said, I was pleased to hear Chairman Bernanke 
pledge to exercise the Federal Reserve's authority under HOEPA 
to strengthen rules protecting customers from unfair and 
deceptive mortgage practices. If such rules were in place 
earlier, they might have provided a somewhat better outcome. If 
confirmed to the Board, I would look forward to working in this 
very important area.

Q.5. Mr. Klane, at your confirmation hearing, in response to a 
question from Senator Shelby about concerns about the credit 
quality of subprime mortgage that ``it also underscores the 
importance going forward of having underwriting criteria that 
take into account rate reset.'' When you were in charge of 
Capital One's home mortgage division did your company take into 
account rate resets in the mortgages that it issued?

A.5.  Given the recent events in the subprime mortgage market, 
all reflective participants involved in the mortgage industry 
have learned the importance of taking into account rate resets. 
The vast majority of mortgages issued by Capital One Home Loans 
were fixed rate and fully documented. All loans were rigorously 
underwritten to the investor's guidelines. Those guidelines, 
for the few adjustable rate mortgages issued, were consistent 
with industry norms at the time which focused principally on 
the initial rate.

Q.6. Mr. Klane, do you think that the 2001 Bush tax cuts have 
resulted in an increase or decrease in real federal revenue?

A.6. I do not have available in my current position all of the 
data and information required to undertake a full analysis of 
the real versus nominal impact on federal revenue of the 2001 
changes to the tax code.

Q.7. Mr. Klane, in your appearance before the Committee, you 
stated that you are a strong believer in the Fed's dual mandate 
for maximum employment and price stability. Are there 
approximate figures for the nation's unemployment rate and 
inflation rate that match what you believe to be maximum 
employment and price stability? If so, can you share what those 
are?

A.7. Given the dynamic nature of the U.S. economy, underlying 
changes to productivity, and the impact of the global economy 
on our country, I do not believe there is a fixed relationship 
between the nation's unemployment and inflation rates in order 
to match maximum employment and price stability. My assessment 
of the relationship between these rates and the twin objectives 
would be informed by the specific environment at the time, 
along with all of the available information and analysis.
    I would like to reiterate my strong support for the dual 
mandate. If confirmed, I would ensure that pursuit of both 
maximum sustained employment and price stability informed my 
thinking on monetary policy.

Q.8. Mr. Klane can you inform the Committee of any periods in 
American history where you believe that maximum employment was 
not being reached or that price stability was not achieved? 
During those periods, what actions do you believe the Fed 
should have undertaken to achieve its mandate?

A.8. Having recently read Timothy Egan's moving book, The Worst 
Hard Time: The Untold Story of Those Who Survived the Great 
American Dust Bowl, I would offer the Great Depression as a 
time when America clearly did not achieve maximum employment or 
price stability. Many economists have written about this time 
period, and I think it is clear that the Federal Reserve, among 
other things, should have injected more liquidity into the 
banking system and should have stood more firmly as a lender of 
last resort for otherwise solvent institutions.

Q.9. Mr. Klane, how do you explain the Federal Reserve's 
findings from the HMDA data that in 2005, 54.7% of African-
American borrowers and 46.1% of Hispanic borrowers got high-
priced loans when buying a home compared to 17.2% of non-
Hispanic whites?

A.9. On their face, these differences are worrisome and I agree 
that no borrower should suffer discrimination. All regulators, 
including the Federal Reserve, should vigorously monitor 
compliance and enforce fair lending laws to ensure there is no 
discrimination in lending.
    Pricing outcomes on loans are driven by an array of 
considerations, some of them not included in HMDA data (e.g., 
FICO scores, debt-to-income ratios, etc.). Many factors, other 
than discrimination, could contribute to the differences sited. 
It is not possible to use HMDA data alone to draw firm 
conclusions on precisely what is driving pricing differentials. 
However, those data can and should be used, along with all the 
other data available to examiners concerning an institution's 
lending practices, to try to reach such conclusions in order to 
root out discrimination.

Q.10. In the Fed's analysis of the data, significant racial and 
ethnic differences remained unexplained even after accounting 
for other information reported in the HMDA data. The Fed found 
that borrower-related factors accounted for only about one-
fifth of the disparity. Do you believe that there is racial 
discrimination in the mortgage market? If so, how do we root it 
out of the system? What specific additional steps should the 
Fed undertake to do so? If you do not believe that there is 
racial discrimination, how do you explain these racial 
disparities?

A.10. Discrimination has no place in lending. If confirmed to 
the Board, I would enforce fair lending laws vigorously. As 
mentioned in a prior answer, it is not possible to draw 
definitive conclusions about potential discrimination based on 
HMDA data alone because pricing outcomes are driven by an array 
of considerations, some of them outside the scope of HMDA data. 
However, regulators, in their supervisory capacity, have access 
to the full set of data around pricing decisions for regulated 
institutions. Regulators need to be vigilant in enforcing fair 
lending laws and investigate possible violations. HMDA data can 
be a useful starting point.

Q.11. As you know, only the Federal Reserve, the Office of 
Thrift Supervision, and the National Credit Union 
Administration currently have the authority to promulgate a 
rule dealing with unfair or deceptive acts or practices. In 
your view, should the other agencies be given the same 
authority? Please explain your reasoning.

A.11. Providing this authority is the prerogative of Congress. 
I do not feel it is appropriate for me as a nominee to opine on 
specific legislation. However, if confirmed to the Board, I 
would work to exercise the authority given to the Federal 
Reserve to the best of my ability.

Q.12. The Committee recently passed legislation to improve the 
regulation and transparency of the private educational loan 
market--the fastest growing segment in the $85 billion student 
loan market. Among the growing trends in the private student 
loan market is the practice of some lenders using non-
individual data--like a school's default and graduation rate in 
the underwriting used to establish the rate a student borrower 
is offered. It's a practice that is eerily reminiscent of 
mortgage ``redlining'', when mortgage rates and products were 
denied to people based on where they lived rather than their 
individual creditworthiness. One of the ways Congress addressed 
mortgage redlining was through enactment of tough anti-
discrimination laws and improving transparency of market 
practices in the form of HMDA (the Home Mortgage Disclosure 
Act), which the Federal Reserve oversees.
    Do you think HMDA has been an important tool to promote 
transparency? Do you think a disclosure, transparency regime 
for private student loans similar to HMDA is a more useful 
approach to addressing concerns about potential ``redlining'' 
in the private student loan market or do you believe we should 
prohibit the practice of underwriting based on factors such as 
the school one chooses to attend?

A.12. The private student loan market is growing rapidly and, 
given demographics and other trends, looks like it will 
continue to grow for some time. The emergence of a private 
market should provide a positive additional choice for 
consumers needing to borrow to finance education. It is 
important in this market, as elsewhere in lending, to have 
clear and comprehensible disclosures. If confirmed to the 
Board, I would look forward to engaging--as appropriate--in the 
issue of the private student loan market. With the tools and 
perspectives available to a Board member, I would then be in a 
position to gather the full range of input on the topics of 
disclosures and whether additional measures should also be 
considered.

Q.13. Mr. Klane, as you know the FOMC voted unanimously in its 
August meeting to keep interest rates constant and in the 
accompanying statement that their ``predominant policy concern 
remains the risk that inflation will fail to moderate as 
expected.'' Over the next ten days there were significant 
disruption in the equity and bond markets that caused the Fed 
to reverse course, cut the rate at the discount window by 50 
basis points and issue the following statement ten days after 
their August meeting: ``Financial market conditions have 
deteriorated, and tighter credit conditions and increased 
uncertainty have the potential to restrain economic growth 
going forward. In these circumstances, although recent data 
suggest that the economy has continued to expand at a moderate 
pace, the Federal Open Market Committee judges that the 
downside risks to growth have increased appreciably. The 
Committee is monitoring the situation and is prepared to act as 
needed to mitigate the adverse effects on the economy arising 
from the disruptions in financial markets.''
    Do you believe that the FOMC made a mistake at their 
original August meeting? Do you believe that the predominant 
policy concern remains the inflation in light of the events 
since the August meeting of the FOMC? If you had been a Fed 
Governor, what actions, if any, would you have taken that were 
different from those taken by the Fed Governors?

A.13. After my receiving this question, the FOMC met on 
September 18th and decided to lower both the Federal Funds and 
Discount Rate by 50 basis points. The FOMC clearly considered 
the recent disruptions to the credit markets and other related 
events to pose a broader risk to the economy and the goal of 
maximum sustainable employment than during the August meeting. 
Not sitting on the Board at the time of either of these 
meetings, and thus not having access to the information 
available at the moment of these policy decisions, I cannot 
speculate whether I would have taken a different position had I 
been a Fed Governor and member of the FOMC at the time.

Q.14. Hedge funds perform an important role in the capital 
markets. Yet some have raised concerns about their potential 
impacts to pension funds and retirees. On February 22, 2007, 
the President's Working Group on Financial Markets, of which 
the Fed is a member, released a set of principles and 
guidelines ``to guide U.S. financial regulators as they address 
public policy issues associated with the rapid growth of 
private pools of capital, including hedge funds.'' The 
agreement concentrates on investor protection and systemic risk 
concerns. The PWG determined that additional regulation was not 
needed. A recent column in The Chicago Tribune stated: ``When 
the hedge fund Amaranth Advisors LLC flamed out last year after 
disastrous bets on energy prices, San Diego County's retirement 
fund was among those burned. Losses to its portfolio were 
estimated at $100 million . . . [This] has, however, raised 
concerns about the safety of retirement money and stirred 
debate on whether more oversight is needed.''
    Last October, the then Chief Economist of the IMF observed 
that ``a number of state pension funds were invested in a risky 
hedge fund like Amaranth. Diversification into such alternative 
investments can be a valuable component of an overall 
investment strategy, if it is carefully thought out. The 
problem is that all too often, it takes place as a form of 
herding and late in the game . . . when the good hedge- or 
commodity funds are closed to investment . . . new unseasoned 
hedge or commodity funds are started precisely to exploit the 
distorted incentives of the pension or insurance fund managers 
who queue like lemmings to dutifully place the public's money. 
Thus far losses from isolated failures have been washed away in 
diversified portfolios and the public has not noticed. Will 
this always continue?''
    How would you respond to these concerns? Do you agree with 
the PWG position that further regulation is not needed? Would 
you closely monitor the implementation of this guidance, 
working with the other PWG members, to preclude systemic 
problems from being caused by hedge funds?

A.14. The emergence of hedge funds and other private pools of 
capital is a significant development for the financial system. 
They can have significant impact on the regulated banking 
sector, as well as on working American families via investments 
made by retirement funds. While I do not have grounded 
information that would cause me to disagree with the PWG on the 
current need for more regulation, I feel strongly that close 
monitoring of developments is well justified. If confirmed to 
the Board, I would work closely with other PWG members to 
monitor the situation, and develop appropriate actions as 
needed.
                                ------                                --
----


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY FROM LARRY A. 
                             KLANE

Q.1. Earlier this year Chairman Dodd sent a letter to the 
Federal Reserve Chairman, Mr. Bernanke, asking him to act on 
the Fed's authority and duty under HOEPA (The Home Ownership 
and Equity Protection Act) of 1994 to address predatory loans. 
We asked him to do three things:

      Require all mortgage originators to evaluate a 
borrower's ability to repay prior to making a mortgage loan and 
that the Fed create a presumption that a loan that requires a 
borrower to pay more than 50 percent of his or her income to 
cover the cost of principal, interest, taxes, and insurance is 
not a sustainable loan and fails to meet this test;

      Designate the failure to escrow taxes and 
insurance as an unfair and deceptive practice;

      Restrict the use of low- and no-documentation 
loans.

    Do you support the Fed taking each of these three actions?

A.1. I support the Federal Reserve's acting on its authority 
and duty under HOEPA, and was pleased to hear Chairman 
Bernanke's intention in this regard. Further, I think each of 
the three areas highlighted justify concern. As I have not 
benefitted from the wide set of perspectives that current Board 
members would have on these particular points, I do not feel I 
can take a fully informed and balanced position these specific 
proposals. That said, if confirmed to the Board, I would 
certainly examine the issues of affordability, escrowing taxes 
and insurance (particularly in subprime loans), and the 
appropriate role of documentation to determine the best course 
of action.

Q.2. A central goal of HOEPA is equity protection. Given the 
decline in homeownership rates among African-Americans over the 
past few years, and given the equity stripping that we have 
seen in the subprime mortgage market: Has the Federal Reserve 
done everything in its power to protect the home ownership and 
equity of these consumers? What, if anything, can be done 
differently?

A.2. Increasing savings generally (one important component of 
which can be homeowner equity) is an important public policy 
goal. Achieving these increases is a multi-faceted challenge. 
On the specific issue of protecting home ownership and equity, 
the Federal Reserve has a role to help ensure borrowers are not 
prey to unfair and deceptive practices. The Federal Reserve's 
recently stated intent to write rules under HOEPA is a positive 
step in this regard.

Q.3. Congress is considering a number of measures to address 
some of the abuses in mortgage lending, including the 
Borrower's Protection Act. That bill would establish lender 
liability for the actions of associate appraisers and brokers. 
Do you support establishing that liability?

A.3. Please see the previously submitted response on the 
Borrower's Protection Act. On the specific issue of 
establishing lending liability around actions of appraisers and 
brokers, some forms of liability could play a constructive 
role. However, any liability needs to be very clearly 
delineated and financial damages reasonable in the context. One 
objective would be to maintain a vibrant, responsible mortgage 
market. Liability rules would need to be structured in such a 
way as to ensure that responsible lenders and brokers do not 
vacate the market. Otherwise, consumers and consumer choice 
would be unduly limited.

Q.4. There is a great deal of data on mortgage lending from the 
Home Mortgage Disclosure Act. That data shows unexplained 
racial disparities in mortgage lending, including interest 
rates and costs. Would you support using this data to identify 
banks and lenders with unexplained disparities, racial or 
otherwise, as a reason at the very least open an investigation 
of those lenders?

A.4. Discrimination has no place in lending. If confirmed to 
the Board, I would enforce fair lending laws vigorously. HMDA 
data can be a useful starting point for regulators when 
examining lending institutions. However, it is not possible to 
draw definitive conclusions about potential discrimination 
based on HMDA data alone because pricing outcomes are driven by 
an array of considerations, some of them outside the scope of 
HMDA data. However, regulators, in their supervisory capacity, 
have access to the full set of data around pricing decisions 
for regulated institutions. Through rigorous statistical 
analysis of the full set of data, regulators can determine 
whether or not an institution has engaged in actual 
discrimination. Regulators need to be vigilant in enforcing 
fair lending laws and investigate possible violations. HMDA 
data can certainly be a useful starting point.

Q.5. Two of you have worked for banks and governor Krozner has 
been on the Federal Reserve Board for the past year.

      In your opinion, is it possible for banks or 
lenders to provide people with too much credit, so much that 
their financial situation is actually harmed?

      Have banks in the recent past been extending too 
much credit to consumers and if so, what should regulators do 
about that?

      And should regulators look for ways to ensure 
that too much credit is not provided?

A.5. Lending institutions should make loans that are affordable 
to borrowers. This is good not only for the consumer, but also 
for the lending institution. A bank that systematically 
provides credit inappropriately will not be a safe and sound 
institution (in addition to burdening the underlying consumer). 
Regulators have a supervisory mandate to ensure safe and sound 
institutions. Regulators also must ensure that supervised 
institutions have appropriate risk management and associated 
underwriting processes. These processes will help ensure that 
borrowers receive appropriate loans. In addition of course, the 
role of financially informed consumers is critical in achieving 
overall good outcomes for borrowers. I strongly support the 
financial literacy efforts of the Federal Reserve and many 
other institutions.

Q.6. Do you believe that yield spread premiums, which 
financially reward mortgage brokers for steering borrowers to 
higher rate loans than they might otherwise qualify for and 
prepayment penalties which trap borrowers in unfair loans, can 
distort competition?

A.6. Brokers steering borrowers to bad loans is unacceptable. 
To the extent that incentive structures drive behavior that 
results in unfair loans, these incentive structures should be 
examined. If confirmed to the Board, I would help the Federal 
Reserve execute its responsibilities in this area.

Q.7. Last Thursday the Leadership Council on Civil Rights 
called upon the FRB to intervene in-the subprime crisis, 
specifically noting that it is ``glad that the nominees showed 
strong interest in getting rid of prepayment penalties and 
other abusive terms in subprime loans.''

      What are you planning to do to combat the abusive 
practice of steering of borrowers (and specifically minorities) 
into loans that are more expensive than loans for which the 
borrowers could qualify?

      What are you planning to do, as LCCR requests, to 
ensure that the FRB ``uses [the keys to resolving the ongoing 
foreclosure crisis] as quickly as possible''?

      What will you do to get rid of abusive terms and 
practices in the subprime market so that borrowers can remain 
in their homes and good, responsible lenders are not placed at 
a competitive disadvantage?


A.7. If confirmed to the Board, I would work diligently and 
urgently on these issues. I would support the effort to write 
rules under HOEPA which address unfair and deceptive practices 
across the entire mortgage industry--not just institutions 
regulated by the Federal Reserve. More generally, I would work 
to broaden the lending choices that consumers have through a 
blend of good regulations, informed consumers, and a 
competitive marketplace populated by responsible institutions.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM LARRY A. 
                             KLANE

Q.1. 1 understand that Capital One, where you are currently a 
top executive, did a brisk business in subprime lending, 
particularly in the origination of exotic loans, such as 2/28 
and 3/27 adjustable rate mortgages. Were you personally 
involved with this type of lending at Capital One, and if so, 
in what capacity? Do you believe that Capital One's subprime 
lending practices were appropriate? Do you think, given the 
plethora of problems that have emerged out of the subprime 
lending industry, that Capital One should have taken a more 
active role in ensuring that responsible lending principles 
were part of its subprime origination practice, including in 
its relationship with the mortgage broker industry?

A.1. I am responsible for Global Financial Services, a division 
at Capital One. This division serves approximately ten million 
consumers and small businesses, principally in the United 
States but also in Canada and the U.K. One of the businesses in 
this division is Capital One Home Loans.
    I believe Capital One Home Loans is a highly responsible 
lender. It is a direct originator of loans, meaning that it 
does not rely on brokers in any way. All marketing is done 
directly to consumers, and every customer is handled by Capital 
One Home Loans' employees. The business thus avoids all of the 
issues and challenges of managing brokers. The entire process, 
from sales through underwriting and finally to settlement, is 
executed, controlled and monitored by the business itself.
    From a product perspective, the vast majority of loans are 
fully documented and fixed rate. This is true for both prime 
and subprime loans. All loans are rigorously underwritten 
against strict guidelines. Subprime loans were only about 20% 
of overall originations and subprime adjustable rate 
mortgages--the focus of your question--were a tiny fraction (1% 
of loans in 2006 and 1/2 of 1% in 2007). As mentioned, 
virtually all loans were fully documented, thus avoiding the 
issues now evident in stated income loans. Finally, the 
business did not originate any option ARMs or other negatively 
amortizing products.
    These elements--a direct model (i.e., no brokers), fully 
documented loans, predominantly fixed rate products, and strong 
underwriting--underlie the responsible lending practices of 
this business.

Q.2. As you know, many experts have criticized the Federal 
Reserve for not taking a more active role in exercising its 
authority under HOEPA to regulate the subprime mortgage lending 
industry. What is your position on the appropriate role of the 
Fed in regulating mortgage lenders? Do you believe that the 
mortgage lending industry should be robustly regulated?

A.2. I believe the mortgage industry needs to be regulated. 
Today, there is a mixed model. Some important participants in 
the industry are well regulated depository institutions (e.g., 
banks and thrifts), but there is a large part of the market 
that is either unregulated or lightly regulated. I think there 
is a public policy interest in bringing more consistency of 
standards across the industry, as well as higher levels of 
regulatory oversight to those participants currently outside of 
regulated depository institutions.
    The Federal Reserve has an important role to play in at 
least three ways. First, it directly supervises many 
institutions. Second, it has authority under HOEPA to write 
regulations that apply to all participants in the mortgage 
market, not just those institutions whom it supervises. (Of 
course the Federal Reserve would not have the authority to 
enforce these rules for institutions it does not supervise. 
This means that states and other regulators will need to 
enforce these rules.)
    The Federal Reserve has stated its intention to exercise 
its rule-writing authority under HOEPA. I welcome this step. If 
confirmed to the Board, I would seek to be a driving and 
constructive force behind finalizing the rule and assuring that 
the mortgage market operates fairly and smoothly in the future.
    Third, the Federal Reserve has a role to play working with 
other regulatory agencies. The recent joint regulatory 
guidances on non-traditional and subprime mortgages, in which 
the Federal Reserve participated, were appropriate. So too were 
the Federal Reserve's and other agencies' efforts to encourage 
lenders and services to work with troubled mortgage borrowers. 
It is also important for the Federal Reserve to coordinate with 
state regulators. The Federal Reserve has actively worked with 
state regulators at CSBS to encourage state adoption of the 
non-traditional and subprime guidances. Those guidances, 
encouraging underwriting of loans to the fully indexed, fully 
amortizing rate, have broad support as an important consumer 
protection making unaffordable loans less likely in the future. 
Finally, the Federal Reserve's pilot consumer compliance 
program with the states, the FTC, and the OTS to examine 
institutions for compliance with mortgage-related consumer 
protections also seems promising and appropriate.

Q.3. What is your opinion of the Fed's course of action to date 
in handling the subprime crisis? What other actions do you 
think the Fed should be taking?

A.3. During the past few months, and particularly at and 
shortly before the September 18th FOMC meeting, the Federal 
Reserve has reacted vigorously to the subprime crisis, its 
impact on credit markets, and the potential impact to the 
broader economy. These actions (including lowering both the 
discount and the target federal funds rate) seem appropriate 
and adequate at this time. However, the Federal Reserve will 
need to continue to monitor further developments closely. If 
warranted by future developments, the Federal Reserve should be 
willing to take further action.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM LARRY A. 
                             KLANE

                                Subprime

Q.1. How would you characterize the Federal Reserve's actions 
in response to the subprime sis? Do you think the Federal 
Reserve has taken adequate action?

A.1. During the past few months, and visibly at the September 
18th FOMC meeting, the Federal Reserve has reacted vigorously 
to the subprime situation, its impact on the credit markets, 
and the potential impact to the broader economy. These actions 
seem appropriate and adequate at this stage, but the Federal 
Reserve will need to continue to monitor further developments 
closely.

Q.2. What do you think the role of the Federal Reserve should 
be for addressing crises in loan markets such as the subprime 
crash?

A.2. The Federal Reserve has a number of roles to play in 
crises in loan markets. These include ensuring liquidity in the 
financial system, standing as a lender (if necessary as last 
resort) to member banks via the discount window, and monitoring 
the implications of the crisis in case it threatens the broader 
economy. If the crisis threatens to impact the broader economy, 
the Federal Reserve's role is to adjust monetary policy 
accordingly.

Q.3. Would you say the meltdown of the subprime market is 
contained at this point?

A.3. While the Federal Reserve has taken strong action, we are 
not yet at the end of the current turbulence. It would be 
premature to say that no further negative developments will 
occur, particularly with the large number of mortgages whose 
interest rate will reset over the upcoming months.

Q.4. What would you recommend the Fed do moving forward to 
ensure that the subprime market stabilizes?

A.4. The Federal Reserve has taken important actions to 
stabilize the current market disruptions. Going forward, the 
Federal Reserve should monitor the situation closely and take 
additional actions as are warranted as new information or 
developments materialize. It is important to assess the impact 
of the actions already taken prior to initiating additional 
actions.

Q.5. Are other areas of the subprime crisis that the Fed has 
not yet addressed?

A.5. Given the recent actions of the Federal Reserve and the 
rule-writing work they are undertaking under HOEPA, I have no 
important additional areas to suggest.

                              Credit Cards

Q.6. Do you think unscrupulous practices by credit card issuers 
are prevalent enough to generate concern or that necessitate 
taking a closer look?
    How would you characterize the prevalence of certain 
practices by credit card issuers that appear to either be 
misleading or unfair? Is it a problem only among a few issuers, 
or a more widespread problem throughout the industry?
    Do you have a position on legislation that would further 
regulate or limit some of these practices?

A.6. I would like to highlight two specific practices and two 
more general areas in credit card lending where I have 
concerns.
    On the specific practices, as we discussed in the hearing, 
I share the Committee's concern with ``universal default'' and 
double-cycle billing. It is encouraging that a number of 
issuers who engaged in these practices have recently changed 
their approach, but to the extent some industry participants 
continue these practices, I remain concerned.
    In addition, I believe that current credit card disclosures 
are not adequate. This is the first of the two more general 
areas I want to address. The complexity of current disclosures, 
along with the difficulty in using them to focus on the most 
consumer-relevant terms and conditions, leave consumers 
inadequately equipped to make informed choices among products 
and issuers. Disclosures must be made clearer and more 
consumer-relevant. In this regard, I am highly encouraged by 
the on-going work of the Federal Reserve in its efforts to 
revise Regulation Z. The use of consumer focus groups and the 
explicit effort to create simpler and more comprehensible 
disclosures is a strong step in the right direction. These 
proposed regulations are out for public comment, and I look 
forward to the Federal Reserve's finalizing them. Once they are 
final, we will be able to judge, after some experience, whether 
further adjustments, amendments, or expansions need to be made.
    My second general area of my concern is penalty repricing 
of accounts, which occurs when a customer breaks one or more of 
the rules embodied in the credit card contract's terms and 
conditions. While it is legitimate in general for an issuer to 
be able to change the price of credit on open-ended lines to 
customers who demonstrate higher levels of riskiness through 
such rule breaks, I am concerned about:

      insufficient disclosures and/or notices to 
consumers on repricing actions (e.g., initially when receiving 
the card, at the moment of rule break, and at the moment of 
repricing);

      the inclusion of multiple repricing rules that 
can be triggered by a single infraction; and

      the options available to consumers who have 
experienced repricing (e.g., the ability to return to the prior 
rate based on good performance over time or the ability to pay 
off the existing balance at the prior rate over some time 
frame).

    The Federal Reserve's proposed revisions to Regulation Z, 
including the 45-day notice provision, address some aspects of 
the concerns I have outlined. However, the general area of 
repricing deserves continued attention to ensure that consumers 
are adequately protected and able to make good decisions on 
their use of credit cards.

Q.7. How do you view the role of the Federal Reserve in this 
area? Do you think the Federal Reserve is doing enough to 
improve disclosure and strengthen enforcement under TILA? Is 
there more to be done?

A.7. The Federal Reserve has important responsibilities with 
respect to implementing TILA. I have been very encouraged by 
the proposed revisions to Reg Z concerning credit cards and 
open-ended credit. This revision, the first in over twenty-five 
years, is a strong step forward to improve disclosures. In 
particular, I applaud the Federal Reserve's use of consumer 
focus groups to help ensure disclosures are understandable and 
address the key elements consumers need. If confirmed to the 
Board, I would look forward to help finalize these rules.

                           Access to Capital

Q.8. Over the last few years, the Federal Reserve, the Small 
Business Administration and others have conducted studies that 
reveal minorities have unequal access to credit for small 
business development, even when factors such as credit history 
and net worth are comparable to non-minorities.
    In your opinion, in addition to promoting financial 
education, how can we improve ``access to capital'' for 
minority-owned businesses?

A.8. In addition to education, I would offer two avenues to 
help ensure access to capital for minority-owned business. 
First, fair lending laws must be enforced so no minority-owned 
business is discriminated against. Second, legislation and 
regulation need to ensure that responsible lending institutions 
are encouraged to lend across the full credit spectrum. 
Minority-owned businesses will be among those hurt if there is 
a significant reduction in the willingness of lenders to extend 
credit across the full credit spectrum. Thus legislators and 
regulators need to ensure they do not inadvertently chill 
innovation and full credit spectrum lending that would be of 
benefit to these borrowers.

Q.9. What role can the Federal Reserve play to encourage 
institutions to engage in expanding access to capital, both for 
individuals and businesses?

A.9. The Federal Reserve System has an important role to play 
in educating individuals and small business owners on how to 
access capital and other financial matters. In addition, in 
connection with its supervisory role, the Federal Reserve has 
responsibility to enforce fair lending and other relevant laws. 
Supervised institutions may also benefit from interaction with 
the Federal Reserve which clarifies the positive role that 
prudent extension of credit to individuals and businesses can 
have on an institution's safety and soundness.
    As an experienced banker (serving roughly ten million 
consumer and small business customers currently), I would look 
forward, if confirmed, to helping the Federal Reserve continue 
its important work in this area.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR AKAKA FROM LARRY A. 
                             KLANE

Q.1. Our modern, complex economy depends on the ability of 
consumers to make informed financial decisions. Without a 
sufficient understanding of economics and personal finance, 
individuals will not be able to appropriately manage their 
finances, evaluate credit opportunities, and successfully 
invest for long-term financial goals in an increasingly complex 
marketplace. What must be done to ensure that Americans have 
the knowledge and skills necessary to make informed financial 
decisions?

A.1. I fully agree with the critical importance of individuals 
having the information and the necessary financial education to 
make informed financial decisions. This is particularly 
critical to ensure good outcomes (for individuals and for the 
economy at large) in today's complex, competitive marketplace. 
As a current board member of America's Promise--a not-for-
profit organization dedicated to underprivileged kids--I am 
constantly reminded of the tremendously beneficial impact of 
financial education. Achieving the goal of broad financial 
literacy will take the combined efforts of parents, schools, 
financial institutions, relevant government bodies, and not-
for-profit organizations. Financial education must begin before 
college.

Q.2. Approximately 10 million households in the United States 
do not have accounts at mainstream financial institutions. 
Unfortunately, too many of these households depend on high-cost 
fringe financial services. They miss out on opportunities for 
saving, borrowing, and lower cost remittances found at credit 
unions and banks. What must be done to bring these households 
into mainstream financial institutions?

A.2. First and foremost, these households must be made aware of 
the full range of options available to them. Today, many 
responsible financial institutions are developing products and 
services designed to meet the needs of the un- or under-banked. 
Community-based organizations have a very helpful role to play 
in providing education and directing these households to 
responsible institutions. Second, regulators have a role in 
encouraging the development of these programs in their 
supervised institutions. The stronger and more vibrant the 
participation of responsible institutions in providing services 
to these households, the better the outcome will be for these 
households and their communities. It is in the interest of 
these families that legislation and regulation do not prohibit 
or unduly restrict the responsible provision of banking 
services and the extension of credit across the full credit 
spectrum.

Q.3. I am deeply concerned that too many working families are 
taken advantage of by unscrupulous lenders through payday 
loans. What must be done to restrict payday loans and expand 
access to affordable, small loans?

A.3. Financial education and an awareness of available options 
from responsible lending institutions are two key elements to 
address this situation. In addition, it is in the interest of 
these families that legislation and regulation do not prohibit 
or unduly restrict the responsible extension of credit across 
the full credit spectrum.

Q.4. Too many working families have their Earned Income Tax 
Credit benefits needlessly reduced by high cost-refund 
anticipation loans ( RALs). What must be done to restrict these 
predatory loans and encourage alternatives to RALs?

A.4. In my current position, I do not have access to all the 
information I would need to have about Refund Anticipation 
Loans. If confirmed to the Board, I would do whatever is 
required to fulfill the Federal Reserve's responsibilities--
including protecting consumers--that exist in this area.

Q.5. I am concerned that consumers are not provided with enough 
information about the long-term consequences of making only the 
minimum credit card payments. What must be done to ensure that 
consumers are adequately informed of the true cost of making 
only the minimum payment?

A.5. I strongly support meaningful disclosure around the 
implications of minimum payments. The Federal Reserve's current 
proposal for revisions to Regulation Z seeks to implement the 
Bankruptcy Reform Act's significant requirements in this 
regard. Institutions should inform customers who consistently 
pay only the minimum of the consequences of their behavior. For 
those customers who pay the minimum for a number of consecutive 
months, it would be beneficial for the lending institution to 
provide a notice on their statement informing them of the 
consequences of doing so. In this statement, the institution 
could encourage consumers to pay more than the minimum in order 
to pay down their balance more quickly. Going further, an 
institution could also provide customers with a web address for 
an online calculator, which allows them to enter specific 
information, customized to their situation, and receive real-
time information about how long it will take to pay off their 
balance.
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