[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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                 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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