[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
                     FEDERAL AND STATE ENFORCEMENT 
                       OF FINANCIAL CONSUMER AND 
                        INVESTOR PROTECTION LAWS 

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 20, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-18

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel


















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 20, 2009...............................................     1
Appendix:
    March 20, 2009...............................................    59

                               WITNESSES
                         Friday, March 20, 2009

Dugan, Hon. John C., Comptroller, Office of the Comptroller of 
  the Currency...................................................     8
Duke, Hon. Elizabeth A., Governor, Board of Governors of the 
  Federal Reserve System.........................................     6
Galvin, Hon. William Francis, Secretary of the Commonwealth of 
  Massachusetts..................................................    37
Glavin, Rita M., Acting Assistant Attorney General, Criminal 
  Division, U.S. Department of Justice...........................    16
Gruenberg, Hon. Martin J., Vice Chairman, Federal Deposit 
  Insurance Corporation..........................................    12
Madigan, Hon. Lisa, Attorney General, State of Illinois..........    39
Pistole, John, Deputy Director, Federal Bureau of Investigation..    17
Polakoff, Scott M., Acting Director, Office of Thrift Supervision    14
Raskin, Sarah Bloom, Commissioner, Maryland Office of Financial 
  Regulation.....................................................    41
Ropp, James B., Commissioner, Delaware Division of Securities....    43
Sharick, Merle D., Jr., Mortgage Asset Research Institute (MARI).    46
Walter, Hon. Elisse B., Commissioner, U.S. Securities and 
  Exchange Commission............................................    10

                                APPENDIX

Prepared statements:
    Cummings, Hon. Elijah E......................................    60
    Dugan, Hon. John C...........................................    62
    Duke, Hon. Elizabeth A.......................................    81
    Galvin, Hon. William Francis.................................    94
    Glavin, Rita.................................................   102
    Gruenberg, Hon. Martin J.....................................   114
    Madigan, Hon. Lisa...........................................   133
    Pistole, John................................................   144
    Polakoff, Scott M............................................   152
    Raskin, Sarah Bloom..........................................   172
    Ropp, James B................................................   203
    Sharick, Merle D., Jr........................................   218
    Walter, Hon. Elisse B........................................   223

              Additional Material Submitted for the Record

Dugan, Hon. John C.:
    Written responses to questions submitted by Representative 
      Posey......................................................   255
Duke, Hon. Elizabeth A.:
    Written response to question posed during the hearing by 
      Representative Foster......................................   261
    Written response to question posed during the hearing by 
      Representative Gohmert.....................................   262
    Written responses to questions submitted by Representative 
      Grayson....................................................   263
    Written responses to questions submitted by Representative 
      Posey......................................................   265
Glavin, Rita M.:
    Written responses to questions submitted by Representative 
      Grayson....................................................   269
    Written responses to questions submitted by Representative 
      Posey......................................................   271
Gruenberg, Hon. Martin J.:
    Written responses to questions submitted by Representative 
      Foster.....................................................   275
    Written responses to questions submitted by Representative 
      Gohmert....................................................   277
    Written responses to questions submitted by Representative 
      Posey......................................................   278
Pistole, John:
    Written responses to questions submitted by Representative 
      Grayson....................................................   282
    Written responses to questions submitted by Representative 
      Posey......................................................   285
Polakoff, Scott M.:
    Written responses to questions submitted by Representative 
      Grayson....................................................   290
    Written responses to questions submitted by Representative 
      Posey......................................................   293
Ropp, James B.:
    Written response to question posed during the hearing by 
      Representative Gohmert.....................................   299
    Written response to question posed during the hearing by 
      Representative Scott.......................................   300
Walter, Hon. Elisse B.:
    Written responses to questions submitted by Representative 
      Foster.....................................................   301
    Written responses to questions submitted by Representative 
      Gohmert....................................................   303
    Written responses to questions submitted by Representative 
      Grayson....................................................   305
    Written responses to questions submitted by Representative 
      Posey......................................................   310
    Written response to question posed during the hearing by 
      Representative Scott.......................................   314


                     FEDERAL AND STATE ENFORCEMENT
                       OF FINANCIAL CONSUMER AND
                        INVESTOR PROTECTION LAWS

                              ----------                              


                         Friday, March 20, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:07 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Waters, Moore of 
Kansas, Green, Foster, Carson, Driehaus, Maffei; Campbell, 
Posey, and Lee.
    Also present: Representatives Cummings, Scott of Virginia, 
and Gohmert.
    The Chairman. The hearing will come to order. I apologize 
for the delay. This has been a somewhat busier week than usual. 
And let me begin by saying when I asked that this hearing be on 
Friday--I didn't ask, I decided--I was told there would be 
votes. And I understand, obviously, there are members who left 
town. I will confess that coming and seeing a manageable number 
of members rather than 72, which is our quota, does give me 
some encouragement, because I think we may be able to not be 
here all day.
    But I do want to explain that it is an important hearing. I 
am not trying to slight it, obviously, by having it on a day 
when there were no votes. We were told there were going to be 
votes. And we do have a very busy schedule, which we are trying 
to accommodate.
    I also want to express my appreciation to my colleagues on 
the Judiciary Committee, because we have before us officials 
who are under the jurisdiction of the Judiciary Committee. One 
of the things I have worked very hard on with my colleagues is 
to avoid jurisdictional disputes. We have tried to be 
cooperative. I have spoken to Mr. Conyers. I know he has spoken 
to his Republican counterpart. And we have with us the 
gentleman from Virginia, Mr. Scott, and the gentleman from 
Texas, Mr. Gohmert, the chairman and ranking member of the 
subcommittee of the Judiciary Committee. So to that extent, 
this is a joint hearing.
    We are joined by our colleague, Mr. Cummings of Maryland--
who also has had a great interest in this--from the Oversight 
and Reform Committee. So it is a joint effort to that extent. 
And it is important, because one of the questions we are going 
to be asking of the assembled panel is whether going forward, 
there is any legislative authority that you would like 
enhanced. We, if that was the case, in the Financial Services 
Committee would have jurisdiction over some of that, but the 
Judiciary Committee would have jurisdiction over other parts of 
it. Anything that is criminal, of course, goes to the Judiciary 
Committee, plus staffing or other requirements for 
recommendations from the people in the Justice Department. And 
given the rules about personnel and salaries that have come up, 
the Government Reform Committee has jurisdiction. Because one 
of the things we have been asked in the past is, in some cases, 
frankly, to make some special rules so some of these agencies 
could acquire the degree of expertise they would need in 
dealing with this. So that explains it all procedurally.
    I am very grateful to the witnesses. It is a panel that is 
fully representative of the capacity of the Federal Government 
to enforce the various laws, both civil and criminal, that try 
to keep our financial system honest in the literal sense.
    You can start my 5 minutes now. I started it. I used up 10 
seconds.
    There are two reasons for this hearing, candidly. One is 
the substance of the subject. We do want to know what, if 
anything, we, the Congress, the relevant committees taking the 
lead, can do to enhance your ability to protect the public, 
which is what you do. And there are agencies that have dual 
functions. You have general functions for keeping the market 
going, but every one of you has some law enforcement activity 
as well, both civil and criminal. And so it is important for us 
to know what, going forward, we can do to help you.
    And I want to make this very clear now. I know there is OMB 
and all those other people. I am asking you on behalf of the 
Financial Services Committee, and I believe the Judiciary 
Committee, we are directing you to volunteer to us--not to 
volunteer, but to respond if you need more resources. This is 
not a case of you being accused of coming here behind OMB's 
back. We insist on knowing what your honest assessment is of 
your resource needs, because we cannot have a situation where 
the public is being told that we don't have enough people to do 
this.
    We have had efforts before on a bipartisan basis out of 
this committee; we have talked to Judiciary to try to get more 
resources, for instance, to the Justice Department to deal with 
mortgage fraud. And mortgage fraud is obviously one of the 
issues that we are talking about.
    The second part of that, and mortgage fraud gets me into 
it, is there is in America today a justifiable level of anger 
at the fact that the great majority of Americans are suffering 
economically because of the mistakes of a relatively small 
number of people and of a system that was inadequate to the 
task. Some of those problems, as I say, resulted from an 
inadequate system. We cannot prosecute people for breaking 
rules when the rules didn't exist. And part of what we have to 
do is to think about what rules we need to have going forward. 
And you should feel free to tell us about those as well.
    But it is also likely that there are people who violated 
the rules, and if we are to sustain the capacity to govern 
effectively, if we are to provide the resources that are needed 
to deal with the current situation, we have to satisfy the 
American public that everything is being done that can be done 
legitimately to hold accountable the people who caused this 
problem. And so it is important for people to know that to the 
extent there were crimes committed, and there certainly were 
crimes committed as we hear, that there will be prosecutions if 
these are possible to achieve. And we will have a second panel 
of State attorneys general whom we understand have a large part 
of the criminal jurisdiction. There are also civil recoveries 
that can be made. There are debarments that can be issued.
    A great deal collectively can be done to protect the 
public, and it is important to do that, because if we don't 
convince the American public that this is being done 
effectively, their response will be, I believe, one that will 
shut down some of these efforts. That might be paradoxical, but 
it will be there.
    And then, of course, we do want to make sure that going 
forward, we are better able to protect our financial system 
from the kind of action and inaction that brought us where we 
are today.
    So this hearing is very important. Just to summarize, we 
want you to tell us--no agency represented here today should go 
out of this room and be able to say, the problem is they didn't 
give us enough resources, or we need this change in the law, 
unless you have told us that and given us a chance to respond.
    I will give you one example. We had a hearing with the FHA 
in January, still under the previous Administration, about 
their role in reducing and issuing mortgages of the sort that 
wouldn't lead to the subprime crisis. What evolved in that 
hearing is they did not have sufficient power to debar past bad 
actors. We elicited that in testimony--my colleagues from 
California Ms. Waters and Ms. Speier. We elicited that 
testimony. In the bill that the House passed a couple of weeks 
ago, we gave the FHA that authority. That is an example of the 
kinds of things we are looking to do.
    And let me say the last thing is we are not asking for 
names. We are not the prosecutors. This is not an appropriate 
forum in which individuals should be attacked. We are 
interested in your plans for going forward and what you intend 
to do going backward. That is, what do you intend to do to 
prosecute and recover funds where we can? What do you need to 
make sure you do the best possible job going forward? This is 
not a hearing in which, as I said, we want you to name names. 
That would not be an appropriate legislative function.
    And with that, let me call on the gentleman from Texas, Mr. 
Gohmert, for an opening statement.
    Mr. Gohmert. Thank you, Mr. Chairman. I appreciate being 
included in this hearing. In several former lives ago, I was 
hired as outside counsel to clean up some banking messes and 
illnesses, and so I have a real interest in this. Those who 
would seek to commit mortgage fraud often prey on the elderly 
and other members of society who are most vulnerable. And 
obviously, they shouldn't be allowed to defraud the American 
public. Honest Americans must have the confidence to know they 
can enter into a financial deal and the person on the other 
side won't be able to cheat them without consequences.
    Unfortunately, reporting of mortgage fraud on the 
Suspicious Activity Reports filed with the Treasury's Financial 
Crimes Enforcement Network shot up by 36 percent from 2007 to 
2008, with 63,173 reported last year.
    The problem of mortgage fraud is getting worse. Federal and 
State entities that police these activities obviously must have 
the resources and tools to deal with them.
    One of the things that may surprise some folks here that 
has brought together the ACLU, the Heritage Foundation, and, 
maybe more surprisingly, Mr. Bobby Scott and me all on the same 
side is that we have often been overcriminalizing way too many 
activities, and so one of the things some of us have wanted to 
start taking a look at is if there are ways to stop or slow a 
bad activity by other means. If there is not criminal intent, 
if there is not mens rea, then would a civil fine or some kind 
of dollar penalty address the issue?
    You look at mortgage companies who intended to put people 
in mortgages so it didn't matter if they put people in homes 
they couldn't afford, it didn't matter if people put down 
fraudulent information in order to get a mortgage because they 
intended to turn around and immediately sell those, package 
them into a neat little security package and sell them without 
recourse. Maybe if there was recourse civilly, you would 
address this issue and you wouldn't see fraud skyrocketing, 
because the people would have a real incentive, like 
Countrywide would have a real incentive, to make sure that 
people did not put down fraudulent information, they didn't get 
in homes they couldn't afford because they didn't want people 
coming back to them for the costs of this thing.
    But I am glad to hear the FBI has increased the number of 
special agents specifically devoted to mortgage fraud 
nationally by half over the last year from 120 to 186. And I am 
looking forward to hearing from the witnesses and learning 
about how this all affects them and their suggestions. But my 
time as a lawyer, as a prosecutor, judge, chief justice, and 
Congressman has taught me that crises such as the scourge of 
mortgage fraud can lead to overreaction in the form of new 
criminal laws that potentially cover people who had no guilty 
intent. For example, in this area, they were greedy, but they 
didn't intend to commit a crime.
    But one of our problems is this overreaction; let us 
criminalize some conduct, let us put people in prison. We have 
heard some terrible anecdotal evidence of some Federal agencies 
who couldn't wait to get their own SWAT team with the red 
lights and the ability to slam people to the ground and 
handcuff them in public, because there apparently is a pent-up 
desire to do that among some people. And wow, you can do it and 
get paid for it at the same time. So we have to be careful 
about spreading that ability to do that among people who should 
not have that.
    But perhaps we could hear thoughts on whether to outlaw 
combining mortgages into securities. I know I have friends who 
think I shouldn't talk like that, but when you lump mortgages 
into a security, and you don't examine the value of each 
mortgage and whether the payments have been made on time or the 
property underlying the mortgage is keeping its value, then you 
are going to end up needing to buy some insurance, or we will 
call it a credit swap, and that way we don't have to hold money 
in reserve in the event the insurable event ever occurs.
    So there are a number of things we need to look at. If 
greed is the problem, but there is no criminal intent, let us 
address it with a proportional monetary cost to the wrongdoer 
and pop them right where they hurt the worst, in the 
pocketbook. And if there is criminal intent, then let us go 
after them. I may be one of the few people in this room who has 
watched his hand sign an order to have somebody taken and the 
death penalty administered. I am serious about crime, but I do 
want to make sure there is criminal intent; otherwise, if it is 
just greed, let us hit them in the pocketbook where they really 
hurt.
    Thank you, Mr. Chairman.
    The Chairman. At this, if I could take a second to express 
agreement with him. That is why I did stress both civil and 
criminal. And that is why we have people here from both the 
civil and criminal jurisdictions. And it is why we are working 
with Judiciary, because we don't want this to be narrowly done. 
The gentleman is absolutely right, and I think he speaks for a 
great majority of both committees.
    Mr. Gohmert. And that is why I do appreciate this hearing 
and being included. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Virginia, who is chairman 
of the subcommittee on the Judiciary Committee.
    Mr. Scott of Virginia. Thank you, Mr. Chairman, for 
inviting the Judiciary Committee to participate in this hearing 
on Federal and State enforcement of financial, consumer, and 
investor protection laws. As a member of the House Judiciary 
Committee and the Chair of the subcommittee overseeing crime 
issues, we are exploring ways to hold accountable unscrupulous 
mortgage brokers and Wall Street executives who are an integral 
part of the problem. With the Department of Justice and FBI 
witnesses, I hope this hearing will give more insight into what 
is being done and what needs to be done, particularly what is 
needed in the way of resources to investigate those suspected 
of serious criminal activity which contributed to the crisis, 
and what needs to be done to make sure they are prosecuted to 
the full extent of the law.
    The Financial Services Committee has been relentless in 
investigating and uncovering the causes of the financial and 
mortgage crisis. As banks and private mortgage companies 
relaxed their standards for loans, approving riskier mortgages 
with less scrutiny, they created an environment that invited 
fraud. In the last 3 years alone, the number of criminal 
mortgage fraud investigations opened by the FBI has more than 
doubled. The FBI has testified before the Senate that it 
currently has 1,800 mortgage fraud investigations that are 
open, but only 240 agents specifically assigned to those cases.
    It is my view that to fully protect law-abiding taxpayers 
from criminal conduct, it is essential that appropriate 
resources be dedicated to meet the challenges of investigating 
mortgage and financial fraud. I am not persuaded that more laws 
are needed, but what is needed is more resources to enforce 
existing laws.
    Many in this industry knew that they were dealing with 
worthless paper. They had even names for the paper. They had 
mortgages like ninja loans, no income, no job. When these are 
passed off as triple A assets, someone has committed common law 
fraud.
    I believe that Federal mail and wire fraud criminal 
statutes should be sufficient to address the problem. Those 
penalties for those violations are substantial. Mail and wire 
fraud violations carry a maximum penalty of 20 years, and any 
mail or wire fraud that affects a financial institution 
increases that maximum sentence to 30 years.
    It is just not mail and wire fraud that is at the disposal 
of Federal prosecutors. The FBI itself has identified nine 
applicable Federal criminal statutes for which this fraud--for 
which those committing the fraud may be charged. In addition to 
the Federal criminal law, these crimes can also be aggressively 
prosecuted by State and local law enforcement officials under 
aggressive and very punitive State criminal law provisions as 
well. So it seems that we may have enough in the way of 
criminal code provisions, but what we need is to make sure that 
we have adequate resources to State and Federal authorities to 
battle fraud. And we need to ensure that the Federal 
authorities are also coordinating their activities with local 
and State officials.
    So, Mr. Chairman, what we need to do is find out what 
resources law enforcement officials need to prosecute the 
fraud, whether it is consumer I.D. theft, contracting fraud in 
Iraq, or even mortgage fraud before us today. I was happy to 
see that the 2009 Omnibus Appropriations Act provided $10 
million to the FBI to dedicate additional agents to the 
mortgage fraud investigations. I am also supportive of other 
bills that provide more resources in this area.
    In conclusion, Mr. Chairman, I support more resources for 
the Department of Justice to assist the FBI and the States in 
enforcing fraud laws to recover the billions of dollars that 
have been lost. We also need to make sure that we have in place 
the prosecution and investigations to prevent these same 
schemes from happening in the future. Today's hearing is an 
opportunity to fully discuss these issues, and I look forward 
to hearing from the witnesses. And I thank you again, Mr. 
Chairman, for your relentless action to make sure that the 
public is actually protected.
    Thank you, and I yield back.
    The Chairman. I thank the gentleman.
    The gentleman from California, Mr. Campbell, will be giving 
an opening statement from the Financial Services Committee. He 
had a conflict, which is an unavoidable fate of all of us. He 
is on his way. I would assume it will be all right with the 
members if we proceed with the testimony, and if Mr. Campbell 
has a statement when he arrives, he will give it. And given the 
large number of witnesses, I cannot tell you how nice it is to 
have the witnesses outnumber the members, because we will get 
some real conversation going.
    We will now begin with our first witness, the Honorable 
Elizabeth Duke, who is a Governor of the Board of Governors of 
the Federal Reserve system, and then go down the list. Governor 
Duke?

 STATEMENT OF THE HONORABLE ELIZABETH A. DUKE, GOVERNOR, BOARD 
           OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Ms. Duke. Thank you, Mr. Chairman.
    Chairman Frank, and members of the committee, I want to 
thank you for the opportunity to discuss the Federal Reserve 
Board's ongoing efforts to address and prevent mortgage-related 
fraud and abusive lending practices in the institutions we 
supervise.
    While the expansion of the subprime mortgage market over 
the past decade increased consumers' access to credit, too many 
homeowners and communities are suffering today because of lax 
underwriting standards and other unfair and deceptive practices 
that resulted in unsustainable loans. The Federal Reserve is 
committed to improving consumer protections and ensuring 
responsible lending practices through each of the roles we 
play, as supervisor for safety and soundness, as supervisor for 
consumer compliance, and as rule writer.
    Let me first address the steps that the Federal Reserve is 
taking to combat mortgage fraud. In recent years, there has 
been a significant increase in suspected mortgage fraud and 
other mortgage-related criminal activity. Federal Reserve staff 
regularly review Suspicious Activity Reports filed by the 
financial institutions we supervise. In appropriate 
circumstances, and particularly when bank insiders may be 
involved, we initiate investigations, make criminal referrals, 
coordinate with law enforcement and other regulatory agencies, 
and pursue enforcement actions against individuals, including 
seeking prohibition orders and, in appropriate cases, civil 
money penalties and restitution. We are currently pursuing 
numerous investigations involving insiders related to possible 
mortgage-related fraud, both commercial and residential.
    More generally, the Federal Reserve's enforcement efforts 
begin with the examination of its supervised institutions. In 
the Federal Reserve's regular safety and soundness examinations 
of State member banks and bank holding companies, we evaluate 
their risk management systems, financial condition, and 
compliance with laws and regulations.
    In assessing a bank's risk management systems, examiners 
evaluate the adequacy of the bank's practices to identify, 
manage, and control the credit risk arising from the bank's 
mortgage lending activity. Examiners look at the bank's 
underwriting standards, credit administration practices, 
quality control processes over both its own originations and 
third-party originations, and appraisal and collateral 
valuation practices. Institutions with weaknesses are expected 
to take corrective actions that include improving their 
underwriting practices in the future. In those instances where 
the bank is not willing to address the problem, we have and use 
a full range of powerful enforcement tools to compel corrective 
action.
    The Federal Reserve conducts regular examinations of State 
member banks to evaluate compliance with consumer protection 
laws. Each examination includes an evaluation of the bank's 
fair lending compliance program. Our objective is to identify 
compliance risk at banks before they harm consumers, and to 
ensure that banks have appropriate controls in place to manage 
those risks.
    When examiners identify banks with weak and ineffective 
compliance programs, they document the weaknesses in the 
examination report and take appropriate supervisory action. In 
addition, when examiners identify patterns or practices of 
lending discrimination, the Federal Reserve makes referrals to 
the Department of Justice as required by the Equal Credit 
Opportunity Act. Furthermore, Federal Reserve consumer 
compliance examiners routinely participate in the review and 
assessment of the adequacy of large bank holding company 
compliance risk management programs.
    In addition to our supervisory activities, in 2008 the 
Federal Reserve Board finalized sweeping new rules for home 
mortgage loans to better protect consumers and facilitate 
responsible residential mortgage lending. The rules, which 
amended Regulation Z, prohibit unfair, abusive, or deceptive 
home mortgage lending practices.
    Importantly, the rules apply to all mortgage lenders, not 
just to the depository institutions supervised by the Federal 
banking and thrift regulators. The rules apply to a newly 
defined category of higher-priced mortgage loans secured by a 
consumer's principal dwelling. The higher-priced thresholds 
would cover all, or virtually all, of the subprime market. For 
these loans, the rules will prohibit a lender from making a 
loan without regard to the borrower's ability to repay the loan 
from income and assets other than the home's value. In 
addition, lenders are prohibited from making stated income 
loans, and are required in each case to verify the income and 
assets that they rely upon to determine the borrower's 
repayment ability.
    Again, I want to thank you for the opportunity to discuss 
what the Federal Reserve does to address and prevent mortgage-
related fraud and abusive lending practices in the institutions 
we supervise. I would be happy to answer any questions. Thank 
you, Mr. Chairman.
    [The prepared statement of Governor Duke can be found on 
page 81 of the appendix.]
    The Chairman. Next, the Comptroller of the Currency, John 
Dugan.

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

    Mr. Dugan. Thank you, Mr. Chairman, and members of the 
committee. I welcome this opportunity to appear before you 
today to discuss the OCC's enforcement authority and how we 
have exercised that authority.
    Recent unprecedented losses at financial firms, the 
mortgage crisis, and shocking examples of both fraud and excess 
have prompted your questions about the adequacy and use of 
enforcement powers by Federal and State authorities. The OCC 
vigorously applies laws and regulations to national banks 
through both supervisory activities and enforcement actions to 
protect the safety and soundness of national banks and their 
customers.
    The OCC and the other Federal banking agencies have a broad 
range of supervisory and enforcement tools that are used to 
supervise banks and protect consumers, investigate and halt 
fraudulent activities, and remove and prohibit those 
responsible from ever working in the banking industry again. 
Unlike the Department of Justice and the FBI, however, the 
Federal banking agencies are not criminal law enforcement 
agencies, and we do not have the authority to investigate and 
prosecute crimes of fraud. Rather, the Federal banking agencies 
refer suspected criminal fraudulent acts to the Department of 
Justice for prosecution.
    My written statement today covers the OCC's activities and 
perspectives on enforcement in four areas. The first is our 
approach to enforcement. National banks are subject to 
comprehensive, ongoing supervision that, when it works best, 
enables examiners to identify problems early and obtain early 
corrective action before enforcement action is necessary. Once 
problems or weaknesses are identified, we expect bank 
management and the board of directors to correct them promptly. 
And because of the tremendous leverage that bank supervisors 
have over banks, management normally takes great pains to do 
so.
    That is not always true, however, and in other cases, the 
seriousness of the problem requires an enforcement response. In 
those circumstances, we have a range of enforcement tools at 
our disposal, from informal enforcement actions such as a 
commitment letter or memorandum of understanding, to formal 
enforcement actions such as a formal agreement, cease and 
desist order, or removal and prohibition order.
    We use all of these tools, depending on the circumstances, 
to vigorously implement our safety and soundness and consumer 
protection mandates, as the chart in my written statement 
summarizes. These include actions taken to address a wide range 
of issues, including capital adequacy, unfair and deceptive 
practices, managerial competence, mortgage fraud, and many 
others.
    The second part of my testimony describes how we have 
employed enforcement actions in problem bank situations to 
protect consumers and eliminate fraud. Problem banks warrant 
special supervisory attention, and our actions here are 
designed to remedy various unsafe and unsound practice and 
compliance violations. The various corrective measures 
incorporated into our enforcement actions have included 
requiring the bank to raise capital, restrict borrowings, 
eliminate certain activities and even entire business lines, 
adopt appropriate underwriting standards and policies to govern 
lending activities, limit the transfer of assets, and eliminate 
payments of bonuses or dividends.
    The third part of my statement describes how we coordinate 
with State and Federal regulatory agencies and law enforcement 
agencies. As an example, when the OCC issues a remedial 
enforcement action against a national bank, the Federal Reserve 
Board will often take a complementary action with respect to 
the bank's holding company.
    We also coordinate extensively with other regulatory 
agencies and with law enforcement authorities. The OCC has 
entered into similar information-sharing agreements with most 
State banking agencies and all 50 State insurance departments, 
and recently with the Federal Trade Commission, and we 
regularly share information with the SEC. When we suspect 
criminal conduct, we make referrals to the Department of 
Justice.
    Finally, my statement concludes with a description of the 
measures we have taken to address mortgage lending practices. 
Abusive lending practices by mortgage lenders and brokers and 
the current foreclosure crisis understandably have raised 
questions about the role and effectiveness of bank regulators 
in anticipating and preventing mortgage lending abuses. This 
area represents a good example of how we apply our approach to 
supervision and enforcement. It is important to be clear about 
who did what.
    The OCC extensively regulates the mortgage business of 
national banks and their subsidiaries, and as a result of the 
standards applied by the OCC, national banks originated less 
than 15 percent of all subprime loan mortgages. In contrast, 
the vast bulk of such loans were originated by nondepository 
institution mortgage lenders and brokers that were not subject 
to our regulation. It is these lenders and brokers that have 
been widely recognized as the overwhelming source of abusive 
subprime mortgages resulting in waves of foreclosures.
    The OCC has been aggressive in combating abusive lending 
practices and in preventing national banks from engaging in 
such activities. We were the first Federal banking agency to 
issue antipredatory lending regulations, and in recent years we 
have issued, with the other agencies, a number of supervisory 
issuances covering payday loans, title loans, unfair and 
deceptive practices, risks associated with subprime mortgage 
practices, and other related issues. Although many of these 
statements were issued as guidance, compliance is not optional 
for national banks. We require it.
    We describe a number of enforcement actions that we have 
taken in our testimony, including several that I won't go into 
the details of here because the details were reported there.
    And thank you very much. I will be happy to answer 
questions.
    [The prepared statement of Comptroller Dugan can be found 
on page 62 of the appendix.]
    The Chairman. Next, we have Commissioner Elisse Walter, a 
relatively new Commissioner, of the Securities and Exchange 
Commission. Commissioner Walter?

STATEMENT OF THE HONORABLE ELISSE B. WALTER, COMMISSIONER, U.S. 
               SECURITIES AND EXCHANGE COMMISSION

    Ms. Walter. Thank you, Mr. Chairman, and good morning to 
you, the members of the committee, and the members of the 
Judiciary Committee. I am one of the five Commissioners of the 
Securities and Exchange Commission, and I am testifying here 
today on behalf of the Commission as a whole. I very much 
appreciate the opportunity to discuss our enforcement program 
and, more specifically, our efforts to address violations of 
the law arising out of the current financial crisis. We are 
fully committed to pursuing wrongdoers and returning as much 
money as possible to injured investors.
    The Commission's enforcement program is in a critical 
transition period. Since joining the Commission in January, our 
new Chairman, Mary Schapiro, has been taking important steps to 
bolster our enforcement efforts and restore investor confidence 
to our markets. Among other things, she has hired a new 
Director of Enforcement, Robert Khuzami, an accomplished former 
Federal prosecutor who is scheduled to join the agency at the 
end of this month. And she has begun streamlining our 
enforcement processes.
    Today, as detailed in my written statement, I would like to 
talk about the SEC's law enforcement authority and the steps we 
are taking to address the current crisis. As you know, the SEC 
is a capital markets regulator and a law enforcement agency. We 
are charged with civil enforcement of the Federal securities 
laws, and our Enforcement Division is authorized to investigate 
any potential violation of these laws. We have the authority to 
take action against any form of fraud in connection with the 
purchase or sale of securities.
    Our Enforcement Division, which numbers about 1,100, 
initiates investigations based on information from many 
sources, including referrals from within the Commission itself 
and from other regulators, investor complaints, and tips. In 
Fiscal Year 2008, the Division received more than 700,000 
complaints, tips, and referrals.
    The enforcement staff coordinates its work with other law 
enforcement bodies across the country and around the globe in 
order to leverage enforcement resources effectively. In our 
actions, we seek a variety of remedies, including disgorgement 
of ill-gotten gains, permanent injunctive relief against 
violations of the law, remedial undertakings, civil penalties, 
revocation of registration, and bars to prevent a wrongdoer 
from serving as an officer or director of a public company or 
from associating with any broker-dealer or investment adviser.
    Whenever possible, the Commission seeks to return monies to 
harmed investors under the Fair Funds provisions of the 
Sarbanes-Oxley Act. Under the authority granted to us by 
Congress in that legislation in 2002, we have authorized 
approximately 220 Fair Funds, with an estimated total value of 
more than $9.3 billion that has been or will be distributed to 
investors.
    To halt an ongoing fraud or to prevent misuse of investor 
funds, we have the ability to seek emergency relief in court, 
including temporary restraining orders, preliminary 
injunctions, asset freezes, and the appointment of a receiver 
to conduct operations during the case or to marshal any 
remaining assets for the benefit of injured investors. During 
this fiscal year thus far, we have already obtained 20 
temporary restraining orders to halt ongoing frauds.
    I would like to take a minute to give you a few examples of 
our recent work to address the current crisis. Our Enforcement 
Division has already filed nine cases involving subprime 
issues, and has many more under active investigation. And 
through the collective efforts of SEC enforcement, State 
regulators, and FINRA, the self-regulatory organization for 
broker-dealers, over the past year, tens of thousands of 
auction-rate securities investors have received or will soon 
receive over $67 billion of liquidity. These cases involve the 
largest monetary settlements in the history of our agency.
    Also, we are investigating the possible manipulation of the 
securities of six large financial issuers involved in the 
recent market turbulence, with particular focus on claims that 
credit default swaps were being used to manipulate equity 
prices.
    We have also brought many cases involving hedge funds. As 
you know, hedge funds and their advisers are not required to 
register with us, but we still have authority to pursue fraud 
cases against them. The SEC has dozens of active investigations 
involving individuals associated with hedge funds.
    Over the past 2 years, the Commission has filed enforcement 
cases against the perpetrators of more than 75 Ponzi schemes, 
including 12 such cases since December 2008. For example, we 
recently filed an emergency action against Robert Allen 
Stanford and others, alleging a massive Ponzi scheme. At our 
request, the court issued a temporary restraining order, 
appointed a receiver, and ordered an asset freeze.
    Also this week, we filed a complaint alleging fraud by the 
accountant who purportedly audited the firm run by Bernard 
Madoff. A criminal fraud case was brought at the same time.
    The SEC is committed to finding ways to improve, to act 
more quickly and efficiently. Within days after her appointment 
as SEC Chairman, Mary Schapiro repealed the pilot project under 
which enforcement staff were required to seek preauthorization 
from the five-member Commission before negotiating civil money 
penalties against public issuers. In addition, she streamlined 
the process for obtaining formal orders, and now they can be 
authorized by a single Commissioner. We are also working with 
the Center for Enterprise Modernization, a federally funded 
research and development center, to establish a centralized 
process that will more effectively identify leads for potential 
enforcement as well as areas of high risk for compliance.
    But these steps are just the start. We are carefully 
examining our processes from top to bottom. However, while our 
job has grown substantially, our resources have not kept pace. 
Our staffing levels have actually declined in the recent past, 
and our technology must be improved.
    As the sole agency charged with protecting investors, the 
SEC is committed to restoring the confidence needed for our 
marketplace to thrive. Thank you again for the opportunity to 
testify, and I look forward to answering any questions you 
have.
    [The prepared statement of Commissioner Walter can be found 
on page 223 of the appendix.]
    The Chairman. Next, Martin Gruenberg, who is the Vice Chair 
of the Federal Deposit Insurance Corporation.

STATEMENT OF THE HONORABLE MARTIN J. GRUENBERG, VICE CHAIRMAN, 
             FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Gruenberg. Thank you, Mr. Chairman, and members of the 
committee. I appreciate the opportunity to testify on behalf of 
the FDIC regarding enforcement of consumer and investor 
protection laws.
    Earlier this month, in a speech before the National 
Association of Attorneys General, FDIC Chairman Bair stated 
that many of the current problems in the economy were caused by 
a widespread failure to protect consumers. She noted that it is 
essential that those whose actions contributed to the current 
crisis and who are engaging in practices harmful to consumers 
be held accountable, and that we take steps to prohibit these 
practices from occurring again.
    The FDIC has a strong commitment to the vigorous and 
effective enforcement of consumer protection laws and other 
statutes under its jurisdiction. The FDIC brings a unique 
perspective to this issue because of the variety of functions 
it performs, including deposit insurer, bank supervisor, and 
receiver for failed insured depository institutions.
    Immediately following the closing of every failed 
institution, FDIC investigators and attorneys begin an 
investigation. The purpose is to determine whether the failed 
institution's directors, officers, and professionals such as 
accountants, appraisers, and brokers were responsible for its 
losses, and if so, to hold them accountable.
    Recent failures of insured institutions, 3 in 2007, 25 in 
2008, and 17 thus far this year, have resulted in a substantial 
increase in our investigations and professional liability 
workload. Since the beginning of 2007 through today, 
investigations of mortgage fraud claims have increased from 0 
to 4,375. Investigations of professional liability claims other 
than mortgage fraud have increased from 34 to 427. And mortgage 
fraud lawsuits have increased from 0 to 113.
    As receiver of a failed institution, the FDIC has the 
authority to terminate contracts upon an insured institutions's 
failure. The FDIC routinely terminates compensation and other 
contracts with senior management whose services are no longer 
required.
    In addition to the development and support of civil claims 
brought by the FDIC with regard to failed institutions, our 
investigators also identify signs of possible criminal activity 
in a failed institution. These findings support the Department 
of Justice's subsequent prosecution of the wrongdoers. The FDIC 
also coordinates with other Federal, State, and international 
agencies to detect and deter bank fraud.
    The FDIC, in addition, pursues enforcement actions against 
open insured depository institutions, their directors and 
officers, employees, and other institution affiliate parties 
where warranted, including third parties and independent 
contractors such as accountants, attorneys, and appraisers, 
under its Federal Deposit Insurance Act authority.
    When FDIC examiners find other violations of law, breaches 
of fiduciary duty, unsafe and unsound practices or 
mismanagement in banks' consumer protection responsibilities, 
the FDIC requires corrective action. During 2007 and 2008, the 
FDIC issued 142 cease and desist orders and 102 removal and/or 
prohibition orders banning individuals from banking. These 
enforcement actions were based on a variety of harm or risks 
caused to an insured institution, and included theft and 
embezzlement by employees of the bank, poor lending policies or 
procedures, and fraudulent actions on the part of a lending 
officer.
    Removing from office and prohibiting from banking those who 
commit financial crimes is a primary goal of FDIC enforcement 
actions. The employees found to have committed financial crimes 
are removed from positions of trust, and are often required to 
make restitution and pay a financial penalty to remedy these 
transgressions.
    The FDIC's Office of Inspector General brings another level 
of enforcement. The OIG conducts investigations of fraud and 
other criminal activity in or affecting FDIC-regulated open 
financial institutions, all closed institutions in 
receiverships, and other FDIC-related programs and operations. 
Currently, the OIG has about 170 active investigations 
involving open and closed institutions. The work focuses on 
various types of fraud, including mortgage securities and 
crimes such as embezzlement and money laundering.
    Investigations of financial institution fraud currently 
constitute about 88 percent of the OIG's investigative 
caseload. Over the last 2 years, it has closed about 100 
investigations, with the crimes occurring almost exclusively in 
open institutions. These investigations have resulted in over 
230 indictments, 170 convictions, and over $530 million in 
fines, restitution, and monetary recoveries.
    The FDIC expects the enforcement challenges in both the 
closed bank and open bank context to increase for the 
foreseeable future. In order to handle the substantially 
increased workload in the closed bank area, we are increasing 
our enforcement staff as well as retaining outside counsel. We 
have also added to both our civil and criminal investigations 
staff. In the open bank area, the FDIC has added 87 full-time 
compliance examiners in 2007 and 2008, and has authorized the 
hiring of 79 more. Since 2007, we have increased our legal 
staff responsible for open bank enforcement by 29 attorneys.
    The FDIC's core mission is to maintain public confidence in 
the banking system. Critical to the achievement of that mission 
is to hold accountable those who do not comply with applicable 
laws and regulations. The FDIC looks forward to continuing to 
work closely with the committee to achieve that goal.
    Thank you, Mr. Chairman.
    [The prepared statement of Vice Chairman Gruenberg can be 
found on page 114 of the appendix.]
    The Chairman. Next, the Acting Director of the Office of 
Thrift Supervision, Mr. Scott Polakoff, to whom this committee 
gave, I think, 2 days off this week. So welcome back, Mr. 
Polakoff.

  STATEMENT OF SCOTT M. POLAKOFF, ACTING DIRECTOR, OFFICE OF 
                       THRIFT SUPERVISION

    Mr. Polakoff. Thank you, sir.
    Good morning, Chairman Frank, and members of the committee. 
Thank you for the opportunity to testify on the enforcement 
authority that the OTS exercises over regulated institutions 
and their affiliates, and in particular OTS enforcement of 
consumer protection laws.
    The OTS has broad powers to protect customers of federally 
regulated thrifts, their affiliates, and thrift holding 
companies. These powers include specific authority regarding 
truth in lending and unfair or deceptive practices. As you 
know, the OTS used that authority over unfair practices to 
initiate a process resulting in a final interagency rule in 
January of 2009 banning unfair credit card practices.
    We exercise our enforcement authority when our examiners 
find problems during their examinations of thrifts as well as 
when we receive consumer complaints and referrals from other 
agencies.
    Throughout 2008 and into 2009, we have seen a steady 
increase in OTS enforcement actions. Formal actions, such as 
cease and desist orders and monetary penalties, increased by 45 
percent from 2007 to 2008, and the pace is accelerating further 
this year.
    I would like to highlight two particularly notable cases. 
The first one occurred in June of 2007 and involved a Federal 
savings bank and two affiliates that were charging excessive 
fees to mortgage customers and failing to adequately evaluate 
their creditworthiness. We required these institutions to 
immediately stop these practices, establish a fund of $128 
million to reimburse consumers, and commit an additional $15 
million to support financial literacy and credit counseling.
    The second case, in June of 2008, involved a Federal 
savings bank and its subsidiaries that were charging 
inappropriate and, in some cases, very large broker and lender 
fees to mortgage customers. The enforcement action required the 
bank to reform its practices and establish a $5 million fund to 
reimburse consumers. Since 2007, I believe that OTS is the only 
Federal banking agency to require institutions to make 
restitution to bank customers for abusive lending practices, 
enabling the customers to stay in their homes.
    On criminal matters, the OTS makes referrals to the 
Department of Justice and U.S. Attorneys' offices. The number 
of these referrals is increasing, particularly in the fair 
lending area. Five recent cases involve steering customers to 
more expensive mortgages based upon their race or national 
origin.
    I would also like to point out that the OTS has been 
increasing its enforcement resources for several years. Since 
2006, the agency has increased the number of attorneys in its 
Enforcement Division by 67 percent. The agency has also been 
expanding the size of its staff devoted to fair lending issues.
    As we discuss actions that will better protect consumers, I 
think it is important to point out that gaps in laws and 
regulations over mortgage lending leave some sectors of the 
financial market underregulated, and therefore may leave 
consumers unprotected. These sectors include mortgage brokers 
and mortgage companies.
    We urge Congress to establish a level playing field in 
mortgage lending, with the same rules and oversights for all 
players. Consumers do not understand, nor should they need to 
understand, distinction between types of lenders offering to 
provide them with a mortgage. They deserve the same service, 
care, and protection from any lender.
    Finally, I would like to offer two suggestions for 
legislative changes that would improve consumer protection. 
Number one, expand and enhance the temporary cease and desist 
authority to make it easier to apply in consumer protection 
cases. Number two, improve the jurisdiction of Federal banking 
regulators over third parties such as mortgage brokers, 
appraisers, and consultants to whom depository institutions 
outsource key parts of their business.
    Thank you again, Mr. Chairman.
    [The prepared statement of Acting Director Polakoff can be 
found on page 152 of the appendix.]
    The Chairman. Thank you, Mr. Polakoff. Those last two 
points are very much what we were hoping to hear.
    And next, with the cooperation of the Judiciary Committee, 
which has the primary jurisdiction over the Department of 
Justice, Ms. Rita Glavin, who is the Acting Assistant Attorney 
General of the Criminal Division.

STATEMENT OF RITA M. GLAVIN, ACTING ASSISTANT ATTORNEY GENERAL, 
         CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE

    Ms. Glavin. Good morning, Mr. Chairman, and members of the 
committee, and members of the House Judiciary Committee. Thank 
you for your invitation to speak today.
    The Nation's current economic crisis has had devastating 
effects on the mortgage markets, credit markets, the banking 
system, and all of our Nation's citizens. And although not all 
of our current economic ills are the result of criminal 
activity, the financial crisis has laid bare criminal activity 
such as Ponzi schemes that may have otherwise gone undetected 
for years.
    The Department of Justice is committed to redoubling our 
efforts to uncover abuses involving financial fraud schemes, 
mortgage lending and securitization frauds, foreclosure rescue 
scams, government program fraud, bankruptcy schemes, and 
securities and commodities fraud. And we are committed to 
adopting a proactive approach for better detecting and 
deterring such fraud in the future. Put simply, where there is 
evidence of criminal wrongdoing, including criminal activity 
that may have contributed to the current economic crisis or any 
attempt to criminally profit from this crisis, the Department 
will prosecute those wrongdoers. We will work tirelessly to 
recover assets and criminally derived proceeds and strive to 
make whole victims of such schemes.
    Historically the Department has had tremendous success in 
identifying, investigating, and prosecuting massive financial 
fraud schemes. Last year, for example, the Department secured 
the convictions of five former executives, including the owner 
and president of National Century Financial Enterprises, one of 
the largest health care finance companies in the United States 
until its bankruptcy in 2002, on charges stemming from an 
investment fraud scheme resulting in $2.3 billion in investor 
losses. Similarly, last year the Department obtained the 
conviction of a former AIG executive and several Gen Re 
executives who engaged in corporate fraud by executing two 
false reinsurance transactions to conceal a $59 million 
decrease in the loss reserves of AIG.
    From the Department's prosecution of executives of Enron to 
WorldCom to Adelphia to Revco, the prosecution of mortgage 
fraudsters and architects of Ponzi schemes across the country, 
the Department has considerable institutional experience which 
it can and will draw upon in fighting crimes that relate to the 
current crisis. Indeed, in recent weeks the Department has made 
clear that its commitment to prosecuting financial crimes will 
not abate.
    The Department secured a guilty plea from Bernard Madoff 
for securities fraud and mail fraud violations. The Department 
filed a criminal complaint against the chief investment officer 
of Stanford Financial, alleging that she obstructed a 
Securities and Exchange Commission investigation into the 
activities of Stanford Financial. And these are just two 
examples of the Department's ongoing vigorous enforcement 
efforts.
    The Department has approached the current financial problem 
with three primary goals. The first is coordination. The 
Department has sought to aid in coordination among law 
enforcement agencies. The sharing of information and ideas is 
essential to identifying and prosecuting financial fraud in the 
mortgage fraud problem. Accordingly, the Department has 
encouraged and led by example a comprehensive information-
sharing effort within the Department and amongst our partner 
agencies.
    Second, investigation and prosecution. The Department has 
focused on the investigation and prosecution of financial fraud 
and mortgage fraud for many years. When criminals go to jail, 
we deter similar conduct by others. The Department over the 
last several years aggressively prosecuted mortgage fraud 
cases, and we have yielded nationwide sweeps, resulting in 
hundreds of convictions, and sending criminals to jail when 
appropriate.
    Third, in addition to deterring, detecting, and prosecuting 
crimes, the Department is committed in its responsibilities to 
help the victims of financial fraud and mortgage fraud schemes, 
and, to the extent possible, attempt to make them whole. To 
this end, prosecutors and law enforcement partners work to 
locate and recover assets from the criminals and provide 
restitution to the victims.
    Unquestionably, the crisis now demands an aggressive and 
comprehensive approach, and we are going to do that, doing it 
the way we have always been doing it, through vigorous 
investigations and prosecutions of those people who defraud 
their customers, the American taxpayer, and may otherwise have 
unlawfully placed billions of dollars of private and public 
money at risk. We are committed to the effort. We are going to 
look at allegations of fraud closely, follow the facts where 
they may lead, and bring our resources to bear to prosecute 
those who have committed crimes. Thank you for the opportunity 
to address the committee, and I would be happy to answer any 
questions.
    [The prepared statement of Acting Assistant Attorney 
General Glavin can be found on page 102 of the appendix.]
    The Chairman. Thank you.
    Our next speaker is John Pistole, who is the Deputy 
Director of the FBI.

 STATEMENT OF JOHN PISTOLE, DEPUTY DIRECTOR, FEDERAL BUREAU OF 
                         INVESTIGATION

    Mr. Pistole. Thank you, Chairman Frank and, from the 
Judiciary Committee, Chairman Scott, and other members of the 
committee.
    Today, I would like to give just a very brief overview of 
what we in the FBI are doing in facing the challenges that we 
have, and I will describe some of the current efforts to combat 
the fraud that has been described previously.
    To state the obvious, we have experienced a significant 
increase in mortgage-fraud-related cases since 2005, when we 
had approximately 720 investigations. Today, the FBI has more 
than 2,000 active mortgage fraud investigations and an 
additional 566 corporate fraud investigations, a trend which we 
expect to continue. Our work in mortgage-fraud-related crimes 
generally appears in two distinct areas: fraud for profit; and 
fraud for housing.
    Our primary focus is in the fraud-for-profit area, which 
refers to those individuals who falsely inflate the value of 
property or issue loans related to fictitious properties. These 
schemes rely on industry insiders, those appraisers, 
accountants, mortgage brokers, and other professionals--who 
override lender controls designed to prevent this crime from 
happening.
    The second area, fraud for housing, occurs when an 
individual borrower, often with the assistance of a real estate 
professional, acquires a house in which to live under false 
pretenses.
    The current financial crisis has also produced an 
additional consequence--the exposure of pervasive fraud schemes 
that have been thriving in the global financial system. These 
schemes are not new but are coming to light, as has been 
described, as a result of market deterioration. For example, 
numerous Ponzi schemes, such as Madoff and other investment 
frauds, have been uncovered which we are actively pursuing in 
the following ways:
    We have shifted resources and now have over 250 agents and 
approximately 50 financial analysts and other intelligence 
analysts assigned to mortgage fraud and related investigations. 
We also have another 100-plus agents working corporate fraud 
matters. We also augment our efforts with approximately 250 
State and local law enforcement officers assigned to 18 
mortgage fraud task forces and 47 working groups. We also 
established at our FBI headquarters a national mortgage fraud 
team to coordinate and to prioritize the FBI efforts across the 
country and to provide tools to identify the most egregious 
fraud perpetrators and to work even more effectively with our 
counterparts in law enforcement, and regulatory and industry 
leaders.
    Even before the creation of this national initiative, we 
were seeing results from our increased focus in this area. For 
example, last June, we completed the initial phases of what we 
called ``Operation Malicious Mortgage,'' involving the arrest 
of more than 400 offenders nationwide believed to be 
responsible for more than $1 billion in estimated losses. This 
initiative has focused on three types of mortgage fraud: 
lending, of course; mortgage rescue schemes; and mortgage-
related bankruptcy schemes. Our work on that initiative and 
others continues.
    In closing, it is clear to us in the FBI and to our law 
enforcement partners that more must be done to protect our 
country and our economy from those who try to enrich themselves 
through illegal financial transactions. We are committed to 
doing so, and we appreciate the committee's support. Thank you.
    [The prepared statement of Deputy Director Pistole can be 
found on page 144 of the appendix.]
    The Chairman. Let me begin with Mr. Polakoff.
    On page 17, Roman numeral V, as to closing the regulatory 
gaps, you talk about establishing a level playing field. You 
talk about unregulated or underregulated people in the mortgage 
market.
    The Federal Reserve has proposed some rules, as you know. 
Actually, under the better-late-than-never category, the 
Federal Reserve is invoking authority that this Congress gave 
it in 1994. It was not used. Mr. Bernanke, to his credit, 
decided to use it.
    Is that the kind of thing you are talking about? What 
specific language would you be looking for?
    Mr. Polakoff. Mr. Chairman, what I am talking about is 
boots-on-the-ground examiners.
    The difference is, you take your respective State; Steve 
Antonakes does a great job with examining mortgage brokers and 
mortgage companies in your State. Not all States have such a 
robust program. Sometimes it is because they do not have a 
sufficient budget, and there are other reasons, so the rules 
need to be consistent across-the-board, but the boots on the 
ground actually examine--
    The Chairman. Do you think we need uniform Federal mortgage 
regulations for the nonbanks? I assume we are talking about 
nonbanks.
    Mr. Polakoff. Yes, sir, but it is the two parts. It is the 
uniform regulation, and then it is the prudential supervision 
of such.
    The Chairman. In those cases where you think the States may 
not have enough, would you authorize Federal regulators to step 
in? How would we deal with that?
    Mr. Polakoff. Yes, sir. We are suggesting that the State 
charter remain as it currently is for these mortgage brokers or 
mortgage companies, and there would be a joint examination 
program with a Federal partner and a State partner.
    The Chairman. That is an interesting approach.
    Triggered by the State's request or would you have the 
right to go in with or without a request?
    Mr. Polakoff. Just like State-chartered banks now, we would 
suggest it would be an alternating program.
    The Chairman. I am not sure I know what that means.
    Mr. Polakoff. I am sorry. So right now, for a State-
chartered bank, typically the State examiners go in one year to 
conduct the examination. Then, the FDIC or the Federal Reserve 
goes in the other year to conduct the examination.
    The Chairman. And you would do the same with the OTS?
    Mr. Polakoff. Our recommendation is there should be a 
Federal agency. We would love to take that responsibility. It 
would be up to you, sir, and Congress.
    The Chairman. All right. Then I also appreciate your very 
specific request about cease and desist power and the third 
parties, and we will be taking those seriously.
    Mr. Pistole, if that is not the correct pronunciation, I 
apologize.
    Mr. Pistole. It is correct, Mr. Chairman.
    The Chairman. On the other hand, I do not pronounce 
anything that well.
    Mr. Pistole. ``Pistole'' is correct.
    The Chairman. Obviously, the complaint, accusation, 
explanation has been that, since September 11, 2001, 
understandably, you have become the first line of defense for 
American safety in ways that we had not anticipated. We are all 
grateful for that.
    The argument has been made that it has led to a diminution 
of activity elsewhere. For instance, mortgage fraud lacks the 
sense of physical threat. So I have a two-part question: Has 
enforcement in that area suffered because of other priorities? 
If so, do we need to do something to overcome it? I guess that 
is the general sense and not a criticism of the FBI, because I 
think people would say, if we had to choose between being blown 
up and being defrauded, defrauded would win. Can we avoid that 
choice in some ways, and is that a legitimate explanation of 
what has happened in the past?
    Mr. Pistole. Thank you, Mr. Chairman.
    After 9/11, obviously, we moved a number of our traditional 
criminal investigative resources to national security, 
particularly counterterrorism. Most of those resources were in 
our drug enforcement areas, recognizing the Department, 
obviously, the DEA, had that primary responsibility and that 
the FBI did not, frankly, need to be in the drug enforcement 
business.
    There were some lower level, white-collar crimes such as 
bank teller fraud and things like that, and we did get out of 
that business, so we did have that, but we did continue in the 
significant corporate fraud investigations and other financial 
frauds, as appropriate, depending on the U.S. Attorney's 
Office's prosecutive guidelines and all that.
    So, as I mentioned, we have more than doubled our resources 
toward the mortgage fraud/corporate fraud investigations in the 
last 2 years, trying to address those allegations that have 
been coming in and also trying to be proactive. I would note 
that we have several ongoing undercover operations, for 
example, in the corporate fraud and financial fraud areas where 
we are being proactive about seeking out perpetrators of frauds 
on a wide-scale basis, not just sitting back, waiting for 
referrals to come in.
    The Chairman. Thank you.
    The gentleman from California, who has graciously waived 
his opening statement, will have his 5 minutes.
    Mr. Campbell. I do not know how gracious I was by being 
tardy, but I will accept that.
    The Chairman. I would just say to the gentleman, as 
chairman of the committee, I never mind members' absences.
    Mr. Campbell. Should I take that personally, Mr. Chairman?
    Anyway, thank you all for being here.
    My question is going to be very broad and is to all of you. 
I could go specifically and all that, but in front of us today, 
we have representatives of the Federal Reserve, the Comptroller 
of the Currency, the SEC, the FDIC, the Office of Thrift 
Supervision, the Department of Justice, and the FBI. So we have 
seven separate agencies all testifying in reasonable detail 
about the investigative things you are doing relative to the 
financial services area and issue.
    My first overall question is: Do any of you believe that 
there are duplicative areas where two out of the seven of you 
or three out of the seven of you have an overlapping 
jurisdiction or responsibility that results in and that has a 
lack of coordination? Or, alternatively, are there areas where 
there is a gap in the current jurisdiction, and so none of the 
seven of you believe that it is actually your primary 
responsibility to investigate? Do not all speak at once.
    Mr. Polakoff. Congressman, I would offer only one example, 
and it is not a gap. It is possibly an overlap, but I do not 
think it is bad.
    The example I would offer, sir, is if, in a financial 
institution, there is an individual who may have his or her 
activities warrant an investigation on our part to possibly 
remove that individual from a bank, quite possibly, the FBI or 
Justice will be looking at that same individual and will ask us 
to stand down while it completes its investigation. That is not 
bad. That is an overlap, and we will work together through 
that. That is the only example I can think of off the top of my 
head, sir.
    Mr. Campbell. Yes. Commissioner Walter?
    Ms. Walter. Thank you.
    In the securities arena, there are gaps in the SEC's 
authority with respect to certain types of instruments or 
entities.
    For example, a few years ago, we attempted to regulate 
hedge funds and those rules were struck down by the courts so 
that, today, we do not regulate hedge funds. As I noted in my 
oral statement, we do have antifraud authority, but what we do 
not have is the access to information about who all of them are 
unless they voluntarily register, what the principals are, the 
nature of their activities. Similarly, we specifically have no 
authority with respect to the credit default swap market.
    So there are a number of areas in which there are 
regulatory gaps that should be filled so that the appropriate 
regulatory agencies--in this case, we think the SEC--have full 
information about what is going on and can proceed vigorously.
    Mr. Campbell. Thank you.
    Ms. Glavin?
    Ms. Glavin. What I was going to mention from the 
Department's perspective is that we work with each of these 
agencies. One of the best, most recent examples is we are 
working now with the SEC on the Stanford financial 
investigation. They work at it from the civil side. We work at 
it from the criminal side.
    One of the ways that we try to check on overlap and on 
coordinating our efforts is that we have within the Criminal 
Division a Bank Fraud Enforcement Working Group where we meet 
on almost a monthly basis, with a number of the agencies that 
are represented here, to talk about what they are doing 
regulatory-wise, and we do some information sharing and 
coordination. There are a number around the country, and it is 
not limited to just the agencies here, but there are task 
forces and working groups around the country that are 
specifically formed with the aim to try and coordinate our 
efforts, do deconfliction where it is appropriate, and do 
coordination where it is appropriate as well so that the 
taxpayer gets the most bang for his law enforcement regulatory 
buck.
    Mr. Campbell. Okay. Do any of the rest of you wish to 
comment?
    Yes, Comptroller?
    Mr. Dugan. I would just highlight and amplify what Director 
Polakoff said earlier about having a common mortgage standard 
that goes across all providers so there are no gaps in what the 
rules are and, secondly, to have comparable kinds of 
supervision and enforcement to make sure those rules are 
enforced comparably. I think that was a big issue that led to 
where we are now with respect to the mortgage crisis, and I 
think the kind of legislation the committee passed last year 
with some amendment, I think, is quite appropriate.
    Mr. Campbell. Thank you.
    Governor Duke, did I see you?
    Ms. Duke. I would really echo what Comptroller Dugan said, 
and would point out that this was the focus of the HOEPA 
regulations that the Federal Reserve issued last year, which 
was to cover all lenders.
    Also, we had a pilot program to go in with both Federal and 
State examiners into the subsidiaries of holding companies that 
we supervise and look at the mortgage operations for consumer 
compliance as well as consumer protection. I think using the 
authorities that we already have in new ways is also going to 
be important in addition to any new authorities we might get.
    Mr. Campbell. Thank you very much.
    My time has expired.
    Ms. Waters. [presiding] Thank you very much. I will 
recognize myself for 5 minutes.
    In my work on the foreclosure crisis, I have noticed an 
explosion of fake Web sites that try to confuse homeowners into 
believing that they are official government sites.
    On Wednesday, I contacted the Federal Trade Commission and 
the Federal Communications Commission to alert them about such 
a fraudulent Web site that was purporting to offer loan 
modifications through the Making Home Affordable Program. Of 
course, within hours of my letter, the Web site was taken down.
    However, I am really concerned about those Web sites and 
the national ads. For example, there is one called the Federal 
Loan Modification Company that is getting more and more 
aggressive. There is no oversight for a business that springs 
up, purporting to do loan modifications with names that sound 
like government names.
    What can be done? Who is doing something about that or who 
is at least looking at it?
    Mr. Pistole. We in the FBI, ma'am, look at any fraud that 
would be perpetrated by one of those businesses, primarily 
through our Internet Fraud Complaint Center, which receives 
thousands of complaints from people around the country, such as 
you have seen on the Web sites, so we look at it from the fraud 
perspective and whatever type of fraud it is, but we are not in 
the prevention business, if you will, of preventing those sites 
from going up. Obviously, we do not do that, but we have a 
number of those types of investigations ongoing right now.
    Ms. Waters. Let me just ask you: The Federal Loan 
Modification Company is advertising that, for $3,500, when you 
talk to them, and I have called them, they will take care of 
modifying your loan. They almost guarantee it. They assure you 
that they can do that, and they collect $3,500 from you, but 
they say, ``We tried, and the loan servicer just would not 
cooperate.''
    What is that? Is that fraud?
    Mr. Pistole. I do not know the specifics about that one, 
but typically, that is an advanced fee scheme where somebody is 
required to pay a fee for a service that is not rendered, and 
it is oftentimes used by people around the world. The Nigerian 
fraud schemes are prevalent. In fact, my name and Director 
Mueller's name have been used in saying the FBI has endorsed 
this, so it is okay to provide that information. So I will get 
calls from friends and family saying, ``Is this accurate?'' It 
is, obviously, not.
    Ms. Waters. Do we need to regulate this whole servicer 
industry? It has become very important. We have servicers who 
are independent and some who are working for our own government 
agencies. Everybody has to have them, whether it is Fannie or 
Freddie, etc. They all have servicers that they are contracting 
with, but I do not know who the servicers are. I do not know 
where they get their training. There is no licensing required, 
and anybody can be a servicer. Do we need some new public 
policy to deal with servicers?
    Mr. Pistole. I would suggest that we would work with the 
Department and the committee to explore that further.
    Ms. Waters. All right. I have another little question I 
want to ask, but it may not seem so big or important.
    Yesterday, I heard information about overdrafts that really 
bothered me. I understand that there are debit cards that 
students may use, that parents get for them. They buy a cup of 
coffee or something at Starbucks, and they can use that card 
even if they do not have enough money on it, and then they 
follow up with a $35 charge on a $4 item.
    What is that considered? Let the marketplace work as it 
may? Should there be any consumer protection in that at all?
    Mr. Pistole. I would defer to my colleagues on that one.
    Ms. Duke. Yes, ma'am.
    The Federal Reserve has regulations out for comment right 
now that would govern overdrafts and particularly those that 
are with electronic means, debit card overdrafts, and those 
regulations are out for comment. I am not sure exactly how far 
we are through the comment period, but it would address exactly 
that.
    Ms. Waters. But it is something you are taking a look at?
    Ms. Duke. Yes, ma'am.
    Ms. Waters. Finally, let me just say to all of you:
    Obviously, Countrywide emerged as the poster nonbank for 
what was wrong with predatory lending and the subprime market. 
How did they stay in business so long and get so far as a 
nonbank with the kind of exotic products that they were putting 
on the market with untrained brokers on the street? Who was 
looking at that? What could have been done with what 
Countrywide was doing? Anybody? Somebody?
    Mr. Polakoff. Congresswoman, from an OTS perspective, I can 
only speak from early 2007 when Countrywide converted to a 
thrift. As you very astutely point out, a good portion of the 
predatory lending business or subprime business was conducted 
outside of the insured financial institution, so we would have 
looked at that. Looking back and looking at all of those 
activities, it would have been under the responsibility of the 
State banking or the State entity to look at that particular 
mortgage company.
    Ms. Waters. Yes.
    Mr. Dugan. Before it became a thrift, Countrywide had a 
national bank, and it also had a holding company that engaged 
in its mortgage activities. A relatively small proportion was 
conducted in the bank. We did not allow the subprime to be put 
in the bank, and so the mortgages that were actually booked in 
the bank were not the issue, but it eventually left our charter 
and became a Federal thrift.
    Ms. Waters. I have to go to our next member now, but--
    Mr. Gohmert. Madam Chairwoman, if there are others who want 
to respond, I would love to hear from them.
    Ms. Waters. Oh, I am sorry. Are there any others who would 
like to respond? Yes, just one second. Okay. We do not have 
anyone else who would like to respond.
    Lastly, the so-called ``exotic products'' that keep 
springing up and all of the products that were on the market, 
whether they were Alt A or adjustable rates options, etc., am I 
to understand that any product that can be thought of by 
somebody--a mathematician or somebody assisting banks in ways 
to make more money--can go on the market without your stopping 
them? Does anybody have the ability to stop an exotic product 
that, obviously, is going to defraud our consumers?
    Mr. Polakoff. I will take the first stab at it.
    What all of the banking regulators have the ability to stop 
is a predatory product, an unsafe and unsound product. So the 
important test for us, Congresswoman, is whether the borrower 
has the capacity to repay, whether that is properly assessed. 
Equally as important is whether the borrowers have the ability 
to understand the product that they are committing to.
    The Chairman. The gentleman from Texas.
    Mr. Gohmert. Thank you, Mr. Chairman. I am pleased you came 
back just to hear me. Thank you.
    I am curious. We have had the credit default swaps brought 
up a number of times. What do you think would have been the 
most effective way to regulate or to control these things that 
really threaten to bring down our financial system? Obviously, 
it is a threat. Should they have been regulated by some type of 
insurance standards or do one of you all have the ability and 
the wherewithal to actually regulate them effectively? What do 
we need to do? I am throwing that open to anybody.
    Ms. Walter. Let me start.
    I believe that, like many other innovative financial 
products, it is very important that there not be a lack of 
transparency. That is the first critical step.
    Mr. Gohmert. Do you think there might have been some?
    Ms. Walter. Oh, only a little, perhaps, but when you have a 
product like this spring up and grow by leaps and bounds and 
become huge and become systemically important before anyone has 
any information about it, I think that is the first place to 
start. We can all attack the issues to a certain extent from 
the institutions we regulate. For example, we regulate broker-
dealers and investment advisers, but unless there is 
transparency within the marketplace itself--
    Mr. Gohmert. I agree with the transparency, but I am asking 
specifically: Who really should have the ultimate authority now 
that we know how untransparent they were? Who should have the 
ultimate authority to regulate them? Who would have the 
wherewithal to do it most effectively?
    Ms. Walter. I think it would be a combination of different 
regulators. We, on the one hand--
    Mr. Gohmert. That is pretty specific. Could you be just a 
little more specific?
    Ms. Walter. Of course. I will go on from there.
    I think that the SEC has a role to play in terms of looking 
at the market forces that go on in terms of how these 
instruments are traded. You are right. They are, essentially, 
an insurance product, so there may be a role for insurance 
regulators to play.
    There, obviously, is a role for my colleagues up here at 
the table to play because a lot of these instruments are held 
by institutions they regulate. I do think, in the first place, 
you need a market regulator who can look at the forces that are 
operating and at the trading that is going on in the market as 
a whole.
    Mr. Gohmert. And you are talking specifically about which 
market regulator?
    Ms. Walter. I am talking about the market actually in 
trading and the transactions that are going on in the credit 
default swap market.
    Mr. Gohmert. No. What entity? When you say it requires a 
market--
    Ms. Walter. I believe that the SEC is the right regulator 
to do that.
    Mr. Gohmert. All right. That is what I was trying to get 
to. All right.
    Anybody else?
    Governor Duke?
    Ms. Duke. The Federal Reserve has believed for some time 
that these should be traded on a central exchange, and we have 
just approved a central exchange for counterparties for that. 
The Federal Reserve Bank in New York has been working on this 
for a number of years, and there is now one up and running. I 
think that will also improve the trading of the credit default 
swaps.
    Mr. Gohmert. Do you think that these things that you have 
both mentioned would be enough to control what has become, 
basically, criminal because of the effect on our economy? 
Civilly, would that be sufficient to regulate this group 
without imposing new criminal laws?
    Ms. Walter. I believe that the criminal laws that are out 
there are sufficient to cover it.
    One of the things that will happen with the centralized 
counterparties--and there are two others that are going to be 
up and running soon, we think, and have been approved--is that 
you will get more regularized pricing information, which will 
provide the public with some indicators that are better than 
the ones that are out there. But if you put them in a system, 
for example, where you call them ``securities,'' securities 
fraud will apply. The mail fraud, as well, will apply. So I 
believe that the criminal statutes are sufficient, but I would 
defer to the criminal authorities to my left.
    Mr. Gohmert. Let me ask a quick question regarding the FBI. 
My time is running out.
    Mr. Pistole, I appreciate your being here.
    From my experience and from what I have seen, white-collar 
crime requires more experience, more expertise, more training. 
I know that since Director Mueller has been in charge, he has 
this 5-year up-or-out policy that has forced out thousands and 
thousands of years of experience.
    Are you still forcing out all of our best experienced 
agents in charge out in the field or have you backed off of 
that policy a little bit?
    Mr. Pistole. We have modified that policy.
    Mr. Gohmert. Because I have not heard that from the field 
yet.
    Mr. Pistole. We have modified that for our field 
supervisors from 5 years to 7 years, and have even given them 
an option to go up over 8 years if they do some time back at 
headquarters. Yes, we have modified that.
    Mr. Gohmert. Okay. I see my time has expired.
    Thank you.
    The Chairman. Let me now turn to the Chair of the Judiciary 
subcommittee, who is our partner, Mr. Scott--or Mr. Moore 
first. Let us go to Mr. Scott first to recognize the joint 
jurisdiction.
    Mr. Scott of Virginia. Thank you, Mr. Chairman.
    I want to follow up on the last question a little bit, to 
Ms. Glavin and Mr. Pistole.
    If everybody knew that they had these so-called ninja 
loans--no income, no jobs, no assets--and they were passed off 
as AAA assets secured by real estate when, in fact, no one had 
done any due diligence to ascertain the reasonable value of the 
collateral or whether or not the borrower had any capacity to 
pay for the loan after the readjustment from a teaser rate; if 
everybody knew all of that was going on and an investor bought 
the package based on a AAA rating, is there any problem with 
the criminal law, fraud, wire fraud, and other things to go 
after that kind of activity? Do we need any new criminal laws?
    Ms. Glavin. There is a bill that just came out of the 
Senate Judiciary Committee which the Justice Department 
supports. It is the Fraud Enforcement and Recovery Act of 2009, 
sponsored by Senators Leahy and Grassley.
    A couple of the key provisions of that Act, which would add 
tools to a prosecutor's arsenal beyond traditional mail fraud 
and wire fraud, are that it would amend the definition of 
``financial institution'' in title 18 to include private 
mortgage lending businesses. So if you make a false statement 
to a private mortgage lending business, which did a lot of 
these subprime loans, we can prosecute you under some different 
statutes, not just the mail and wire fraud statutes. That would 
be helpful, and it would expand the menu of options that 
prosecutors can use. Also, I think it could help us make 
cleaner presentations to grand juries and to juries.
    Mr. Scott of Virginia. Is that a jurisdictional issue that 
you do not have to prove mail and that you can just prove a 
financial institution?
    Ms. Glavin. With mail and wire fraud, you do have to find 
the mails and the wires. On the amendments to that particular 
statute, I think there has to be some type of a Federal nexus, 
which, I think, you would probably be able to find in a lot of 
the private mortgage lending companies. If there is an 
interstate--
    The Chairman. If the gentleman would yield, only very few 
of them operate intrastate.
    Ms. Glavin. Yes.
    The Chairman. I do not know of any company that does its 
business only intrastate.
    Ms. Glavin. So I do not think there would be difficulty in 
a lot of cases if prosecutors wanted to use statutes beyond 
1341 and 1343 to prosecute fraud on the mortgage lending 
businesses.
    In addition, one of the things that particular proposed 
statute does is, the major fraud statute, which I believe is 
1031, would also explicitly cover fraud in connection with TARP 
funds and fraud in connection with the stimulus package. That 
is not to say that we do not have other tools with which we can 
prosecute such fraud, but it gives us a broader menu of 
options, which the Department supports.
    Mr. Scott of Virginia. In your comments, you mentioned 
restitution involving the Iraq contracting. At a previous 
hearing in the last Congress, we heard that the Department was 
hesitant to get involved in False Claims Act cases involving 
Iraqi fraud. In fact, it had many of the cases sealed, which 
put whistleblowers out on a limb, where they could not get 
evidence to prove what they were saying.
    Is that policy of being reluctant to go after false claims 
cases in Iraq and sealing those cases going to change?
    Ms. Glavin. Congressman Scott, I come from the criminal 
side of the Department. I think you are referring to the False 
Claims Act, which is enforced by the civil side of the 
Department. I am not aware--and I am happy to get back to you 
on this--of a slowdown, and I think you are talking about the 
sealing of cases, the qui tam cases, and I think there are time 
limits for when it can be sealed.
    Mr. Scott of Virginia. If you could get back to me on the 
details.
    Ms. Glavin. Yes, I would be happy to do that.
    Mr. Scott of Virginia. Finally, I guess, for you and Mr. 
Pistole, how many accountants would you need to effectively go 
after these cases without transferring people from Homeland 
Security's terrorist cases?
    Mr. Pistole. Look, Congressman, to give you some context, 
we have a little over 250 agents currently working on these 
types of investigations along with about 50 financial analysts, 
forensic accountants, and intelligence analysts. To go back to 
the S&L crisis, we had about 1,000 agents. Obviously, the scope 
of what we are dealing with now just hugely dwarfs the S&L 
crisis, so we are--
    Mr. Scott of Virginia. Has the Department submitted a 
potential budget so we know, if we wanted to deal with it, we 
could deal with it?
    Mr. Pistole. In the 2009 budget, we received an additional 
58 positions, which we are getting on board, and are applying 
to that. Also, we are going through the 10 process right now.
    Mr. Scott of Virginia. Mr. Chairman, I think he said 59. 
The order of magnitude he was suggesting was that 1,000 would 
not be enough. So, obviously, we have a lot of work to do.
    The Chairman. Thank you. It does sound like that is a piece 
of legislation where our two committees would be able to 
cooperate, but it does sound to me like something we would want 
to move on.
    The gentleman from Florida.
    Mr. Posey. Thank you very much, Mr. Chairman.
    I have a lot more questions than we have time to have 
answered here today. I wish I could have about an hour with 
each of you individually.
    The Chairman. Of course, we do have the option of getting 
the follow-up answers in writing.
    Mr. Posey. Thank you, Mr. Chairman. I was going to ask for 
your permission to do that. Thank you, Mr. Chairman.
    The first thing I would appreciate from all of you, if you 
can see your way clear, would be a one-page summary, not a book 
but a one-page summary and without corroborating your theories 
with each other, of what you think the root cause of this 
financial crisis is, not just the word ``greed.''
    If your life depended on solving this puzzle, how would you 
do it, and what do all indicators point to? If you think that 
Congress is somehow culpable, I would expect you to say that in 
all honesty and forthrightness for which you all have a 
reputation. Stealing is still stealing even if the government 
is doing the caper, unfortunately.
    Also, since time will not allow an answer to these, I just 
will request that you respond to us in writing.
    First, to Governor Duke, the number of employees that you 
have and the number of prosecutions and convictions to date 
that you have had.
    To Mr. Dugan, if and when you find criminal conduct, you 
said you would refer it to an agency. I want to know how often 
you have ever found criminal conduct and who you have referred 
it to.
    Commissioner Walter, I notice in your testimony, you have 
1,100 attorneys in your organization. It looks like an attorney 
handles a case every other year. It does not say anything about 
convictions. I am interested in knowing how many convictions 
they have ever had, if any.
    I want to know, after the Madoff fiasco and when Mr. 
Markopolos took that thick dossier to your organization almost 
a decade ago and tried to get them to investigate Bernard 
Madoff and you refused to do it--your agency, not you--I wonder 
what discipline was taken for the employees who disregarded the 
best interests of the citizens of this country and allowed that 
to be perpetrated and allowed $75 billion to disappear from the 
face of the Earth? There are quite a few people in my 
constituency who think crime would not pay if the SEC were in 
charge of it.
    Just to put it in a local perspective, if you have a local 
police force and your street cops write one ticket every other 
year, you probably have more than you need or they are not 
doing enough.
    Mr. Gruenberg, yours does not say how many employees you 
have or how many prosecutions or convictions you have had, just 
that you have had 4,375 mortgage fraud claims filed, and they 
are expected to result in 900 additional civil mortgage fraud 
lawsuits over the next 3 years. I would like your estimate, 
your prognosis on what you think the success rate will be, what 
justice you think will come to the American public, what amount 
of money you think we will be able to recover from the bad 
people involved in that.
    Mr. Polakoff, there is a list attached of the total numbers 
of OTS formal enforcement actions. It is a very, very modest 
number. It looks like it is probably under 200. I wonder how 
many employees it takes to get this many enforcement actions, 
but more importantly, I would like to know how many of them 
were criminally prosecuted successfully, and how many you 
expect to see successfully prosecuted. Thank you.
    Ms. Glavin, your agency has 62,000 suspicious activity 
reports. I would be interested in knowing or of having a 
breakdown of how those were handled and how they were referred. 
That was between just the years of 2007 and 2008. I wonder if 
your agency needs an invitation to invite the companies who 
received TARP money to be investigated under the RICO, the 
racketeering statutes, and if you would need Congress to ask 
you to do that or if somebody from the Treasury or someone else 
could ask for that. I think the public would just like a good 
cleansing of the possibility that there is racketeering 
involved.
    Ken Lay went to prison for fleecing investors. We have 
people in some of these companies who have fleeced every member 
of the American public and future generations as well, and I 
think the public deserves to know there was no racketeering 
involved if, in fact, there was not any.
    I would pose that same question, basically, to the FBI. I 
would like a short summary of the prognosis you have for the 
team you established in 2008. Unfortunately, I think we were a 
day late and a dollar short in getting in front of this crime 
wave. We got behind it, and we have a lot of cleanup to do, but 
I would like your thoughts as to a prognosis of what you 
forecast statistically, if necessary, to be the consequences 
and the results of the new fraud team that you have put in 
place there.
    Again, I would wonder if you have done any investigations 
on any of the companies that received TARP money or bailout 
money and, if you have not, what it would take to have you take 
a perfunctory view to see if there is evidence of racketeering 
there. I think much of the public suspects that it is there, 
and for better or for worse, I think we probably deserve to 
know. Thank you.
    Thank you very much for your indulgence.
    The Chairman. Yes, we would like those answers, obviously, 
in writing. They will be made a part of the record and will be 
shared with all members of the committee.
    The gentleman from Kansas, the chairman of the Oversight 
Subcommittee.
    Mr. Moore of Kansas. Thank you, Mr. Chairman.
    Mr. Pistole, in your written testimony, you discuss the 
rise in mortgage fraud investigations the FBI is conducting.
    You say, ``The number of FBI mortgage fraud investigations 
has risen from 881 in fiscal year 2006 to more than 2,000 in 
fiscal year 2009. In addition, the FBI has more than 566 open 
corporate fraud investigations, including 43 corporate fraud 
and financial institution matters directly related to the 
current financial crisis... The increasing mortgage, corporate 
fraud and financial institution failure case inventory is 
straining,'' and I repeat straining, ``the FBI's limited white 
collar crime resources.''
    Mr. Pistole, if you would, please, give us your best 
estimate of how many more agents you need, that the FBI needs 
now, to keep up with the growing number of fraud 
investigations.
    Mr. Pistole. Thank you, Congressman.
    We are obviously doing a scrub of all of our investigative 
resources internally, initially, to assess whether we can move 
additional resources first from within our criminal 
investigative division, from violations that are not as high-
priority as this, and that is where we have gleaned those 
additional bodies, doubling from 2 years ago to where we are 
now. We also look at the enhancement through the task forces, 
which I also mentioned. I would have to get back with you in 
terms of a precise number, but we obviously--
    Mr. Moore of Kansas. I would appreciate that, sir.
    Mr. Pistole. We will do that. We are also working with the 
Department and with OMB to assess what we may be able to get in 
the out-years, 2010 and beyond. In the meantime, we are moving 
those resources as we can do that.
    Mr. Moore of Kansas. That would be very helpful because I 
think every member of this committee would want to make sure 
that your Department, your agency, has sufficient personnel 
resources to conduct the investigations necessary to stop what 
is going on.
    Mr. Pistole. Thank you, Congressman. I greatly appreciate 
that.
    Mr. Moore of Kansas. Thank you.
    Ms. Glavin, I was a district attorney for 12 years in my 
home district, and I certainly understand how important 
personnel resources are, especially prosecutors, in trying to 
stop some of what is going on here.
    My question to you is basically the same as I just asked 
the FBI agent: Do you have, do you think, adequate personnel 
resources in terms of prosecutors right now, the Department of 
Justice, to do what needs to be done to get this thing under 
control?
    Ms. Glavin. It just so happens the Attorney General made 
some public comments about this a couple of days ago, and had 
indicated that he had asked the President and OMB to take a 
look at our budget numbers from 2010 to give additional 
resources for what the Attorney General calls the ``traditional 
side of the Department,'' which would be the non-national-
security side, so that we have the ability to hire new agents, 
look at financial fraud matters, as well as hire additional 
prosecutors to look into those matters.
    Mr. Moore of Kansas. Thank you, Ms. Glavin.
    I truly, truly believe that every member of this committee, 
Republicans and Democrats, believes that we want to provide 
sufficient resources to the agencies here to stop what is going 
on when there are abuses and violations of criminal law, and I 
thank you for that. If you can provide any more written 
information about what you need, we would appreciate that as 
well.
    Thank you, Mr. Chairman. I yield back my time.
    The Chairman. The gentleman from Texas.
    Mr. Green. Thank you, Mr. Chairman.
    I thank the witnesses for appearing today, and I also thank 
my colleagues for the questions that I have heard. The 
questions, themselves, have been beneficial to me.
    Ms. Walter, ma'am, you indicated that the credit default 
swaps were, and I am using my terminology now, under the radar 
such that they had become quite pervasive before we had an 
opportunity to discover the impact. Is this a fair rendition of 
what you are saying, or would you prefer to say it another way?
    Ms. Walter. Yes, Congressman, I think that is part of what 
happened because, unlike with respect to instruments that trade 
on an organized and regulated market, the information was not 
available. Everyone knew they were growing and growing fast, 
but we knew very little about the underlying aspects of them, 
and because they were not standardized, the terms varied.
    Mr. Green. I have a follow-up question quickly. My time is 
limited. I am sorry.
    Ms. Walter. That is okay.
    Mr. Green. If this is true, is there some agency that these 
products are required to be registered with? Is there some 
clearinghouse, or is there some methodology by which we can 
ascertain that such a product exists so that we can make some 
determination as to the worth of it?
    Ms. Walter. There has not been an agency with which these 
types of instruments have to be registered. We do obtain 
piecemeal information about them, various of us up here, 
through institutions that we regulate.
    As Governor Duke mentioned earlier, there is now one 
central clearinghouse that is up and running, and that will 
cause some further information to come forth. There are likely 
to be at least two more, and that will cause some 
standardization of the instruments as well, but we think 
participation in a central clearinghouse should be mandatory, 
and there should be an information flow to the regulators 
across-the-board.
    Mr. Green. Just for my edification, does everyone agree 
with the commentary accorded, just presented? If you disagree, 
would you kindly extend a hand into the air?
    If such a clearinghouse is needed and if it should be 
mandatory, should the penalty for failure to comply be civil or 
criminal? Can you give me some indication as to how we would 
enforce such a penalty, please?
    Ms. Walter. If there were a requirement placed by statute, 
depending on the statute in which it was placed, there would be 
civil law enforcement authority. I, once again, will defer to 
the criminal law enforcement authorities about how best to 
address criminal sanctions for failure to follow the law.
    Mr. Green. Are you of the opinion that they should be 
criminal as well as civil, the penalties and sanctions?
    Ms. Walter. Yes, I would certainly support that, of course, 
with the appropriate state-of-mind requirements and the like 
that are true in general with respect to criminal prosecution.
    Mr. Green. Mr. Pistole?
    Mr. Pistole. Yes, Congressman, I think we would have to 
look at the details. If it is tantamount to a false statement, 
then, obviously, there would be those criminal sanctions, but 
absent that, in terms of a central clearinghouse, I think the 
thing we would not want to happen is to slow down anything in 
terms of the sense of urgency, and would want to focus on where 
we are going. We have fairly robust reporting requirements now 
to the individual components here, so my only concern would be 
in going to a central clearinghouse that somehow slows 
something down. If it acts as a deconfliction mechanism, that 
has always been beneficial.
    Mr. Green. My concern is that these products embrace so 
many people and so many lives. Do we slow down at the end and 
prosecute over some long period of time, or do we take the time 
to make sure that they are products that will not harm us, is 
the question?
    Listen, do not answer that. I want to go to a closing 
statement.
    I do not favor invidious persecution. I do favor vigorous 
prosecution. I think the public is not privy to prosecutions 
that are taking place. I believe you when you say they are, but 
my suspicion is most members of the public would say not enough 
is being done. If it is as you say it is, we have to find a way 
to get this message to the masses so that not only will they 
know that the prosecutions are taking place but also such that 
there will be a proper deterrent.
    My time has expired. I yield back.
    Ms. Waters. [presiding] Thank you very much.
    Mr. Foster?
    Mr. Foster. Governor Duke, my first question, do you think 
that the detection of fraudulent mortgage originators would 
have been quicker without teaser rates and so on that 
temporarily hid a borrower's inability to repay?
    Ms. Duke. I am not sure that I can understand the 
characterization of the fraud as the inability to pay, because, 
at the time, the ability to pay was not necessarily required by 
regulation or by statute. It was only in the HOEPA regulations 
that the requirement of identification and verification of the 
income that would be used to pay became a requirement for 
making a mortgage loan, if that is responsive to your question.
    Mr. Foster. I was just wondering,if the only kind of 
mortgage that was allowed to be originated was one that had a 
constant level of payment, just this sort of fraudulent--
    Ms. Duke. The regulations, actually, address not only 
fixed-rate mortgages but also variable-rate mortgages, and 
require that they be underwritten to the fully indexed rate so 
that they be underwritten to the rate that they would 
automatically go to after the teaser time expired.
    Mr. Foster. Okay. Is there anyone else who would like to 
make a comment on that?
    Mr. Gruenberg. Congressman, I would just say that the 
teaser rate was one of the means by which those who engaged in 
predatory practices drew in borrowers who did not fully 
understand the terms of the mortgage, such as when it would 
adjust upwards. So, in a sense, it was part and parcel of the 
problem. The guidance and the rules issued by the Fed under 
HOEPA tried to address that by requiring lending based on the 
borrower's ability to pay, which hopefully would address that 
kind of a mortgage product.
    Mr. Foster. Okay. Comptroller Dugan, I guess, this question 
is for, how comprehensive is the list of banned individuals? Is 
the list public? Is it nationwide? Does it span all financial 
services industries?
    Mr. Dugan. I am sorry, Congressman. Could you repeat that?
    Mr. Foster. Oh, yes.
    I was just wondering how comprehensive the list of banned 
individuals is. Is it public? Is it nationwide? Does it span 
all financial services industries?
    Mr. Dugan. Yes, it is public. We publish it whenever we 
issue such an order, and it is put on our Web site, and it is 
distributed to all the law enforcement agencies as well, while 
understood in the community.
    Mr. Foster. Okay. Is it easy for consumers to sort of get 
at it and be aware that--
    Mr. Dugan. Yes. There is a central Web site. There are 
links from all the agencies about who is banned and who is not.
    Mr. Foster. Okay. Then the last question I have, I guess it 
is to everyone, and it will probably require a written 
response. I am trying to get my arms around what is the optimum 
level of effort and money to put into enforcement. So what I 
would like and if you could answer first is, what is your 
budget associated with enforcement activities? What is a best 
estimate of the losses in the area under your purview?
    So, for example, for the SEC, that would be security fraud 
and related activities. What would be the effect of an 
increased avoidance of losses for a 10 percent and a factor of 
2 increase in your budget? Do you understand my question?
    I am trying to sort of prod the shape of the curve. From a 
purely economic point of view, there is some best amount to 
spend on enforcement activities. If we are underspending, then 
giving you an additional dollar will result in more than one 
dollar of losses avoided. If we are past that point, giving you 
an additional dollar will result in less than a dollar of 
avoided losses. I am just trying to get some feeling for where 
we are on that curve for each of your activities.
    Okay. I yield back.
    Ms. Waters. Thank you very much.
    Mr. Carson?
    Mr. Carson. Thank you, Madam Chairwoman.
    I appreciate, first of all, all of the witnesses joining us 
today to discuss these very important issues.
    My colleagues briefly touched on the recent growth of 
mortgage foreclosure rescue schemes. I represent Indiana's 
Seventh Congressional District, a district that has seen 
dramatic rates of foreclosures in the past 2 years. I am 
extremely invested in making sure my constituents are armed 
with an effective knowledge base about these scams.
    My first question goes to Mr. Pistole, a fellow Hoosier. 
You said earlier, sir, that the FBI has open cases, and you 
mentioned the problems with foreclosure rescue fraud in your 
testimony. Will you please elaborate on the most common forms 
of scams your agency and its regulatory partners have seen 
lately and what specific kinds of actions the Bureau has taken 
so far against these operations?
    Mr. Pistole. Thank you, Congressman.
    Yes. What I can talk about is from the Operation Malicious 
Mortgage, which I mentioned, that is ongoing, but it is where 
we have had over 400 people arrested. Part of that was focused 
on the, obviously, upfront lending, all the false statements 
and the fraud involved in those mortgage applications. We have 
also seen areas of bankruptcy fraud associated with that, so 
you are further downstream in terms of the fraud where people 
who are caught up simply cannot pay, and then there may be even 
unwitting people involved there, but then there is a bankruptcy 
fraud committed.
    Another aspect is, even in the reverse mortgage area, where 
people, senior citizens, are able to get reverse mortgages, 
there has been fraud that has been uncovered in that area. We 
are looking at all of those to try to assess the systemic 
nature of it and the numbers that would represent, again under 
prosecutive guidelines for each U.S. Attorney's Office, what 
makes sense in terms of trying to prioritize our limited 
resources in a way that can have the maximum impact, for 
example, on Indianapolis. So those are some of the areas that 
we have focused on.
    As one of the other members mentioned earlier, virtually 
any scheme that could be conceived or devised has been, and we 
believe we have uncovered, virtually, all of them. It is simply 
a matter of applying those resources to the problems in the 
various districts, and that is where we are right now.
    Mr. Carson. Thank you, sir.
    Secondly, Mr. Gruenberg and Mr. Dugan, would you please 
comment on whether or not banks have been stepping up their 
outreach to troubled borrowers, at least warning them of these 
scams that are taking place?
    Mr. Dugan. Speaking for the OCC, we have put information up 
on our Web site about the scams.
    And I also wanted to mention that the NeighborWorks 
organization, which a number of us sit on the board of and it 
is funded by Congress in part, also has an initiative that is 
specifically related to this particular issue, which we 
support.
    Mr. Gruenberg. Congressman, I should mention that pursuant 
to a directive from the Congress, the FDIC recently conducted a 
large nationwide survey of banks' outreach efforts, 
particularly with respect to consumers who lack access to 
mainstream banking institutions. I think it is fair to say that 
our survey indicated that, in terms of outreach efforts to 
inform people in the community about the services that 
mainstream financial institutions offer, there has been an 
increasing effort by insured depository institutions to do 
that.
    Mr. Carson. Thank you, Madam Chairwoman. I yield back the 
balance of my time.
    Ms. Waters. Thank you very much. Mr. Gohmert had a request.
    Mr. Gohmert. Yes. Thank you, Madam Chairwoman.
    I have two questions that I would like to ask for written 
answers to, if I could, to be submitted within the next 2 
weeks.
    Ms. Waters. Yes.
    Mr. Gohmert. If that would be appropriate.
    One, this is to everybody. We have a pretty amazing panel 
here, when you look at everybody's title; and it is this 
question: What would you recommend we do legislatively to keep 
at least some financial risk with those who put people in 
mortgages and with those who package and sell them as 
securities?
    If your answer is, do away with mortgage-backed securities, 
fine. But I am not looking for a treatise on what all is 
involved or who could--the question is very specifically: What 
do you personally recommend? Because if you don't have 
suggestions on something that has nearly brought down the 
financial system, then we are in bigger trouble than I thought.
    The other question is to the FBI; and that is, what is the 
status of providing the States access to criminal history 
information through the Nationwide Mortgage Licensing System 
and Registry as required by the SAFE Act. Specifically, since 
States are going to need that information this summer, has that 
or when will that access be granted? Two, what is the status of 
setting up the distribution mechanism between the Department of 
Justice and the appropriate State agency? And, three, who 
within the FBI is responsible for granting this access? And, 
last, can the FBI provide this committee and the Judiciary 
Committee with periodic progress reports on the status of this 
issue?
    That will take care of it.
    Ms. Waters. Thank you.
    Mr. Posey, I think you had an additional question you 
wanted to ask.
    Mr. Posey. Thank you very much, Madam Chairwoman.
    This would be for Ms. Glavin and Mr. Pistole, written 
responses, too, just in the interest of time. I appreciate your 
patience, Madam Chairwoman.
    To what extent are the RICO laws useful to convict those 
committing white collar crimes? I understand that the DOJ 
prosecutor did not use the RICO approach very often. How often 
is it used and why is it not used more often? Are the RICO 
statutes sufficiently broad to capture the kinds of activities 
white collar criminals engage in? What are the limitations of a 
RICO approach in deterring and prosecuting financial white 
collar crimes? How do prosecutors determine criminal intent 
apart from recklessness or general incompetence? And then, 
finally, how best could Members of Congress strengthen criminal 
statutes to discourage some executives from running off with 
big bonuses while running their companies into the ground?
    That is the bottom line that we are looking for. I thank 
you all for your attention and your courtesy and for appearing 
here today.
    The Chairman. Did the gentleman from Virginia want to ask 
some questions?
    Mr. Scott of Virginia. Yes, if I could, Mr. Chairman. If I 
could very briefly pose a couple of questions to be answered 
for the record.
    Ms. Walter indicated some of the exotic instruments that 
are being used. One of the problems we have had is the 
deviation from insurance standards, what are essentially 
insurance products. If you could comment on the need for assets 
to back what are essentially insurance products and the 
deviation from the need for an insurable interest before you 
can buy what is essentially an insurance product.
    And for Ms. Glavin, whether or not there are any changes 
that we need and restitution laws to make sure that we can get 
our assets recovered and whether conspiracy laws are sufficient 
to--and, also, Mr. Pistole, if you could answer this--whether 
conspiracy laws are sufficient to get those who may also be 
involved, like the accountants and others that may be involved.
    And then, finally, to Mr. Polakoff, you indicated cease and 
desist orders. Could you give us an idea of what you are using 
these cease and desist orders for? Because my initial reaction 
is that some of these could possibly be referrals for criminal 
activity, rather than to stop breaking the law. If you could 
give us an idea of what you are using those for?
    Thank you, Mr. Chairman.
    The Chairman. I thank the panel. It has been useful. And I 
must say I thought the questions asked by my colleague, Mr. 
Posey from Florida, were useful ones. We will look forward to 
those answers.
    Mr. Polakoff, you gave us some specific legislative 
suggestions; Ms. Glavin did as well. All of those will go to 
the Judiciary Committee. I promise you we will take all of them 
very seriously, because we clearly, collectively have to do a 
much better job than we have done as we go forward.
    The next panel is now before us.
    The panel will be seated. You can all be polite to each 
other outside, please. I will ask the staff to close the doors, 
and we will begin.
    One of the points noted was the multiplicity of 
jurisdictions, and we wanted to make clear that a very 
important set of jurisdictions exist here at the State level.
    Let me make a preliminary statement here. One action that 
happened under the Bush Administration, although it was done by 
a Clinton Administration holdover appointee, the Comptroller of 
the Currency, was what I believe to be an excessive preemption 
by the Comptroller of the Currency of the ability of States to 
enforce laws against nationally chartered banks; and I believe 
that left us with a vacuum because the Federal authorities did 
not have the power to promulgate a code to fill the vacuum.
    That was a resistance of the Federal Reserve. We have 
improved that some. But there is clearly a role for the States.
    And I will say it is not entirely irrelevant that on the 
panel before us today at least two are elected. Mr. Ropp, are 
you elected or appointed?
    Mr. Ropp. My boss is elected.
    The Chairman. We do have two directly elected officials. 
Your boss, the Governor or the--
    Mr. Ropp. The Attorney General of the State of Delaware.
    The Chairman. The Attorney General.
    I will say this: Consumer protection, particularly when you 
have individual cases, for a variety of reasons does not have 
the same aura that making grand policy does; and I have found 
that, in the absence of a direct electoral spur, consumer 
protection sometimes lags. Those of us who are in an elected 
office here in the Congress are often asked by individuals in 
our districts to do this, and we pursue it.
    At the State level, unlike the Federal level, much of the 
administration of consumer protection law is in the hands of 
directly elected officials: the Secretary of the Commonwealth 
of Massachusetts, the Attorney General of Illinois, the 
Attorney General of Delaware; and I think there is a great deal 
to be gained there.
    So there are reasons for involving the State in consumer 
protection both in terms of federalism, but, also, I believe 
that having elected officials be charged with some of the 
responsibility for consumer protection helps us overcome the 
institutional lag that exist.
    And your people say, these consumer things, they can be 
annoying. When people vote for you, they become a lot less 
annoying. So that is, I think, a mechanism that we want to take 
a shot of.
    With that, I will begin with my former colleague in the 
Massachusetts Legislature, who has done a very good job of 
administering securities law. In Massachusetts, the Secretary 
of the Commonwealth is the Securities Administrator, William 
Galvin.

STATEMENT OF THE HONORABLE WILLIAM FRANCIS GALVIN, SECRETARY OF 
               THE COMMONWEALTH OF MASSACHUSETTS

    Mr. Galvin. Thank you, Mr. Chairman.
    Chairman Frank and members of the committee, I am pleased 
to have this opportunity to testify on the crucial role of 
State securities regulators in financial regulation and 
investor protection.
    As Secretary of the Commonwealth, I am the Chief Securities 
Regulator for Massachusetts. The Securities Division regulates 
to protect investors and promote confidence in securities 
markets. In the United States, securities regulations are 
regulated by the Securities and Exchange Commission and by 
States' securities agencies and by a system of complementary 
regulation. State regulators serve an important backstop to 
other regulators if they are not acting to protect investors.
    Massachusetts, along with other States, has been at the 
forefront to bring enforcement actions to protect investors. 
These include actions against brokerages using bogus stock 
analyst reports to entice customers to buy low-value stocks and 
debt securities, cases against mutual fund companies that 
illegally facilitated market timing trades, actions against the 
abusive sales of variable annuities, actions against the use of 
spurious senior credentials to sell inappropriate investments 
to older investors, actions against unsuitable sales and 
fraudulent practice in the sales of auction rate securities to 
retail and municipal investors, and investigations and actions 
against pyramid schemes including the Madoff scheme and their 
feeder funds and several hedge fund cases.
    The Massachusetts Securities Division has acted promptly 
and decisively to protect the interest of investors, 
particularly retail investors. Massachusetts and other States 
have negotiated substantial refunds for investors and imposed 
significant fines against violators. Massachusetts was the lead 
State in 3 auction rate securities cases that ended with 
settlements that returned $33.9 billion to investors. The 
States' combined efforts in these cases will bring back $61.3 
billion to date to investors across the country.
    The State enforcement powers, however, go beyond monetary 
sanctions. The Securities Division has revoked the licenses of 
serious violators in order to drive them out of the securities 
business. Massachusetts has often required financial firms to 
admit wrongdoing.
    The current crisis in financial services has once again 
exposed a failure of aggressive enforcement, particularly at 
the Federal level. For too long, a culture of compromise and 
accommodation has overwhelmed enforcement efforts. Too often, 
the guilty neither admit nor deny any wrongdoing and routinely 
promise not to cheat again until they come up with a more 
clever way to do again what they just said they would not do 
again. I ask this committee and the Congress to give the States 
the tools we need to maintain and enhance our ability to 
regulate effectively and protect investors.
    The National Securities Markets Improvement Act of 1996, 
NSMIA, removes State regulatory authority over mutual funds, 
most private offerings of securities and over large investment 
advisors. Since the adoption of NSMIA, jurisdiction over 
investment advisors has been split between the Federal 
Government and States. I ask that Congress restore the States' 
powers to act against federally registered investment advisors, 
particularly for dishonest and unethical business practices.
    The States Securities Act permits the States to impose a 
range of remedial sanctions against violators, including that 
violators make rescission to investors--that is repayment to 
investors--for violation of laws. These sanctions give the 
States the ability to recover money for defrauded investors. 
The rescission remedy is particularly important because it 
helps make the investors whole.
    Unfortunately, several recent court decisions have held the 
Federal Arbitration Act preempts the States' ability to order 
rescissions for security violations. These cases hold the 
rescission remedies preempted because arbitration is the sole 
mechanism for investors to recover their losses. We strongly 
dispute these decisions which ignore the remedial and deterrent 
purposes of State-ordered rescission. We urge Congress to amend 
the Federal Arbitration Act to clarify that it does not preempt 
the States from ordering securities law violators to make 
rescission to their victims.
    Another area--under current law, broker-dealer firms deal 
with their customers without fiduciary obligations. In contrast 
to brokers, investment advisors work solely for their customers 
and acknowledge a fiduciary duty of them.
    Brokerages like to have the issue both ways. Among other 
practices, they frequently give their salespeople the title 
``financial advisor.'' This term blurs the nature of the firm's 
relationship with its customer by making the broker appear to 
be an investment advisor. However, when a dispute arises 
between the customer and the broker, the broker will strongly 
assert that it does not work for the customer but instead has 
only an arm's-length relationship with the customer.
    The Securities Division has seen examples of brokers 
dealing unfairly and improperly with customers, and we have 
witnessed customers who have recovered little or nothing for 
their losses through the pro-industry arbitration system and 
due to the fact that brokers are not considered fiduciaries.
    This system should be changed. I urge the committee and the 
Congress to require that brokerages be in a fiduciary 
relationship with their customers, at least with respect to 
individual retail customers.
    There are, finally, several problems on the horizon that I 
would like to bring your attention. Many hedge funds are 
liquidating because their investment strategies did not work 
and because the advisors anticipate they will not receive an 
incentive share of funds profit for the years to come--the 
investors, that is, will not receive profit for years to come.
    We can expect many of the people who ran and advised the 
last generation of hedge funds to set up new funds and start 
again. Unless regulation of hedge funds is significantly 
improved, we can expect to see a replay of past problems which 
can and have caused great damage to our economy, including wild 
speculations and essential commodities. I ask the committee and 
the Congress to take steps to make hedge funds more transparent 
and their activities more visible.
    Lastly, American households now rely on mutual funds to 
help fund retirement costs. Because so many retail investors 
have their savings in mutual funds, I urge the committee and 
the Congress to give mutual funds appropriate scrutiny.
    No topic or type of investment should be off the table as 
Congress enacts regulatory reform and improvements to investor 
protection. Congress has an urgent need to restore confidence 
in the financial markets. Effective regulation or enforcement 
are desperately needed.
    Thank you for this opportunity to testify on these 
important issues, and I will welcome your questions.
    [The prepared statement of Mr. Galvin can be found on page 
94 of the appendix.]
    The Chairman. Next, Attorney General Lisa Madigan, State of 
Illinois.

  STATEMENT OF THE HONORABLE LISA MADIGAN, ATTORNEY GENERAL, 
                       STATE OF ILLINOIS

    Ms. Madigan. Mr. Chairman and members of the committee, 
thank you for inviting me to testify today.
    My testimony is divided into two parts: first, I am going 
to summarize the major enforcement actions that have been 
brought by my office and other State Attorneys General against 
lenders and other participants involved in the collapse of the 
mortgage market; and second, I will identify some of the key 
impediments to effective enforcement of consumer protection 
laws at the State level.
    Because State Attorneys General are on the front line of 
consumer fraud, we hear about problems as they are happening. 
And let's debunk the myth that the predatory practices in the 
mortgage lending industry just started a year or two ago. In 
fact, we have been pursuing predatory mortgage lending 
practices for over 10 years. In that time, State Attorneys 
General have often targeted very large mortgage lenders for 
investigation, because our aim is to bring cases that will have 
an impact on the lending practices of the industry as a whole.
    In 1998, Illinois, Massachusetts, and Minnesota brought 
civil consumer fraud suits against First Alliance Mortgage 
Company, a California-based lender. FAMCO's business and 
lending practices will, unfortunately, sound very familiar to 
you. FAMCO sold high-cost home loans to subprime and prime 
borrowers. Most of its loans were re-fi's, with borrowers 
typically placed into a 2/28 ARM, one of the same products that 
is causing so much trouble in the current market.
    Another foreshadowing of today's crisis, FAMCO bundled and 
sold its loans on Wall Street to Lehman Brothers. As a result 
of being sold unnecessarily high-cost home loans, FAMCO 
borrowers paid the price in the form of higher monthly payments 
and lost equity. In a settlement of the lawsuit in 2002, the 
States recovered well in excess of $50 million in restitution 
for consumers' losses; and FAMCO was ultimately forced out of 
business and into bankruptcy.
    In the years since FAMCO, the States have brought a 
succession of enforcement actions against some of the biggest 
names in mortgage lending. These actions include a multistate 
investigation of the subprime mortgage giant Household 
Financial, which culminated in a $484 million settlement in 
2002.
    Following the Household settlement, the States launched a 
probe of Ameriquest, the largest subprime lender in the Nation 
at the time. The Ameriquest investigation was resolved in 2006 
when the lender entered into a $325 million settlement 
agreement with the States.
    All of these enforcement actions targeted the kinds of 
fraudulent, unfair, and deceptive practices that eventually led 
to the collapse of the mortgage market.
    By the fall of 2007, as the subprime mortgage market was 
starting to crumble, my office opened an investigation into the 
lending practices of Countrywide Home Loans. At the time, 
Countrywide was the largest prime and subprime mortgage lender 
in the Nation. My investigation, which was conducted in 
conjunction with the California Attorney General's Office, 
revealed that Countrywide had engaged in a wide range of 
deceptive lending and marketing practices in relentless pursuit 
of greater market share and profits.
    As a result of our investigation, I filed a lawsuit against 
Countrywide in June of last year; and in October, I and several 
other State Attorneys General announced a settlement with 
Countrywide's new owner, Bank of America. That settlement 
established a mandatory loan modification program that covers 
approximately 400,000 borrowers nationwide. The program is 
estimated to provide $8.7 billion worth of loan modifications 
to borrowers and give them a fighting chance to stay in their 
homes. A mandatory loan modification program which requires the 
lender to reviewer its most toxic products and modify its loans 
is at the heart of the Countrywide settlement.
    In my view, saving homes and stabilizing communities must 
be the primary goal of any enforcement action against predatory 
mortgage lenders. Unlike previous settlements with major 
lenders, the Countrywide agreement could not prevent the 
company from engaging in deceptive lending practices in the 
future. This is because once we subpoenaed Countrywide, the 
company moved all its lending business to its federally-
chartered subsidiary which State Attorneys General are arguably 
prevented from investigating due to OCC regulations. In other 
words, the lenders, supported by the OCC, argue that the States 
are preempted.
    We devote a tremendous amount of resources to investigating 
and prosecuting the many other State-licensed participants 
involved in the mortgage meltdown, including brokers, title 
companies, and appraisers.
    Congresswoman Waters, to address your concern about 
mortgage rescue fraud, I want you to know that the State of 
Illinois has brought 22 lawsuits against mortgage rescue fraud 
companies; and we have outlawed up-front fees being paid for 
these services. Our prosecutions of these wrongdoers are both 
civil and criminal and remain a vital part of our enforcement 
efforts.
    While the States have been aggressively pursuing 
enforcement actions against major lenders and other industry 
participants, for years our efforts have been impeded by a 
number of obstacles. State enforcement actions have been 
hamstrung by the dual forces of preemption of State authority 
and lack of oversight on the Federal level.
    In the run-up to the crisis, many federally-chartered 
lenders were engaging in the same predatory practices as State-
licensed lenders. The States, however, could not pursue these 
Federal lenders, even though we would have liked to. When a 
report showed that several lenders in the Chicago area had 
possibly violated fair lending laws, I could send subpoenas 
only to the State-licensed lenders implicated in the study. Two 
of those State lenders have since moved to Federal charters to 
avoid our investigation.
    Preemption is a clear impediment to our investigations of 
fair lending and consumer protection violations by Federal 
banks. To give you an appreciation of the preemption battle, 
there is currently a case before the United States Supreme 
Court where a coalition of national banks is challenging the 
authority of State Attorneys General to investigate violations 
of State fair lending laws; and we all know the reason that 
national banks have fought so hard to block States from 
enforcing State laws against them.
    Over the years, efforts to preempt State consumer 
protection powers have left a large gap in regulatory 
authority. So far, the Federal agencies have been unwilling to 
fill this gap, and the national banks are counting on their 
regulators to remain similarly resistant in the future.
    As home loans grew increasingly complex and risky, Federal 
regulators could have and should have taken steps to ensure 
that lenders evaluated borrowers' ability to repay their 
mortgage loans. Unfortunately, Federal regulators chose not to 
exercise their authority to enact uniform marketwide 
underwriting standards until the mortgage market showed the 
first signs of the meltdown. By then, it was too little and too 
late.
    To conclude, I would say that the best thing you can do to 
prevent further preemption is to give us the authority that we 
need to go after federally-chartered banks as well.
    Thank you for this opportunity to testify, and I would be 
happy to answer any questions you may have.
    [The prepared statement of Ms. Madigan can be found on page 
133 of the appendix.]
    The Chairman. Next, Commissioner Sarah Bloom Raskin of the 
Maryland Office of Financial Regulation--you should know that 
Congressman Cummings is a great supporter of yours. He was here 
earlier and was called away but is clearly very pleased that 
you are here.

STATEMENT OF SARAH BLOOM RASKIN, COMMISSIONER, MARYLAND OFFICE 
                    OF FINANCIAL REGULATION

    Ms. Bloom Raskin. Thank you for that.
    Chairman Frank and distinguished members of the committee, 
my name is Sarah Bloom Raskin, and I am the Commissioner of 
Maryland's Office of Financial Regulation. Thank you for 
inviting me to talk about my efforts and those of my 
counterparts in other States to address the crisis of mortgage 
fraud.
    The downturn in our economy has ripped the veneer off of a 
lot of predatory transactions that the good times kept hidden 
from view. And what we are seeing today in the States is ugly 
indeed. Let there be no doubt: We have a mortgage industry in 
America; and we have a mortgage fraud industry in America. In 
my office, people come in every day with heartbreaking stories 
of bank accounts depleted, life savings wiped out, homes lost, 
families bankrupted, and American dreams turned to living 
nightmares with eviction notices and foreclosure sales.
    In our Federal system, State officials play the leading 
part in regulating mortgage activity which brings together a 
buyer, a mortgage company, a house, and a neighborhood. State 
Commissioners license and regulate over 77,000 mortgage 
companies, another 50,000 branches, and over 400,000 loan 
officers. This makes sense, because we are in proximity to the 
transactions and to our citizens. Like neighborhood cops who 
know their beats, we can detect both positive and negative 
trends right as they emerge, and we have the flexibility at 
ground level to respond.
    But, as you know, the financial underpinnings of the 
mortgage industry are national, if not international, in scope 
and scale. Capitalization, securitization, wholesale funding, 
servicing, and other integral functions are consolidated and 
national in character. As State regulators, our reach into 
these functions is minimal. Oversight in these fields is either 
federalized or, as we have too frequently seen, nonexistent.
    As State bank supervisors, we can meaningfully address only 
the end point of the problem, the final rip-off of the mortgage 
purchaser; and that is usually after the fact. But we are 
without power to regulate the essential structural incentives 
in the national banking industry or the basic content of 
industry practices and transactions.
    Now, don't get me wrong. State authorities have been 
effectively pursuing unfair and deceptive mortgage practices. 
Through several landmark settlements, State regulators have 
recently returned nearly $1 billion to consumers who had been 
ripped off by their mortgage companies.
    In 2002, a settlement forced Household Financial to pay 
consumers $484 million in restitution. A settlement with 
Ameriquest Mortgage Company 4 years later produced $295 million 
in restitution, and home buyers got back $60 million in a 
settlement with First Alliance Mortgage Company.
    My office responds to some 2,500 consumer complaints per 
year. We conduct over 1,000 mortgage exams. Nationwide, States 
took almost 6,000 enforcement actions against mortgage lenders 
and brokers.
    Furthermore, we have worked with our State legislatures to 
enhance consumer protections to address rank abuses ungoverned 
by Federal law. In Maryland, we have expanded legal protections 
for homeowners in delinquency and foreclosure to thwart the 
financial scam artists who inevitably descend on financial 
victims like vultures on highway roadkill.
    But one key point I want to make is that Congress should 
eliminate the preemption of consumer protections enacted by the 
States. I urge Congress to promptly implement a recommendation 
made by the Congressional Oversight Panel in its special report 
on regulatory reform to eliminate Federal preemption of the 
application of State consumer protection laws to national 
banks.
    The magic of federalism is that if one level of government 
falls asleep at the wheel or has too much to drink at the 
party, another can drive everybody home safely. But when you 
preempt our best laws, you take away the keys to the car and 
our license to drive.
    Today, we all share the same goals of stabilizing 
homeownership, stopping foreclosures, ending the mortgage crime 
wave, and getting our communities moving again. Such ability to 
expand upon a basic Federal standard is essential to the 
development of effective responses to new mortgage abuses as 
they emerge.
    Today, as you have heard, we have seen another mortgage 
storm brewing in the area of loss mitigation consulting. 
Historically, we confronted fraudulent transactions where title 
was conveyed as part of a scheme to strip homeowners of their 
equity. Today, there is no equity left to strip, so the rip-
offs have become fee-based with so-called consultants charging 
high up-front fees to vulnerable consumers to help them get a 
loan modification.
    Up-front fees are restricted in Maryland, and our office 
has recovered more than $80,000 for consumers to date. We have 
worked through the State Foreclosure Prevention Working Group 
to raise the issue with the Administration and to warn those 
overseeing the President's housing program of the potential for 
these practices to cause further financial instability.
    On behalf of the 50 State banking supervisors, I want to 
thank you for the opportunity to testify and restate our 
commitment to working with you to reform and revitalize our 
mortgage industry. We view close collaboration as the best way 
to come out of this crisis and Federal preemption of our laws 
as an impediment to swift recovery. And I look forward to 
answering any questions you may have.
    [The prepared statement of Ms. Raskin can be found on page 
172 of the appendix.]
    The Chairman. Thank you.
    And next, Mr. Ropp.

STATEMENT OF JAMES B. ROPP, COMMISSIONER, DELAWARE DIVISION OF 
                           SECURITIES

    Mr. Ropp. Chairman Frank and members of the committee, I am 
Jim Ropp, Delaware Securities Commissioner and Chair of the 
Enforcement Section of the North American Securities 
Administrators Association.
    The Chairman. Could you pull the microphone a little closer 
to you, please?
    Mr. Ropp. I am sorry. I didn't turn it on, sir.
    The Chairman. That is the alternative.
    Mr. Ropp. I appreciate this opportunity to focus on the 
role of State securities regulators in the current economic 
crisis.
    Since the Securities Division is part of the Delaware AG's 
office, we have statutory jurisdiction over administrative, 
civil, and criminal actions to address securities fraud. And we 
do not have to refer our cases to an independent prosecutorial 
agency. This allows us more freedom to pursue offenders 
criminally, and we do not shy away from bringing criminal 
cases.
    Delaware was recently the first to indict a Ponzi scheme 
operator who was offering investments in fraudulent real estate 
deals. In another case, Delaware indicted a broker who had 
defrauded a senior citizen out of more than $200,000. The 
broker diverted funds from the client's account into a 
fictitious account. Shortly thereafter, the broker withdrew the 
money and left the country. Warrants are still outstanding and 
we are attempting to secure his extradition to the United 
States.
    In short, criminal prosecutions are an important tool for 
effective enforcement of Federal and State securities laws.
    Delaware obtains cases in a number of ways. The primary 
source of securities cases comes from investor complaints about 
fraud and misconduct. We obtain cases from branch office 
examinations, referral from local law enforcement agencies, 
referral from other States, NASAA, the SEC, and FINRA.
    Mr. Chairman, as you noted during last year's ARS hearings, 
in a number of States it has been the State securities 
officials and law enforcement officials who have taken the 
lead. High-profile national cases receive great public 
attention, but they should not obscure the more routine and 
much larger caseload representing the bulk of the State's 
enforcement work. Those are the cases which affect everyday 
citizens and their local communities across the country.
    During the past 3 months, the States have been very active. 
Washington, working with the FBI and the IRS, broke up a $50 
million oil and gas investment Ponzi scheme. Hawaii, with the 
assistance of the SEC and the CFTC, shuttered a suspected Ponzi 
scheme targeting a deaf community in Hawaii, parts of the 
mainland, and in Japan.
    An investigation by Texas resulted in a 6-year prison 
sentence for a Ponzi scheme operator who stole at least $2.6 
million from investors. Arizona stopped a religious community 
fraud and ordered more than $11 million returned to investors.
    Since January, the Alabama Securities Commission has 
announced the conviction of nine individuals convicted of 
securities fraud. These convictions encompass cases of fraud 
and abuse ranging from classic Ponzi schemes to violations of 
Reg D Rule 506. All convictions and charges were felonies. 
Currently, Alabama has 27 defendants awaiting trial for 
securities fraud in 19 separate cases.
    During our most recent 3-year reporting period, State 
securities regulators have conducted more than 8,300 
enforcement actions, which resulted in $178 million in monetary 
fines and penalties and more than $1.8 billion ordered returned 
to investors.
    We are responsible for the sending of fraudsters away for a 
total of more than 2,700 years in prison over the last 3 years, 
and yet, over a number of years, there has been a concerted 
industry effort against State regulation which calls for the 
preemption of both State regulation and enforcement.
    For example, NSMIA did preempt much of the State's 
regulatory authority for securities trade on national markets, 
and although it left State antifraud enforcement largely 
intact, it limited States' abilities to address fraud in its 
earliest stages before massive losses had been inflicted on 
investors.
    A prime example in this area is the private offerings under 
Rule 506 of Regulation D. These offerings enjoy an exemption 
from registration under Federal securities laws, so they 
receive virtually no regulatory scrutiny. As a result, since 
the passing of NSMIA, we have observed a steady and significant 
rise in the number of offerings made pursuant to Rule 506 that 
are later discovered to be fraudulent.
    Although Congress has referred the State's authority to 
take enforcement actions for fraud in the offer and sale of all 
covered securities, including Rule 506 offerings, the power is 
no substitute for the State's ability to scrutinize offerings 
for signs of potential abuse and to ensure that the disclosure 
is adequate before harm is done to investors.
    The time has come for Congress to reinstate State 
regulatory oversight over all Rule 506 D offerings. There are a 
number of legislative proposals pending now to significantly 
increase funding for Federal law enforcement agencies. NASAA 
supports these efforts, but urges Congress to consider 
establishing Federal grant programs to assist State agencies, 
including securities divisions, involved in the prevention, 
investigation and prosecution of certain financial crimes.
    State securities regulators have learned how to do more 
with less. However, there is little doubt that additional 
resources during this economic downturn would help prosecute 
these cases, which have resulted in vulnerable investors 
looking to recover their losses. State securities regulators 
welcome the opportunity to work with our regulatory partners at 
the SEC and the SROs to collectively use our resources to 
protect investors.
    To facilitate communication and coordination, on all 
financial service issues, NASAA believes the President's 
working group should be expanded to include representatives 
from the State agencies that regulate banking insurance and 
securities. Another improvement would be more consistent 
cooperation between States and their regional counterparts at 
the SEC.
    In conclusion, State securities regulators are dedicated to 
pursuing those firms and individuals who have violated 
securities law. We want to ensure that we not only maintain but 
enhance our authority to regulate at the local level and bring 
enforcement actions with appropriate remedies against those 
firms that violate securities laws in their jurisdictions. With 
additional resources and support from Congress, State 
securities regulators will continue to provide an indispensable 
layer of protection to Main Street investors.
    Thank you.
    The Chairman. Thank you, Mr. Ropp.
    [The prepared statement of Mr. Ropp can be found on page 
203 of the appendix.]
    The Chairman. And finally, Mr. Merle Sharick from the 
Mortgage Asset Research Institute.
    Mr. Sharick?

  STATEMENT OF MERLE D. SHARICK, Jr., MORTGAGE ASSET RESEARCH 
                        INSTITUTE (MARI)

    Mr. Sharick. Good afternoon, Chairman Frank, and 
distinguished members of the committee. My name is Merle 
Sharick, and I am with MARI, the Mortgage Asset Research 
Institute, a LexisNexis service. I commend the chairman and the 
members of the committee for holding this hearing and for your 
dedication to protecting consumers and promoting the principles 
of responsible lending.
    For over 18 years, MARI has managed and maintained the only 
cooperative contributory database existing today in the 
mortgage industry specifically established to keep track of 
mortgage professionals and companies. This database, known as 
MIDEX, the Mortgage Industry Data Exchange, includes public 
financial sanction information from over 200 government 
regulators and nonpublic incident reports provided by 
subscribers when fraud or misrepresentation is confirmed in a 
loan transaction.
    MARI became a key part of LexisNexis in 2008. Our current 
focus is driving and supporting the installation of a loan 
fraud prevention database for loan origination pipelines for 
all lenders to share and compare loans and process to prevent 
fraud early in the mortgage process.
    This month, MARI released its 11th periodic mortgage fraud 
case report to the Mortgage Bankers Association, of which all 
committee members have a copy. This report found that reported 
cases of mortgage fraud in the United States are at an all-time 
high and increased by 26 percent from 2007 to 2008. 
Additionally, the report found that for the first time, Rhode 
Island ranked first in the country for mortgage fraud with more 
than 3 times the expected amount of reported mortgage fraud for 
its origination volume. Florida ranked first in 2000 and 2007 
and 2006, but dropped to second place for 2008 instances and is 
followed by Illinois, Georgia, Maryland, New York, Michigan, 
California, Missouri, and Colorado.
    The top fraud incident type in 2008, representing 61 
percent of all reported frauds, was application fraud. For the 
5th year in a row, it topped the list. Second were frauds 
related to tax returns and financial statements, which jumped 
60 percent from 17 percent of reported frauds in 2007 to 28 
percent of reported frauds in 2008. Additional documented fraud 
types included in order of their volume frauds related to 
appraisals of valuations, verifications of deposit, 
verifications of employment, escrow or closing costs and credit 
reports.
    In 2008, Rhode Island made its first official appearance on 
MARI's top 10 list. But since last year's case report, reports 
of material misrepresentation have bolstered the State's 
ranking to number 5 in our current snapshot of loans originated 
in 2007.
    The significant drops in reported incidences in Nevada, 
Utah, California, and Michigan are most likely the result of 
the lack of investors for subprime and alternative lending 
products and tightened underwriting guidelines on conforming 
products and that the flurry of delinquent and foreclosed loans 
does not allow servicers significant time to investigate 
default causes. Future reports that we will issue will indicate 
whether this is just a 2008 phenomenon or not.
    Some observations about fraud types: Many of the percentage 
figures shown in our report are similar to those MARI has 
reported for several years. Notable differences in the 2008 
data include the percentage of reports of tax return and 
financial statement misrepresentation nationwide is higher in 
2008 than in previous years. The same is true for verification 
of employment misrepresentation. Credit report fraud has 
decreased and incidences reported for both 2007 and 2008.
    Appraisal fraud is higher at the time of this report in 
past years. Typically, appraisal fraud numbers grow as more 
issues are uncovered.
    There are many mortgage schemes out there, and I won't 
elaborate on all of them, but I do want to comment on some 
emerging fraud trends that have been reported by our 
subscribers. These emerging fraud trends are further draining 
lender, law enforcement, and consumer resources in the 
industry's most challenging times ever.
    Our subscribers reported an increase in traditional 
mortgage misrepresentation of income inflation and bank 
statement fraud. Our subscribers reported an increase in 
foreclosure prevention schemes. Our subscribers also reported 
an increase in elderly and immigrant identity fraud and a 
significant increase in builder bailout fraud.
    We must use technology more wisely, and we must pay 
attention to details to return confidence and integrity to the 
mortgage loan to attract the capital from a variety of sources 
that the industry will need in a recovery. Combating mortgage 
fraud is critically important to restoring integrity in the 
mortgage loan transaction and attracting the necessary capital 
to meet the needs of prospective homeowners in the industry. It 
is also critical to rebuilding consumer trust in the industry's 
professionals when the real estate market segment begins to 
improve. We believe that the mid- to longer-term systemic 
return of the real estate market segment must be anchored by 
improved fraud prevention and lending practices already being 
pursued by lenders.
    Mr. Chairman, we look forward to working with the mortgage 
industry, this committee, the States, the Federal financial 
regulatory agencies, and other stakeholders to combat mortgage 
fraud, protect consumers and promote the principles of 
responsible lending.
    I very much appreciate the time.
    [The prepared statement of Mr. Sharick can be found on page 
218 of the appendix.]
    The Chairman. Thank you, Mr. Sharick.
    Should that show any difference in terms of their 
originations between the banks and the mortgage companies, to 
the extent to which they are regulated at the Federal or State 
level? Has that been in any way--is there any distinction?
    Mr. Sharick. I think we will see that in future reports 
particularly. But the change that has happened in the mortgage 
industry over the last couple of years, the banks and 
government-regulated financial institutions are the main 
survivors.
    The Chairman. And they have done a less bad job?
    Mr. Sharick. They have, I think, more controls in place.
    The Chairman. So that they have been less contributory.
    The other question is, for those outside of that--and you 
say they are survivors, but would you recommend--you said, 
tighten the underwriting guidelines.
    We still have some entities which operate outside of these 
kinds of regulations. Would you recommend some kind of 
statutory or other establishment of better guidelines?
    Mr. Sharick. I am not sure. What I would recommend is more 
due diligence, tightening underwriting guidelines.
    The Chairman. Due diligence by whom?
    Mr. Sharick. By everybody who is involved as far as the 
lender and the lending transaction.
    The Chairman. You would recommend that to the lender. But 
if we have lenders that aren't doing it, would you mandate it?
    Mr. Sharick. I think that is something that could be looked 
at. We would be happy to talk with you about that some more.
    The Chairman. Thank you.
    Let me turn back to the question of preemption, which is an 
important one. Attorney General Madigan, I think you were 
referring to the case of Andrew Cuomo as the lead against the 
central clearinghouse. I am pleased to reference here the 
amicus brief signed by myself, the chairman of the Judiciary 
Committee, Mr. Conyers, and several other senior members of 
this committee on the side of the attorneys general.
    Ms. Madigan. We appreciate it.
    The Chairman. There is no question. But I often learn from 
my former colleague, Mr. Galvin. In the area of bank 
preemption, we don't need to change the statute. What happened 
was, the Comptroller of the Currency, a Clinton appointee who 
stayed over until the Bush Administration, Mr. Hawke, issued, I 
think, an excessive degree of preemption. It was challenged in 
court; and what the Supreme Court said basically was, this is a 
matter that is very much within the discretion of the 
administrator.
    It was an extreme case of matters of discretion. What it 
means was that--and it was a very extreme preemption. What it 
says is that virtually no State laws can apply to banks--no 
State law specifically related to a lot of banks; and even 
where a State law or general application applies to banks, they 
have to get the national bank people to administer it. Fair 
lending, for example, would not hear the case the attorney 
general and I were referring to. It is not an effort to 
regulate sort of core banking decisions; it is a fair lending 
issue.
    The Comptroller of the Currency can undo what the 
Comptroller of the Currency did. I was asked, I will say, by 
members of this Administration, what my view was on the 
reappointment of the current Comptroller. I have found him to 
be responsible in a number of ways, for instance, in his 
refutation and the argument that the Community Reinvestment Act 
has been the cause of serious problems. And he was not the one 
who did the preemption and he has been somewhat flexible in his 
approach to it.
    But I have asked--and I am in the process of asking all 
three of the agencies, organizations represented here--the 
State attorneys general, the State bank supervisors and the 
State securities administrators--to create a working group; and 
we will meet under our guidance with the Comptroller of the 
Currency to un-preempt in the banking area. But my colleague 
tells me that, apparently, in the securities area that has to 
be statutory.
    So we will do that as well, and we will have a--actually, 
it will be the attorneys general and the State bank supervisors 
in kind of a working group to dial back the preemption there. 
But we will be asking the securities administrator, Mr. Ropp, 
and Mr. Galvin to give us the statutory changes.
    I think there is no question that this could work well. And 
it would be my hope to have some hearings essentially on this, 
maybe one in each of the two relevant subcommittees and a full 
committee hearing. It is a very important subject, and I would 
hope by the end of this year or early next year we could have 
gotten an agreement to undo some of the excessive preemption by 
the Comptroller and get back into--and change some of the 
statutory matters that have to be done.
    So I appreciate this, and I do not think--certainly in the 
mortgage area, we didn't suffer from overenforcement. And I 
think we are able to do this in a way--and it is a legitimate 
complaint by a potential enforcement target, one of them being 
hit in a contradictory way. I think we could work out among 
ourselves ways to avoid that, so you could have a primary guide 
or you could have some degree of coordination. But that is very 
high on our list.
    The gentleman from Texas.
    Mr. Gohmert. Thank you, Mr. Chairman, and thank y'all for 
being here today. I am sorry; I try to avoid saying y'all when 
I am up here, and I let one out. I know Jeff Foxworthy is 
right; when people hear a southern accent, they deduct 50 IQ 
points from how smart they think you are.
    But thank you. We appreciate you being here.
    Mr. Ropp, you indicated the SEC has been criticized for 
inaction toward securities fraud. Do you think that is a result 
of a lack of commitment on the SEC's part, a lack of resources 
or a need, heaven help us, for larger Federal regulatory 
situation or a restructuring?
    Mr. Ropp. I think it is a combination of things. I think 
you have hit on most of them.
    I think part of it probably is resources. I understand 
their budget has not been raised for a number of years until 
recently. I think that they focus on big cases and cases that 
will bring them a lot of publicity. And unlike the States, 
where we try to handle as much as comes along from the Main 
Street investors, they rarely look at this one-person case, 
two-person case, or the ones where there is a $25,000 loss or 
$30,000 loss, which are real cases and real losses to these 
people.
    I think, because of the size and their resources, they do 
look at the larger cases and don't necessarily look at some of 
the smaller cases.
    Mr. Gohmert. Thank you.
    And I am a big proponent of States' rights. I hate to see 
more and more States' rights usurped when I think the 10th 
amendment means what it says, those powers are not specifically 
enumerated, but are reserved for the States and the people.
    But in that regard, you have been here. You have heard the 
testimony of the other panel as they have talked about the 
credit default swaps flying under the radar for way too long, 
getting too big too fast. We are finding the inadequacies of 
the Federal system in not picking that up sooner, before it got 
us in some significant trouble.
    What was it, do you think, that kept the States from 
picking up on this, this growing, burgeoning fiasco? What kept 
you guys from being able to pick up on it?
    We know the Fed had problems. How about yourselves?
    Mr. Galvin. If I may, I think part of this relates to the 
preemptions that have been put into the law over the last 
couple of decades.
    Mr. Gohmert. As I understand it, some of the problem with 
the credit default swaps was, we didn't have control over it. 
We didn't jump in and take over, and that is why--
    Mr. Galvin. It is a definitional issue. Part of the problem 
here is, you had entities creating new instruments that were 
unheard of before, new types of risks.
    I don't think--I don't presume to speak for anybody else on 
this panel, but I personally do not--I am not arguing for the 
absence of a Federal regulator. There has to be a national 
market regulator and that has to be Federal.
    I think the issue really is, how do the two sides--this 
isn't a competition between the States and the Federal 
regulators; this is about making sure the States have the 
ability to protect their citizens.
    I do think there needs to be a national regulator. I know 
you are going to revisit the whole issue of the structure, and 
I think some of the gaps we have seen are now exposed. The 
reality is, I think--the biggest lesson I think we can all take 
from what has happened most recently is, these industries, they 
aren't just some other business. This is a business that 
affects every other business and all of us--indeed, you might 
say even beyond the confines of the country.
    So when we are talking about some sort of a regulatory 
process, there has to be a national market regulator. There has 
to be an entity that can step in and deal with the definitional 
issues that you were touching upon in your question. But at the 
same time, there has been this conscious effort to peel back 
the rights of the States to protect their citizens. And in most 
instances, those State laws are more aggressive than the 
Federal laws.
    Mr. Gohmert. Okay. I was trying to be specific on the 
credit swap because if we can figure out exactly how we let 
this get--or fall between the cracks so nobody picks it up, 
then maybe we can avoid it. Because, let's face it, people on 
Wall Street, people who came up with these ideas--Countrywide 
pushed sometimes--they are smart people and they look for these 
loopholes. And with credit swaps, heck, it basically sounds 
like insurance. But if you don't call it insurance, you don't 
have to put money in reserve to reserve against the insurable 
event. And then we have a big problem.
    So I am just looking for suggestions you might have on how 
we keep it from falling between the cracks of the States and 
the Federal Government.
    Attorney General Madigan, I know you want the Federal 
Government to run it all, but maybe you could elaborate.
    Ms. Madigan. Obviously, one of the problems--and I don't 
think we have specifically addressed it with this group--is, it 
comes down to resources. I went through this Countrywide 
investigation and lawsuit--six lawyers, and I have one of the 
largest consumer protection bureaus in the country in an 
attorney general's office.
    So, obviously, resources was an issue. Last year alone, we 
got over 33,000 consumer fraud complaints; we got 8,000 calls 
from people who are struggling to pay their mortgages, who are 
already in foreclosure. So we are attempting at the local level 
to keep people in their homes and to do all we can to hold the 
people involved in the mortgages.
    Mr. Gohmert. My time is running out. I really appreciate 
what you are doing. I am just looking for a way to figure out 
how we keep another credit default swap from overwhelming.
    I know my time is running out, Mr. Chairman.
    If I could ask to submit in writing any suggestions you 
might have as to how we can do it more effectively--I don't 
need a term paper, just your own personal opinion of what we 
can do to avoid this in the future.
    Thank you, Mr. Chairman.
    The Chairman. I am going to ask unanimous consent to just 
take--the gentleman asked a very important question. I think 
there is this distinction, because the problem with credit 
default swaps was not that individuals were being swindled as 
much as the cumulative impact was great. And that is not 
something a State can do. The problem was that you had 
accumulation of these that went beyond the capacity of the 
system to handle them.
    So I think there is a very important role for the States in 
protecting investors from being mistreated. But when we are 
talking about a systemic impact, that is inherently, I think, a 
Federal thing. And that isn't always the case, but I think that 
was the problem.
    The problem with all insurance risk securities was that 
people were not getting paid back. They weren't a systemic 
risk. The problem with credit default swaps is that they became 
a risk beyond any individual or any company nationally.
    Mr. Gohmert. If I could just explain my question, though. 
People at the State level often pick up on these quicker, and 
even though it is a national problem, we should be the ones to 
do something about it. There ought to be a way that they can 
alert the Feds more quickly.
    The Chairman. I appreciate the gentleman. If the gentleman 
would yield, again, part of the problem though is--the problems 
that went beyond any one State or the transactions in any one 
State. One of the things we need to say, to be able to 
accumulate these things, to keep track of all of them.
    But there certainly needs to be--it is a cooperative 
relationship and the States can, and have in some cases. I 
believe the problem with auction rate securities, for example, 
first came from the States alerting us.
    The gentlewoman from California.
    Ms. Waters. Thank you very much, Mr. Chairman, and I am 
very appreciative for this hearing.
    I am very appreciative for this panel. I was about to 
regret that I had taken my Friday to come because the first 
panel was obviously brain dead or something, except for maybe 
the FDIC and the AG's office, I was beginning to feel a little 
bit hopeless that we could get any real help in dealing with 
these problems.
    I think, Mr. Chairman, one of our real challenges is, how 
do we have a clearinghouse on products without interfering in 
``let the marketplace work?'' It seems to me as you gather in 
the kind of interaction that you have described, that is one 
thing that perhaps you can take a look at.
    I know there are people who would think that, oh, you can't 
have a clearinghouse where mere human beings would perhaps 
interfere with products that were thought up by mathematicians 
and others in the back room. But I think it is very important 
that we find a way to look at these products before they hit 
the market, so that we can at least do some kind of assessment 
about what harm they may be causing to the citizens of this 
country.
    I want to especially thank this panel and, of course, 
Attorney General Lisa Madigan and also Commissioner Bloom 
Raskin. You have, I think, really inspired me and given me a 
lot of hope that we certainly can do more.
    Just the information that you gave us today about up-front 
fees, I think can be executed also at the Federal level--and in 
just talking with my chairman, as we whisper back and forth, he 
seems to have liked that idea also.
    And, of course, the preemption issue that he is talking 
about, engaging the States and the Feds, I think is something 
that can lead us to avoiding the kind of problems that we have 
experienced in this meltdown and in this crisis.
    I want to thank you for the work that you did on Ameriquest 
and Household Finance. Household Finance had been around for 
years, ripping off minority communities. I can remember as a 
young woman with a family having been interactive with 
Household Finance. So I want to thank you for all of that.
    And I am just hopeful that you won't be in the position of 
continuing to chase these bad actors all the way up to the Fed 
door and then have the Fed door slammed in your face. And I 
hope you come up with some real help to us in how you can take 
your knowledge and your experience and all that information and 
somehow work with the Feds to continue the chase until you get 
them.
    And that is it. Thank you very much.
    The Chairman. The gentleman from Virginia.
    Mr. Scott of Virginia. Thank you, Mr. Chairman. I wanted to 
follow up on what you and the gentleman from Texas were talking 
about on credit default swaps, because they are essentially 
insurance products without the insurance regulation.
    There are a couple of--and in terms of the marketplace 
working, if you don't have to back these insurance products 
with assets, you get to collect the assets, the premiums every 
year, and when the house burns down, you don't have any money. 
That is a very profitable business when--when the house burns 
down, you either declare bankruptcy or get bailed out.
    Ms. Waters. Yes.
    Mr. Scott of Virginia. But in the meantime, it is a very 
profitable business.
    One of the things that the insurance requires is, one, it 
has to be backed by assets. And it can't get out of control 
because you have a finite amount of assets to back up your 
insurance assets guarantee.
    The other thing is, you have to have, if it is insurance, 
an insurable interest. Because if you don't have an insurable 
interest, then you are just betting on outcomes and everybody 
gets to play, and nobody is really--so if something bad happens 
or good happens, people are just kind of betting on the side.
    Can the panelists say something about the need for anything 
that looks like insurance to actually have assets backing it up 
and whether or not the principle of having an insurable 
interest is still a good thing?
    Mr. Galvin. I don't have insurance jurisdiction. But I 
served in the legislature for a long time, and I was on the 
Insurance Committee in a leadership role.
    I think one of the things we have seen is--and this does 
touch upon the earlier discussion we were having about 
preemption--there is an ongoing discussion about where 
insurance should be regulated, where appropriately it should be 
regulated. Wholly, the market has become national and 
international, but some of the principles have been lost. Those 
two principles you are talking--speaking about, assets and a 
particular insurable interest, are fundamental to anyone who 
has studied insurance or knows anything about the concept that 
there has to be some interest in why you are getting this 
insurance policy.
    I think what has happened in the migration from insurance 
to credit default swaps is those principles have been lost. I 
certainly think that the problem--and I tried to touch upon 
this in my remarks--is the problem with trying to regulate 
credit default swaps, as we now know them, it is almost like a 
bacteria. It is going to change into something else; by the 
time we have a vaccine to deal with the current outbreak, we 
will have something new.
    So I think that it does argue--and I know there has been 
some discussion of this--of having some sort of a national 
regulator deal with some of these more exotic products. I think 
you may well have to look at that, and you may have to look at 
the concept that the lady from California mentioned about some 
sort of a clearinghouse of products or an identification of 
products, a definition of terms.
    Frankly, the credit default swaps issue touches quite close 
to home to me, coming from Massachusetts. One of the major 
problems we are having in our finances right now is one of our 
larger public entities, the Massachusetts Turnpike Authority, 
got into some very bad credit default swaps at this point, and 
they are having difficulty living up to the terms of them to 
the extent they had to vote the State's credit behind it.
    It is a real problem. But I don't think simply trying to 
identify what happened before is going to solve the problem 
going forward.
    I am not arguing for an insurance--national insurance 
regulator exemption of the States or preemption of the States. 
I am saying, I think you have to start identifying these 
products where they really exist, in anticipation there will be 
new products that will take their place.
    Mr. Scott of Virginia. You can kind of call them different 
things and tweak them here or there. But if you are ultimately 
liable, if something occurs and there is insurance, you have to 
have assets around it. And that will cure any getting out of 
control because you only have limited assets. And then the 
insurable interest will limit the number of people who can get 
into the thing.
    Let me ask all of the witnesses to talk about the 
cooperation with the Feds. We talked about eliminating the 
preemption, but in law enforcement, there has to be some 
cooperation so you can effectively use all of your resources.
    How has the Federal Government helped or hindered your 
ability to go after the bad actors?
    Ms. Madigan. I can address that. And I know some others 
have as well.
    Most, if not all of us, are involved in essentially 
mortgage fraud task forces. I think there are 18 of them, 
regional ones, and I know there are about 47 that are smaller 
in nature. And so we work mainly on criminal matters 
cooperatively with the Feds.
    But in terms of the Countrywides, the Ameriquests, rarely 
were we working with the Feds. We were working with the other 
States, we were working with the other State bank regulators as 
well.
    Ms. Bloom Raskin. I would only add, in Maryland, for 
example, we have teamed up with our U.S. attorney and with a 
variety of State regulatory agencies in the area of mortgage 
fraud to create a Maryland mortgage task force; and we find 
these mechanisms to have great potential because they provide 
for a sharing of information, a real two-way street in terms of 
what we are all seeing.
    And we all bring different things to the table in terms of 
the levels of enforcement, the number of feet we have on the 
ground, and these turned out to be critical mechanisms for 
spotting trends very early.
    Mr. Ropp. From my standpoint, I work with the Federal 
Legislation Subcommittee with NASAA, and almost every Federal 
act that we look at has some preemption language in it, 
preempting State action in certain areas; and I am not sure it 
is always thought through what the impact of this is going to 
be.
    Secretary Galvin and I both spoke about the situation with 
Reg D 506 offerings, private placements where States have 
effectively been taken off the case except for where we know 
there is fraud. So we can't look at them to see if there are 
dishonest, unethical practices or bad actors or people who have 
prior records, which we used to be able to do. And frankly, now 
we get notice filings which we just sort of look at quickly and 
file away because we really have no authority anymore because 
of preemption under NSMIA to look at these things. These are 
some of the concepts; and Secretary Galvin has also mentioned 
them in his remarks, where the Federal Government has preempted 
the States from being able to do what we think is our job of 
protecting investors.
    The Chairman. The gentleman from Illinois.
    Mr. Scott of Virginia. Mr. Chairman? If we could, if the 
witnesses, in writing, could respond, we have had ways where we 
could hinder. If you could make recommendations how we can 
actually effectively help these investigations, we would 
appreciate those.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman from Illinois.
    Mr. Foster. Secretary Galvin, you had mentioned market 
timing trade frauds. What fraction of market timing trade 
frauds do you think are actually detected? And do you view this 
as basically a State or a national problem?
    Mr. Galvin. The market timing issue--which Massachusetts 
brought, I think, the first case in the Putnam Investment 
case--was clearly a national trend in the mutual fund industry.
    One of the amazing things about that case was that as we 
got deeper into it, we had company after company saying, oh, 
well, we did it too. And when we tried to go back at them and 
say, well, why? Well, everyone was doing it. So it kind of 
argued against the policing, the self-policing of the industry.
    I mentioned in my oral testimony the necessity of looking 
at mutual funds. I think mutual funds again are an area of 
financial services that morphed over time. Initially, they 
started out as fairly small, pooled assets--people thoughtfully 
investing your money, safety in numbers--and they got into 
something very different.
    I think the common thread that runs through both the market 
timing scandal and many of the other issues that we have dealt 
with is the idea that you have two different types of 
investors. Special people are taken care of. Market timing was 
all about you took care of the special customers, you let them 
trade at a higher rate, you let them get out and make a quick 
profit, while the average person that was relying on mutual 
funds for their financial security, they were stuck.
    So I think that these issues, as they emerge, while they 
are different in the particular, are similar in the fact that 
they really get back to the idea that there are two sets of 
customers--special treatment for special customers. And what we 
at the State level, I think, are more likely to find is, when 
that is occurring, we are able to move more nimbly sometimes.
    That is not to argue with the Federal people. We work with 
the SEC, we worked with them on auction rate securities. We 
have to work together. This is not a case where, as I said, we 
are competing.
    Mr. Foster. Thank you. I have to move on to a few other 
issues, but I think this is a ball we have to keep our eye on.
    Attorney General Madigan, you mentioned that several 
institutions had changed to a Federal charter to basically 
avoid subpoenas. Is that effect instantaneous, or can you look 
back to the years when they were--in fact, were State-
chartered?
    Ms. Madigan. We have to decide whether or not we are going 
to essentially fight a preemption battle with these entities 
when things of that nature occur. So when we look at potential 
targets and we know there are bad actors out there, the first 
thing we have to do is determine, are we going to fight that 
battle or are we going to go after the other bad actors? And 
there are plenty of them.
    And so, on a going-forward basis, I think what I mentioned 
in terms of Countrywide, part of that settlement and previous 
settlements with Ameriquest and others, we put in injunctive 
measures--so no prepayment penalties; certain notifications 
have to be made if you are going to change the terms.
    We couldn't do that in Countrywide because on a going-
forward basis we wouldn't be able to. Arguably, once they have 
moved, we will have to engage in a preemption battle even for 
past conduct.
    Mr. Foster. Okay. And did the large settlements against 
FAMCO and Countrywide and others that you mentioned, did those 
result in anyone being added to the black list of banned 
individuals that are not allowed to participate in financial--
    Ms. Madigan. I don't know the answer to that question. We 
can find out.
    Mr. Foster. Okay. That is a very interesting one.
    And does anyone on the panel have any reservations about 
Attorney General Madigan's assessment of the value of freezing 
and rolling back the Federal preemption? Is there any downside 
to that you can see?
    Ms. Madigan. Not on this panel.
    Mr. Foster. Okay.
    Mr. Sharick, how does tax return fraud typically work? And 
are there technological fixes that might make this harder to 
accomplish?
    Mr. Sharick. Tax return fraud is accomplished by altering 
documents in some way, altering the information. There are a 
number of solutions now that allow certain vendors to go 
directly to the IRS and to the Social Security Administration 
to verify information. But the great percentage of fraud that 
you see in the mortgage industry has to somewhere center itself 
around altered documentation.
    Mr. Foster. Okay.
    And I guess my last question is the same one I posed to the 
previous panel as to the cost-effective amount of resources to 
put into enforcement.
    And so, if you could, each of you, I guess the first four 
members of the panel, provide an estimate of your total budget 
for enforcement activities, the total value of losses averted--
just an estimate, do the math--and how many additional losses 
might be avoided by a 10 percent increase and a factor-of-two 
increase in your enforcement efforts?
    Mr. Galvin. I am not sure I am good at math questions, but 
I will tell you that my division, the Securities Division, is 
relatively small.
    My total operating budget for all my divisions is about $40 
million. The Securities Division probably is about $3 million 
of that. We do recoup some fines for our use. Most of it goes 
to our general fund.
    In terms of what we have saved, I did cite in my testimony 
literally millions of dollars. Just in the last year, we 
returned over $10 million to Massachusetts investors. But in 
some of the larger cases where we cooperated with our 
colleagues in other States, the States led the effort, for 
instance, on auction rate securities; and as I noted in my 
testimony, over $61 billion has been freed up by that.
    So I think in terms of bang for your buck, you are getting 
a very good bang for your buck at the State level.
    Mr. Foster. I would just like to see that quantified across 
the range of enforcement activities so we can think sensibly 
about where to put the increase in enforcement activities.
    Ms. Madigan. As I mentioned, our legal team who dealt with 
Countrywide--six lawyers. I don't have financial investigators 
in the office, so we end up hiring experts. Total, statewide, I 
probably have 28 lawyers who do consumer fraud work.
    There is an endless number of bad actors in the mortgage 
meltdown that we could go after--literally hundreds, if not 
thousands of brokers. In terms of just the volume of consumer 
fraud complaints around mortgage fraud that we received last 
year, 2,400.
    And so we could always use more resources. With more 
resources, we would have the ability to prevent, as well as 
recoup, potentially, some of those losses and keep people in 
their homes, which is what our priority is right now out of the 
attorney general's office in Illinois.
    Mr. Foster. So, for example, doubling your budget would 
double the amount--you are still in a situation where doubling 
your budget would double the amount of bad actors and losses 
you would avoid?
    Ms. Madigan. Potentially. And we would love it if you could 
help us do that.
    Mr. Foster. I yield back.
    The Chairman. I do want to add--yes, Mr. Ropp, go quickly.
    Mr. Ropp. I just wanted to say, our budget, I would love to 
have Secretary Galvin's $3 million budget. I have $800,000 in 
Delaware. And we had two investors in the auction rate 
securities who had $1,250,000 returned to them just in those 
two complaints based upon the leadership work done by the 
States and Secretary Galvin's office and Texas and Missouri and 
other States. So there can be a huge bang for the buck.
    And in another case, we had one fraud actor who ripped off 
11 Delawarians for $400,000, which would have been half of my 
budget.
    Now, we didn't get all the money back, but certainly the 
cases we do on a very inexpensive basis do a lot of good for 
the citizens of the States.
    The Chairman. I am just going to--Mr. Ropp, you did say 
that you could use some help with the funding. I would say 
this.
    I do believe that the States should be given more power, 
but I don't think I could support sending the money with it. I 
don't think you are going to see the Federal Government 
subsidizing the State enforcement. And I think you can point 
out the amount you could recover; and at some point, we are all 
going to have to explain to the American people who in the 
absence of a sufficient level of taxation, they cannot expect 
the government activity that they need to protect themselves. 
So I do think, at some point we yield to that.
    The only other thing I just want to underline, and 
Commissioner Bloom Raskin talked about--I think it was 
Commissioner Bloom Raskin--the $25,000 fraud, the case of an 
individual who would look to some of the Federal people, like a 
fairly small case.
    And the answer is, I think that is precisely why elected 
officials need to be in the mix, because the anger of 
individual constituents and the fear that one of them will go 
to the newspaper and look terribly sympathetic and unaided is a 
powerful goad to an elected official intervening.
    As you percolate up to the appointed officials here in 
Washington, that gets attenuated. So as I said, there is a good 
political science reason why you want to connect State 
officials, because you don't want the electoral process so--I 
don't want the consumer complaint process as insulated from 
electoral politics as it is here.
    The hearing is concluded. We appreciate this, and we will 
be pursuing many of these issues.
    [Whereupon, at 1:10 p.m., the committee was adjourned.]



















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                             March 20, 2009

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