[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
BANKING INDUSTRY PERSPECTIVES ON
THE OBAMA ADMINISTRATION'S FINANCIAL
REGULATORY REFORM PROPOSALS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
JULY 15, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-58
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53-238 PDF WASHINGTON : 2009
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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:
July 15, 2009................................................ 1
Appendix:
July 15, 2009................................................ 55
WITNESSES
Wednesday, July 15, 2009
Bartlett, Hon. Steve, President and Chief Executive Officer, The
Financial Services Roundtable.................................. 11
Courson, John A., President and Chief Executive Officer, Mortgage
Bankers Association............................................ 14
Leonard, Denise M., Vice President, Government Affairs, National
Association of Mortgage Brokers................................ 20
Menzies, R. Michael S., Sr., President and Chief Executive
Officer, Easton Bank and Trust Company, on behalf of the
Independent Community Bankers of America (ICBA)................ 24
Stinebert, Chris, President and Chief Executive Officer, The
American Financial Services Association........................ 15
Yingling, Edward L., President and Chief Executive Officer,
American Bankers Association................................... 22
Zeisel, Steven I., Vice President and Senior Counsel, The
Consumer Bankers Association................................... 17
Zywicki, Professor Todd J., George Mason University Foundation
Professor of Law and Mercatus Center Senior Scholar, George
Mason University School of Law................................. 18
APPENDIX
Prepared statements:
Bartlett, Hon. Steve......................................... 56
Courson, John A.............................................. 111
Leonard, Denise M............................................ 145
Menzies, R. Michael S., Sr................................... 158
Stinebert, Chris............................................. 176
Yingling, Edward L........................................... 187
Zeisel, Steven I............................................. 206
Zywicki, Professor Todd J.................................... 211
Additional Material Submitted for the Record
Bachmann, Hon. Michele:
Editorial from The Wall Street Journal entitled, ``A Tale of
Two Bailouts''............................................. 246
BANKING INDUSTRY PERSPECTIVES
ON THE OBAMA ADMINISTRATION'S
FINANCIAL REGULATORY
REFORM PROPOSALS
----------
Wednesday, July 15, 2009
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Kanjorski, Waters,
Maloney, Watt, Sherman, Meeks, Moore of Kansas, Hinojosa,
McCarthy of New York, Baca, Lynch, Miller of North Carolina,
Scott, Green, Cleaver, Bean, Moore of Wisconsin, Ellison,
Klein, Wilson, Perlmutter, Donnelly, Foster, Carson, Speier,
Minnick, Adler, Driehaus, Himes; Bachus, Royce, Lucas,
Manzullo, Jones, Biggert, Miller of California, Hensarling,
Garrett, Barrett, Neugebauer, McHenry, Putnam, Bachmann,
Marchant, McCarthy of California, Posey, Jenkins, Lee, Paulsen,
and Lance.
The Chairman. The hearing will come to order.
As people know, we are in a very, very serious examination
of the financial regulations of the country. It is the
intention of myself as Chair to--that is pretty pompous--it is
my intention to begin marking up a couple of aspects of this.
Most of the complex, systemic ones will be coming in
September. But we do have a very heavy schedule of hearings,
and I want to invite anyone listening in the audience today or
through any other means, please feel free to submit
information. We have a serious set of issues here. They are
interconnected. We really do welcome information.
The hearing today is to receive the views of people in the
financial services industry on various regulatory proposals.
And I invite people to talk about the full range. Obviously,
there is a certain amount of concern about the proposal for a
financial customer protection agency, but we also are going to
be dealing with the questions of systemic risk for those
institutions which are not banks, the question of the resolving
authority and how we can extend that.
We did have a separate hearing on compensation, but that
will be one of the topics.
We obviously will also be dealing with questions of
derivatives and how much we are going to tighten regulation on
that, and the answer is a significant amount.
And I do want to note that on this coming Monday, after the
Chairman of the Federal Reserve testifies, we are going to have
a hearing specifically on the question of ``too-big-to-fail.''
That has become a very important issue that people are
concerned about.
My own view is that the Administration's approach deals
with that in a reasonable way, but it is important that we both
be doing it right and be seen to be doing it right. And so on
Monday, we are going to be having a hearing specifically to
address how we can avoid the danger of a too-big-to-fail
regime. How do we have a situation--obviously, the hope is you
want to keep them from getting too big and, particularly, you
hope to keep them from failing. But how do you deal with that
if it happens?
So I do recommend to anyone--and I almost want to have an
essay contest, except we are not allowed to give anybody
anything except through an appropriations bill, and that has
gotten tougher than it used to be. But anyone who has any
proposal for what we should be doing to substantially diminish
the likelihood of any institutions being treated as too-big-to-
fail--I am serious--please feel free to let us have them, in
writing in particular, because I think there is a general
consensus that one of the things we want to come out of this
with is a substantial diminution, at the very least, of that
problem.
Now let me begin my statement.
Today's hearing is about the whole set of issues.
Obviously, the financial consumer protection issue has
attracted a lot of attention, and that is the one that I
believe we will be able to mark-up before we go.
I just want to read a memo I got from my staff. It is a
memo summarizing the large number of complaints we have
received both directly from consumers and from Members on both
sides of the aisle who have heard from their constituents
objecting to practices that the credit card companies are
engaging in now that we have passed the bill.
Essentially, the argument is that in anticipation of the
legislation, a number of things are happening. Senator Dodd, in
fact, sent a letter to the Chairman of the Federal Reserve
talking about this.
As you know, in a compromise with people in the banking
industry, we agreed to hold off the effective date. But we were
concerned that the effective date being held off might lead
people to kind of flood the zone before we could get there. We
have had complaints about significant increases in the monthly
minimum payment, for example, from 2 percent to 5 percent on
existing balances.
Again, I want to make clear, in my own mind, there is a
distinction between what you do with existing balances and what
you do going forward. And I don't think an increase in the
minimum monthly payment is a bad thing in every case; and maybe
it discourages people from getting too deeply in over their
heads. But to raise the monthly minimum on an existing balance
is changing the rules after people have started playing. And
people could rightly say, ``Well, if I had known that, I would
have altered my behavior at the outset.''
One of my colleagues told me that he had people complain
that JPMorgan Chase had told him that it was Federal law
requiring such increases. That is, of course, not true; and I
have no reason to disbelieve people saying that is what they
were told by various bank employees.
We have other changes being made, some of which are within
the law, some of which I think would be prevented by the law.
But that, I must tell you, is what strengthens the case for
this Agency. We cannot and should not try to pass a law every
time there is a set of complaints. What we need is for there to
be rules. And it is not our experience that the existing
regulators have used statutory authority given to them very
vigorously.
But this, this flood of complaints--and I must tell you the
complaints about the credit card issuance, the credit card-
issuing banks--has become a very significant one.
There are a couple other points I will make with regard to
financial customer protection. I know there will be people who
won't want it in any case. I certainly agree that it should not
be a situation in which any bank could ever be given
contradictory orders. We can guarantee that this law will be
written, if it becomes law, to prevent that.
I previously expressed my view that the Administration made
a mistake in including the Community Reinvestment Act here. I
think that is a different order of activity.
One other concern that came because, as the Administration
sent it, they, of necessity, talked about their plans to
abolish--well, to merge the OTS and the OCC and to--I know
there are people who think merging the OCC and the OTS is kind
of like merging Latvia with the Soviet Union, but we do really
see this as a merger because we think there is a very important
thrift function that has to be preserved.
And in that conjunction, I do not think this committee is
going to abolish the thrift charter. I think it is important
that we preserve the thrift charter. The problem with the
thrift charter is that it is both a charter to engage in thrift
activity and, to some extent, a hunting license to go and do
other things with less regulation. I believe we are capable of
rewriting that so that it is a thrift charter and a thrift
charter only and will not get into that.
And while I am on thrifts, I just want to have one--we are
often criticized, and good things happen and people don't
notice, I was pleased to read in the report of the Federal Home
Loan Banks, not that they had lost money; they lost money, as
we expect for people in the housing business, but they made a
point of noting that their losses were significantly less than
they would have been had it not been for the alterations that
had been made in the mark-to-market rules; that their ability
to distinguish between instruments held for trading and
instruments that they plan to hold until maturity, which are
fully paying, minimize their losses.
When you minimize the losses of the Federal Home Loan
Banks, you increase their ability to make home loans at a time
when we need them. So I do want to take credit, because this
committee had a major role in an advocacy capacity on both
sides in urging that change in mark-to-market. And we have just
had some evidence that it was the right thing to do.
The gentleman from Alabama is recognized for how much time?
Mr. Bachus. Actually, Mr. Chairman, I don't have an opening
statement.
I do want to respond to something in your pre-opening
statement.
The Chairman. Sure.
Mr. Bachus. The chairman invited you to submit essays. And
I would simply say that they need to be plain vanilla essays.
And if they are not, you need to get Elizabeth Warren's okay
before you submit them.
The Chairman. That sounded like an opening statement to me,
but all right.
The gentleman from Texas, Mr. Neugebauer, is recognized for
2 minutes. And then I will go right to the gentleman from
California for 2 minutes. We split that up.
Mr. Neugebauer. Thank you, Mr. Chairman.
As we continue to assess the Administration's and the
chairman's proposal for regulatory restructuring, we need to
take more time to understand the impacts. And I think we just
heard the chairman say, there are consequences when we pass
legislation. And we heard some of that today.
How will these proposals affect the cost of credit for
those whom we represent? What are the impacts on the community
lender and the constituents and small businesses in our
hometowns who count on that credit?
At a time when our economy has slowed, and lenders are
hesitant to lend, a new regulator would further limit the
available credit. New fees to fund this agency mean added costs
for consumers at a time when they can least afford it.
What do consumers get for this new tax? They get a massive
Federal agency to substitute the government's judgment for
theirs about what financial products and services best fit
their needs. Taxpayers I represent are getting tired of the
Federal Government dictating what kind of energy they are going
to use, who is going to provide their health care, what kind of
credit card they can have, what kind of a mortgage is
appropriate for them, even what kind of car they can buy.
Our Republican plan is better for consumers. We keep safety
and soundness regulation and consumer protection regulation
under the same roof, because this structure holds regulators
accountable. Our plan requires better disclosure and antifraud
enforcement. When the American people receive good information
about their financial products and services available and know
that the fraudulent behavior will be stopped and punished, we
think they are smart enough to make decisions about what
products are best for them to use.
The problem I have had with this whole process is that we
had a lot of legislation on the books. We had regulators in
place who were supposed to be doing their job. The problem is
that regulators, in many cases, didn't do their job. And so now
our answer, rather than going back and holding those people
accountable for their action, is to throw a whole new blanket
of regulation over the markets to somehow give some indication
that is going to fix the problem.
What we don't need is more regulation. We need better
regulation, we need smarter regulation, and we need regulators
doing their job. And I hope to hear from our witnesses today on
some commonsense approaches to this so that we can continue to
provide credit and not limit the choices of the American
people. I don't think the American people are going to be
overly excited about their choices being limited.
So I thank you, Mr. Chairman, for holding this hearing.
The Chairman. The gentleman from California for 2 minutes.
Mr. Royce. Thank you, Mr. Chairman. A major component of
the Administration's regulatory reform proposal is the creation
of a Consumer Financial Protection Agency, which would separate
safety and soundness regulation from consumer protections.
This idea of separating the two has been around for some
time. In fact, we saw that very structure over the GSEs. A weak
safety and soundness regulator, OFHEO, was competing with HUD,
who subjected Fannie Mae and Freddie Mac to ever-increasing
affordable housing goals. And we know how that ended. The
affordable housing goals of Fannie and Freddie, enforced by
HUD, were the main reason behind the GSEs loading up on junk
bonds, which ended up accounting for roughly 85 percent of
their losses. Clearly, the goals were at odds with the long-
term viability of these firms, and ultimately led to their
demise.
We are now looking at applying that regulatory framework to
the entire financial services sector. As the GSEs have shown,
there is an inherent conflict in separating these two
responsibilities. And there is also a reason why regulators
like James Lockhart, who heads up the FHFA, and Sheila Bair,
head of the FDIC, have expressed concern over such a proposal.
I think, long term, this Agency will do more harm than
good, and based on the GSE history and political interference
at the expense of safety and soundness, it should be avoided at
all costs.
I yield back, Mr. Chairman.
The Chairman. The gentleman from Kansas is recognized for 2
minutes.
Mr. Moore of Kansas. Thank you, Mr. Chairman, and I thank
you for your work to introduce H.R. 3126 to create the Consumer
Financial Protection Agency.
I look forward to working with you and members of this
committee to ensure that we have oversight of any new agency
and the regulatory structures. I will be working to add an
independent Office of Inspector General to the CFPA, as well as
increasing the coordination between all financial IGs to ensure
regulatory gaps are identified and addressed.
The financial meltdown last year made it very clear that
our financial regulatory structure has problems that need to be
fixed. We need to make sure that we have a system that protects
consumers, investors, and taxpayers.
I thank the witnesses for their views on the
Administration's proposal. We need to act thoughtfully and
carefully, but quickly, to repair the gaps identified in our
regulatory system. We also need to make sure that community
banks that did not create this crisis are fairly treated under
the new system.
Thank you, Mr. Chairman, and I yield back.
The Chairman. The gentlewoman from Illinois, Mrs. Biggert,
for 2 minutes.
Mrs. Biggert. Thank you, Mr. Chairman.
It is no secret that one of the reasons our country got
into this financial mess in the first place is because there
simply were too many regulators who weren't doing their job and
not talking to one another. Thus, I am very skeptical that for
consumers the answer is making government bigger by creating a
new Federal agency that is paid for by taxpayers, that tells
consumers what financial products they can and cannot have, and
tells financial institutions what products they can and cannot
offer.
There is no question that our financial services regulatory
structure is broken; and for both consumers and the health of
our financial services industry and the economy, we need to
clean it up. However, I fear that we are moving in the wrong
direction when we strip from the banking regulators their
mission to protect consumers. Instead, we place that
responsibility with a new government bureaucracy, an agency
that I think should really be called the Credit Rationing and
Pricing Agency.
Why do I say this? Well, because this new agency, charged
with deciding what is an affordable and appropriate product for
each consumer, can only result in one or more of three things:
First, many consumers who enjoy access to credit today will
be denied credit in the future;
Second, riskier consumers will have access to affordable
products, but who will pay for that risk? It is the less risky
consumer whose cost of credit will increase; and
Third, financial institutions will be told to offer certain
products at a low cost to risky consumers, which will
jeopardize the safety and soundness of that financial
institution.
Secretary Geithner last week couldn't really answer the
question, would the safety and soundness banking regulator
trump a new consumer regulator if the consumer regulator's
policy would put the bank in unsafe territory?
We must first do no harm. We must find a balanced approach
to financial regulation. I think our Republican plan that puts
all the banking regulators and consumer protection functions
under one roof is a better answer for the consumer and really
gets to the heart of preventing another financial meltdown.
I look forward to today's hearing and I yield back.
The Chairman. The gentleman from Texas, Mr. Green, for 2
minutes.
Mr. Green. Thank you, Mr. Chairman. And I thank you for the
introduction of H.R. 3126.
I am eager to hear commentary on H.R. 3126. I believe that
we can have consumer protection as well as safety and
soundness; I don't think these things are mutually exclusive of
each other. I don't think that legislation is perfect, but I do
think that we can do things to perfect it. And I am interested
in being a part of the perfection process to make sure we have
safety and soundness as well as consumer protection.
Thank you, Mr. Chairman. I yield back.
The Chairman. The gentleman from California, Mr. Miller,
for 2 minutes.
Mr. Miller of California. Thank you, Mr. Chairman. I want
to thank you for holding this hearing today.
And I believe that everyone in this room would agree that
our current regulatory system failed to adequately protect not
only the markets, but investors, and it does need to be
restructured. However, I believe we need to proceed with
caution to ensure that legislation does not overregulate our
markets, stifle innovation or take choices away from consumers.
I want to thank the chairman for bringing up the issue of
mark-to-market. I believe it was in February of last year that
I introduced an amendment on a bill, the housing bill, that
required the Federal Reserve and the SEC to look at mark-to-
market, perhaps take part of it and revisit it and restructure
it, and perhaps even avoid implementing portions of it at that
point in time.
It is sad to say, I think I did that 3 or 4 times, and the
Senate removed it from every bill we sent over there. I think,
had we moved more aggressively in that direction, perhaps some
of the problems we face today might have been avoided.
There has been much debate about Freddie and Fannie. I know
in 2002-2003, we also passed legislation providing a strong
regulator and providing oversight for Freddie and Fannie that
perhaps might have avoided some of the circumstances they are
facing today. But the concept of not having a Freddie or Fannie
there today, when they are providing about 73 percent of all
the loans out there and the guarantees in the marketplace, is
bothersome to me. And if you include FHA in that, between
Freddie, Fannie, and FHA, over 90 percent of the loans made
today are taken by those or guaranteed by those companies.
The fact is that with liquidity as it is, the banks just
don't have the liquidity on hand to make fixed-rate 30-year
loans and hold those loans in many cases.
I think one thing we didn't do was open Freddie and Fannie
up to the high-cost areas. We did that much later, in fact in
this last year, but I think had we done that early on there
would have been more liquidity in the overall marketplace, and
I believe that certain portions of this country wouldn't have
been discriminated against because they weren't having the
option to participate in the program.
I really hope that the comments by this group of
distinguished individuals today will be honest, above board,
and really tell us your concerns. I am concerned that we
overregulate you. We need to allow the market to take its
course. We need to allow innovation within the marketplace, and
especially within your industry, we need to allow for
innovation.
I think sometimes we are not timely in implementing
programs like mark-to-market. And I think sometimes we react
overaggressively after the fact when things have occurred, and
I am hoping we don't do that in many cases.
I hope we are thoughtful in what we are doing here, we
discuss the pros and cons as it applies to your industry, and
we come up with something that is reasonable.
Mr. Chairman, I thank you and I yield back the balance of
my time.
The Chairman. The gentleman from Georgia, Mr. Scott, for 2
minutes.
Mr. Scott. Thank you, Mr. Chairman, and thank you for this
hearing. This is an important hearing. As I have often said,
the banking industry is the heart of our financial system, and
through it, everything flows.
We have so much on our plate as we deal with the
President's regulatory reforms: the new financial oversight
agency, the Consumer Financial Protection Agency; the Federal
Reserve and its role as systemic regulator; the creation of a
council of regulators; the FDIC's role; the merger of the
Office of Thrift Supervision into the OCC; title rules on banks
that package and sell securities backed by mortgages and other
debt; proposals that companies issuing their mortgages retain
at least 5 percent on their books; and the requirement that
hedge funds and private equity funds register with the SEC and
open their books to regulation. We have a lot on our plate to
deal with in this regulatory reform.
And on top of that, how do we make this work with our
State, our Federal, and international regulators, all in our
efforts to ensure the stability of the financial services
sector and protection of the financial consumer? What a
challenge we have. It is the banking community that is at the
heart of it, and this is why this hearing is so vital and so
important.
Thank you, Mr. Chairman.
The Chairman. The gentleman from Texas, Mr. Hensarling, for
2 minutes.
Mr. Hensarling. Thank you, Mr. Chairman.
Under the national energy tax, House Democrats want to help
decide what cars we can drive. Yesterday, House Democrats
announced a plan to help decide what doctors we can see and
when we can see them. And now under CFPA, House Democrats want
to decide whether or not we qualify for credit cards,
mortgages, or practically any other consumer financial product.
Yes, there is a troubling trend. The CFPA represents one of
the greatest assaults on economic liberty in my lifetime. It
says to the American people, you are simply too ignorant or too
dumb to be trusted with economic freedom. Therefore, five
unelected bureaucrats, none of whom know anything about you or
your family, will make these decisions for you. But never fear,
surely several of them will have Ph.D. by their names, and they
will engage in vigorous discussions about consumer credit
issues at very exclusive cocktail parties in Georgetown.
This is the commission that will now have sweeping powers
to decide under the subjective phrase ``unfair,'' what
mortgages, credit cards, and checking accounts you may qualify
for. Sleep soundly at night.
To take from consumers their freedom of choice, to restrict
their credit opportunities in the midst of a financial
recession, all in the name of consumer protection is positively
Orwellian.
Let's protect consumers from force and fraud. Let's empower
them with effective and factual disclosure. Let's give them
opportunities to enjoy the benefits of product innovations like
ATM machines and online banking. And let's not constrict their
credit opportunities.
A consumer product Politburo does not equate into consumer
protection.
I yield back the balance of my time.
The Chairman. The gentleman from Texas, Mr. Green, for 2
minutes.
I am sorry, the gentlewoman from California.
Ms. Waters. Thank you very much, Mr. Chairman.
I am pleased we have an opportunity this morning to
interact with the banking industry. I am particularly pleased
that many of our witnesses have indicated they support more
regulation for the shadow banking industry, a collection of
unregulated lenders who operate outside of State and Federal
oversight due to their nonbank status.
It was, yes, many of these lenders who preyed on customers
with products such as no-doc loans, and helped erode the
lending markets which compromised the foundation of our
economy.
However, I am still concerned with the consumer-related
activities of regulated banks. Large banks, in particular, have
substantial interactions with the public, be it as a mortgage
servicer, as a place for consumers and small businesses to
access necessary credit.
I would agree with you that additional regulation would be
unnecessary were our financial system functioning properly.
However, data from the Federal Reserve on the availability of
credit shows this is not the case.
Likewise, neither do the calls I receive from my
constituents, the ones who are facing foreclosure, yet cannot
reach their servicer to modify their loan. After all that we
have gone through in trying to make loan modifications
available to deserving people, we still have people who cannot
reach their servicers. And even when they do, the servicers are
not working out credible loan modification arrangements.
Clearly, the mechanisms we have to protect consumers and
ensure their access to credit are inadequate. I believe that a
Consumer Financial Protection Agency is vital to the proper
functioning of our economy.
Our current crisis began when collateralized debt
obligations and mortgage-backed securities began to be packed
with exotic products such as no-doc and liar loans. It was
exacerbated as consumers were continually squeezed with
excessive penalties and fees from bank products, reducing
purchasing power and leading families everywhere to make tough
decisions. A strong regulator, one which focuses solely on
consumer safety and champions simpler disclosure and products
would have prevented all of this.
Thank you, Mr. Chairman. I yield back the balance of my
time.
The Chairman. The gentleman from New Jersey, Mr. Garrett,
for 2 minutes.
Mr. Garrett. Thank you, Mr. Chairman. Let me just make two
points. The first one--I don't want to single out any single
member of this committee, because what I want to say is a
reflection on the process and not just the individual, because
he is certainly not alone.
But this last Monday, in the American Banker magazine, this
member of the committee was asked this question: ``How will a
dispute be settled between the safety and soundness regulators
and the newly formed CFPA?'' And he responded, ``Unfortunately,
I can't give you an answer to that.'' He went on to say, ``Your
question is a good one, because you have to think about what
you haven't thought about, and I haven't even thought about how
a dispute between the agencies would be resolved, so I had
better figure that out.''
Now this comment, mind you, comes from one of the bill's
sponsors, who just a couple of days ago had not thought about a
process that is basically fundamental to the issue that is in
this bill.
As I stated before, I am not singling out a single member,
because I think other people have the same questions. They
haven't had the time to think this all through, nor has the
Administration thought about the unintended consequences of
their proposal--this, despite the fact we rush long into the
April break--I mean the August break--with the goal of getting
this rammed through Congress without having thought it through.
Secondly, you know, there was an op-ed by Peter Wallison
recently which points out that traditionally in this country
for consumer protection we talk about disclosure, adequate
disclosure. And it is always assumed if you have adequate
disclosure, that regardless of the level of sophistication of
the consumer, the consumer would make a rational decision as to
what he was doing.
If the Administration's proposal is put through, however,
the consumer will be told that regardless of the level of his
sophistication, his education, or perhaps his intelligence, he
is not going to be able to understand what is being offered to
him. You know, this Administration has made a fairly dramatic
move to make more and more decisions in place of the decisions
that have been traditionally been made in the place of the
consumer, whether it is in the area health care that you talked
about, the bankruptcy process or the like.
Quite honestly, I don't think Americans want government
bureaucrats deciding if they are smart enough or sophisticated
enough to take out a line of credit at the local retailer, or
policing whether the credit card that they choose offers reward
points or not. When you come down to it, having choices is part
of being an American.
With that, I yield back.
The Chairman. The gentlewoman from Kansas for 2 minutes.
Ms. Jenkins. Thank you, Mr. Chairman.
For months now, this body has been attempting to relieve
the pain felt by our constituents because of today's economic
turmoil. However, politicians should not use the current
financial crisis as a convenient excuse for a massive overreach
of government intervention into our free markets.
Smart and lean regulation can be effective, allow free
markets to innovate, and balance consumer protection.
Innovation is the base of American economic strength. Killing
innovation, whether through overregulating or by allowing only
plain vanilla products, could hinder access by individuals and
businesses to sound, yet creative, financial products.
Plus, many of the proposals before us may not address the
real faults in the system. The regulatory compliance costs
alone may severely impact smaller financial institutions at a
time when many of these institutions in Kansas are already
struggling.
I am eager to hear this week about how we can best reform
our system, protect consumers, and allow for vibrant growth.
Regulatory restructuring is not to be taken lightly. I urge
my colleagues to proceed with caution, taking into account
unintended consequences these reforms may have on the financial
industry and the consumer.
Thank you, Mr. Chairman. I yield back the remainder of my
time.
The Chairman. We will now hear from Mr. Watt, then we will
be able to hear one of the statements, and then we will break.
Mr. Watt is recognized for 1 minute.
Mr. Watt. Thank you, Mr. Chairman. I really had planned not
to give an opening statement, but Mr. Garrett and his comments
provoked me; and I did want to be clear that in answering the
question that the gentleman asked, I don't think an appropriate
response or answer is--just as if you have a safety and
soundness regulator, you wouldn't have the consumer regulator
overrule the final decision on safety and soundness, I don't
think the appropriate response is to have a safety and
soundness regulator overrule and be the final word on consumer
issues.
The Chairman. Would the gentleman yield me his last--
Mr. Watt. I am happy to.
The Chairman. First of all, if we have the answers before
the hearing, people are upset. And if we have the hearing
before the answers, people are upset. If people want to be
upset, there is nothing I can do to stop it.
I will say this: I can guarantee that any legislation that
comes out of here will make it clear that no bank will be faced
with any conflicting demands and that there will be, very
clearly, a final resolution matter, and no one will be
subjected to that double standard.
And now we are going to take one witness. And the members
may know that in seniority, two people elected at the same
time, if there is a member who had prior service that was
interrupted, that member gets seniority. So following that
principle, the former member of this committee, the gentleman
from Texas, as he then was, Mr. Bartlett, will be our lead
witness representing the Financial Services Roundtable.
STATEMENT OF THE HONORABLE STEVE BARTLETT, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, THE FINANCIAL SERVICES ROUNDTABLE
Mr. Bartlett. Thank you Mr. Chairman, Ranking Member
Bachus, and members of the committee.
The focus of this hearing is on the future, as it should
be, but I want to begin with an apology about the past--I said
this at other times, in other forums, and in other places for
perhaps a year; John Dalton, representing the Roundtable and
Housing Policy Council, said this the last time he was before
the committee--and that is, our sincere--my personal, sincere
apologies and those of our organizations for the role that we
played and I played in failing to see the crisis in time to
help to avert it.
So I accept my responsibilities. And we are here to set out
some responsibilities to seek reform to avert the next crisis.
It is the Roundtable's view and my view that this reform
should be comprehensive, should be systemic, and should be
quite large in terms of its scope of averting the next crisis.
The fact is, there is a lot of blame to go around, a lot of
sources of the problem; but the number one problem, it seems to
me, that brought us here was the regulatory system that is in
chaos in terms of its structure. The current system is
characterized much more by silos of regulation than coherent
regulation, and that introduces hundreds of different agencies
who regulate the same companies with the same activities in
totally different ways based on different statutes, different
standards, different systems, different goals, with a total
lack, or virtually total lack, of common principles and common
goals.
So I am here today to start with this committee to urge
comprehensive reform. The Roundtable supports bold reform,
comprehensive reform that will strengthen the ability of our
financial systems to serve the needs of consumers and to ensure
the stability and integrity and safety and soundness of the
financial system.
To be clear, the status quo is unacceptable.
I am going to comment orally on several components of the
legislation or the proposal that has been proposed by the
Administration. I have about 15 in total in my written
testimony. I will offer four or five.
The Chairman. And without objection, all submissions by any
of the witnesses on any material will be accepted into the
record.
Mr. Bartlett. I will comment on four or five of those in my
oral testimony.
One is the Consumer Financial Protection Agency, no doubt
the subject of the largest amount of heat and attention by this
committee, as it should be. The Roundtable believes that
strengthened consumer protection is an essential component of
broader regulatory reform. To that end, we endorse the spirit
to ensure sound protections and better disclosures for
consumers, but we strongly, strongly oppose the creation of a
separate, free-standing Consumer Financial Protection Agency.
Rather than create a new agency and bifurcate consumer
protection from safety and soundness, we recommend that the
Congress enact strong national consumer protection standards
for all consumers.
We are not here to advocate the status quo; we are here to
advocate stronger regulation. In short, we support consumers,
we support financial regulatory reform, we support protection,
and we oppose the agency.
Second, systemic risk regulator and the so-called Tier 1
financial holding companies: An essential part of regulatory
reform legislation is the creation of a systemic risk
regulator. Today, no single agency has the specific mandate or
surveillance purview or the accountability to detect and
mitigate the risks of financial stress in future financial
crises.
We strongly support the designation of the Federal Reserve
Board as a systemic risk oversight authority. However, the
Board should not be added as an additional super-regulator.
Rather, it should work with and through the powers of
prudential supervisors in nonemergency situations to achieve
their goals.
We support a national resolution authority. The recent
financial crisis demonstrated the urgent need for that
authority.
The Roundtable supports and has advocated for the
establishment of a resolution regime for insolvent nonbank
financial institutions. We recommend that the Treasury
Department have the authority to appoint the appropriate
prudential regulator for an institution upon determination that
authority is necessary. However, we strongly believe that the
FDIC and other agencies that are set up for those sectors
should be segregated and held off just for the sectors that
those funds have been designated for.
Insurance: The Administration's proposal recognizes ``our
current insurance regulatory system remains highly fragmented,
inconsistent and inefficient,'' and ``has led to a lack of
uniformity and reduced competition across State and
international boundaries, resulting in inefficiency.'' Well,
you get the picture. That is from the Administration's
statement.
So at the Roundtable, we think a logical extension of that
should strongly support the adoption of a Federal insurance
charter as part of this regulatory reform for national
insurers, reinsurers, and producers under the supervision of a
single national regulator.
We urge the committee to consider H.R. 1880, the National
Insurance Consumer Protection Act offered by Congresswoman Bean
and Congressman Royce as part of this regulatory structure.
Mr. Chairman, the Roundtable supports comprehensive reform
now. We recommend a number of practical and important
improvements to this legislation to achieve that reform.
I yield back.
[The prepared statement of Mr. Bartlett can be found on
page 56 of the appendix.]
The Chairman. We will now recess. We will vote.
It looks like there is one adjournment vote. So we will be
able to come back fairly quickly, and we will get to the rest
of the witnesses.
The committee is in recess.
[recess]
The Chairman. The hearing will reconvene. I have been told
by the staff that the timer is broken, so I will be looking at
the clock and going by the clock. That doesn't mean you won't
get much time.
I will try to give people--I will try. That is not hard,
except I may forget. That will mean you have a minute to go, so
people will have a chance to wind up what they are saying or,
to use the terminology of the industry, they will have a chance
to resolve their statements; which means put you out of
business, as we know. That is a nice way to say that.
So we will now go to John Courson, who is president and
chief executive officer of the Mortgage Bankers Association,
and my very able colleague here has a timer of 5 minutes, very
good.
So we have a 5-minute timer from Mr. Neugebauer. Thank you.
Mr. Courson, please go ahead.
STATEMENT OF JOHN A. COURSON, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, MORTGAGE BANKERS ASSOCIATION
Mr. Courson. Thank you, Mr. Chairman. Let me say from the
outset that MBA supports regulatory modernization and
strengthening our consumer protections. Our country's economic
crisis gives us a once-in-a-generation opportunity to really
improve the regulation of our mortgage markets. These
improvements to the financial regulatory structure will have a
profound effect on the availability and affordability of
mortgage financing.
We believe they must be judiciously considered so reform is
done right. Today's financial regulatory system is a patchwork
of State and Federal laws. While MBA strongly supports the
Congress' and the Administration's efforts to improve this
system, having reviewed these proposals through the prism of
our regulatory modernization principles, we do have some
concerns.
MBA's principles include that all parts of financial
services regulation must be addressed comprehensively and
regulatory changes should focus on substance, not form.
Uniformity and oversight and interpretation of standards should
also be promoted whenever possible. Collaboration among
regulators and transparency should be required. Appropriate
borrower protections must be balanced with the opportunities
for the industry to compete and to innovate.
Finally, attention must be given to ensure the continued
availability and affordability of sustainable mortgage options.
With these points to guide our analysis, MBA has the
following concerns about the creation of a consumer financial
protection agency. Establishing a new consumer protection
regulator, while also maintaining the authority at existing
regulators, may actually weaken consumer protections by
disbursing regulatory power and removing consumer protection
from the mainstream of the regulators' focus.
In addition, CFPA may result in a worse patchwork of
Federal and State laws as well as uneven protection and
increased costs for consumers. To truly protect consumers, we
need greater uniformity.
Additionally, while the proposal suggests that HUD and the
Federal Reserve work together to achieve a single combined
RESPA/TILA of disclosure or have it become the responsibility
of CFPA, the bill does not require such collaboration as this
committee directed in the mortgage reform bill, which passed
this House in May. And borrower protections offered in H.R.
3126 could stem competition and innovation.
If saddled with responsibilities across the spectrum of
financial products, CFPA could fail to give proper attention to
the biggest asset most families purchase: a home. Because the
new regulator would not be solely focused on mortgage
regulation, there is a danger that mortgage products may not
receive sufficient priority.
To respond to these issues, MBA believes there are better
alternatives for improving consumer protections. With our
expertise in the mortgage markets, MBA has developed a
groundbreaking proposal to protect consumers and improve the
system that regulates mortgage finance. We call it the Mortgage
Improvement and Regulation Act.
It would provide uniform standards, consistent regulation
for all mortgage lending. MIRA would improve the regulatory
process to include more rigorous standards for lenders and
investors and equally clear protections for consumers. Instead
of adding duplicative regulation at the Federal level, it would
fill gaps in regulation of nondepository lenders and mortgage
brokers, providing them with a Federal regulator, streamline
regulation, and would enhance enforcement.
MIRA could easily be part of a more comprehensive
regulatory modernization effort. More importantly, it would
ensure that consumers are provided mortgage financing and
protection from abuse.
We hope the committee will consider our MIRA proposal as
part of its regulatory modernization efforts.
Mr. Chairman, MBA looks forward to working with the
committee on new consumer protection and regulatory
modernization legislation as these proposals develop. These are
extremely complex and important issues, and we hope the
committee will take all of the time it needs to do the right
thing.
Thank you for this opportunity to testify.
[The prepared statement of Mr. Courson can be found on page
111 of the appendix.]
The Chairman. Thank you, Mr. Courson.
Next, we will hear from Chris Stinebert, president and
chief executive officer of the American Financial Services
Association.
STATEMENT OF CHRIS STINEBERT, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, THE AMERICAN FINANCIAL SERVICES ASSOCIATION
Mr. Stinebert. Thank you, Mr. Chairman, and thank you for
your assurances about no contradictory orders out there. That
is very helpful. And, also, I heard from everyone in their
opening statements about the desire of everyone to move
cautiously and carefully as we move forward, and that is
appreciated as well.
Today I am going to focus most of my remarks on the new
formation of the Consumer Financial Protection Agency. Let me
say from the outset that AFSA fully supports strong consumer
protection.
What is troubling, however, is the notion that improved
consumer protection depends entirely on the creation of a new
Federal agency empowered to make product choices for consumers.
We believe the country does not need a vast new
bureaucracy, and that the goals of the Administration and
Congress can be achieved through other means that are quicker,
more efficient, and certainly less costly.
If signed into law today, the CFPA's earliest action could
be taken perhaps 2 to 3 years from now. Why then would Congress
rush to launch a new agency before taking the time to carefully
evaluate the potential consequences on the availability of
credit and certainly the overall economy? We believe that a
thorough assessment is needed to determine if the benefits will
outweigh the risk and certainly the costs.
In essence, the proposal would impose a new tax on
consumers at a time when they are least able to afford it.
Congress should think carefully about setting up a new
government agency that would cost taxpayers more money at a
time when they are already struggling to stay afloat
financially.
Given the vast scope of the new agency, it is certainly
acceptable that these costs could be staggering. Any assessment
or fees charged to lenders undoubtedly will be passed on to
consumers. The result will be an increase in costs and hurt the
availability of credit.
AFSA believes consumers will be better served by a
regulatory structure where the prudential and consumer
production oversight is housed within a single regulator.
Congress tried to separate these two functions with the GSEs.
Director James Lockhart recently cited this separation of
functions was one of the primary reasons for failure at Fannie
Mae and Freddie Mac.
We urge Congress to support a regulatory structure that
continues to have that balance, that necessary balance between
safety and soundness and the viability of the companies that
offer them.
We also believe that the proposed agency has the potential
to roll back the clock 30 years, back to when consumers only
had a choice of standard and plain vanilla products.
In the last 30 years, in adjusted inflation dollars,
consumer credit has increased from $882 billion to $2.6
trillion; household mortgages, from $2 trillion to $10.4
trillion.
For the last 30 years, financial innovation has been the
fuel of this economy. We are not here today to claim that
financial innovation did not play some role in the subprime
mortgage crisis, but regressing to a bygone era is not
progress. Financial services reform should take us forward, not
back to plain vanilla.
Most AFSA members are regulated primarily at the State
level subject to a patchwork of inconsistent requirements.
Under this new proposal, you could wind up with 50 different
State requirements as far as trying to meet those regulations
in different forms and different disclosures, and certainly
that is not a formula for simplification.
We have six different suggestions:
Allow time to evaluate the effects of other government
initiatives, such as the Cardholders' Bill of Rights recently
signed into law and the new changes to HOEPA.
Make current and future consumer protection rules apply to
all financial service providers.
Pursue a regulatory structure that does not separate
financial services and products from the viability of the
companies that offer them.
Leave enforcement of rules of existing regulators, but give
backup authority to the Fed for these areas, and step up
enforcement. Step up enforcement, make stronger enforcement of
existing consumer protection laws, and make sure that the
necessary resources are provided.
Last but not least, I would like to mention, preserve the
industrial bank charter. The Administration's proposal calls
for eliminating the industrial bank charter. Industrial banks
provide a safe, sound, and appropriate means for delivering
financial services to many in the public. These institutions
have not been part of the problem. As a matter of fact, there
have been no instances of any problem within the ILC structure,
and we think they should be part of the solution moving
forward.
I am happy to answer any questions that you might have.
[The prepared statement of Mr. Stinebert can be found on
page 176 of the appendix.]
The Chairman. Next, we have Mr. Steven Zeisel who is vice
president and senior counsel of the Consumer Bankers
Association.
STATEMENT OF STEVEN I. ZEISEL, VICE PRESIDENT AND SENIOR
COUNSEL, THE CONSUMER BANKERS ASSOCIATION
Mr. Zeisel. Good morning, Mr. Chairman, members of the
committee. My name is Steve Zeisel, and I am senior counsel at
the Consumers Bankers Association. I am very pleased to be
given this opportunity to present the views of CBA to the
committee.
CBA is a trade association focusing on retail banking
issues, and we are therefore limiting our testimony today to
the proposed Consumer Financial Protection Agency. CBA supports
strengthening consumer protections as part of the regulatory
reform initiative, and we support several of the goals outlined
in the CFPA proposal, including improving transparency,
simplicity, fairness, accountability, and access for consumers.
Our concern is with the approach being proposed. We believe
these objectives can best be achieved within the existing
regulatory framework rather than dismantling the current system
and creating a separate new regulatory agency. Safety and
soundness and consumer protection are intimately related, and
cannot be separated without doing harm to both.
Furthermore, putting consumer protection in a separate
agency will create a host of problems, including how the
agencies will coordinate their activities--as the chairman
mentioned--who will resolve inevitable disputes, and many more,
none of which are necessary to achieve improved consumer
protection. We also believe there needs to be stronger
supervision of nonbank lenders so they receive a consistent and
comparable level of oversight and enforcement as experienced by
banks.
Although we have many other issues, many other concerns,
there are two issues I particularly want to highlight today.
First, we are concerned that the proposal would subject
retail banks to the consumer laws of 50 States. I ask you to
consider the practical impact of such a policy. It could result
in dozens, perhaps scores of differing requirements pertaining
to minimum payments, fee limits, underwriting prescriptions and
the like, making nationwide lending into a complex and costly
undertaking.
Not only will this limit the range of products available,
but some banks may have to make the unwelcome decision not to
do business in States they otherwise would, due to the
complexity and cost associated with the compliance burdens.
That could mean fewer and more expensive choices for consumers
as a result of the decreasing competition.
Further, due to the elimination of uniform consumer laws
for federally chartered institutions, even a simple uniform
disclosure, which is one of the goals of this initiative, would
have to be supplemented by State disclosure requirements in
every State in which the bank does business.
The best intentions of the bank or the CFPA to provide
simple disclosures would be frustrated, as a uniform loan
agreement would become a voluminous document cluttered with
State-specific information. We believe the better approach is
to maintain a uniform national standard as it relates to retail
banking.
Second, under the proposal, the CFPA will require retail
banks and other financial service providers to offer products
that are designed entirely by the Federal Government. This so-
called plain vanilla requirement will remove product
development from banks and transfer it to the new agency. Banks
will offer vanilla products, but it is less clear whether they
will be able to offer the variety of products they offer today
or may develop tomorrow.
This is because the proposal strongly discourages the
offering of other products consumers may find useful by
creating regulatory uncertainty regarding how these nonvanilla
products must be described, how they can be advertised, and the
disclosures that must accompany them.
It is also unclear whether an institution would be required
to make available the same plain vanilla products and features
to everyone, regardless of whether they quality. It is unclear
what hurdles a consumer would have to jump to obtain any other
products, and it is unclear what risks the institution would be
taking when it allows a consumer to have any other products.
The list of questions is long. In the final analysis, we
believe retail banks are in a better position than the
government to know which products serve their clients' needs.
In conclusion, we believe the proposed changes, though well
intentioned, may stifle innovation, raise costs to consumers,
reduce access to credit, and result in more confusion rather
than less.
Thank you for the opportunity. I will be happy to answer
any questions you may have.
[The prepared statement of Mr. Zeisel can be found on page
206 of the appendix.]
The Chairman. Next is Professor Todd Zywicki, from George
Mason University.
STATEMENT OF PROFESSOR TODD J. ZYWICKI, GEORGE MASON UNIVERSITY
FOUNDATION PROFESSOR OF LAW AND MERCATUS CENTER SENIOR SCHOLAR,
GEORGE MASON UNIVERSITY SCHOOL OF LAW
Mr. Zywicki. Thank you, and let me make clear that even
though this hearing estopped banking industry perspectives, I
appear only as myself. My affiliation with the banking industry
is as a consumer.
I am going to address the Consumer Financial Protection
Agency today, and I think there are three fatal problems with
the CFPA that I think are irremediable and really can't be
overcome or approved.
The first is that it is based on misguided paternalism. The
second is that because it misdiagnoses the underlying problems,
it will create unintended consequences that will probably
exacerbate rather than improve the situation we have seen in
the past few years.
And, third, it creates a new apparatus of bureaucratic
planning that is simply unfeasible and, at a minimum,
unworkable.
First, it is based on an idea of misguided paternalism. The
causes of the foreclosure crisis, if we focus on that
particular issue, really have very little to do with consumer
protection. What the causes of foreclosure crises erode from
were a set of misaligned incentives that consumers rationally
responded to. When consumers rationally respond to incentives,
that is not a consumer protection problem.
Take an example. Say there is a fellow in California who
got a no-doc nothing-down loan. California has an
antideficiency law that means that if you walk away from your
house, the bank is limited in taking back the house and they
can't sue you for any deficiency.
Say the guy was going to buy the house, live in it for a
couple of years, and then flip it for a profit. Instead, the
house goes down in value. He crunches the numbers and says
well, it is worth it for me to walk away from the house and
give it back to the bank. The bank can't sue me for any
deficiency. There is no consumer protection issue in that
hypothetical. There is a very, very, very serious safety and
soundness issue. That was a very foolish loan by the bank, and
it really created a lot of problems for safety and soundness.
But that is not a consumer protection issue. And if we consider
it a consumer protection issue, rather than consumers
rationally responding to incentives, we are going to have
problems.
Similarly, the other factor that caused a lot of
foreclosures was adjustable rate mortgages. Adjustable rate
mortgages are not inherently dangerous. There have been many
times in the past, over the past 30 years, where adjustable
rate mortgages have been 50 or 60 or 70 percent of the new
mortgages that were written. Adjustable rate mortgages are a
problem when the Federal Reserve engages in the kind of crazy
monetary policy it engaged in from 2001 to 2004. When the
Federal Reserve engages in crazy monetary policy, that is not a
consumer protection issue. And I don't think there is anything
in the CFPA that will make the Federal Reserve engage in better
monetary policy in the future. So that basing it on the
misguided idea that the crisis was spawned by hapless consumers
being victimized by ruthless lenders is not going to be a basis
for good policy.
Second, that leads to a second problem which is a problem
of unintended consequences. Consider two issues identified in
the Obama Administration's White Paper, prepayment penalties
and mortgage brokers and yield spread premiums. Prepayment
penalties are an especially good example. They talk about how
they are going to get rid of prepayment penalties in subprime
mortgages.
Well, what we know about prepayment penalties from all the
empirical evidence is that there is no empirical evidence that
prepayment penalties increase foreclosures. Why is that?
Because consumers pay a premium in order to have the right to
prepay their mortgage, because that shifts the risk of interest
rate fluctuations to the bank.
Consumers pay about 20 to 50 basis points more for a
mortgage that has a right to prepay, and that is even higher
for subprime borrowers for reasons we can talk about. The
effect is that by allowing borrowers to pay less for a
mortgage, they are less likely to get into financial trouble
and less likely to end up in foreclosure. So getting rid of
prepayment penalties would increase the price of mortgages and
have no discernible impact on foreclosures.
In fact, it could end up having the unintended consequence
of worsening things. Why? Because the United States is
virtually unique in the Western world in having the right
generally to prepay your mortgage, which is basically to
refinance when your interest rates go down.
What a lot of Americans did was when equity ramped up in
their house, they exercised that right to prepay and refinance
their mortgage and sucked out all the equity in their house. As
a result, when their house went down in value, they decided to
walk away from the house.
In Europe, they have had very big property value decreases
as well, but Europe has not had a foreclosure crisis. And one
reason is because in Europe nobody can prepay their mortgage.
You have a 10- or 15-year mortgage with a balloon payment and
an adjustable rate mortgage and no right to prepay. No right to
prepay means you can't suck out the mortgage when your house
goes up in value. When you can't suck out the mortgage, then
you have a better equity if the house goes down in value. So
that banning prepayment penalties would likely have the impact
of increasing foreclosures by giving more people an opportunity
to suck out equity in their homes going forward.
With respect to mortgage brokers, the evidence is clear
that competition is what matters. If we reduce the number of
mortgage brokers, people are going to pay more for mortgages.
Finally, let me say the third point, which is the problem
of bureaucrat central planning. The CFPA essentially requires
an impossibility. It requires identifying certain terms and
mortgages as being unsafe.
What we know is there are no individual terms and mortgages
that are unsafe. Terms in combination may be unsafe. Terms
designed with State antideficiency laws may be unsafe. But the
idea you can identify certain terms as unsafe is just folly and
will stifle innovation and create other problems.
Thank you.
[The prepared statement of Professor Zywicki can be found
on page 211 of the appendix.]
The Chairman. Next is Denise Leonard who is vice president
for government affairs at the National Association of Mortgage
Bankers.
STATEMENT OF DENISE M. LEONARD, VICE PRESIDENT, GOVERNMENT
AFFAIRS, NATIONAL ASSOCIATION OF MORTGAGE BROKERS
Ms. Leonard. Good morning, Chairman Frank, distinguished
members of the committee. I am Denise Leonard, vice president
of government affairs for the National Association of Mortgage
Brokers.
In addition to being vice president, I am also a mortgage
broker in Massachusetts and have been for the past 19-plus
years. I would like to thank you for the opportunity to testify
before you here today.
We applaud this committee's response to the current
problems in our financial markets and we share a resolute
commitment to a simpler, clearer, more uniform and valid
approach relative to financial products, most specifically with
regard to obtaining mortgages and to protecting consumers
throughout the process.
As such, NAMB is generally supportive of the tenet behind
the plan and conceptually agrees with the establishment of an
independent agency that focuses on consumer financial products
protection, but believes some changes are necessary.
Before I address some specific areas of concern, I must
first extinguish the false allegations targeted at mortgage
brokers for years. We do not put consumers into loan products.
We provide mortgage options to consumers and work with them
throughout the process. We don't create loan products. We don't
assess the risk on those products or approve the borrower. We
don't fund the loan, and we are regulated.
Our testimony will focus on the Consumer Financial
Protection Agency and how it affects us, as well as H.R. 3126.
In order for the CFPA to be effective, the structure must
adequately protect consumers and account for the complexity of
the modern mortgage market, and it must be in disparate
treatment of any market participants. Any agency, whether new
or existing, must act prudently when promulgating and enforcing
rules to ensure real protections are afforded to consumers, and
not provide merely the illusion of protection that comes from
incomplete or unequal regulation of similar products, services,
or providers.
To the extent that the CFPA will enhance uniformity in the
application of those rules, regulations, disclosures, and laws
that provide for consumer protection, NAMB supports such an
objective, although we do believe that there should be added
limitations on the CFPA's powers. Whereas the purpose of the
agency is to promote transparency, simplicity, fairness,
accountability, and access in the market for consumer financial
products and to ensure the markets operate fairly and
efficiently, it is imperative that the creation of new
disclosures or the revision of antiquated disclosures be
achieved through an effective and even-handed approach and
consumer testing.
It is not the ``who'' but the ``what'' that must be
addressed in order to ensure true consumer protection and
success with this type of initiative. To ensure that all
consumers are protected under the CFPA, there should be no
exemption from its regulatory purview or limited exemptions
that pick winners and losers in the industry.
We are very supportive of H.R. 3126's requirement that the
CFPA propose a single integrated model disclosure for mortgage
transactions that combine those currently under TILA and RESPA.
Consumers would greatly benefit from a uniform disclosure that
clearly and simply explains critical loan terms and costs.
Therefore, NAMB strongly encourages this committee to
consider imposing a moratorium on the implementation of any new
regulations or disclosures issued by HUD and the Federal
Reserve Board for at least a year after the designated transfer
date. This would help to avoid consumer confusion and minimize
the increased costs and unnecessary burden borne by industry
participants to manage and administer multiple significant
changes to mandatory disclosures over a very short period of
time.
We strongly support empowering the CFPA to take a
comprehensive review of new and existing regulations, including
the new Home Valuation Code of Conduct. Too often, in the wake
of our current financial crisis, we have seen new rules
promulgated through the use of existing regulations that run
afoul of the purpose and objectives of the Administration that
do not reflect measured, balanced, and effective solutions to
the problems facing our markets and consumers.
The HVCC provides the most notable recent example of that
flawed method and, as such, should be revealed during the
CFPA's review of existing rules. We also believe that the SAFE
Act should be amended to ensure that the CFPA possesses
complete and exclusive authority to implement it in its
entirety.
In addition, we support a Federal standard of care based on
good faith and fair dealing for all originators as defined
under the SAFE Act. We believe such a standard would greatly
enhance consumer protections.
Finally, with regard to the board makeup as it is proposed,
the committee would be anything but independent, and we
recommend that its makeup be expanded and consistent with other
agencies such as the FTC with regard to political affiliation.
There should be no more than three members of the same party as
the President who appoints them.
We appreciate this opportunity to appear before you, and we
look forward to continuing to work with you, and I am available
for any questions.
[The prepared statement of Ms. Leonard can be found on page
145 of the appendix.]
The Chairman. Next, Mr. Edward Yingling, president and
chief executive officer of the American Bankers Association.
STATEMENT OF EDWARD L. YINGLING, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, AMERICAN BANKERS ASSOCIATION
Mr. Yingling. Thank you, Mr. Chairman.
ABA believes there are three areas that should be the
primary focus of reform: the creation of a systemic regulator;
the creation of a mechanism for resolving institutions; and
filling the gaps in regulation of the shadow-banking industry.
The reforms need to be grounded in a real understanding of
what caused the crisis. For that reason, my written testimony
discusses continuing misunderstandings of the place of
traditional banking in this mess. ABA appreciates the fact that
the bipartisan leadership of this committee has often commented
that the crisis in large part developed outside the traditional
banking industry. The Treasury's plan noted that 94 percent of
high-cost mortgages were made outside traditional banking.
The ABA strongly supports the creation of an agency to
oversee systemic risk. The role of the systemic risk oversight
regulator should be one of identifying potential systemic
problems and then putting forth solutions. This process is not
about regulating specific institutions, which should be left
primarily to the prudential regulators.
It is about looking at information on trends in the economy
and different sectors within the economy. Such problematic
trends from the recent past would have included the rapid
appreciation of home prices, proliferation of mortgages that
ignored the long-term ability to repay, excess leverage in some
Wall Street firms, the rapid growth and complexity of mortgage-
backed securities and how they were rated, and the rapid growth
of the credit default swap market.
This agency should be focused and nimble. In fact,
involving it in a day-to-day regulation would be a distraction.
While much of the early focus was on giving this authority
directly to the Fed, now most of the focus is on creating a
separate council of some type.
This would make sense, but it should not be a committee.
The council should have its own dedicated staff, but it should
not be a large bureaucracy.
The council should primarily use information gathered from
institutions through their primary regulators. However, the
systemic agency should have some carefully calibrated backup
authority when systemic issues are not being addressed. There
is currently a debate about the governance of such council. A
board consisting of the primary regulators, plus Treasury,
would seem logical.
As to the Chair of the agency, there would seem to be three
choices: Treasury; the Fed; or an independent person appointed
by the President.
A systemic regulator could not possibly do its job if it
cannot have oversight authority over accounting rulemaking. A
recent hearing before your Capital Markets Subcommittee clearly
demonstrated the disastrous procyclical impact of recent
accounting policies, and I appreciate the chairman's reference
to that at the beginning of this hearing.
Thus a new system for oversight of accounting rules needs
to be created in recognition of the critical importance of
accounting rules to systemic risk. H.R. 1349, introduced by
Representatives Perlmutter and Lucas, would be in a position to
accomplish this. ABA has strongly supported this legislation in
previous testimony.
As the systemic oversight agency is developed, Congress
could consider making that agency the appropriate body to which
the FASB reports under the approach of H.R. 1349.
Let me turn to the resolution issue. We have a successful
mechanism for resolving banks. Of course, there is no mechanism
for resolution of systemically important nonbank firms. Our
regulatory bodies should never again be in the position of
making up a solution on the fly to a Bear Stearns or an AIG or
not being able to resolve a Lehman Brothers.
A critical issue in this regard is ``too-big-to-fail,'' and
again I appreciate the chairman's reference to a separate
hearing on that critical issue. Whatever is done on the
resolution system will set the parameters for too-big-to-fail.
We are concerned that the too-big-to-fail concept is not
adequately addressed in the Administration's proposal. The goal
should be to eliminate, as much as possible, moral hazard and
unfairness.
When an institution goes into the resolution process, its
top management, board, and major stakeholders should be subject
to clearly set out rules of accountability, change, and
financial loss. No one should want to be considered too-big-to-
fail.
Finally, the ABA strongly supports maintaining the Federal
thrift charter.
Mr. Chairman, ABA appreciates your public statements in
support of maintaining the thrift charter. There are 800-plus
thrift institutions and another 125 mutual holding companies.
Forcing these institutions to change their charter and business
plan would be disruptive, costly, and wholly unnecessary.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Yingling can be found on
page 187 of the appendix.]
The Chairman. Finally, Michael Menzies, who is the
president and chief executive officer of the Easton Bank and
Trust Company, and he is here on behalf of the Independent
Community Bankers of America.
STATEMENT OF R. MICHAEL S. MENZIES, SR., PRESIDENT AND CHIEF
EXECUTIVE OFFICER, EASTON BANK AND TRUST COMPANY, ON BEHALF OF
THE INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA)
Mr. Menzies. Thank you, Mr. Chairman, and members of the
committee. As you mentioned, I am president and CEO of Easton
Bank and Trust, just 42 miles east of here. We are a $150
million community bank, and I am honored to be the volunteer
chairman of the Independent Community Bankers of America, who
represent 5,000 community-bank-only members at this important
hearing.
Less than a year ago, due to the failure of our Nation's
largest institutions to adequately manage their highly risky
activities, key elements of the Nation's financial system
nearly collapsed. Even though our system of locally owned and
controlled community banks were not in similar danger, the
resulting recession and credit crunch has now impacted the
cornerstone of our local economies: community banks.
This was, as you know, a crisis driven by a few
unmanageable financial entities that nearly destroyed our
equity markets, our real estate markets, our consumer loan
markets and the global finance markets, and cost American
consumers over $7 trillion in net worth. ICBA commends you and
President Obama for taking the next step to reduce the chances
that taking risky and irresponsible behavior by large or
unregulated institutions will ever again lead us into economic
calamity.
ICBA supports identifying specific institutions that may
pose systemic risk and systemic danger and subjecting them to
stronger supervision, capital, and liquidity requirements. Our
economy needs more than just an early warning system. It needs
a real cop on the beat.
The President's plan could be enhanced by assessing fees on
systemically dangerous holding companies for their supervisory
costs and to fund, in advance, not after the fact, a new
systemic risk fund.
ICBA also strongly supports H.R. 2897, introduced by
Representative Gutierrez. This bill would impose an additional
fee on banks affiliated with systemically dangerous holding
companies and better account for the risk these banks pose,
while strengthening the deposit insurance fund.
These strong measures are not meant to punish those
institutions for being large, but to guard against the risk
they do create. These large institutions would be held
accountable and discouraged from becoming too-big-to-fail.
But to truly prevent the kind of financial meltdown we
faced last fall and to truly protect consumers, the plan must
go further. It should direct systemic-risk authorities to
develop procedures to downsize the too-big-to-fail institutions
in an orderly way. This will enhance the diversity and
flexibility of our Nation's financial system, which has proven
extremely valuable in the current crisis.
In that regard, ICBA is pleased the Administration plan
maintains the State bank system and believes that any bill
should retain the thrift charter. Both charters enable
community banks to follow business plans that are best adapted
to their local markets and pose no systemic risk.
Unregulated individuals and companies perpetrated serious
abuses on millions of American consumers. Community banks
already do their utmost to serve consumers and comply with
consumer protections. Consumers should be protected. Any new
legislation must ensure that unregulated or unsupervised people
in institutions are subject to examinations just like community
banks.
My written testimony outlines serious challenges with the
proposed Consumer Protection Agency, which we oppose in its
current form. For example, we strongly believe that rural
writing and supervision for community banks should remain with
agencies that also must take safety and soundness into account.
Clearly a financial institution that does not adhere to
consumer protection rules also has safety and soundness
problems. And we, too, are grateful, Mr. Chairman, with your
statement that you are committed to preventing conflict between
safety and soundness and consumer protection.
If we truly want to protect consumers, Congress must enact
legislation that effectively ends the too-big-to-fail system,
because these institutions are too-big-to-manage and too-big-
to-supervise. And we are grateful for your hearings on Monday,
Mr. Chairman.
ICBA urges Congress to add an Assistant Secretary for
Community Financial Institutions at the Treasury Department to
provide an internal voice for Main Street concerns. H.R. 2676,
introduced by Representative Dennis Cardoza, will provide that
important balance between Wall Street and Main Street within
the Treasury.
Mr. Chairman, community banks are the very fabric of our
Nation. We fund growth, we drive new business. Over half of all
the small business loans under $100,000 in America are made by
community banks. We help families buy homes and finance
educations. We, too, are victims of the current financial
situation, but we are committed to help the people and
businesses of our communities, and we will be a significant
force in the economic recovery.
Thank you, sir.
[The prepared statement of Mr. Menzies can be found on page
158 of the appendix.]
The Chairman. We have another hearing at 2 o'clock, so we
will go as long as we can stay, until about 1:45.
I have to correct myself. That hearing on ``too-big-to-
fail'' will be Tuesday. We will have the Chairman of the
Federal Reserve in the morning, and we will have the too-big-
to-fail hearing in the afternoon. It is a serious pace, but we
need to deal with this.
My question has to do with a question many of you raised,
and that is your objection to the extent where we would
recognize State authority in this area. Now, I understand that
the Comptroller of the Currency a few years ago did preempt,
very substantially, State banking laws.
There was a good deal of concern about that. It was
actually right at about the time a Republican Member of the
House, our colleague Sue Kelly from New York, who was Chair of
the Oversight Committee, she was particularly troubled by that,
and I want to focus on that.
I gather it is a position of many of you here that we
should continue to preempt any State consumer laws regarding
national financial institutions. Tell me that, Mr. Bartlett.
Mr. Bartlett. We support uniform national standards. As an
essential ingredient to get to that, you have to preempt State
laws. The goal is strong, high uniform national standards.
The Chairman. Well, I understand that. But the goal is also
a Federal system, which people in various parties at various
times seem to find convenient depending on the issue at hand.
Are there any others who would agree that all consumer
State protection laws should be preempted here? Let me go down
the list. Mr. Courson?
Mr. Courson. Mr. Chairman, I can--obviously the Mortgage
Bankers Association can only speak about mortgages, but we have
certainly been consistent in asking for a uniform national
standard. But I would also say that in working with the State
regulators, we think they still play a very important role. We
are not going to get--
The Chairman. All right. But I need to have you tell me,
would you have us--should the law at the end of this process
preempt all State laws on mortgages?
Mr. Courson. Yes, that would be our position.
The Chairman. Okay. Next, Mr. Stinebert.
Mr. Stinebert. Mr. Chairman, what we believe is that the
way the proposal is currently structured right now in the area
of consumer protection, you would have basically a meet-or-
exceed standard that would be created by the new agency. But
you would give the authorities to the States to--
The Chairman. All right. Well, what would you propose?
Mr. Stinebert. So I think if you had a national Federal
standard that was developed for--or standards that were
developed for consumer protection, that should apply to all 50
States equally.
The Chairman. So you would preempt. I mean, I know
sometimes people don't like to say it, but sometimes you would
have to.
Mr. Stinebert. Yes, we would preempt.
The Chairman. You are preempting for all State consumer
protection areas in the areas that--
Mr. Stinebert. Yes, promote consistency across the CFPA.
The Chairman. All right. Let me ask Mr. Zeisel.
Mr. Ziesel. Yes. The CBA's position is that uniformity is
important, that it is a consumer protection and that strong
uniform Federal laws ought to be a ceiling, not a floor.
The Chairman. But you think the consumers are better off if
we preempt all State consumer laws?
Mr. Ziesel. If they are all strong, good, clear Federal
laws, yes.
The Chairman. Well, we will get to that in a minute.
Professor Zywicki.
Mr. Zywicki. Yes, you should preempt them for the same
reasons that you can anticipate the possible conflict between a
consumer protection regulator and a safety and soundness
regulator, and you can anticipate consumer protection State law
conflicting with safety and soundness regulators and Federal
State ways preempt--
The Chairman. Wait, we do have the supremacy clause of the
Federal Constitution. It does not arbitrate between the FDIC
and this, but it does arbitrate between States and Federal. So
there is no competition. Federal Government wins. Supremacy
clause.
Ms. Leonard.
Ms. Leonard. No, because we are currently regulated under
those State laws.
The Chairman. So you are not for preempting them.
Ms. Leonard. No.
The Chairman. You find this impossible. Are you torn in 50
different directions? Are you besieged by conflicting and
inconsistent standards?
Ms. Leonard. No.
The Chairman. Good. Mr. Yingling?
Mr. Yingling. We would generally be in favor of preemption.
However, we would urge that the kind of conversations that you
had been urging for the last couple years between the
Comptroller and the States continue and that there be some
mechanism for coordination.
The Chairman. But you would preempt the laws. It would be
at the grace of the Comptroller?
Mr. Yingling. Well, I don't know that it has to be at the
grace of the Comptroller. I think you could work in some
mechanism that encourages this kind of coordination.
The Chairman. But as we all know, you can encourage; but
having the law say it is qualitative in its difference.
Mr. Yingling. Maybe you could do a little more than
encourage.
The Chairman. Mr. Menzies.
Mr. Menzies. Well, basically a States' rights organization,
if preemption means that we neuter CSBS, then we probably would
be opposed to it. But we do like the notion of uniformity, and
we think CSBS has done a great job and isn't the reason we have
the financial problems for that.
The Chairman. You are talking about the Conference of State
Banking Supervisors?
Mr. Menzies. Yes, sir. The State regulators.
The Chairman. The question is whether nationally chartered
institutions would be exempt from any State law and covered
only by Federal law. That is the issue.
Mr. Menzies. Well, if you put national chartered
institutions in a position where they are exempt and State
institutions are not, as we are subject to our State
regulations, then you create exactly what you don't want to
create.
The Chairman. An unfair or uneven competition.
Mr. Menzies. Yes, sir.
The Chairman. All right. I am appreciative of that mix. I
have to say that the description of chaos that comes if you
have the State laws does not seem to be an accurate portrayal
of what the situation was before the Comptroller did all that
preemption. But my time has expired.
The gentleman from Texas.
Mr. Neugebauer. Thank you, Mr. Chairman. One of the things
that I heard, a common theme was coordination, innovation, and
the fact that with two different regulators there could be
conflicts.
And one of the things that I think about from my lending
days is many times when people came in to borrow money,
sometimes we had to tailor financial products to meet the
consumer's need. And I think this hearing today is about the
consumers to a great degree. And everybody here, I believe,
believes that they ought to be treated fairly and appropriately
and with integrity.
But what I am concerned about under the proposal that the
Administration and the chairman have laid out is that this is
really not a consumer protection bill but a products regulation
bill.
And there is a difference between product regulation and
consumer protection.
And I think I would just kind of like to go down the line
there and get your perspective of--you know, one is about a
behavior, and when people try to defraud or misrepresent
something to someone, that is a behavioral issue and not a
product issue--but get your reflections on the implications of
the Federal Government being very prescriptive about the
products that you would be providing and how that might impact
the people that we are talking about here, and that is the
consumer.
Mr. Bartlett?
Mr. Bartlett. Congressman, you have hit the nail on the
head. These agencies should regulate for safety and soundness
and for consumer protection, but not to determine products. The
products themselves, leave them in the competitive marketplace,
but then protect the consumers by disclosure by anti-fraud
protection, by unfair and deceptive acts, by coordinating the
decentralized complaint systems and, otherwise, by sales
practices, but don't set the products. As for the products,
consumers are far better off with choice and with innovation.
Mr. Courson. I certainly agree. And I think the key is--and
there been those also who say that this might not even be
prescriptive. You have a plain vanilla, and you can still then,
once you have your plain vanilla, offer other products. But I
think if you have a regulator out there that has the ability to
call a product down the line out of bounds, that you clearly
are going to move--lenders are going to move very reluctantly
and with great trepidation of innovating products that may
later be deemed to be ``out of bounds.''
And the other piece of that is, if the secondary market
authority exists, consumers are going to pay more because the
market is going to demand a premium for a product that they may
buy, put on their balance sheet or secure, as it may not exist
going down in the future.
Mr. Neugebauer. Mr. Stinebert.
Mr. Stinebert. I think the flexibility moving forward is
very important. As long as you look at specific products, I
think it was mentioned on the panel earlier about adjustable
rate mortgages, or ARM products--for many, many years and in
other parts of the world are considered very good products. We
talked about some types of balloon payments.
Everything should be customized to fitting what the
consumer needs in that specific circumstance, that best meets
what they need.
If you try a plain vanilla, if everything is just standard,
you eliminate all innovation and you are really making choices
of those people who don't necessarily need money, can get
options, can have products that are available to them. Others
that might have a more blemished credit record, might be lower
income, would have less options, less choice.
And I think that it is best left to the industry and the
lenders to make those decisions of what products are available
to them--to their customers.
Mr. Neugebauer. Mr. Zeisel.
Mr. Zeisel. Yes, I think that the financial institutions
deal every day with their customers, and they know what their
customers' needs are and they understand those needs in a way
that a Federal Government agency is not going to. And as a
government agency defines what is an acceptable product, they
are also defining what is not an acceptable product. And when
they take a product off the shelf, it is one less option
available for the consumer.
The product may or may not be acceptable for some consumers
and not others. That is the determination that has to be made;
not whether the product itself is always acceptable or always
not acceptable, for the most part.
Mr. Neugebauer. Mr. Zywicki.
Mr. Zywicki. A plain vanilla loan would be perfect for a
plain vanilla consumer. I have never met that person,
unfortunately. Every consumer seems to be completely different
to me. And every consumer seems to have different needs and
wants and different sorts of things. To think about plain
vanilla products is being like credit cards 30 years ago. They
were very simple.
They were plain vanilla, and they were really lousy
products. They had a $40 annual fee, a high fixed-interest
rate, no benefits, nothing else that came along with it.
Competition has intervened and credit cards have certainly
gotten much more complex, but they have gotten much, much
better for consumers. And if you think about the way in which
consumers use credit cards to cash advances, to travel, to
small businesses, all those sorts of things, there is no plain
vanilla consumer. There is a plain vanilla loan.
The Chairman. Time has expired. I don't mean to imply
that--Mr. Zywicki was certainly not the one who began this. I
would say for this committee in particular, we would like the
basic option to be either plain vanilla or basic black. We are
not an entirely plain vanilla committee even in our legislative
approach.
The gentleman from Pennsylvania.
Mr. Kanjorski. Thank you, Mr. Chairman. I am not sure, in
my decision to come to this hearing, I am not more confused
leaving the hearing after hearing all of your statements than
before I got here.
If you could help me think this through, were any of the
eight witnesses here consistent in their beliefs as to what we
should do?
Mr. Stinebert. I think everybody certainly recommended a
cautious, careful approach to addressing this issue.
Mr. Kanjorski. And I understand that. You know, I really
want to get to a more fundamental problem of why I worry about
where we are going and how we are going to get there.
Did anybody who is on the panel, the eight witnesses, did
you see this coming, and what actions did you take in terms to
warn us of this eventuality? I remember very distinctly Alan
Greenspan testifying here, a direct question as early as 2005,
I think. I asked him a question: ``Is there any foreseeable
problem in the real estate bubble?'' And he clearly said, ``No,
we have it all under control. There is nothing to worry
about.''
Now, you all do not handle all real estate, although the
mortgage people sort of cover the unbanked portion of it. Who
did see it and did not take action--or of you who did not see
it? And is that not what we want to get to, what is the next
calamity and how is it going to be handled? And God knows,
there is going to be another calamity.
All we are arguing is whether we are going to get a rather
comprehensive regulatory reform that will last 75 years, as the
last set of regulations lasted, or whether we are going to get
a financial crisis every 25 years as the history of the
Republic reflected for its first 200 years or first 150 years
of existence.
But if you could give me that fundamental question, because
I am hearing from that side of the aisle that this all occurred
from CRAs. How many of you believe that? Was that a major
contributor to our problem?
How many of you believe that, except for Fannie Mae or
Freddie Mac, this disaster would not have occurred?
Well, there go your two propositions, Randy.
Ms. Leonard. One of the things that we saw was the fact
that there was a need for licensing, there was a need for
increased professional standards, and we advocated for that and
with the SAFE Act that has now come into play. That is one of
the things that we believe will help long term with some of the
problems that did exist.
Mr. Courson. Congressman, may I? I would respond
differently. We didn't see it coming.
But I think it points up, and someone had asked me, what
could have prevented this? And I think if we would have had a
strong, uniform national standard and a consistent strong
regulation, particularly in our industry, we have--we are
examples of being subject to 50 different State regulators,
very uneven regulation. Some States, granted, are very good,
some States are not. That is why we are asking ourselves for a
strong Federal regulator for nondepository mortgage brokers and
lenders.
Mr. Bartlett. Mr. Chairman, as I said in my opening
statement, we saw it coming, beginning--and I did and my
officers, in about the summer of 2006 as it began to--and as we
began to unravel the pieces and try to figure it out, we spent
6 months trying to avoid it, setting up new standards,
advocating some new regulations, advocating some new
legislation. By January of 2007, we were pretty much--we were
full on board by that--by that time the horses were out of the
barn and running around in the pastures about 10 miles away.
It is one of the regrets of my professional life that I
didn't see it earlier. But I don't think anyone did, and we saw
it beginning in the summer of 2006.
Mr. Yingling. Congressman, I would just say that I think
what your question points out is the need for some kind of
systemic oversight body. Did anybody see it coming? Some did.
Should we have seen? Absolutely. It is a terrible failure of
ours. It is a terrible failure of our regulatory system.
We had a previous discussion in a previous hearing. I had a
previous discussion with the Chairman, that the Fed had the
numbers; and we really should have done something about it, and
that is true. But the weakness in our regulatory structure is
there is really nobody at this point who is charged with
looking for these kinds of disasters coming down the pike,
ringing the alarm bell, and making sure something is done about
it. And I think it points out the need for some type of
oversight regulator that doesn't regulate, but says there is a
disaster coming.
The Chairman. The gentleman from California, Mr. Royce.
Mr. Royce. Well, yes, as a matter of fact we did have the
Fed telling us there was a disaster coming. They said it was a
systemic risk to the entire financial system unless there was
deleveraging, some kind of regulation for safety and soundness
over Fannie and Freddie. Not to get off the point, but I
remember those lectures ad nauseam out of the Fed. And as a
matter of fact, the Treasury chimed in as well.
But on the issue of bifurcating consumer protection and
prudential regulation, Sheila Bair, the head of the FDIC, had
this to say, and I am going to ask Mr. Courson to respond to
this, if you would. She said, ``I have always felt that
consumer protection and safe and sound lending are two sides of
the same coin. And if you have an abusive product that doesn't
serve your customers' long-term interest it will come back to
bite you.''
Now as I mentioned in my opening statement, this idea of
separating the two has been around for some time. In fact, we
saw that very structure over the GSEs, a weak prudential
regulator, in this case OFHEA, was competing with HUD, and HUD
strong-armed OFHEA and Fannie and Freddie into ratcheting up
the affordable housing goals. We know how this ended.
As Ms. Bair alluded to, the affordable housing goals of
Fannie and Freddie enforced by HUD were at odds with the long-
term viability of the regulated entities, in this case Fannie
and Freddie, and ultimately led to their demise.
And I was going to ask you, do you see the potential for
future conflicts between a Consumer Financial Products Agency
and their prudential regulator in this case?
Mr. Courson. Well, clearly--I mean obviously there is
opportunity for the conflict. Not to be simplistic, but for 12
years we have been trying to get the Fed and HUD to work
together on one simple upfront disclosure, and we can't get
this done. In addition, to the fact that what we have said,
and, in our case with a Federal regulator, we want a combined
prudential, safety and soundness and mission consumer
protection, all under one umbrella for mortgage banking.
Mr. Royce. Well, certainly the housing goals were created
and enforced with an altruistic belief. It was misguided, but
it was an altruistic belief that the highest possible stretch
for homeownership was to the benefit of consumers. And I think
it would be very difficult to create a separate regulatory
entity, charge it with consumer protection oversight, and then
not expect it to come up, you know, with a similar politically
driven mandate further down the road.
It seems to me logical that would be the course of action
here. In large part, these politically driven mandates caused
the financial collapse, and allowing for a similar structure
will likely encourage similar mandates down the road.
So I would like you to comment on the likelihood that a
CFPA will be used for politically driven mandates in the
future.
Mr. Courson. Well, Congressman, obviously that is a concern
in any regulatory venue, particularly when you are creating a
new one.
The issue is in this respect, there is trepidation that we
are trying something, sort of a laboratory experiment, to try
something with the consumers; and, frankly, safety and
soundness being at risk. So I think there are those concerns.
Mr. Royce. Yes. I just don't see how it is not something
that we have already tried with pretty clear results.
But I will ask Mr. Zywicki for any observations he has on
this front.
Mr. Zywicki. Sure. I think you point out more generally the
fundamental problem here is that there are all kinds of
tradeoffs. There are tradeoffs between the particular terms and
the price of loans, between--as I talked about--prepayment
penalties. Consumers pay an extra 100 to 150 basis points to
get a fixed-rate mortgage. All these sorts of tradeoffs to
think about price versus terms, accessibility versus risk, all
the different sorts of things you are talking about are
invariably and inevitably going to turn into political
questions where there is no obvious answer.
And it is precisely these sorts of tradeoffs between risk
and price, for instance, why we have eschewed government
central planning and dictating of credit terms in the past,
because there is no right answer to these questions and they
run the risk of being politicized.
Mr. Royce. Thank you, Mr. Chairman.
The Chairman. The gentlewoman from California, Ms. Waters.
And we will break after this.
I must say, it is not entirely clear if we will be able to
reconvene this panel. We have five votes, I am informed,
leading with a 15-minute vote. I am told that Members are
advised that additional Republican procedural votes are
possible during this next series of votes.
So if we have not been able to conclude by about 1:30--if
we are not back by 1:30, goodbye.
Ms. Waters. Mr. Chairman and members, I almost hesitate to
ask you any questions. I am just dumbfounded that we have
before us representatives of the overall industry here today
who do not appear to understand we have a crisis.
We have rising foreclosures. There is no end. And the tale
keeps going on and on and on. And you come here today and say,
don't try to stop us from having any kind of product we can
come up with that we can put on the market, no matter what you
say about some kind of standard product. We have products for
any and everybody, whatever you can think of.
Someone just said to me, maybe I should design my own
product for you.
Well, let me just say that, in addition to no support, no
real support for a consumer finance agency to protect consumers
from these exotic products that worry us so much, we are
confronted with our constituents who are trying to get loan
modifications. You can't even do that right. You can't set up
systems where you can train enough people, that you can have
telephone responses, that you can work out modifications and we
can do something about keeping people in their homes.
You don't come here with any real instructions, advice, or
plans that you can share with us to deal with the crisis that
we are having. All you can do is come here and talk about
preemption, knowing full well that you will work your magic
with your influence in the Congress of the United States to
keep any real strong legislation from coming out of here; and
you want to prevent the States from coming up with anything
that would cause you any kind of concerns at all.
What do I have to ask you? I don't know what I have to ask
you. Would somebody answer me whether or not you think there is
a crisis? Anybody? Is there a crisis?
Mr. Bartlett. Congresswoman, there is a crisis, the crisis
of delinquencies. There are some 3 million mortgage
delinquencies today. We--as an industry, we are providing
modifications for about 250,000 a month. That is woefully
inadequate. We are doing everything we can to increase that
number by as much as double, and we are seeking to do that. I
believe we will do that. There are real barriers to keep us
from it, but that is no excuse. We are going to increase those
modifications because it has to be done for the economy to
recover. There is a crisis.
Ms. Waters. You are right. You have done a terrible job of
modifications.
How many of you own or are connected with service agencies
in addition to your banking interests? Financial Services
Roundtable?
Mr. Bartlett. You mean lenders?
Ms. Waters. Yes, servicers. You own servicing, also. You do
servicing, also. Is that right?
Mr. Bartlett. Our members do. And we are one of the
sponsors--
Ms. Waters. That is what I mean. Your members, yes.
Mr. Bartlett. Yes.
Ms. Waters. Why can't you get it right? Why can't we get
the modifications right?
Mr. Bartlett. Congresswoman, we are doing 250,000 a month.
That is not enough.
Let me stay that when we started this in July of 2007, we
didn't measure the number, but we think that, historically,
that mortgage modifications were in the range of 1,000 to 2,500
a month, and now we have moved it up to 250,000.
Is that enough? No, it is not enough. But we increase it
every month, and we increase it every day. The new Obama mods,
as they are called, are beginning to take hold and are
beginning to get some real numbers. They are not there yet, but
it is a big improvement.
I met with the Secretary yesterday--Under Secretary
yesterday to seek--and we have a checklist of 10 additional
steps that we can take to improve those numbers. We are
painfully aware we have to improve the number of modifications,
and we set about to do it every day.
Ms. Waters. Mr. Bartlett, you have publicly said that the
new agency would end up increasing the cost of financial
products. Do you really mean that?
Mr. Bartlett. I believe it will increase the cost of
financial products. But, worse than that, it will increase the
cost of credit, deny credit to consumers, and it will decrease
safety and soundness, and it will deny consumers with financial
products that they want and need and deserve.
Ms. Waters. As I understand, the President's plan is to
transfer existing staff and use a portion of those existing
fees that you pay for enforcement of existing laws. Why would
your members have to increase the cost of financial products?
The President's plan proposes no additional costs to your
members, yet you are here claiming that consumers will have to
pay more. Why do you say that?
Mr. Bartlett. Consumers will have to pay more under the
plan as is before us with a separate agency than there would be
separate regulation of products.
Product regulation is not the answer. The answer is--
The Chairman. We will have to get the rest in writing.
And, before closing, the gentleman from Oklahoma, Mr.
Lucas, whom I should note is also the ranking Republican on the
Agriculture Committee, with which we are working closely in our
approach to the regulation of derivatives. The gentleman from
Oklahoma.
Mr. Lucas. That is very true, Mr. Chairman. I recently met
with a group of bankers from small community banks and
financial institutions in my district, and they have serious
concerns, as do I, about the impact of the proposed Consumer
Financial Protection Agency and what it will do to them.
Our community banks are small financial institutions that
have had little to do with the cause of the current financial
crisis and continue to serve their communities as safe and
reliable sources of credit. Their very success depends on the
success of their communities. However, under this new
regulatory agency, they could, I fear, be disproportionately
burdened with additional regulations and fees.
In addition, there has been a lot of discussion here today
in regard to the threat that too-big-to-fail institutions pose
to the stability of our financial institutions as a whole, and
how best to address this threat.
When considering how best to approach reform, we must not
sacrifice the health of our small institutions that did not
cause this situation.
Now, I address my question in particular to Mr. Yingling
and Mr. Menzies. I do not represent a capital-intensive
district. I do not have any money market facilities,
institutions in my district. I have consumers of products, and
I have small businesses.
Your two organizations represent the backbone of the
financial institutions in my district. Expand for a moment what
the effect of this piece of legislation, as now drafted, will
be on those institutions. Because, after all, we all know rules
have many effects. And they can limit opportunities and they
can kill, too. That is the nature of the Federal process.
Explain to me what this bill will do to your folks in my
district.
Mr. Yingling. Congressman, first, I want to thank you for
your leadership on the accounting issue. And I do think that
since you introduced your bill the report of the G-20 and the
Group of 30 and others have shown that your approach was
correct.
The concept that is in the Administration proposal that we
are particularly concerned about is that products should be
designed. And, as was pointed out earlier, particularly in
community banks, loans to your constituents are not cookie-
cutter. They are individually designed.
And lest people think we are being paranoid here, I would
like to read from the paper that the Administration handed out
in the White House when they announced this; and it says, the
CFPA should be authorized to define standards for products and
require firms to offer them.
So let's suppose it is a loan, a cookie-cutter loan that is
a standard loan; and it says to your banks, you must offer
these. Then they deviate from it. So they want to deviate one
off like they do all the time and say, all right, I will let
your father guarantee it. Or I will change this one provision.
Or I will change the repayment terms so you can qualify for
this loan.
Here is what the President's proposal says: ``The CFPA
could impose a strong warning label on all alternative
products, require providers to have applicants fill out an
experience questionnaire, require providers to obtain the
applicant's written opt in to such products.'' ``Originators of
alternative products''--that is your bank--``should be subject
to significantly higher penalties for violations.''
You are not going to make that loan. You are not going to
make those one-off deals. And I am reading from the
Administration because I have to take what they say seriously.
Mr. Lucas. Mr. Menzies.
Mr. Menzies. Congressman, the $7 trillion of loss to this
Nation was not the product of community banks. It was the
product of mega banks and Wall Street creating shadow
corporations and SIVs that stuffed toxic assets based on
products that they created into those entities, and community
banks are truly the victim of the product regulation that is
contemplated today because of that activity.
Don't take away my right to take care of a widow whom I
loaned a year ago, who had 25 percent borrowed against her
house, interest only for a year, at a market rate, no payments
required, while she could care for her husband, who was dying,
understanding that after he died she could go back and get a
job and then we could amortize that loan.
That is a nonconforming product in every possible manner,
but it provides me with the flexibility to be creative and take
care of the needs of our customers. That is essential to retain
the role that community banks do for this Nation.
Mr. Lucas. Thank you for those real-world insights.
Thank you, Mr. Chairman, for your tolerance on the time.
The Chairman. The hearing is recessed. And, as I said, we
may not be back in time. If we can be back here by 1:30, we
will have a couple more rounds of questions, but it may not be
possible. I apologize, but that is the way it is.
[recess]
The Chairman. The hearing will reconvene.
The gentleman from North Carolina is recognized for 5
minutes.
Mr. Watt. Thank you, Mr. Chairman.
I was hoping Mr. Bartlett would be here, but I can deal
with the ones who are here.
I perhaps have deluded myself into thinking that I am one
of the members who deals with members of this panel on a
regular basis and tries to understand and listen to what they
really have to say about these issues. I guess I am a little
bit perplexed about some of the things I am hearing today.
I think Mr. Garrett raised a valid question in his opening
comments today. If you put part of the authority for consumer
protection with the regulators and part of it with a new
regulatory agency, there is the conflict potential because
people are working on the same turf and you are going to have
that conflict.
I am not sure that I see quite the conflict between
consumer protection, which is one responsibility, and safety
and soundness, which is another responsibility. I acknowledge
that there are occasionally circumstances where the two
overlap.
So I did hear Mr. Courson say that to the extent you leave
part of the responsibilities one place and put part of them in
the new agency that there is that potential. I am actually of a
mind to agree with that and think that more of the
responsibilities, most of the responsibilities for consumer
protection, if not all of the responsibilities for consumer
protection, ought be given to the new agency, taking the
people, some of the people who are doing it in the existing
agencies and putting them over there into the new agency, using
the experience that they already have and building a new
entity.
So I am troubled by this notion that somehow keeping
consumer protection and safety and soundness in the same entity
is an imperative, and if you don't do that there is going to be
some kind of conflict. There are multiple agencies doing safety
and soundness now. And when--I guess the systemic regulator
will be the ultimate authority on that, ultimately, but I don't
hear anybody suggesting that there are irreconcilable conflicts
now between the various agencies that are doing safety and
soundness.
So my question is, is this real or is it--I understand that
there is a resistance to change, but this didn't work in the
old framework. And it seems to me to be more of an excuse for
saying we want consumer protection subordinate to the other
objective, rather than we think that there is the potential for
conflict.
So that is one question that I hope you all will address
for me, and I won't ask you to do it in this context.
The other thing I have trouble with, Mr. Bartlett in
particular, is your position that we should set up a brand new
Federal agency to deal with insurance. The cost I suppose would
be fairly high, yet we should not spend the money to set up an
agency that deals with consumer protection so that the people
who come to work every day have as their primary, sole
responsibility looking at consumer protection. I am having
trouble reconciling those two positions. So if you can
reconcile them for me, I would love to have you maybe address
that little piece of--
The Chairman. In light of the unusual circumstances, we
will do an extra couple of minutes--I don't think there would
be objection--so that we can get a response to that.
Mr. Bartlett. Mr. Chairman, I can understand how you could
reach that conclusion.
Let me say it forcefully. We are not advocating the status
quo. Consumer protections are not adequately provided in
current Federal law for the safety and soundness regulators.
That is the primary reason why they didn't get the job done.
The unfair, deceptive trade practices does not apply to the
OCC, just as one example. TILA and RESPA are with two different
agencies that are mandated to cooperate, but they are not
cooperating, and they have not done their job. So in issue
after issue, these consumer protection practices are not in the
hands of the safety and soundness regulators, and they should
be.
I think you heard unanimously that it would be an
unmitigated disaster to separate safety and soundness from
consumer protection because--
Mr. Watt. I heard it. I just don't understand it. I really
do not understand that, and I will talk to you separately on
that.
Mr. Bartlett. We will submit for the record if you like,
also.
Mr. Watt. I really don't care to hear from Mr. Zywicki on
this. I don't even know how you got on this panel, to be
honest.
Excuse me. I yield back.
The Chairman. He was, as is the practice, as the gentleman
knows, the witness suggested by the Republicans, which is I
think an important part of our trying to get through this all.
Next is Mrs. Biggert.
Mrs. Biggert. Thank you, Mr. Chairman.
I wanted to follow up a little on Mr. Kanjorski's question.
We have 50 States, 50 State regulators, plus the territories,
and then we have the OCC, the OTS, the NCUA, the FDIC, and the
Fed, and now we have a new bill that creates the credit
rationing and pricing agency, to add another layer. And I
understand that the Administration says it is interested in
consistent regulation of similar products. Yet its proposal
would gut the doctrine of preemption under which the national
banks and thrifts have long operated.
How would the Federal standard work which allows the States
to pile on on top? How would the Federal standard then promote
consistent regulation of similar products?
I will start with whomever wants to answer.
Mr. Courson. Congresswoman, being president of an
association that is subject to 50-State regulation, we can tell
you; and I would say that we think that is one of the things
that, had we had a uniform national standard, we could have
avoided. Some of this could have been avoided. It is really a
disservice to consumers in the different States.
I will tell you we deal in all of the States; and some
States, as I have said before, have very good regulations, very
solid laws on the books. And, frankly, there are others that
don't. And we have a map that we put in the back of our
testimony that shows this patchwork.
We have to have a uniform national standard. State
regulation, particularly if this is--if the national standard
is a floor, just merely adds more complexity, additional
disclosures, which we are trying to go the other way with our
HUD and Fed initiative, and really doesn't well serve, assuming
that the uniform national standard has to be strong and at the
proper ceiling.
Mrs. Biggert. Do you think that the new agency weakens the
regulations or the standard even further?
Mr. Courson. Well, it just puts a floor in to continue on
with this patchwork of State laws we have. And, in some
respects, I must say that every time we see a Federal law it is
almost a stimulant for the States to go in and do something
else.
Mr. Stinebert. We also have a good example of where that
has happened with the implementation of the SAFE Act. You have
basically a mandate on the States that they have a certain
period of time in order to implement conforming laws, and we
are finding in all 50 States we have basically no uniformity.
We are going to have 50 different laws.
Mrs. Biggert. Okay. Thank you.
I yield back, Mr. Chairman.
The Chairman. The gentleman from New York, Mr. Meeks.
Mr. Meeks. Thank you, Mr. Chairman.
I think that part of what--some of what we are looking at
is credibility issues, etc. I would have liked to have heard--
and what I think a lot of the members have heard, at least on
this side, is that if people are diametrically opposed to a
CFPA, I would have liked to have heard and would like to hear
in the future how we can make it work, what we can do to make
sure that it works. Because, obviously, consumers do need
protection.
Someone--I don't know whether it was the professor or not,
but somebody talked about how there are no foreclosures in
Europe. And I don't think you really want to go where they are.
Because if you look at Europe in particular, there are
generally huge consumer protection programs, and banks
primarily offer only vanilla products. And, you know, I am not
so sure that I want to go all the way there, because I think
that there is some good utilization of some diversity in
products.
But there has to be a buy in, some kind of way that we need
to talk. And I, for one, want to again sit down, as I have with
many of you, to talk and to try to figure out so that we can
get this thing right. Because I am hoping that we will put a
piece of legislation in place that is going to survive the test
of time and try to minimize any unintended consequences but
make sure that individuals who are in my district, for example,
number one in New York City, which is small compared to some of
my colleagues in other States, in home foreclosures, and how we
can figure out how to make them. Because that is what--people
are coming to me. They are saying, how do we fix this thing?
I am going to change the area that I am going to, because
the question that I really wanted to ask to get your opinion
has to deal with the subcommittee of which I am the Chair, and
that is dealing with international monetary policy. And I know
that many industry organizations and individual financial
firms, and from what I am hearing here, agree that we must have
some kind of a change and a resolution authority so that there
would be a systemic risk manager.
The FDIC has typically put forward a successful example of
how we can bring this kind of stability to the industry. But
several of the key bank failures that brought the global
financial system to the brink of collapse were international
bank holding companies, with operations in multiple sovereign
jurisdictions; and I was wondering if you had any thoughts on
whether and how an FDIC-type model could work to manage these
type of global banks so that, you know, people get out here, go
to another jurisdiction and cause a systemic risk in Europe or
other places where we don't have the direct jurisdiction. I was
wondering if there were any thoughts on how we could manage
that.
Mr. Bartlett. Mr. Chairman, yes, we have some. And we have
prepared some work--we actually would be preparing some
suggestions for the record for the committee on global
harmonization. We think that the President's draft said the
right words as the goal for global harmonization. We would put
our emphasis on the G-20, by the way; and we are going to offer
some suggestions for how to beef that up to actually create an
institutional framework for global harmonization through the G-
20. We think that is essential to happen.
The markets are porous across international borders, and to
just leave it to the sense of goodwill on an informal basis
that the nations will try we think is expecting too much. So we
will offer your subcommittee as well as this full committee
some suggestions on how to structure global harmonization.
I don't see it in the context of the FDIC, by the way, but
we will take your request and suggestion and think that through
for you.
Mr. Meeks. Thank you.
One other question I want to ask really quickly. I was
wondering, you know, because I am concerned about like the
failure of Lehman Brothers. Many individuals in the United
States have some--they thought they were investing in Lehman
United States. They now found out they were investing in Lehman
U.K. Their money is caught up in a bankruptcy proceeding in the
U.K. They can't get it out, foundations, universities, etc.
I was wondering if any of your banks or institutions fell
into that problem, where you are stuck with the U.K. And how
you think we need to deal with bankruptcy proceedings in a
foreign land or how do you think we can resolve those issues to
protect those United States investors, citizen investors who
invested here thinking they were investing safely in the United
States, but actually the money was in the U.K. proceedings.
Mr. Bartlett. We think that the new systemic regulator will
look at that. So far, we haven't seen the adverse effects, but
we may well. We think it is still an open question.
That is a real problem. Obviously--and you are not implying
this--you don't want to solve that problem by denying Americans
the right to invest across markets. So we think it is a
problem, but as of this point it hasn't led to a crisis. It
hasn't added to the crisis. But we think it ought to be
something that ought to be looked at, and we will get you some
thoughts on that on the record.
Mr. Meeks. Thank you. I look forward to working with you.
The Chairman. The gentleman from California.
Mr. Miller of California. Thank you, Mr. Chairman.
I want to thank all of you for your testimony today. I
appreciate you being candid. And, Professor Zywicki, I enjoyed
your presentation.
I am trying to look at this not as a Republican or a
Democrat. I am trying to look at the economy which I think is
in far worse condition than I think some of us will
acknowledge, and I think we need to look how do we get it back
where it should be. And even with some of my good friends on
the Republican side, we disagree on some things.
I heard some comments that some believe that the GSEs,
Freddie and Fannie, should be phased out. I don't agree with
that concept. I think they need a very strong regulator, and I
think in recent years they were encouraged to forego basic
underwriting standards that they should have implemented. And I
think they should be strongly regulated, but I think there is a
very sound place for them in the economy and especially in the
housing industry.
So even on my side we can disagree, but we can disagree
with a smile. But I think we have very tough times ahead of us;
and I think you all need to be very honest, regardless who on
this committee, my side or the other side, gets offended,
because we are dealing with the future.
And I saw some grain of similarity throughout this
testimony. You are concerned about winners and losers. More
government could be more confusion, perhaps. You want
uniformity. You are concerned about the board makeup. You want
it to be more independent. Systemic risk and oversight was a
big concern. But the national standard was talked about a lot.
But standard enforcement seemed to be something that I
heard ring throughout your testimony. You are concerned with
that, and I think that is something that didn't occur in recent
years, and that things weren't enforced.
But there are many Federal banking statutes out there that
already exist. And if the bank regulators had enforced those,
do they have the authority basically with everything on the
books now to pretty much do what we are talking about doing
today, in your opinion?
Mr. Zeisel. Congressman, there are a lot of tools out there
that are available, Federal and State certainly, to address a
lot of these problems. In addition, there are now regulations,
such as HOEPA, that deal with a lot of the mortgage products
that may have been behind a lot of the problems we have
experienced.
Mr. Miller of California. And regulators could enforce
that?
Mr. Zeisel. Regulators can enforce that, and the FTC can
enforce that, and the States can enforce that as well.
Mr. Miller of California. The trouble I have with the SEC
testimony--and I asked specifically a question--is she is
modifying mark-to-market, the Board is, to some degree. And yet
I said, are you really working closely with regulators on
enforcement? Because you are going to have quite a change from
the history. They have always mandated on banks and regulators
and what mark-to-market modifications might be. And the
response was, we have talked to a few regulators.
But I think there is going to be more than talking to a
few. You are going to have to get two organizations together to
understand things have to be modified, and we have to also deal
with each other on that modification.
The adoption of CFPA would result, some said, in serious
reductions in credit to consumers; and, Professor Zywicki, you
had talked about that. Could you kind of expand on your opinion
on that?
Mr. Zywicki. Sure. There is a variety of different ways in
which that would happen. Obviously, the idea of an exalted
plain vanilla product that might fit some consumers but
wouldn't fit a huge number won't add much. But it will make it
much more difficult to tailor-make products for other
consumers, because they will have to get permission in order to
do this and all those sorts of things.
It will--they are contemplating outright bans on certain
useful terms like prepayment penalties. They are contemplating
a crackdown on mortgage brokers, which the empirical evidence
is pretty clear that mortgage brokers--if there is competition,
that mortgage brokers generate lower prices for consumers.
And so the final point is that, you know, I worked at the
Federal Trade Commission. I know about the antitrust policy and
that sort of thing. And the plain vanilla notion here is a very
dangerous notion from a competition perspective, which is that
we know, for instance, by studying usury ceilings on consumer
credit is they tend over time to turn into collusive focal
points and tend to dampen competition.
So the idea that everybody would be offering the same
product has a lot of antitrust and anti sort of competition
concerns embedded in it, because it makes it easier for parties
to collude, more difficult for them to compete on different
sorts of terms. That, too, would certainly not lead to lower
prices and could lead to higher prices.
Mr. Miller of California. We talked about something similar
with GSEs. We talked about the programs that a GSE might adopt
and within that program various products they would come up
with daily that modified what was the demand in the
marketplace. And my concern was we overly restricted them in
some fashion, or we could have, to not allow them to do the
function based upon market needs and market demands and market
trends.
And I thank you all for your testimony. I appreciate it.
The Chairman. The gentleman from Colorado--the gentleman
from Kansas. I am sorry.
Mr. Moore of Kansas. Thank you, Mr. Chairman.
How should this committee consider and balance the costs of
creating the Consumer Financial Protection Agency? I think we
need tougher consumer protection enforcement to prevent another
costly financial meltdown in the future. So some additional
resources may be needed up front so we don't have to spend more
money later in rescuing the financial system or the economy in
the event of another meltdown. But, Mr. Bartlett or anybody
else on the panel, do you have any thoughts about what this
committee should consider as we think about new costs?
Mr. Bartlett. Mr. Chairman, I think there will be some
additional costs with additional consumer protections, whether
it is by the safety and soundness or a new agency. But the cost
of a new agency itself would be a factor of tenfold of what it
would cost to embed it into existing agencies.
I do think the existing agencies have the advantage of
being able to see the whole of the organization, of the bank or
the company that they are regulating and tie it all together
and then relate it back to consumer protections.
In response to that as well as an earlier question, I will
say that the laws granting consumer protection to the existing
agencies are woefully inadequate. I think this committee and
this Congress and we didn't realize how inadequate they were.
But they are spotty. Some have UDAP, some have HOEPA, some have
other things, but they are spotty and inconsistent across
agencies. And the agencies, as a result, without a statutory
mandate, had not acted very much at all on consumer
protections.
We think it is the job of this Congress and this committee
to provide those additional mandates and those additional
consumer protections, but do it with an agency that can do
something about it by coordinating with safety and soundness.
That is not only less costly; it is also far more effective for
consumer protection.
Mr. Moore of Kansas. Thank you, Mr. Bartlett.
Yes, sir.
Mr. Stinebert. One of the areas that I think there was
agreement among all the panel here was the additional resources
that are needed among the current agencies so they can step up
their consumer protections.
Mr. Moore of Kansas. Very good.
Any other comments?
Mr. Courson. I would just--I am sorry, go ahead.
Mr. Yingling. I would comment about the budget of this new
agency. Nobody has any idea what it is. And I think the
conundrum is if it is not large enough to do what it says it is
going to do, it is going to end up having regulations,
examining banks, but it is not as it says it is going to do--
examine and enforce these rules on the thousands of nonbanks.
And that is where the great majority of the problem has been.
But, to do that, it is going to take a significant budget. And
so, in a weird way, we kind of want the budget to be bigger. It
sounds unusual. But then the question is, how are you going to
pay for it? And if it is done on the cheap, it cannot do what
it says it is going to do, because it will end up
discriminating in enforcement against banks.
Mr. Moore of Kansas. Did somebody else have a comment?
Mr. Courson. Congressman, in following up on that, as I
have said, the mortgage bankers, we are one, ironically, that
are here asking for Federal regulation, safety and soundness,
prudential regulations, which we have not had from a Federal
level. And in our proposal, this MIRA proposal that we have
talked about, we envision that, as in the other agencies, those
that are regulated would have to share in the cost of that
regulation. We know there is going to be another cost, whether
it is tucked inside an existing regulator or someplace else;
and we are prepared, our members are prepared to pay their
share of that cost.
Mr. Moore of Kansas. Thank you.
I yield back, Mr. Chairman.
The Chairman. The gentleman from Texas.
Mr. Hensarling. Thank you, Mr. Chairman.
I have a number of concerns about this legislation and
particularly the aspect of it that would regulate products,
since I view it as abrogating consumer rights. I am concerned
about the safety and soundness issues.
I am sorry that the gentleman from North Carolina is no
longer here. When I think about the separation of essentially
product supervision and safety and soundness, Fannie and
Freddie come to mind. That was a model that we had up until
roughly a year ago, and so I see parallels here.
I don't know if anybody else on the panel does, and would
care to comment. I see a few heads nodding in the vertical. Mr.
Bartlett?
Mr. Bartlett. Congressman, I think that is one of several
examples from the past of the bad things that happen when you
separate consumer protection with safety and soundness. HUD had
the approval over activities. So far as I know, so far as I
know, HUD never disapproved an activity so far as I know. And
that is a--zero is a very small number.
At the same time, OFHEO had their safety and soundness
regulations disapproved, rejected, turned down, put on hold for
decades and in part because it was separated and in part
because they were not an independent authority. So we think
that is an example that proves that that is not the right
model.
Mr. Hensarling. Let me change subjects here, if I could.
And this is a fairly long bill, I say, by congressional
standards, weighing in at 200-some odd pages. Maybe it isn't
all that long. I am not sure I found the language where it
expressly says there will be product pre-approval. But as I
read various sections of the underlying Act that was introduced
by the chairman, subtitle C, section 131, it talks about the
rulemaking authority of this new agency:
``The agency may prescribe regulations identifying as
unlawful unfair acts, abusive acts or practices in connection
with any transaction with a consumer financial product.
Regulations prescribed under this section may include
requirements for the purpose of preventing such acts and
practices.''
So if we give the agency the ability to declare unlawful
unfair practices--I assume each of your associations or
organizations has legal counsel who has probably, hopefully,
had a chance to review this. Have your organizations concluded
whether a prepayment penalty in a 30-year fixed mortgage is
fair under this statute? Mr. Yingling?
Mr. Yingling. Congressman, one, if you are looking for
where they are authorized to have standard products, it is
section 1036, right in plain language.
Mr. Hensarling. Thank you. I hadn't quite memorized it all.
Mr. Yingling. You are raising an important issue, and that
is this legislation changes everything. There is no law on the
books that this Congress has authorized in the consumer area,
no regulation that isn't trumped by this.
You read a very broad statute where they have changed the
definition under UDAP. So we don't know what it means.
But let me just very briefly read you another section which
trumps everything:
``The agency shall prescribe rules imposing duties on a
covered person''--that is anybody engaged in consumer financial
services--``as the agency deems appropriate or necessary to
ensure fair dealing with consumers.''
I am a banking lawyer of 35 years. I have no idea what that
means, other than they can do anything they want. It is the
broadest standard I think any of us could imagine, which
means--and it gets back to the preemption argument--we are not
going to know what the rules are for years.
Mr. Hensarling. Is it your interpretation then that
functionally Congress will cede to this five-person unelected
body essentially the right of pre-approval of all consumer
financial service products? Has anybody come to a different
conclusion?
Mr. Yingling. They could do that.
Mr. Hensarling. With the exception, I believe, I don't
believe they can impose usury limits.
Mr. Yingling. They can't do that. They also can limit
compensation in any way they want, except they can't limit
total compensation. So they can regulate compensation, but not
in total.
Mr. Hensarling. I see my time is running out. I am going to
try to slip this in quickly.
I know the statute appears to be aimed at consumer
products, but, according to the Federal Reserve, 77 percent of
all small businesses use credit cards. I am led to believe a
number of those are under an individual name. Might this have a
deleterious impact on small businesses and job creation?
Mr. Stinebert. Absolutely.
Mr. Zeisel. Yes, Congressman, small businesses often use
consumer products and services, mom and pop shops and other
small operations, and certainly would be affected by this.
Mr. Hensarling. Thank you.
The Chairman. The gentleman from Colorado.
Mr. Perlmutter. Thanks, Mr. Chairman.
And, Professor, I would just say that ordinarily I don't
agree very often with George Mason because my economic
philosophy is a little different than yours. But I do agree
with you I think with respect to the subprime piece and whether
it was really a consumer protection issue or whether it was
just a deregulation or refusal to do appropriate underwriting
that affected financial institutions and people who invested in
financial institutions and people who bought big portfolios.
That I agree with.
I think you are off base on the credit card piece. That
really is a consumer issue. And all the bells and whistles that
come along with credit cards are probably one of the top five
things discussed if you were to go door-to-door, walk in a
precinct or having a town hall. People didn't expect ``X,''
``Y,'' or ``Z'' with respect to their credit cards.
So--which brings me to sort of the general question of who
is best, who best can assist consumers with a credit card that
has, you know, this fee and that fee and, you know, this
surcharge and that penalty charge? Is it a new agency? Is it
the FTC? Is it the FDIC? The OCC? The Federal Reserve?
And so my question, if we don't go with what has been
proposed and create a new agency, how do we--do we set up
ombudsmen or new departments in every one of the regulators? If
anybody has an answer to that, I would like to hear it. Or do
we just beef up the FTC?
Mr. Zeisel. Congressman, every one of the bank regulatory
agencies has consumer departments. They do the examination of
the consumer issues. Some of them have merged them with the
safety and soundness teams. Some of them have separate ones.
Each one probably has advantages. But if the consumer portion
of their oversight doesn't get the amount of attention it
deserves at the agency, that can probably be addressed through
that agency and the agency charter and the agency structure
more easily than stripping it out of each of the agencies and
creating a new agency to do the same basic function.
Mr. Zywicki. I would just add I think the FTC could
probably do a lot of this. A lot of it is simply unworkable for
anybody, I think. But the FTC could do a lot of it.
And I think it is also worth exploring the proposal that I
think the Republicans have suggested of creating a new agency
that sort of takes the safety and soundness functions away from
the Fed and combine--you sort of have a stand-alone safety and
soundness/consumer protection agency separate from the Fed.
But I think keeping those two together really is an
important issue, and I think the Federal Trade Commission does
have this sort of expertise and experience and understanding of
consumer decision-making and that sort of thing--that it could
also be more authority at the FTC would probably be--could be a
useful thing as well.
Mr. Perlmutter. Okay. Thank you. And just for me and
listening to the bankers, Mr. Yingling and the gentleman from
Easton Bank--I am sorry. I forgot your name.
Mr. Menzies. That is all right.
Mr. Perlmutter. You know, for me, having been on this
committee and what we went through in September and all of last
year, you know, it really is a too-big-to-fail. I mean, for me
that is the big issue here, and I have sort of become
radicalized on the whole issue. That and derivatives, you know,
regulating derivatives, the hedge funds and credit rating
agencies. I mean, those are where I think I would like to see--
and I know a lot of our attention is focused on that. I do
think that some consumer practices caused some issues. But
really the focus I would like the reform to be really on, the
too-big-to-fail. And anybody can comment on that if they like.
Mr. Menzies. Congressman, I am itching to make a point. And
this hearing, this legislation needs to focus on those who
created the train wreck, not those who didn't, not those who
played by the rules and did not abuse the consumer. And the
small finance, small banking players in this arena had skin in
the game, and they played by the rules. And it is as simple as
that.
It is so important to make certain that it is recognized
that community banks are really not in the product business. We
are in the solutions business. And we create solutions with an
array of products, some of which are on the shelf and some of
which we need to create. And if our right to create solutions
for individuals and small businesses are packaged into a bunch
of pre-approved products, it will destroy our capacity to
participate in this recovery.
Mr. Perlmutter. Thank you, and I yield back.
The Chairman. The gentlewoman from Minnesota.
Mrs. Bachmann. Mr. Chairman, thank you very much, and I
would like to ask unanimous consent to insert into the record--
The Chairman. We have general leave for anybody to insert
anything into the record. We got that already today.
Mrs. Bachmann. Okay. I would like to insert into the record
today the editorial from the Wall Street Journal, ``A Tale of
Two Bailouts.''
I had read this editorial this morning as I was preparing
for this hearing today, and the question that I would ask of
the panel is, is the discipline of the marketplace now a thing
of the past? I am really wondering, as I look at what has
transpired just since last fall and the actions that Congress
is taking.
You take a look at risk, and risk in the American system
has been a really good thing. We saw risk hurt a lot of people,
but the question is, did risk hurt people because the Federal
Government provided the backstop through a GSE like Freddie and
Fannie? Was that the problem?
It was no longer really risky, because what happened is we
spread--losses occurred. The only thing is the shareholders
didn't have to bear the brunt of the losses. The net was spread
wider so that now all of the American taxpayers are on the hook
for those losses.
So it isn't that the losses went away. It is who is
responsible for the losses. There were private contracts made
between individuals who contracted for money and those who were
lending money. But those people who were part of a private
contract aren't the ones that are on the hook for risk.
Now people who had no part of that contract, the American
taxpayer, they are all made involuntarily a part of that
contract. They have to subsume a risk they never wanted, they
never asked for, and now it is their problem.
And so that is what I am asking you, a very simple
question: Is the discipline of the marketplace now a thing of
the past?
Professor Zywicki, and then I think Mr. Yingling, also
would like to respond.
Mr. Zywicki. I agree with you completely.
Mrs. Bachmann. Thank you. That doesn't happen very often.
Really.
Mr. Zywicki. Like I said, I am on this panel, but I don't
speak for the banking industry, and so I am not sure I would
get uniform agreement with this, but I think that is a very,
very serious problem. I think that, you know, risk and the risk
of failure, if you get to keep the profits and socialize the
losses, you are going to have a train wreck. If we continue to
do that going forward, it is going to be an even bigger train
wreck.
And I think that coming up with some way of making sure
that those who fail feel the pain of their failure and they
actually fail is an important part of capitalism and risk. And
it applies even to consumers as well that, you know, that
consumers have to have the opportunity to be able to take
chances, and we can't put a safety net under every consumer as
well for every decision that they make.
Mrs. Bachmann. And I wonder as well about growth in our
economy. How will we have continued growth in our economy
without risk? We need to have a certain element of risk taking,
risking capital on the gamble that somehow you are going to
profit down the road. If we have just plain vanilla products,
it seems to me we are going to be limiting consumer choices,
especially for those at the bottom echelon of the economic
lifestyle.
And just like we saw in the article this morning in the
Wall Street Journal, they termed it, is Goldman Sachs GoldiMac?
Because now they are too-big-to-fail. The American taxpayer is
always going to be bailing out Goldman. I have nothing against
Goldman. It is a great American company. But if you take a look
at CIT and look at the fact that we did give them bailout
money, now it looks like we might be predisposed to giving them
bailout money again, is this really systemic risk? You know,
supposedly this panic has passed now. It is like the article
says, we vitiated the definition of systemic risk.
Mr. Yingling.
Mr. Yingling. Well, you are raising excellent points, and
it really comes down to too-big-to-fail. And I think Mr.
Perlmutter was raising the same question. You left out
accounting from your list, Congressman Perlmutter.
Mr. Perlmutter. I know. Yes, and accounting.
Mr. Yingling. And that is why this issue of the systemic
risk resolution is so important. Because that is the mechanism
through which you all will determine too-big-to-fail in the
future.
And I think the Administration's proposal was, frankly, too
weak and too vague in this area. The systemic risk process will
look--the marketplace will look to that and it will say, what
will happen to an institution when it goes through systemic
risk? And when it goes through that process, say a future
Lehman Brothers or a future AIG, it should pay very, very heavy
penalties so that you don't want to be there, so that the
stakeholders you are talking about, the people who take risks
through it, are basically wiped out. And that is why that part
of this proposal is so critical and should be getting I think
more attention than the Administration gave to it.
The Chairman. The gentleman from Connecticut.
Mr. Himes. Thank you, Mr. Chairman.
I would like to direct a couple of questions to Professor
Zywicki.
Professor Zywicki, I appreciate your testimony and some of
the facts here, but I would like you to defend some of the
things that I have read and heard in your testimony. Stories
have power. And you tell a story that you call not unrealistic
here about a California borrower in northern California who can
pay his mortgage but chooses not to and consults with his
lawyers, your conclusion is that this does not present a
consumer protection issue.
I have never been to this part of northern California. I
represent Connecticut, which includes Bridgeport, which is the
densest concentration of foreclosures in Connecticut. We have
seen over a thousand. And while you call this not unrealistic,
what I see when I go to Bridgeport is often minority families
out of their house, on the curb, with crying children,
surrounded by their belongings. They didn't consult their
lawyer, because they don't have a lawyer. They didn't have a
choice.
And I don't ordinarily deviate from the sort of rationale
here, but your story just sort of strikes me as a cartoon of
where the American people find themselves today, and the
conclusion is what really concerns me. Foreclosure is
certainly, in my district, a terrible consumer protection
issue. It is a community protection issue. Because, as you
know, as an economist, when you have a neighborhood with
foreclosures, you see a decline in property values with all
that that implies.
So I guess I would like to know whether you really
believe--and this is a question being asked by somebody who
worked for 12 years in the financial services industry who
sometimes has trouble understanding his own mortgage and credit
card contracts. Do you really believe that the foreclosure
situation was really more about incentives and that in fact all
of our individual actors here were rational economic actors who
had that fundamental quality that capitalism requires, which is
information and knowledge of what they got into?
Mr. Zywicki. Thanks. That is an excellent question. So let
me clarify my thoughts, which is, first, yes, there are serious
problems in a lot of inner cities where people got in bad
mortgages and ended up in foreclosures. I don't doubt that.
That is definitely a problem. Those are--things should be done
about that. What I am focusing on--
Mr. Himes. My question is really very narrow, which is do
you believe that we have done an adequate job as regulators, as
government, as private industry to creating that fundamental
unit of capitalism, which is a fully informed, smart consumer?
Mr. Zywicki. Right. With respect to the story that I told,
I get one or two e-mails a week from borrowers in California
and Arizona who say, ``Professor Zywicki, I bought a house 2
years ago. I am $100,000 underwater. I saw an article that said
I can walk away from my mortgage. Should I do it?''
Right. People are out there. So it is not a cartoon. People
are making that decision.
Do people understand their mortgages? No, nobody does. I
mean, that is one of the problems with this, is it sets up this
aspirational standard where every person can understand every
mortgage. And according to a study done by the Federal Trade
Commission 2 years ago, what they found was that nobody
understands their mortgages, whether they are prime or subprime
borrowers. It is not a subprime versus prime sort of issue.
What they also recommended, which I think--to go to what
else we should do--is they went through and they gave very
clear instructions on how we could construct better disclosures
so that people could shop in a better sort of way. That would
solve a lot of the problems if we solved the disclosure
problem. The disclosures are not good.
Mr. Himes. The reason I am going down this path is, look,
this is a complicated topic, and we have to get it right. There
is merit on both sides and many different sides, and we have to
get it right. But to me it is a no-brainer, and as people with
some economic training here, it is a no-brainer that you need a
fully informed consumer.
And you repeat here there is no evidence that the financial
crisis was spawned by a systematic lack of understanding. No
evidence that consumer ignorance was a substantial cause.
Nobody is saying that it was spawned by consumer ignorance.
Was not a substantial contributing factor to this crisis the
lack of education, the lack of knowledge, the lack of
information that consumers had?
Mr. Zywicki. No.
Mr. Himes. It was not a contributing factor?
Mr. Zywicki. Not a substantial contributing factor. I have
not seen that it is a minor contributing factor, but--
Mr. Himes. But you did just say that we agree that there
was substantial misunderstanding and misinformation out there.
So you are saying that exists, despite no evidence that it was
causal, you are saying that it didn't cause it.
Mr. Zywicki. Sure. That has been around for 10, 20, 30--
that has been around forever, those sorts of problems. But the
problems that were caused here were caused, as you read my
testimony, as you see, I think caused by incentives. It was
interest rates, Federal Reserve monetary policy, and incentives
when house prices fell. That is what caused the problem. There
were other things that exacerbated it that were around the
margins.
Mr. Himes. Thank you. Thank you, Mr. Chairman.
The Chairman. The gentleman from Florida, I think, was
next.
Mr. Putnam. Thank you, Mr. Chairman.
I apologize for being late. So if we are going over
previously plowed ground, my apologies.
The Chairman. Well, given the next job the gentleman looks
for, that is probably a good practice.
Mr. Putnam. I appreciate the chairman's faith and optimism.
If you accept that the credit, liquidity, economic
contraction crisis is substantially behind us, is it far enough
behind us for us to make the type of sweeping regulatory
reforms that are being contemplated with the immediate
aftermath being such recent history? Do we understand enough
about the events of last summer and fall to accomplish the type
of sweeping reforms that are being discussed here today?
It is a simple question, so let's start at one end and work
down to the other. Mr. Menzies?
Mr. Menzies. I guess your question presumes that we have
some knowledge on whether this is all behind us or not; and
that depends upon whether you are from Florida, California,
Arizona, Nevada, Ohio, Michigan, or Atlanta, or when you are
from the Eastern Shore of Maryland. You can bet I don't know
the answer to that question.
It also presumes that there is a need to create some
regulation to deal with the problem, to deal with the collapse,
if you will. And again I would repeat that it is so important
to focus on what caused the problem. What caused the $7
trillion of economic loss to the American consumer?
We can have all the product legislation in the world and do
everything possible to protect the consumer, but the greatest
damage to the consumer was the failure of a system because of
concentrations and excesses across the board, of a Wall Street
vehicle that gathered together substandard, subprime, weird
mortgages that community banks didn't make, created a warehouse
to slice and dice those entities, make huge profits selling off
those items, and have very little skin in the game, very little
capital at risk, and to be leveraged, leveraged in some cases,
according to the Harvard Business Review this week, 70 to 1.
That deserves attention. The too-big-to-fail, systemic-risk,
too-big-to-manage, too-big-to-regulate issue must be dealt
with. And from the perspective of the community banks, that is
the crisis of the day. That is what has destroyed the free
market system.
Mr. Putnam. Mr. Yingling, do we know enough?
Mr. Yingling. I think we need to be extremely careful,
because what the Congress does with this legislation will not
just determine the regulatory structure, it will determine the
financial structure for decades to come. It will change all the
incentives. So I think we need to be very careful.
And I would just add another point that I touched on
earlier. There is great uncertainty already in the markets, and
it is affecting the markets. It is affecting the cost of
credit. And I do worry, particularly in terms of this consumer
agency, as I mentioned earlier, that all the rules will be
changed, and we won't know what the rules are for years to
come.
So I think an additional point to the one you are raising
and related is, is there going to be so much uncertainty in the
market that people will not know what the rules of the road
are? And that can affect economic recovery.
Ms. Leonard. I think we, too, need to be extremely
cautious, because the market has changed. The market has
adjusted based on going so far in the opposite direction in
terms of being risk tolerant that there could be extreme
unintended consequences for future credit if we don't really
take the time to know where the problems took place all the way
down the line and how to stop them from happening again.
Mr. Zywicki. This proposal made credit more costly and less
available to consumers. That would be bad in itself.
Secondly, it will probably push consumers to even less
attractive forms of credit such as pawn shops, payday lenders,
a lot of these sorts of organizations, because it will make
regular credit less available. That is a bad idea anytime. It
seems like an especially bad idea at this time.
The Chairman. The gentleman from California.
Mr. Sherman. Thank you, Mr. Chairman.
The gentlelady from Minnesota mentioned Goldman. The one
issue that I need to bring up is we own warrants in Goldman.
They are worth between a quarter and a half billion dollars.
And there are negotiations now in process that I fear will lead
to us cashing in those warrants for far less than they are
worth.
We took a huge risk. Goldman is doing well. We are going to
have to profit on this deal, because I know we are going to
lose money on a bunch of the other deals.
As to consumer ignorance being the cause of all this, I
would say to my way of thinking it is investor ignorance. They
treated Alt-A as triple A. They loaned $500,000 to people to
buy a three-bedroom bungalow in my district, and then we
counted that as increase in our worth. It increased property
values, didn't exactly increase the value of that home.
And I don't think the borrowers were all that dumb, even if
they signed a loan that they ultimately couldn't pay. Because
if they sold in 2006, they made more money on their home than
they ever made working, or at least for many years of working.
The people who took ridiculous risks were the investors,
the lenders. They thought they were creating wealth. All they
were doing is creating a bubble.
The three issues that I think are going to be most
contentious on regulatory reform are: first, the enhanced
powers of the Fed. We are going to have to deal with Fed
governance. It is absolutely absurd to put huge governmental
powers in an entity that is selected, whose leadership is
selected--not always one man, one vote--they will have to
appoint Fed board members. But in some cases, the regional side
and various other entities, the governance of the Fed is one
bank, one vote; one big bank, one big vote. And last I checked
the Constitution, governmental powers should be in the hands of
those who are elected one man, one vote; one woman, one vote.
Also a big discussion on whether the Fed should be audited
like every other government agency. The more governmental power
you give it, the more reason there is to audit.
And, finally, the chairman has discussed Section 13.3 of
the Federal Reserve Act.
Mr. Bernanke was here and I facetiously questioned him
about whether he would accept a $12 trillion limit on the power
of the Fed to go lend money to whomever he thought ought to get
it. He thought a $12 trillion limit on that power would be
acceptable. The power of the purse is supposed to be in Article
1 of the Constitution, not Article 2.
And the proposal of the Administration is to say, well, you
need two entities in Article 2 of the Constitution, both the
Fed and the Treasury Department, to go out and take--and to
risk trillions of dollars. I would think that we would want a
dollar limit imposed by Congress.
Derivatives are often a casino. We are told that they are
used as hedges, and that is the justification for them. But for
every $10 billion that an airline hedges on the future fuel of
costs, there seems to be $10 trillion in casino gambling. Which
would be more or less fine, except, unlike Las Vegas, we have
the Secretary of the Treasury, when he came before us a couple
of days ago, making it plain that he reserves the right to use
whatever governmental powers he might have to bail out the
counterparties on derivatives being written today.
So we do have an interest in minimizing the over-the-
counter derivatives and minimizing what could be a risk that
ultimately falls on the taxpayer.
I would think at a minimum, we would limit over-the-counter
derivatives to those cases where somebody has a genuine
insurable risk and is unable to hedge it in the exchange-traded
derivatives.
For us to say we are going to have a taxpayer-insured
casino involving trillions of dollars a day, just so that one
or two airlines could hedge fuel costs, fails to recognize the
size of this, of the casino part of the over-the-counter
market.
Finally, Professor, I will be introducing a bill that would
deprive the issuer of a debt security from selecting the
credit-rating agency. To me, that is like having the umpire
selected by the home team. Which is fine if it is a beer
league; not so fine if you are in the major leagues.
And instead, we would select at random from a panel of SEC-
qualified credit-rating agencies. Another way to go would be to
make the credit-rating agencies liable for negligence. I don't
know if I am allowed a response.
The Chairman. No, you can't get--
Mr. Sherman. I will ask you to respond for the record.
The Chairman. The gentleman's time has expired.
The gentleman from Illinois.
Mr. Manzullo. Mr. Chairman, you know it is amazing, if I
had asked each of you guys--that of course includes the
gentlelady--what caused everything, the answer is pretty
simple: too easy credit. The Federal Reserve had the authority
to stop the 2/28 and the 3/27 mortgages, and the Federal
Reserve also had the authority to require, goodness gracious,
written proof of a person's income before that person was
eligible to get the mortgage.
You know something? No one starts with the problem. The
problem is not in the derivatives, the problem is in the stinky
piece of financial garbage that was generated because of the
bad subprime loans.
So if we already have a government agency that had the
powers to stop this, and didn't do so for any number of
reasons, why create another agency given the authority to come
in and mess up?
I mean, I don't know if you guys have taken a look at this
Consumer Financial Protection Agency Act of 2009, the proposal
on it. You know what that does? That says that this new
organization gets to work with HUD, and perhaps FHSA, on a
Truth-in-Lending and RESPA financial disclosure form. And how
long did we fight those people at HUD on RESPA?
When I chaired the Small Business Committee, that went on
for 6 years. They finally came up with something they thought
would work.
And now FHA says well, we are going to take care of the
appraisers. It allows banks to own an appraisal management
company so that the appraisal management company can be wholly
owned by the bank. But if you separate the men's bathroom from
the women's bathroom, they can go out there and do an
independent appraisal.
And if a person gets an appraisal that he doesn't like--you
know, we were told by the head of the FHFA what his resolution
is: to contact them or the CC. You know, the more power and the
more agencies we set up, it just screws everything up.
I mean, Mr. Menzies, you know, you are a community banker.
In your opinion--I like to pick on you--this is the third time
since you have been here.
In your opinion, if we did not have those exotic mortgages,
if they were not allowed, and people had to show proof of their
income, don't you agree that this crisis probably never would
have occurred?
Mr. Menzies. You do pick on me all the time.
Mr. Manzullo. Yes, that is because I like your answers.
Mr. Menzies. Thank you, sir. You know, as a community
banker, knowing that my personal capital is at risk, knowing
that I have personal skin in the game, introduces a great deal
of morality in the business decision-making; because we own,
individually and personally, the consequences of our own loan
decisions, whether we put it in the secondary market through
Fannie and Freddie, whether we keep it, we own the consequences
of those decisions personally.
So my perspective would be that the lack of capital, the
lack of ownership, the extraordinary leverage, the lack of skin
in the game, created an environment that allowed those who were
feeding off of the system to create products that they would
not have created if their personal skin were in the game, if
their personal capital were at risk, if they were truly at risk
of owning their own decisions.
Mr. Manzullo. Now, Ms. Leonard, do you agree with my
assessment that had the Fed had some reasonable--I mean, the
Fed finally has put these into effect, will take effect in
October of this year-- wouldn't that have stopped a lot of the
subprime?
Ms. Leonard. Yes. If the lenders were not allowed to create
those products, those, you know, riskier guidelines, yes.
Mr. Manzullo. Well, then isn't that the answer? You know, I
just can't see setting up a whole new--I mean, this consumer
financial protection--
The Chairman. The gentleman's time has expired. I am going
to give myself 10 seconds.
Mr. Menzies, I take what you have said, if I am correct, as
a strong argument in favor of some requirement of risk
retention throughout the system.
Mr. Menzies. Yes, sir. We believe that risk retention is an
important part of the whole system. And at the same time, we
hope those transactions that are clearly underwriting, like a
conforming mortgage loan, don't get buried or weighted down in
that process. But we think risk retention is an important part
of the whole system.
The Chairman. Right. And it seems to me it takes the place
of some other restrictions that may come.
I thank the panel very much, and it is dismissed.
[Whereupon, at 2:07 p.m., the hearing was adjourned.]
A P P E N D I X
July 15, 2009
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