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




 
                 REGULATORY RESTRUCTURING: SAFEGUARDING
                  CONSUMER PROTECTION AND THE ROLE OF
                          THE FEDERAL RESERVE

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                        DOMESTIC MONETARY POLICY

                             AND TECHNOLOGY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 16, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-60



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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
        Subcommittee on Domestic Monetary Policy and Technology

                MELVIN L. WATT, North Carolina, Chairman

CAROLYN B. MALONEY, New York         RON PAUL, Texas
GREGORY W. MEEKS, New York           MICHAEL N. CASTLE, Delaware
WM. LACY CLAY, Missouri              FRANK D. LUCAS, Oklahoma
BRAD SHERMAN, California             JIM GERLACH, Pennsylvania
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            BILL POSEY, Florida
KEITH ELLISON, Minnesota             LEONARD LANCE, New Jersey
JOHN ADLER, New Jersey
SUZANNE KOSMAS, Florida


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 16, 2009................................................     1
Appendix:
    July 16, 2009................................................    43

                               WITNESSES
                        Thursday, July 16, 2009

Carr, James H., Chief Operating Officer, National Community 
  Reinvestment Coalition (NCRC)..................................    31
Duke, Hon. Elizabeth A., Governor, Board of Governors of the 
  Federal Reserve System.........................................     7
McCoy, Patricia A., Director, Insurance Law Center, and George J. 
  and Helen M. England Professor of Law, University of 
  Connecticut School of Law......................................    28
Saunders, Lauren K., Managing Attorney, National Consumer Law 
  Center, on behalf of Americans for Financial Reform............    29

                                APPENDIX

Prepared statements:
    Watt, Hon. Melvin............................................    44
    Carr, James H................................................    48
    Duke, Hon. Elizabeth A.......................................    72
    McCoy, Patricia A............................................   161
    Saunders, Lauren K...........................................   183

              Additional Material Submitted for the Record

Watt, Hon. Melvin:
    Responses to questions submitted to Hon. Elizabeth Duke......   228
    Responses to questions submitted to Lauren Saunders..........   239
    USA Today article entitled, ``Banks raise penalty fees for 
      customers' overdrafts''....................................   247


                       REGULATORY RESTRUCTURING:
                         SAFEGUARDING CONSUMER
                        PROTECTION AND THE ROLE
                         OF THE FEDERAL RESERVE

                              ----------                              


                        Thursday, July 16, 2009

             U.S. House of Representatives,
                  Subcommittee on Domestic Monetary
                             Policy and Technology,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:03 p.m., in 
room 2128, Rayburn House Office Building, Hon. Melvin L. Watt 
[chairman of the subcommittee] presiding.
    Members present: Representatives Watt, Meeks, Sherman, 
Green, Cleaver, Ellison, Adler, Kosmas; Paul and Posey.
    Ex officio present: Representative Bachus.
    Chairman Watt. This hearing of the Subcommittee on Domestic 
Monetary Policy and Technology will come to order. We will 
proceed with opening statements up to 10 minutes per side, and 
I will recognize myself for a brief opening statement.
    This hearing is entitled, ``Regulatory Restructuring: 
Safeguarding Consumer Protection and the Role of the Federal 
Reserve.'' This is the second in a series of hearings about 
financial regulatory reform and the role of the Federal 
Reserve, the second in this subcommittee, that is. The first 
hearing, held on July 9th, examined how to balance the Federal 
Reserve's existing role as the independent authority on 
monetary policy with its proposed role as systemic risk 
regulator under the Administration's financial regulatory 
reform proposal.
    Today's hearing examines a different aspect of the 
Administration's regulatory reform proposal, the proposed 
Consumer Financial Protection Agency (CFPA). While the full 
Financial Services Committee has held a hearing--or a series of 
hearings, for that matter--on the CFPA, this hearing will drill 
down further and examine some of the public policy and 
operational considerations related to the proposed CFPA, 
including whether the Federal Reserve should maintain a role in 
consumer protection, given its current responsibilities for 
writing rules, supervising institutions, and enforcing the 
Nation's consumer protection laws, and if so, what that role 
should be and how it might be coordinated with, supportive of, 
or at least not in conflict with the new CFPA.
    Although no witnesses from other Federal banking agencies 
are testifying today, this hearing may also touch upon how the 
same set of questions should be answered with respect to their 
consumer protection roles and their interactions with the CFPA.
    Today there is no single agency focused solely on 
protecting consumers from products and services that could be 
detrimental to their financial health. Since the idea of having 
a single Consumer Financial Protection Agency was advanced by 
Harvard Law School Professor Elizabeth Warren, other academics, 
commentators, Members of Congress, and regular citizens have 
embraced the idea. They have witnessed the way that our 
fragmented regulatory system produced serious gaps in 
regulation and oversight and failed to have anyone whose 
highest priority was protecting consumers, that is, someone who 
goes to work every day with that as their single most important 
objective.
    Others, of course, criticize the idea of a single consumer 
protection agency as adding another layer of regulation.
    There can be no doubt that regulatory gaps helped create an 
environment for toxic financial products such as predatory 
mortgages and other abuses that helped cause the current 
financial crisis. To remedy this, the Administration has 
proposed placing focused authority in the proposed CFPA to 
administer the Nation's consumer protection laws. As Congress 
and President Obama work to enact financial regulatory reform, 
it is critical for us to examine the public policy rationale 
for vesting virtually all authority for consumer protection of 
financial products in a single agency. Also, as a matter of 
public policy, we will examine whether and how the Federal 
Reserve can effectively balance its responsibilities to execute 
monetary policy, take on a new role in systemic regulation, and 
if it continued to have this role, protect consumers 
effectively.
    For far too long, consumer protection has been an 
afterthought. I hope that the record developed at today's 
hearing will offer further support for the elevation of 
consumer protection to be on equal footing with prudential and 
safety and soundness regulation.
    We also hope that today's hearing testimony will begin to 
address some of the questions surrounding the operational 
details of the proposed consumer protection agency, including 
coordination between and among Federal regulators and State 
regulators so that there is effective and efficient regulation 
of the Nation's consumer protection laws in the financial 
services area, as many believe we have in the food and product 
safety area.
    With that, I will recognize the gentleman from Texas, the 
ranking member of the subcommittee, Mr. Ron Paul, for, I guess, 
up to 10 minutes or as much time as--I guess, 6 minutes; 6 
minutes is what I have been told.
    Dr. Paul. Thank you, Mr. Chairman. I want to thank you for 
holding these hearings because I think they are very important. 
The subject of consumer protection and the role of the Federal 
Reserve is, to me, a very important issue.
    I look at this somewhat differently than others because 
they talk about consumer protection, and they are thinking 
about financial products and services, credit cards and gift 
cards and that if there is any harm done to the consumer, that 
just additional regulation will handle this. But I think there 
is a much bigger issue related to the consumer and the Federal 
Reserve, something I think is neglected in a serious manner.
    For instance, the Federal Reserve has something to do with 
the value of our money, and the Federal Reserve has been around 
since 1913 and now we are working on a 4-cent dollar. So the 
systematic destruction of the value of our money has not helped 
our consumers; our consumers are destroyed by the loss of their 
purchasing power.
    The fact that the Federal Reserve regulates interest rates 
and gets them down to 1 or 2 percent, so if you happen to be a 
saver and you are in retirement and you put money away, you get 
punished. Maybe the market would say that the interest rates 
ought to be 5 percent or 6 percent or 7 percent, if you are a 
saver. But we punish them, and this has to do with the 
regulations and manipulations going on with the Federal 
Reserve.
    So the Federal Reserve is hardly a protector of the 
consumer when it distorts the interest rate that is paid to the 
savers, and they are the consumers.
    Think about how the consumer was protected with the 
collapse of the financial bubble. The financial bubble--it is 
well-known the financial bubbles come from inflating the money 
supply, lower interest rates, malinvestment, too much debt. The 
source of all this mischief comes from the Federal Reserve, and 
who suffers? The consumer.
    Who benefits? The people who had been making bundles on 
Wall Street and the bankers, for years when the bubble is being 
built, and then all of the sudden the bubble bursts, and who 
gets punished? The little guy gets punished. He loses trillions 
and trillions of dollars in value.
    Who gets bailed out? Goldman Sachs.
    And we pretend that the Federal Reserve is going to protect 
the consumer when the consumer is being destroyed under these 
conditions.
    Think about the consequence of the collapse of the bubble 
that has been artificially created. Who suffers? It is the 
consumer, the people who lose their jobs, the poor people, the 
middle class.
    This type of system that we have today, historically it is 
well-known if we pursue it, and we are pursuing it, because the 
middle class gets wiped out. Look at all of the inflations 
throughout history, all of the paper moneys of history. The 
middle class eventually gets wiped out because the value goes 
down. And the people who suffer the most aren't the people on 
Wall Street; the people who suffer the most are the middle 
class. They lose their jobs. They lose their houses.
    And I just think that as well intended as this is, to have 
more regulations to protect the consumer with their financial 
products and their other services--maybe it will help a little, 
but if you don't address the subject of how the consumer is 
destroyed, it won't help.
    Mexico has gone through this quite a few times with the 
destruction of currency. Who gets wiped out? The middle class. 
They are all holding pesos. The peso goes to the dogs. The 
middle class gets wiped out.
    Now, and I have had correspondence and meetings with 
members of congress from Mexico, and now they have a savings 
account in Mexico where if you are frightened about the 
destruction of currency, you can actually go in and have a 
savings account in silver. That is--they are trying to help 
protect the consumer.
    But here in this country, if you happen to want to use 
silver and gold as legal tender, you go to jail, even though 
the Constitution tells us exactly what to say.
    So, ultimately, these--this process will work its way 
through the progress and there will be another consumer 
protection agency, but it is not going to do a whole lot until 
we address the subject of how do you protect the little guy, 
the middle class, by having honest money and not allowing the 
monetary system to inflate at will behind closed doors and to 
benefit special interests. This is what has been happening for 
a long time.
    Some day, we are going to have a revelation and find out 
that when we open up the books and find out every agreement 
that was ever made between the Federal Reserve and Goldman 
Sachs and have it on the record, maybe then we will find out 
how we can protect the consumer and not have a system that 
protects all the wealthy on Wall Street as well as those 
individuals who happen to work for Goldman Sachs.
    I yield back the balance of my time.
    Chairman Watt. The gentleman yields back the balance of his 
time.
    The gentleman from California, Mr. Sherman, a member of the 
subcommittee, is recognized for 3 minutes.
    Mr. Sherman. The Federal Reserve is a very powerful 
government agency exercising government power. The proposal now 
is to give them a lot more power.
    In a constitutional democracy we have one person, one vote. 
The executive branch is headed by the President and all 
important executive branch appointees are appointed by the 
President or appointed by the President's appointees.
    There is one incredible and offensive exception. That is 
the Federal Reserve where, at the regional bank, a majority are 
selected and, ultimately, on the Federal Open Market Committee, 
perhaps the most important government agency we have, a 
majority of the power is in the hands of one bank, one vote. Or 
should I say, ``one big bank, one big vote;'' ``one small bank, 
one small vote?''
    This is an affront to the Constitution which will be 
exacerbated if we transfer more power to the Federal Reserve 
without mandating that all its Governors be appointees of those 
who are elected by the voters. It is a testament to the power 
of the banks that such incredible governmental power is 
invested in agencies where the voters don't decide who are the 
Governors. I realize the Federal Reserve Board of Governors is 
appointed, but those regional slots and the Open Market 
Committee are very important centers of government power.
    Second, the ranking member on this committee has a bill 
which I have cosponsored to audit the Federal Reserve. It is 
absurd to have a government agency with this kind of power be 
the agency immune from such audits.
    And finally, there is the idea of, where do we put consumer 
protection? Right now, we have a Federal Reserve where the 
banks choose the majority of those on the regional boards and 
on the Federal Open Market Committee, and then we are told that 
is the agency that will protect consumers from the banks. No 
other industry has that much power to select its regulators.
    Finally, if the Fed is going to be the systemic risk 
regulator, we have to recognize that ripping off consumers is 
one way to ameliorate systemic risk because if you can double-
cycle bill, you can get the banks a little bit more healthy, 
and maybe they will survive their stress tests. We can't put 
those responsible for the stress test on the one hand with the 
responsibility for protecting consumers on the other. And I 
don't care how healthy you can make the banks with credit card 
rip-offs, we ought to prevent those credit card rip-offs, we 
ought to prevent those credit card rip-offs because ripping off 
the consumer is not the best way to make the banks healthy.
    I yield back.
    Chairman Watt. The gentleman yields back the balance of his 
time.
    The ranking member of the full committee, Mr. Bachus from 
Alabama, is recognized for 4 minutes.
    Mr. Bachus. I thank the chairman. I thank you for convening 
this hearing on consumer protection and the role of the Federal 
Reserve. And I would like to personally welcome Governor 
Elizabeth Duke.
    I guess ``welcome'' is a good word. You are welcome. 
Obviously, you have a difficult task any time you face a 
subcommittee. And I am not sure who selected you as the one to 
come up here, but I think it was a very capable decision.
    At one point in her distinguished career, she was the head 
of the community banking for one of our long-based Birmingham 
banks. And I thank you for being here.
    As we heard in this morning's hearing, and it is likely to 
come out in this hearing, proponents of the Administration's 
proposal to create a Consumer Financial Protection Agency are 
contending that there was a massive failure in consumer 
protection on the part of the Federal Reserve, and that failure 
led to the collapse of the global economy. I think that is an 
oversimplification and unduly unjust criticism. And there is 
lots to criticize about the Fed's response to the growth and 
the collapse of the subprime mortgage market, as well as the 
agency's handling of the credit crisis and the turmoil in the 
financial markets.
    In addition, we all agree that comprehensive reform of our 
financial regulatory system is needed. But I think it is, or 
should be, clear to all of us that last September, the 
challenges that the central bank faced were without precedent 
and that Chairman Bernanke and the Federal Reserve, in 
combination with the other regulators, the Administration, and 
the Congress acted with good intentions, and I believe averted 
a much more catastrophic economic collapse.
    I am not sure this Congress and the people we represent 
fully realize that they did some very good work.
    Both the Democrats' regulatory reform proposal and a plan 
we have put forth strips the Federal Reserve of its consumer 
protection mandate. And it does that although--with both the 
subprime lending regulations in 2007, and the credit card 
regulations of the Fed advanced in 2008 were very good. In 
fact, in a bipartisan way, both the chairman of the full 
committee and I as ranking member and most of the members 
complimented you on that work and, I think, had--I think they 
were very good.
    The difference in the Republican plan is that it 
streamlines and consolidates the functions of the four bank 
regulators, including consumer protection, into a single 
umbrella agency; and this creates clear lines of accountability 
and prevents regulatory authorities from passing the buck.
    In contrast, the Democrats' plan adds a massive new layer 
of bureaucracy with broad undefined and arbitrary powers to a 
brand-new agency with absolutely no experience. It is a plan 
that continues the kind of turf battles that undermine rather 
than promote effective consumer protection.
    In closing, let me say that I understand that Governor Duke 
will be suggesting some other approaches and I think other 
approaches probably will carry the day, given the Fed's 
extensive regulatory expertise and their recent successes in 
this regard, we have a responsibility to carefully consider 
them and judge them on the merits.
    Thank you, Mr. Chairman.
    Chairman Watt. I thank the gentleman for his statement.
    The gentleman from Texas, Mr. Green, is recognized for 2 
minutes.
    Mr. Green. Thank you, Mr. Chairman. And I do want to 
associate myself with some of the comments made by the ranking 
member of the full committee.
    I appreciate what you said about averting the catastrophe 
that the country was facing and that we did some good here in 
Congress by working with the Fed and helping. I think that was 
important.
    And I think that Mr. Bernanke has done a good job, an 
outstanding job, and I salute him for what he has done. He has 
been very much amiable and amicable in terms of working with 
the Congress, to the extent that he can without surrendering 
his autonomy, and I don't expect him to do this.
    I think the Fed has an awesome task. Right now we are 
talking about systemic risk regulation. You currently deal with 
setting and executing monetary policy, and now we are looking 
at the possibility of adding consumer protection.
    With reference to your consumer protection function 
currently, you deal with supervision and enforcement, complaint 
investigation, rule-making, consumer education, as well as 
community development.
    You did promulgate some rules that were, I think, of 
benefit with reference to dealing with credit card practices; 
the rule that relates to the 45-day notice, I thought was of 
benefit; prohibiting double-cycle billing was beneficial; and I 
think that the way that you have put in place the allocation of 
payments with reference to interest rates, when the interest 
rates can vary, I think that is a benefit too.
    But my concern is, candidly speaking, that these things are 
done in a reactive way. Congress was about to do something, and 
I think the Fed judiciously and prudently gave us a very good 
reaction to what was about to become congressional action. And 
I am concerned that we don't--we won't have a proactive entity 
if we have this in the hands of the Fed.
    So I welcome your comments later to help me to understand 
better how this will become a proactive initiative, if you have 
it, as opposed to reactive.
    I thank you, Mr. Chairman, and I yield back.
    Chairman Watt. I thank the gentleman for his opening 
statement.
    Without objection, all members' opening statements will be 
made a part of the record.
    And now, I will proceed with the introduction of our 
witnesses. Our first witness, the only witness on this panel, 
is the Honorable Elizabeth A. Duke, Governor, Board of 
Governors of the Federal Reserve System.
    Without objection, of course, Ms. Duke, your written 
statement will be made a part of the record, and you will be 
recognized for a 5-minute summary of your testimony. There is a 
lighting system that you are very familiar with; you have been 
here before. When it goes to yellow, you will have 1 more 
minute; and then we will--I am pretty generous in trying to 
hear our witnesses, because I think that is more important than 
hearing ourselves sometimes. So we will give you a little slack 
if you run over.
    So you are recognized for 5 minutes, and you may proceed 
with your testimony.

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

    Ms. Duke. Thank you, Mr. Chairman. And I will try to be 
mindful of my time.
    Chairman Watt, Ranking Member Paul, and members of the 
subcommittee, I appreciate the opportunity to appear today to 
discuss regulatory restructuring and the role of the Federal 
Reserve Board in consumer protection.
    The members of the Federal Reserve Board are in strong 
agreement with the Administration that a fundamental lesson of 
the financial crisis is that we need to do a better job for 
consumers of financial products.
    While arguments for consolidating consumer protection 
functions may be compelling, it is important to also consider 
the substantial opportunities presented by existing 
arrangements. In our view, the Federal Reserve has the 
resources and the experience to execute an ongoing, 
comprehensive program for effective consumer protection in 
financial services. Our team of seasoned professionals and 
specialists focus exclusively on the panoply of activities 
that, taken together, can most effectively protect consumers; 
however, their work is augmented by supplemental expertise in 
market research and supervision from within the Board and the 
12 regional Reserve Banks.
    We believe that replicating in another agency the full 
array of functions that support our consumer protection program 
would be enormously challenging. A report outlining our 
extensive program and recent actions is provided to my written 
testimony.
    We also view consumer protection as complementary to, 
rather than in conflict with, the other functions of the 
Federal Reserve, such as prudential supervision and financial 
stability. These missions enforce one another. For example, 
sound underwriting benefits consumers as well as institutions, 
and strong consumer protections can add certainty to the 
markets and reduce risk to the financial system.
    We have demonstrated, particularly in the recent years with 
which I am most familiar, our commitment and capacity to 
effectively execute our congressionally assigned consumer 
protection responsibilities. The Board is also concerned that 
removing consumer protection responsibilities from the Federal 
Reserve would weaken the consumer perspective that currently 
exists in our monetary and supervisory policy discussions.
    It is appropriate and beneficial that the central bank has 
a mission that includes an analytical and nuanced understanding 
of developments in the consumer marketplace.
    For these reasons, we stand ready to work with this 
subcommittee and others in Congress to help identify ways to 
further strengthen our consumer protection program 
institutionally.
    As Congress considers regulatory reform, one option that 
might be considered would be to retain the Federal Reserve's 
consumer protection responsibilities and consider additional 
policies to strengthen and further reinforce our commitment 
going forward. Along these lines, I would like to offer some 
suggestions for how this could be accomplished.
    First, we believe that enhanced accountability could be 
achieved by codifying or otherwise institutionalizing consumer 
protection as a core mission or responsibility for the Federal 
Reserve, just like monetary policy in bank supervisions. This 
would provide a clear and ongoing understanding that consumer 
protection matters are an integral part of the Federal 
Reserve's overall mission.
    Second, Congress could require the Chairman of the Federal 
Reserve Board to annually report regarding the state of 
consumer protection, similar to the semiannual monetary policy 
reports to the Congress. Such reporting could include a 
comprehensive review of the Federal Reserve's actions taken to 
strengthen consumer protection, planned future actions to 
address potentially unfair and deceptive acts and practices, a 
review of enforcement actions, studies of consumer finances, 
availability of financial services, especially in underserved 
areas or other matters as requested by the Congress.
    Third, we plan to conduct periodic sufficiency reviews of 
consumer regulations and policies. These reviews will consider 
emerging trends in consumer financial services, whether 
existing regulations are adequate for protecting consumers, and 
identify those areas in which new consumer protection measures 
are needed. We will develop a process that includes regular 
public hearings in Washington and regional locations around the 
country similar to the process required by the Credit Card Act 
of 2009. These findings and recommendations could then be 
reported to Congress as part of the annual testimony and report 
discussed previously.
    Strong, timely and thoughtful consumer protection is 
critical for the economic health and vitality for our country. 
We at the Federal Reserve Board remain strongly committed to 
effectively protecting consumers, and we look forward to 
continuing to work with Congress on these critical issues.
    Thank you, Mr. Chairman.
    [The prepared statement of Governor Duke can be found on 
page 72 of the appendix.]
    Chairman Watt. I thank you for your testimony.
    And I now recognize the members for questioning and I 
recognize myself for 5 minutes.
    Ms. Duke, I learn something new in this job every day; and 
reading your testimony, I learned something new. Both on page 2 
and page 17 of your testimony, you indicate that consumer 
protection was never at the core mission statutorily of your 
agency. You say, correcting that would help you do consumer 
protection more. I mean, I am reading it here.
    I thought you said we should codify consumer protection as 
a core mission along with our other responsibilities. On page 
17, you say, ``codify consumer protection as a core mission or 
responsibility''--``similar to monetary policy in banking 
supervision and regulation.''
    I didn't realize that consumer protection was dealt with 
differently than--certainly not banking supervision and 
regulation; maybe monetary policy, I recognize, is pretty 
carefully statutorily outlined.
    Are you saying to me that the Fed has viewed this as a 
secondary role?
    Ms. Duke. The monetary policy targets that we have are in 
the statute. I think the reason that I would suggest that be 
put into statute, that this be codified, is that there is a 
perception, whether true or untrue, that consumer protection 
has taken a lower priority than some of the other functions of 
the Federal Reserve.
    At times in our history--
    Chairman Watt. I can certainly understand the perception, 
but according to this, it is a reality.
    Is there something more explicit about banking supervision 
and regulation and the responsibilities the Fed has for that 
than there is about consumer protection?
    Ms. Duke. Mr. Chairman, since I have been with the Federal 
Reserve, it has been my observation that the three are all 
important in the Federal Reserve. However, over time, the 
codification of that would simply make it--we would ensure that 
it remains.
    Chairman Watt. Would you argue with the notion that 
somebody in our government ought to show up every day with the 
prime responsibility for protecting or dealing with the issues 
of consumers in their financial matters?
    Ms. Duke. I wouldn't argue with that at all. In fact, I 
would hope there is more than one somebody.
    Chairman Watt. Okay. All right.
    Now, some of the people in the industry have said that if 
we leave part of this responsibility in the Fed and create this 
new consumer protection agency, that will lead to conflicts. 
And I think I started to understand that yesterday, so I am 
prepared maybe to move it all out of the Fed. That is one 
possibility of resolving conflicts. Or leave it all in the Fed.
    But this is all over the place now: It is in the Fed; it is 
in OTC; it is in a number of different regulatory agencies. And 
while you have been pretty aggressive about saying that you 
think that the Fed can do it, I am wondering if you have the 
same level of confidence in the other regulators who are doing 
it. Or should we--are you saying that we should continue to 
leave consumer protection in the Fed, in the OTC, in the other 
regulators as an alternative for the new agency?
    Ms. Duke. I am assuming that your question refers to the 
examination responsibilities, the supervision responsibilities.
    Chairman Watt. I am talking about protecting consumers, not 
the examination responsibilities. Do you have to examine an 
institution to protect consumers?
    Ms. Duke. There are actually two parts to the consumer 
protection. One part is the rule-writing and the other part is 
the inspection within the institutions to ensure that all of 
the rules are being followed.
    So within the banks, within the banking industry, there are 
on-site examinations similar to prudential supervision 
examination, but focused entirely on consumer issues. So to the 
extent that there would be any conflict between the prudential 
supervision, the safety and soundness side and the consumer 
compliance side, as a matter of practice right now within the 
agencies, because of the day-to-day contact, those are usually 
resolved in the ordinary course of business.
    Chairman Watt. I think that is another question that I 
have, but my time has run out and I don't want to abuse it.
    I actually think this may be a panel that we do a second 
round of questions, so as not to put the other members at a 
disadvantage.
    Let me proceed with recognizing the ranking member for 5 
minutes for his questions.
    Dr. Paul. Thank you, Mr. Chairman.
    And welcome, Governor Duke, to our hearing.
    I find it rather fascinating that we are talking about 
where the regulations will go, whether it is going to be in the 
Fed or a new agency. From my viewpoint, I am not sure it makes 
a whole lot of difference. I think it is the principle of 
regulation, whether it will work or not.
    But it is rather ironic that a lot of people are talking 
about putting them in the Fed with the amount of failure of the 
Federal Reserve and the amount of noncompliance or at least, an 
observation by the Congress, its inability to audit makes it 
sort of ironic that we might give the Federal Reserve even more 
power.
    I am concerned about the history of regulation. We don't 
have a real good record that regulations prevent problems. We 
have had the SEC around for a long time, and the SEC didn't 
prevent Enron and so many other bankruptcies and big problems. 
Then, of course, when we had that failure, we had Sarbanes-
Oxley and that hasn't prevented much either. We had a lot of 
housing regulations. It didn't prevent the housing bubble. It 
goes on and on.
    A lot of people think, if you are not a strong endorser of 
all these regulations, therefore, you think it runs free and 
there is no regulation. But the regulations come differently; 
it comes through the marketplace. If you do badly, and you 
don't serve the consumer, you go bankrupt.
    But when you prop-up policies that are bad, ultimately the 
consumer is hurt by these regulations because the market 
doesn't hold them in check, and I see that as a bigger problem.
    The question is, though, do you think that with additional 
regulations, more rules and--it might not hurt the consumer in 
the sense that it is going to be difficult to come up with a 
new package for the consumer. People might just say, ``To heck 
with gift cards and other things; I am not going to mess with 
this.''
    And then there is a cost; there is a cost always, and it is 
always borne by the consumer. Any time you have a regulation, 
you say, I am going to regulate the businessman, that is a 
fallacy. All regulations are a tax, and they are a tax that is 
passed on to consumers.
    Could you address that, on how you can regulate without 
putting a tax on the consumer?
    Ms. Duke. I think all consumer regulation--and I frankly do 
think there needs to be some, that it needs to be informed by a 
deep understanding--an understanding of the market, an 
understanding of financial institutions, an understanding of 
the way financial markets operate and the way transactions 
operate--in order to avoid adding excessive costs; and that 
such regulations have to be done with an eye toward the 
availability of financial services.
    So it is a balance between the quality and the quantity of 
financial services.
    Dr. Paul. Right now, there is a big grass-roots effort by 
consumers, who are saying that the Congress has not fulfilled 
its responsibility in knowing exactly what the Federal Reserve 
does--what kind of agreements they make with international 
banks, other governments, international financial 
organizations, what kinds of conversations they have had with 
companies like Goldman Sachs.
    And because of this consumer concern, they have asked for 
more oversight of the Federal Reserve, and there are now 277 
Members of Congress who think that should be the case.
    Why do you think it would hurt consumers for us to know 
more about what the Federal Reserve is doing, which may well be 
hurting the consumer if we knew more about it? How can this 
information be harmful?
    Ms. Duke. Congressman, we are making quite a bit of 
information available now.
    We have a weekly report of our balance sheet. We have a 
monthly report which is submitted to Congress. We have a great 
deal of information on our Web site. And we also are subject to 
quite a bit of GAO oversight.
    The one place, the one exception to that oversight, is in 
monetary policy; and what research has shown with monetary 
policy is that the independence of monetary policy is important 
for expectations of--
    Dr. Paul. May I interrupt, because this bill would have 
nothing to do with monetary policy. They might find out what 
has been done, but it wouldn't interfere at all with monetary 
policy.
    And I would beg to disagree. There is more than one issue. 
It is not monetary policy. If you look at the code, it exempts 
about five categories; one is, all relationships and 
transactions with foreign governments, foreign central banks, 
international financial institutions, private corporations. So 
those are exempt, too, and I think those are pretty important.
    In a way, if the Federal Reserve can have an agreement with 
another government, that is like a treaty. And surely it isn't 
exactly what the founders intended when they wrote the 
Constitution.
    I see my time has expired.
    Chairman Watt. The gentleman's time has expired.
    The gentleman from Texas, Mr. Green, is recognized for 5 
minutes.
    Mr. Green. Thank you, Mr. Chairman. And I thank the 
witness, Ms. Duke, for appearing today.
    It is an honor to have you with us, Ms. Duke. My concern 
has to do with what I called to your attention earlier about 
being proactive as opposed to reactive. And while I appreciate 
much of what was done in December of last year, it appeared to 
be reactive, and I am interested in how do you move from that 
level of engagement, such that you start to look for ways to 
protect the consumer, which is what I think most people assume 
that a consumer protection agency would do.
    Let me just give you an example. My suspicion is that a 
consumer protection agency would have, or a consumer protector 
would have, looked at the yield spread premium, an undisclosed 
yield spread premium, and probably have concluded that there is 
something wrong this as it relates to the consumer, the one who 
actually received it.
    And I said ``undisclosed,'' wherein you qualify the buyer 
for 5 percent, and you don't tell the buyer that you qualified 
for 5 percent; and you give them a loan for 8 or 10 percent, 
and he or she never knows that he or she qualified for prime 
and was pushed into the subprime market.
    How would you do this? How would you become proactive on an 
issue like this?
    Ms. Duke. I appreciate that question.
    We have actually talked about this quite a bit and have 
recognized the need to be proactive, and I think, at least in 
recent years, have become quite proactive. The regulations that 
I appreciate you mentioning, the regulations governing both 
mortgages and credit cards that we recently passed are one 
example of that.
    A second example that you may not be as much aware of is 
the review of disclosures that we have done, the review of 
disclosures under truth in lending, and we have finalized new 
disclosure rules for credit cards.
    We will this week be unveiling new disclosures for mortgage 
loans, as well as home equity, which will address exactly the 
yield spread premium that you are talking about. As part of 
doing that, we have instituted consumer testing, and we have 
spent quite a bit of time testing disclosures with consumers to 
make sure we understand how they make decisions and what 
information is meaningful to them. And what we are finding is 
that, in some cases, there are some practices that you just 
plain can't explain with a disclosure, no matter how hard you 
try, and those are the practices we elect to prohibit.
    Mr. Green. It seems to me--and I appreciate what you are 
doing. It seems to me that if we have this located in the Fed, 
the consumer protection agency, that you have a balance that 
you have to achieve and that is safety and soundness. You 
obviously always want to have that in mind and then you want to 
protect the consumer. I don't think that either agency should 
lean one way or the other, assuming that this consumer 
protection agency is separate and apart from the Fed.
    I think it should be concerned about safety and soundness 
as well. But your perch tends to dictate what your view is. You 
can go to Mount Rushmore, and if you are standing on the wrong 
side, you won't see all of these pictures, these carvings of 
Presidents.
    And if you are a consumer protection agent, it just seems 
to me that you would be more focused on the recipient and how 
the consumer will benefit than you will--than a person who is 
in banking and is concerned about the product. I think that 
concern about the product is what actually caused us to have 
problems with protecting the consumer.
    So how do you reconcile this, if you have it?
    Ms. Duke. I understand what you are saying. And, frankly, a 
lot of these discussions talk about prudential supervision and 
the good of the institutions versus the consumers, if they are 
two different things. And that might have been a reasonable 
perception a couple of years ago.
    Given what we have come through recently, I don't think 
anybody can argue that what is important, as far as consumers 
understanding the products they are buying, is absolutely 
important also for the workings of our economy in addition to 
the financial institutions; and that what is good for one is 
good for the others, and that each of those perspectives gives 
you another window into ferreting potential problems.
    Mr. Green. My concern is that the enlightenment came after 
a certain degree of friction, if you will. And I think that a 
consumer protector being proactive would have picked up on some 
of these things a little bit sooner because that is the job of 
the consumer protector.
    And my time is up, so I will have to yield back and wait 
for a second round.
    Thank you, Mr. Chairman.
    Chairman Watt. The gentleman from Alabama is recognized for 
5 minutes.
    Mr. Bachus. Thank you, Mr. Chairman.
    Governor Duke, you noted in your written testimony, ``We 
believe that replicating in another agency the deep expertise 
and full array of functions embedded within the Federal Reserve 
and used to support our consumer protection program would be 
enormously challenging.''
    Can you elaborate on that? What challenges do you think we 
would face in setting up a brand-new agency?
    Ms. Duke. Our Consumer Affairs Division draws frequently 
and deeply on the researcher, the economic researchers that we 
have. We do regular studies of 3-year--every 3 years a study of 
consumer finances. We have numerous studies going--on markets 
for consumer credit, on debt markets. We are closely entwined 
with the securitization markets and, in addition, all of the 
supervision people that we have.
    So having all of that, those resources which are core 
competencies of the Federal Reserve, for the consumer 
protection group to draw on is something that I think informs 
their policymaking in a very positive way.
    Mr. Bachus. And that new agency wouldn't have that 
expertise or that resource?
    Ms. Duke. I believe that the proposal calls for the new 
agency to have research capability. But whether it would 
replicate the entire research capability of the Federal 
Reserve, I wouldn't think so.
    Mr. Bachus. All right.
    You testified--and I think the chairman actually mentioned 
this--that the Federal Reserve views consumer protection as 
``complementary to, rather than in conflict with, other 
responsibilities at the Federal Reserve, such as prudential 
supervision and fostering financial stability.'' And, of 
course, those are both very important to consumers also.
    And you say these missions reinforce each other, which--I 
think that is absolutely true.
    What are the dangers of setting up another agency that may 
view consumer protection as a conflicting mandate with 
prudential supervision or safety and soundness, rather than a 
complementary one as the Fed does?
    Ms. Duke. I think probably those risks would have to do 
with inadvertently adding costs to consumer products through 
less familiarity, say, with the payment systems and the way 
those work, or the way the markets work, the way financial 
institutions are structured, and so mandating protections that 
are simply more expensive to comply with, or in some cases, 
that might cause financial institution providers not to offer 
the product and reduce availability.
    Mr. Bachus. Thank you.
    Let me say this: I think you suggested two, I think, 
beneficial changes. I think this Congress, particularly if we 
leave consumer protection at the Fed and that codifies consumer 
protection as a core mission, I think that would be important.
    And another thing you say is, ``establish periodic 
reporting requirements for consumer protection similar to the 
Federal Reserve's semiannual monetary policy report.'' Of 
course, you do it twice a year, your Chairman comes before the 
Congress to talk about monetary policy. That is very helpful. 
And I think it would be invaluable in us overseeing--and you 
actually, the Federal Reserve, discharging its duties in 
consumer protection--to have a similar hearing once a year, or 
semiannually, to have a progress report on consumer protection 
and answer questions from the members because markets change, 
as you said in your statement or in the statement on the Fed's 
role in consumer protection. Markets change and products 
evolve. I think that would be an important reform that the 
Congress could make.
    Thank you.
    Chairman Watt. The gentleman yields back.
    The gentleman from Missouri, Mr. Cleaver, is recognized for 
5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Governor Duke, thank you for being here. I represent the 
Fifth District of Missouri, primarily Kansas City, Missouri, 
and of course, we have a regional Federal Reserve office.
    It is a cute building, too, incidentally. It is a brand-new 
building. Have you seen it yet?
    Ms. Duke. Yes, I have.
    Mr. Cleaver. Don't you think it is cute?
    Thank you for--
    Ms. Duke. I have never discussed that subject, if a 
building is cute, but--
    Mr. Cleaver. It is.
    The thing that strikes me about the regional office in 
Kansas City is that it is the center for all of the national 
complaints. The complaints that would occur in New Jersey end 
up being routed to the call center in our Federal Reserve 
office; and they report that there is about one complaint per 
bank per year, one complaint per bank per year, which would 
suggest, I think, that--that is a pretty good average.
    I mean, that is unbelievable. Churches get more complaints 
than that on a Sunday. So I think that is pretty good.
    And while I do agree that Sarbanes-Oxley didn't live up to 
what it was intended or certainly by those who promoted it, 
that the truth of the matter is, I think one of our problems is 
that we don't have an opportunity for people to understand what 
is going on.
    I don't know--have you ever seen ``Jaywalking?''
    Ms. Duke. Yes.
    Mr. Cleaver. Isn't it amazing, people can't tell you who 
the Vice President of the United States is? So how would they 
know, the people on the street, even know what the Federal 
Reserve is?
    You start asking questions--I bet if they asked questions 
on the street, most people wouldn't have any idea what the 
Federal Reserve is. So most people I would think, and maybe you 
would agree, if they had a complaint against a bank, they 
wouldn't know where to take it. Would you agree?
    Ms. Duke. Yes.
    Mr. Cleaver. Now, stay with me.
    Ms. Duke. I am with you.
    Mr. Cleaver. Burger King--I used to be on the board; our 
goal was to always have free-standing Burger Kings as opposed 
to having them in buildings because our research showed that we 
did infinitely more business if we had free-standing Burger 
King stores. Are you still with me?
    Ms. Duke. I am still with you.
    Mr. Cleaver. Do you agree then that if we had a free-
standing agency to handle consumer complaints that we might get 
more than one a year?
    Ms. Duke. Yes. I think if you consolidate the complaints 
and do a good job of publishing and publicizing the place to go 
with those complaints, you will get more complaints.
    Mr. Cleaver. Thank you.
    Chairman Watt. The gentleman--I am going to give him a law 
license, I think, after the end of this hearing.
    The gentleman from California is recognized for 5 minutes.
    Mr. Sherman. I have a law license. I made sure they 
shredded it. I disclaim it.
    Whenever I have a member of the Board of Governors here, 
and I don't think I have had a chance to examine you yet, I ask 
about just your personal legal interpretation of section 133. 
You will remember this is the code section that says that that 
in times of emergency and after proper consultation, the Fed 
can basically extend credit so long as it is secured.
    And your Chairman has taken the position, what does that 
security mean? To him, it means the equivalent of AAA.
    Do you agree with that?
    Ms. Duke. Yes, sir, and you have asked me that question 
before.
    Mr. Sherman. As the chairman of the full committee says, 
duplication is often a very good thing.
    I am concerned about form shopping, not just on prudential 
regulation, but consumer regulation. If we bring together all 
of the consumer regulation, then it doesn't matter whether you 
are subject to Fed regulation or not. You are going to have the 
same consumer regulation.
    Do you think it makes sense to have the Fed provide 
borrower protection to those who borrow from, say, banks but 
then have a different consumer regulator define what it takes 
to protect consumers if they are borrowing from a nonbank?
    Ms. Duke. I think there are two pieces to that. One is the 
rules which should, and in most cases do, cover all lenders who 
are offering the same product.
    The other piece, and the really important piece here, is 
the supervision--the level of supervision and enforcement, 
which has been uneven, and I think that is one of--
    Mr. Sherman. Are you saying that the Fed has the power to 
turn to some guy in my District who offers a friend a mortgage, 
that you have regulatory power over the terms of that mortgage?
    Ms. Duke. We have power over the terms of the mortgage. We 
don't have the authority or the mandate to go in and examine 
whether or not the guy actually complied with the regulations.
    Mr. Sherman. So Fed regulations apply even to the most 
private loans. If I loan money to my brother-in-law, I had 
better check Federal regulations?
    Ms. Duke. I am not a lawyer, and I cannot tell you that.
    But they do apply to lenders generally--commercial lenders, 
bank and nonbank.
    Mr. Sherman. Bank and nonbank.
    Now there are those who say there would be a conflict if 
you had the safety and soundness regulator and the consumer 
protection regulator separated. And yet lenders today have to 
deal with IRS rules and they have to deal with environmental 
rules, they have to deal with State consumer regulation, they 
have to deal with prudential regulation, they have to deal with 
the FDIC. Somehow we work it all out.
    Do you see it as somehow impossible for the prudential 
regulators to work--to avoid conflicts with the consumer 
regulator?
    Ms. Duke. I do not. And as a matter of fact, we do work it 
out with other regulators all the time.
    Mr. Sherman. I would like to return to the governance 
issues I brought up in my opening statement.
    How much power do the members of the regional Board of 
Governors have in dealing with consumer protection in 
prudential regulation?
    Ms. Duke. Very little. The regional boards are focused 
primarily on economic matters and the operation of the Reserve 
Banks themselves and not on supervision or consumer protection.
    Mr. Sherman. Can you identify any harm there would be if we 
had, as Presidential appointees, all the members of the Board 
of Governors of all of the regional banks?
    Ms. Duke. I think that the system that we have with the 
separate Reserve Banks who are--who have separate boards of 
directors are important for our independence and monetary 
policy, that they perform a critical role in monetary policy.
    Mr. Sherman. So you think it is critical that monetary 
policy be determined in large part by those voted on by 
bankers, rather than reflect the outcome of elections?
    Ms. Duke. It is not exactly that directly. And the number 
of votes on the Open Market Committee--there are seven for the 
governors and five voting members from the Reserve Banks.
    Mr. Sherman. That is still an important number, 5 out of 
12. And it is not like the meatball industry gets 
representation; it is not like the lawyers, the accountants or 
the shoemakers get representation. They are all affected by the 
Federal Open Market Committee as well.
    And why bankers would have such tremendous power over 
government, over the most famous of all Federal Government 
decisions. There is nothing the Federal Government does that is 
watched more intently than the Federal Open Market Committee.
    Ms. Duke. Actually, two-thirds of the boards of each of the 
Reserve Banks are made up of members of industry, not from--
    Mr. Sherman. So if you had--the industry dominates the 
regional; the regional has five-twelfths of the Open Market 
Committee, and that is not democracy.
    Ms. Duke. Not the banking industry, but from manufacturing, 
commerce, retail, labor, consumer.
    Chairman Watt. The gentleman's time has expired. I 
announced earlier that we may go a second round if the 
gentleman is prepared to stay for that.
    Mr. Ellison is recognized for 5 minutes.
    Mr. Ellison. Thank you, Mr. Chairman. And I also thank you, 
Governor Duke. It is good it see you again. I appreciate the 
time you have taken to help us understand the issues today and 
yesterday. It is a pleasure to see you here.
    In your view, is consumer protection from the view of the 
Fed an equal partner to potential regulation?
    Ms. Duke. It is today.
    Mr. Ellison. How do you feel that we got to the point we 
are at now over the course of the last 8 years? Do you think it 
has been historically?
    Ms. Duke. I think when you look back, we absolutely could 
have and should have taken action earlier than we did. It is 
hard for me to determine why not. But what I can tell you is 
that in the time that I have been there, and actually when I 
arrived there, there is quite a bit of focus on both 
supervision and consumer protection.
    Mr. Ellison. Do other central banks around the world have 
consumer protection within their portfolio?
    Ms. Duke. It is not a typical central bank function. 
Although I would point out that after 40 years, we have quite a 
bit of institutional experience and knowledge and memory and 
that, as an overall matter, our consumer structure and 
availability in the United States is the envy of the world.
    Mr. Ellison. Yes. Thanks for talking about the Consumer 
Advisory Council in your testimony. I know they play an 
important role in advising the Board on consumer regulatory 
matters. But as I was looking at the membership of the 
committee, it sort of looked to me like there are a lot of 
people from the banking industry on the Consumer Advisory 
Council. Has that ever come to your attention?
    Ms. Duke. That is actually required by statute.
    Mr. Ellison. I see.
    Now is there a similar board that advises the Fed on 
banking issues?
    Ms. Duke. There is also within the statute the Federal 
Advisory Commission which is made up entirely of the banks.
    Mr. Ellison. Are consumer advocates on that board?
    Ms. Duke. They are not.
    Mr. Ellison. The bankers have their own board and part of 
another one. That is a good deal.
    Ms. Duke. Again, it is statutory.
    Mr. Ellison. And I think it is important to point out that 
Congress had its own role to play in all of this. I think that 
is what it means when it is statutory.
    Ms. Duke. Excuse me. If I could, though, we do meet quite 
regularly with numerous consumer groups as well as industry 
groups in our boardroom with the entire Board.
    Mr. Ellison. Right. As I went through here, I looked for 
people who were bankers. There are some nonprofits. But if you 
look on--just from my look at what was printed on the Board's 
Web site the Consumer Advisory Council, it is at last half 
representation by the banking industry or credit score agency 
or real estate.
    That is not a critique of you, Governor, it is just an 
observation. And I think it is something we need to look at 
when we talk about issues of governances. Issues around this 
have already been raised.
    Let me kind of paint a scenario for you. Let's just say 
that banks are reaping a lot of their profits from, say, 
overdraft fees, and we have a safety and soundness regulator 
who says, great, you are making money, you have an income 
stream. And then you have a consumer regulator who says, that 
is a problem, this person had a 35-cent overdraft and has a $35 
fee.
    Now under the present system, that problem will be 
resolved. Somebody will, someone will make a decision and say 
the prudential matters are of greater importance than the 
consumer. Or it could happen the other way, although I doubt 
it. Isn't that true? Somebody right now is resolving these 
conflicts that could arise between the prudential regulation 
and consumer regulation. That is happening now; isn't that 
right?
    Ms. Duke. Well, if I could come back to, in particular, 
overdrafts. What we have found, again, particularly in the most 
recent crisis, the important thing--we talk a lot about the 
conflict, but there is also the benefit of having the consumer 
regulation inform safety and soundness and say this may be a 
short-term source of profitability, but it may not be a 
reliable long-term source of profitability, and to sound a 
warning on the prudential side that products that are not well 
understood and not used well by consumers can actually, as we 
have seen, come back and endanger the very institution itself.
    Mr. Ellison. And we could have joint examination even if 
the function were separated.
    Ms. Duke. Conceivably.
    Mr. Ellison. I guess my main point is that there has been 
some dialogue around the conflict, not raised by you but by 
members of our committee, and they seem to say there is a 
conflict and the bill doesn't clearly spell out what to do in 
the case of a conflict. But my point is, there already is a 
potential for a conflict and probably already have had those 
kind of conflicts resolved. But now there is just collapse 
within one entity, and the public really never knows how these 
things are resolved; is that right?
    Ms. Duke. There are possible conflicts. Although I think 
the complementarities are stronger even than the conflicts.
    Mr. Ellison. And would you agree that you could have 
complementarity even from agencies that are not under the same 
roof?
    Ms. Duke. Yes, I would.
    Mr. Ellison. I think that means I am done.
    Chairman Watt. The gentleman's time has expired. We are at 
this juncture. I don't want to be unfair to the second panel, 
but I think there is some benefit to be gained by going at 
least some more with this witness.
    I have a few more questions. So I am thinking that maybe if 
we did a second round of 3 minutes each, and if somebody really 
needed more than that, we can do it by unanimous consent. Would 
that be satisfactory to everybody?
    In that case, I recognize myself for 3 minutes. And I start 
by acknowledging the testimony that you gave about the 
expertise that is on your staff at the Fed and let you know 
that Ms. Braunstein, who is sitting behind you, is one of my 
favorite people. So I recognize that there is substantial 
expertise at the Fed in the consumer and consumer outreach 
area, and I respect that.
    The question I have is, though, I presume that expertise, 
whether it is Ms. Braunstein or members of her staff or others, 
could be transferred to a separate agency if they were not 
doing consumer protection inside the Fed; and perhaps do that 
with reference to all of the consumer regulation in this area 
as opposed to just for the Fed. Am I missing something here?
    Ms. Duke. I am not sure--first of all, I thank you for 
recognizing Ms. Braunstein and her staff, because they are 
outstanding.
    Chairman Watt. I wouldn't think of doing otherwise.
    Ms. Duke. They are outstanding public servants and they 
bring not only knowledge and experience to the job, but a 
passion for consumer protection.
    Chairman Watt. You have a reasonably good legislative 
affairs guy there too. I didn't want him to feel like he was 
being left out.
    Ms. Duke. I will use your time to praise all of our staff. 
But I think that one of the things to consider would be that in 
the rule-writing area in particular, that as good as they are, 
they might find it more difficult to write their rules without 
the support of the research staff, the market staff and the 
supervision staff.
    Chairman Watt. All right.
    Let me go to the real question, because I noticed the real 
complaint from the panel we had here from the industry 
yesterday was that there was this big conflict or potential for 
conflict if we created this agency. And I dealt with the part 
of the conflicts between consumer and consumer. I recognize 
that possibility exists.
    I notice you didn't say anything in your testimony about 
the potential conflict that they kept talking to me about, that 
nobody was able to identify for me, the conflict that they have 
said exists between your prudential regulation and the consumer 
part. There is nothing in your testimony that I could identify.
    Is there such a conflict between the consumer side of your 
operation and the regulatory or monetary policy side of your 
operation?
    Ms. Duke. There is probably--
    Chairman Watt. Maybe just give me one example. I asked a 
witness this morning, on the panel that we had this morning, to 
give me one example of a potential conflict between consumer 
protection and regulation, and he wasn't able to do it.
    I am just having trouble figuring out what that conflict 
is.
    Ms. Duke. There are probably conflicts in a number of 
different senses. I am trying to sort through them pretty 
quickly in my mind. There is a potential for conflict between 
agencies. Any time you have agencies--
    Chairman Watt. I understand that. I am talking about policy 
conflicts. I am talking about policy conflicts between a 
consumer representative, whether it is in your agency or 
outside your agency, and the responsibilities you have as 
regulator of banks and/or monitor policy.
    Ms. Duke. There are a couple of different pieces. There is 
probably a perceived conflict between, for instance--
    Chairman Watt. I am talking about real conflict.
    Ms. Duke. Well, a conflict in perception between a consumer 
protection proposal that might have the potential to increase 
cost or reduce availability. So you might have that weighing of 
those two considerations.
    Chairman Watt. All right, okay. Let me go one step further. 
Suppose we just assumed that there is that conflict, and the 
consumer side of your operation says, this is a real problem 
for consumers; and the regulatory side of your operation says, 
this is a real problem for regulators. How does that get 
resolved? Who has the final word on that now? Is it the 
consumer's interest that is being driven or is it the bank's 
interest that is being driven?
    Ms. Duke. From the standpoint of within an agency or even 
between agencies, it is a policy balance and ultimately that is 
what a policymaker has to do, has to make the call balancing 
those two interests.
    From an industry standpoint, if I could reach back into my 
industry days, I think what that might mean is if you have one 
set of regulators telling you one thing and another set of 
regulators telling you something else, the question of which 
one do you pay the most attention to, which possibly gives rise 
in a difference in intensity from one or the other.
    Chairman Watt. All right, my time has run out, 
unfortunately, and I am well over the 3 minutes that I said I 
was going to try to hold people to.
    The gentleman from Texas is recognized for 3 minutes.
    Dr. Paul. Thank you, Mr. Chairman. I want to follow up on 
my question about whether or not current Federal Reserve policy 
is fair to the consumer. I argue there is a real challenge to 
the consumer in two points. One, the consumer is always losing 
purchasing power, and only the Federal Reserve can undo the 
purchasing power of a dollar. And also the low interest rates 
which are artificial, because the Fed is involved in interest 
rates and it really hurts the innocent consumer.
    As a matter of fact, the people who are more frugal, the 
people who borrow against mortgages, they don't care that much. 
But the frugal people who are doing what a lot of people think 
they should do, they get penalized. And I know the answer so 
often that comes back is--I always get the quotes back of what 
the CPI is doing, and there is really no inflation so don't 
worry about it. Inflation is a monetary issue and we just 
doubled the money supply in a short period of time. And I would 
also argue that prices are going up significantly in certain 
areas.
    One thing characteristic about inflation, all prices don't 
go up uniformly. If they did and wages went up uniformly, 
inflation would be no problem. But we have educational costs, 
they go up disproportionately. Just think about how military 
equipment goes up and how the military industrial complex gets 
served with this system. And then also the people who 
participate in the financial bubbles, and if they are able to 
get out they benefit tremendously.
    But also today in medicine, today we are facing this 
medicine crisis. Not that the care isn't there. We can get good 
care, but it costs too much. That is an inflationary problem as 
much as anything else, because those places where government 
gets involved, like these three things I mentioned, that is 
where the money goes and that is where the prices get pushed 
up. You don't get better service, because you don't get better 
education or medical care, you get higher prices.
    So what is your defense of this position that the Fed isn't 
a very good protector of the consumer because it undermines the 
value of a dollar? We have lost 96 percent of the value of our 
dollar since the Fed has been in existence, and also this low 
interest rate issue that I bring up.
    Ms. Duke. We are conducting monetary policy to achieve our 
dual mandate, which is low inflation and steady prices and 
economic growth. And the inflation rate right now, the core 
consumer inflation is about 1.8 percent.
    Dr. Paul. According to government statistics, but not 
according to the consumers. Private sources say that the 
consumer price index is much higher than what the government 
reports. So it is in the interest of the government and the 
Federal Reserve to say that there is no erosion. But whether or 
not it is today or next year, we know the history.
    But what justification is it? Doesn't this seem to be 
unfair? If you had a CD in the bank, or your parents had a CD 
in the bank and they were making 1 percent instead of 5 
percent, is that fair or unfair?
    Ms. Duke. The interest rates are set and are managed, 
again, to meet our mandate. And right now rates are 
particularly low in order to support economic activity, 
particularly funds' availability to borrowers.
    Dr. Paul. I think the consumer loses on that deal. Thank 
you.
    Chairman Watt. The gentleman's time has expired.
    The gentleman from New York is recognized for 3 minutes. I 
am recognizing him for 3 minutes because we are on the second 
round of questions with an understanding that if people need 
more than 3 minutes, they can get it by unanimous consent. The 
gentleman from New York.
    Mr. Meeks. Thank you, Mr. Chairman. And thank you, Ms. 
Duke.
    Let me ask you, we had a panel here earlier before the full 
committee, and what I was trying to figure out and what a 
number of individuals are talking about is the fact that some 
are questioning whether the systemic risk regulator should be 
the Fed. The Fed has been--they have talked about giving the 
Fed a lot more jurisdiction, a lot more responsibility. And 
some are concerned about--and I think that based upon the White 
Paper that the President has put out, that there is going to be 
tremendous responsibility that is going to cause a lot more 
work.
    Now we want to make sure, because we are looking forward to 
put some legislation that we think is going to take place and 
survive for 70, 80, 100 years. What is wrong with letting the 
Fed focus as a systemic risk regulator and doing what it has to 
do in maintaining this whole spectrum of responsibilities, and 
then having another agency whose primary focus is on consumer 
protection? It seems to me to make sense so that we are not 
overburdening the Fed. What is wrong with that?
    Ms. Duke. If the question is the overburdening of the Fed, 
the first thing I would say about the systemic risk 
responsibility that is in the proposal from the Administration 
is actually not an incrementally large increase in the 
activities we have today. The systemically important 
institutions, the vast majority of them were not necessarily 
bank holding companies last Fall, but through the crisis became 
bank holding companies. And I am not aware of very many 
institutions that would be considered systemically important 
that we don't supervise today.
    I think the difference would be probably in the focus of 
that supervision which would look not just to the individual 
institutions themselves, but also to the impact of their 
activities across the financial system.
    Mr. Meeks. But the problem is that it seems no one picked 
up. We are in this crisis now. There is enough blame to go 
around. I am not blaming just the Fed. And no one seemed to 
pick up the problems that we were having, and the Fed is the 
one that is supposed to be the independent authority on 
monetary policy; now we get the systemic risk on top of that.
    Then what concerns many individuals is the fact that the 
Fed had authority, for example, to issue rules implementing the 
Home Ownership and Equity Protection Act beginning in 1994, yet 
it chose not to do anything or issue any rules until 2008, 
which would be important to the consumer. Why is that? Can you 
explain that?
    Ms. Duke. Again, in hindsight, we could have and should 
have acted faster on that. Since that time, however, the Fed 
has been very proactive in the areas of regulations governing 
mortgages and credit cards, in consumer testing and issuing new 
consumer disclosures which would be much more helpful to 
consumers, and also in community outreach for foreclosure 
prevention and neighborhood stabilization.
    I would say since learning that lesson, the Fed has been 
extremely proactive.
    Mr. Meeks. I see my time has expired.
    Chairman Watt. Thank you. And I am squeezing people a 
little bit, because we do have to be out of the room by 4:30 
and we have another panel. So be cognizant of that.
    The gentleman from Alabama is recognized for 3 minutes.
    Mr. Bachus. Thank you.
    Governor Duke, as I think someone else said, the Fed has 
had the right to regulate unfair and deceptive loans since, I 
guess, 1994. Is that correct?
    Ms. Duke. I think so.
    Mr. Bachus. Now it really took until 2007 or 2008 for them 
to do that; is that correct?
    Ms. Duke. 2008.
    Mr. Bachus. 2008? I think maybe if we had had something 
where you came up every year and explained your progress. On 
occasions members did write and say, what are you doing?
    Let me ask you this. Even on the lending underwriting 
standards, I think at the same time or around that same period 
of time, you were given the jurisdiction on all loan 
underwriting standards; is that correct?
    Ms. Duke. I believe, and I am not certain on this, so if I 
get too deep into it, I may have to respond in writing. But I 
believe that we issued guidance to those institutions that we 
supervised on underwriting, but then afterwards when we came 
out with regulations, those regulations would have governed 
both bank and nonbank lenders.
    Mr. Bachus. You know, there was no going into the banks and 
examining anything. But I know the State charter banks were 
examined for underwriting standards. One thing I ran into when 
I was advocating for subprime lending legislation in 2005, I 
would talk to some of the banks, the big banks, bank holding 
companies, and they would say, we don't do these subprime 
loans. And I found out later that was somewhat half true in 
that they all had nonbank affiliates who were making those 
loans hand over fist. But I don't think that the Fed did any 
audits or supervision of those nonbank affiliates, did they?
    Ms. Duke. I think the authority to do that kind of 
examination was a little unclear under Gramm-Leach-Bliley. 
However, we did conduct a pilot program within the last year 
where we went into nonbank subsidiaries jointly with the FTC, 
with the OTS, with State regulators, and did full compliance 
exams on those. And as a result of what we learned there, we 
are going to continue those examinations.
    Mr. Bachus. Will you enforce the hope of regulations as 
well?
    Ms. Duke. We will enforce all consumer regulations.
    Mr. Bachus. Will that be just on subprime loans or--
    Ms. Duke. It will be on every kind of loan.
    Mr. Bachus. Thank you.
    Chairman Watt. The gentleman's time has expired. The 
gentleman from California is recognized for 3 minutes.
    Mr. Sherman. I want to return to the issue of governance at 
the regional board level. Who has the power to select those 
members at the regional level, not selected by the President? 
When I say this, I mean even if bankers are doing the 
selecting, but have to select a former union leader, that 
person is a bank selectee. You can always find a former union 
leader that will reflect the interest of those appointing. How 
are these slots filled? Who has the power to fill them?
    Ms. Duke. I assume you are talking about the Reserve Bank 
presidents?
    Mr. Sherman. And their boards, yes.
    Ms. Duke. Let me back up. The boards of directors of the 
Reserve banks, there are nine members of the board of 
directors, A, B, and C directors. The A directors generally are 
officers or directors of banks and they are elected by the 
member banks.
    Mr. Sherman. Okay.
    Ms. Duke. The B directors generally come from and there is 
a list of 6, and I am not sure I can name them all. It is 
commerce, manufacturing, labor, retail, agriculture--and I am 
missing one.
    Mr. Sherman. All right.
    Ms. Duke. And those are elected by the banks. But that is 
where they come from, and they are not permitted to be 
affiliated with a bank.
    Mr. Sherman. But you are free to find the retailer who is 
most bank-friendly and appoint that person, elect that person?
    Ms. Duke. In theory. But in practice, that is not the case. 
And I can actually send a breakdown of what they are. And the C 
directors are appointed by the Board of Governors, and again 
from that same group.
    Mr. Sherman. You have two-thirds selected by the banks. 
They can't select bankers, but there are literally millions of 
people that they can turn to, and they just have to find a 
business person or whatever who meets their interest.
    Trust me, if only bald people got to vote, but we had to 
vote for people with hair, there would be no taxes on bald 
people. We would find some--some would go get the Bosley thing 
and sneak in. But that is a little off point.
    Now, our friend Mr. Paul has a bill to audit the Federal 
Reserve. Obviously I don't think there is anything in that bill 
that says that an audit means you have a stenographer at the 
Open Markets Committee, and that is immediately published. What 
is the problem with auditing such a powerful government agency 
the way other government agencies are audited?
    Ms. Duke. As I understand it, GAO does audit many parts of 
the Federal Reserve, and that there are 20-some audits underway 
right now. They have been specifically asked to audit the 13(3) 
facilities and to audit the specific loans to individual 
institutions. The concern with having them audit the open 
market, the FLMC operations, has to do with--as I understand 
the way those audits go, it is a review of policy decisions, 
and it would be some perception of a reduction in the 
independence with respect to policy.
    Mr. Sherman. Why would you lose--
    Chairman Watt. The gentleman's time has expired.
    The gentleman from Texas.
    Mr. Green. Thank you, Mr. Chairman. Mr. Chairman, I was so 
impressed with the questioning of the gentleman next to me, I 
would like to ask the Chair for some guidance. Do I refer to 
him henceforth as Reverend, or Doctor, or Attorney, or Reverend 
Doctor Attorney?
    Chairman Watt. I think the latter would be appropriate.
    Mr. Green. Attorney Doctor. But I do appreciate his 
questions and I would like to do a quick follow-up. I thought 
it was a fantastic point that you make.
    Quick follow-up, with reference to the complaints that you 
receive, how many complaints have actually gone from complaint 
to a case that was referred to the Justice Department with 
reference to your mission to deal with patterns on practices of 
discrimination?
    Ms. Duke. In terms of numbers of complaints received or 
otherwise, I would have to get back to you in writing on that. 
I do know that we investigate every complaint that we receive 
on our member banks that we actually supervise. And with 
respect to referrals to the Justice Department, they primarily 
come from reviews of fair lending in the institutions. And to 
the extent that we find discrimination, we do refer those to 
the Department of Justice.
    Mr. Green. Have you had occasion to have any bank, as a 
result of the Justice Department's action, respond and take 
corrective action?
    Ms. Duke. I believe so. But if I could follow up in writing 
with specifics.
    Mr. Green. Okay.
    The reason I am asking is because every survey indicates 
that African Americans, minorities who apply for loans, are 
less likely to get the same treatment as equally qualified 
persons who are not minorities. And I am concerned that, given 
the history of this, and the lack of what I see as affirmative 
action to correct it, what will happen if we leave it there? It 
seems to me that a consumer protection agency would probably 
look at these things a little bit closer and see it as a 
greater mission than it has been accorded where it is 
currently.
    Ms. Duke. I would just say that our examiners take this 
very seriously. And there really are two parts to the 
examination process. Sometimes they may find a practice that is 
not in itself discrimination but looks suspect or looks 
dangerous, and they will talk with the bank and maybe take 
informal action to get that practice stopped. In those cases, 
the practice does stop. In cases where either that is not an 
option or the practice does not stop, those cases are referred 
to Justice.
    Mr. Green. Thank you, Mr. Chairman. I will yield the 
balance of my time to the attorney from Missouri.
    Chairman Watt. The gentleman from Missouri.
    Mr. Cleaver. No questions, Mr. Chairman.
    Chairman Watt. The gentleman from Minnesota, then, is 
recognized for 3 minutes.
    Mr. Ellison. Thank you again for your patience, Governor. 
You have been great this afternoon.
    You know, I read an article which says that banks and 
credit unions collect about $17.5 billion, with a ``B'' in 
overdraft fees per year. How does this overdraft issue play in 
terms of the safety and soundness of banks? Is it, I guess, a 
good thing from their perspective, because it is a stream of 
income; or does it indicate something we should be concerned 
about?
    Ms. Duke. It is a stream of income. However, there are also 
some issues with overdraft protection or with overdraft fees. 
We have actually already published, for comment, rules 
governing overdrafts. Those rules have both an opt-in and an 
opt-out alternative, and we are now testing disclosures of 
those alternatives. And we will issue some final rules this 
year. And so to the extent that banks are overly reliant on 
overdraft income, that would in the short term. That would be a 
risk in the long term.
    Mr. Ellison. I am speaking only from a prudential regulator 
standpoint. What sort of things might a regulator who might go 
to a particular individual bank, who sees that a significant 
portion of their profitability based on these overdraft fees--
what does that conversation kind of go like, if you understand 
what I am saying? Is it like you are relying on us too much or 
you need to develop other products? Because I would imagine a 
safety and soundness conversation going like this: You have to 
have more capital, you have to develop more ways to have income 
streams.
    And so I was curious to know, how does the regulator 
approach the bank if they are excessively relying on overdraft 
fees?
    Ms. Duke. I am not quite sure with respect to the overdraft 
fees. But if I could, let me go to a different example. And 
that would be: Suppose you had an institution that was 
generating very strong fees from the origination and sale of 
subprime mortgages. Then certainly the fact it has the income 
stream is one possibility. But one risk is that if something 
should go wrong in that marketplace, that that revenue source 
will dry up. So I think from the prudential side, you would 
look for--
    Mr. Ellison. In your example, the prudential issues are 
clear because it represents the possibility of default, right? 
But not with overdraft fees. This is a just a stream of income. 
They are not going to default by having too many overdraft 
fees. But it is just them getting money from a consumer, that I 
think most people, if you bring specific examples forward, 
would say the consumer is getting taken advantage of here. And 
yet the only person whom I think is really going to raise a 
stink is someone who has a view of the consumer in mind.
    So I am just curious to know--I guess we have been beating 
this horse pretty thoroughly--but I am still curious to know. I 
think that these two points of view are somewhat in conflict. I 
think that is a good thing.
    Ms. Duke. To your point, though, it was the Consumer 
Affairs Division that actually has initiated and completed the 
rulemaking proposal on overdrafts this year.
    Mr. Ellison. Thirty seconds? I just want to say for anyone 
who is interested in getting comments to the Fed about this 
overdraft issue, they have to get their comments there by July 
18th. So, if anybody is interested.
    Chairman Watt. The gentleman's time has expired. The 
gentlelady from Florida, Ms. Kosmas.
    Ms. Kosmas. I don't have any questions.
    Chairman Watt. In that case, the Chair notes that some 
members may have additional questions for this witness that 
they may wish to submit in writing. It seems like there are a 
number of questions still outstanding here.
    Without objection, the hearing record will remain open for 
30 days for members to submit written questions to this witness 
and to place her responses in the record.
    We thank you so much, Governor Duke, for being with us this 
afternoon. And we thank your trusted people, whom we have 
praised behind you, for being with us. And you are excused, and 
the second panel is officially requested to come forward.
    While the witnesses are coming forward I ask unanimous 
consent that an article from USA Today entitled, ``Banks raise 
penalty fees for customers' overdrafts'' be submitted for the 
record. That is the article that Mr. Ellison has requested be 
submitted. Without objection, it is so ordered.
    Now I will introduce briefly the witnesses on the second 
panel. The first witness is Ms. Patricia McCoy. She is the 
director of the Insurance Law Center, and the George J. and 
Helen M. England Professor of Law at University of Connecticut 
School of Law.
    Our second witness on this panel is Ms. Lauren Saunders, 
managing attorney at the National Consumer Law Center.
    And our third witness on this panel is Mr. Jim Carr, the 
chief operating officer at the National Community Reinvestment 
Coalition.
    We had a fourth witness, but he turned out to be on the 
earlier panel, at a hearing earlier today, and I think he had 
heard enough from me for one day, so he decided he wouldn't 
come for this one.
    Each of you will be recognized for 5 minutes. Your full 
written statements and any supporting materials, of course, 
will be made a part of the record. And we would ask you to 
summarize your testimony in approximately 5 minutes. There is a 
lighting system in front of you there. The green light stays on 
for 4 minutes, the yellow light comes on for 1 minute, and the 
red light means you have hit 5 minutes. We are not religious 
about that in my subcommittee, but we do ask you to stay 
reasonably close to that
    Ms. McCoy, Professor McCoy, you are recognized for your 
testimony.

STATEMENT OF PATRICIA A. McCOY, DIRECTOR, INSURANCE LAW CENTER, 
AND GEORGE J. AND HELEN M. ENGLAND PROFESSOR OF LAW, UNIVERSITY 
                  OF CONNECTICUT SCHOOL OF LAW

    Ms. McCoy. Chairman Watt, Ranking Member Paul--
    Chairman Watt. Press that button and pull it close to you.
    Ms. McCoy. Chairman Watt, Ranking Member Paul, and members 
of the subcommittee, thank you for inviting me here today to 
discuss restructuring financial regulation. Today I will 
testify in support of the Consumer Financial Protection Agency 
Act of 2009.
    This bill would transfer consumer protection and financial 
services from Federal banking regulators to one agency 
dedicated to consumer protection. We need this to fix two 
problems: first, during the housing bubble, fragmented 
regulation encouraged lenders to shop for the easiest 
regulators and laws; and second, banking regulators often 
dismiss consumer protection in favor of the short-term 
profitability of banks.
    Under our fragmented system of credit regulation, lenders 
could and did shop for the easiest laws and regulators. One set 
of laws applies to federally chartered banks and thrifts and 
their operating subsidiaries. Another set of laws applies to 
independent nonbank lenders and mortgage brokers.
    Because lenders could threaten to change charters, they 
were able to play regulators off one another. This put pressure 
on regulators, both State and Federal, to relax their standards 
and enforcement.
    Countrywide, for example, turned in its charters in early 
2007 in order to drop the OCC and Federal Reserve regulators 
and to switch to the OTS. The result was a regulatory race to 
the bottom that only the Fed had the power to stop.
    During the housing bubble, three of the four Federal 
banking regulators--the Federal Reserve, the OCC, and the OTS--
succumbed to pressure to loosen loan underwriting standards and 
safeguards for consumers.
    Today I will focus on the Fed. Under Chairman Alan 
Greenspan, the Federal Reserve Board failed to stop the 
mortgage crisis in thee crucial ways:
    First, the Federal Reserve was the only agency that could 
have stopped the race to the bottom. That was because it had 
the ability to prohibit unfair and deceptive lending for all 
lenders nationwide under the Home Ownership Equity Protection 
Act. But Chairman Greenspan refused to exercise that authority. 
The Fed did not change its mind until last summer when it 
finally issued such a rule. At that point, the horse was out of 
the barn.
    Second, the Fed as a matter of policy did not do regular 
examinations of the nonbank subprime lenders under its 
jurisdiction. These included the biggest subprime lender in 
2006, HSBC Finance, and Countrywide ranked number three.
    Finally, the last time the Fed did a major overhaul of its 
Truth in Lending Act mortgage disclosures was 28 years ago, in 
1981. With the rise in subprime loans and nontraditional ARMs, 
those disclosures became solely obsolete. Nevertheless, the Fed 
did not even open a full review of its mortgage disclosure 
rules until 2007, and it still has not completed that review.
    So why did the Federal Reserve drop the ball? One reason 
was its overriding belief in deregulation. Another, however, 
was an attitude that a good way to improve bank safety and 
soundness was to bolster fee income at banks. We still see that 
today with respect to rate hikes with credit cards still going 
on.
    This focus on short-term profits not only hurt consumers, 
it undermined our Nation's financial system. The Act would fix 
these problems in three ways: first, it would stop shopping by 
providing one set of consumer protection rules for all 
providers nationwide; second, the Act puts the authority for 
administering those standards in one Federal agency whose sole 
mission is consumer protection. We are asking the Fed to do too 
much when we ask it to excel at four things: monetary policy; 
systemic risk regulation; bank safety and soundness; and 
consumer protection.
    Housing consumer protection in a separate agency in fact 
will provide a healthy check on the tendency of Federal banking 
regulators to underestimate risk at the top of the business 
cycle.
    Finally, to avoid any risk of future inaction by the new 
agency, the Act gives backup enforcement authority to the Fed 
and other Federal banking regulators in the States.
    My time is up. Thank you and I will welcome any questions.
    [The prepared statement of Professor McCoy can be found on 
page 161 of the appendix.]
    Chairman Watt. Thank you so much.
    Ms. Saunders, you are recognized for 5 minutes.

 STATEMENT OF LAUREN K. SAUNDERS, MANAGING ATTORNEY, NATIONAL 
   CONSUMER LAW CENTER, ON BEHALF OF AMERICANS FOR FINANCIAL 
                             REFORM

    Ms. Saunders. Thank you, Chairman Watt, Ranking Member 
Paul, and members of the subcommittee. Thank you for the 
opportunity to testify today on behalf of Americans for 
Financial Reform and many of its individual organizational 
members. We believe that better consumer protection demands 
more than modest changes to the existing structure. The 
structure itself is the problem.
    I am Lauren Saunders with the National Consumer Law Center. 
We at the National Consumer Law Center have a long and deep 
history of working with the banking agencies. We publish an 18-
volume set of consumer law treatises, write hundreds of pages 
of comments every year on proposed regulations, and have 
participated on the Fed's Consumer Advisory Council and have 
otherwise interacted regularly with the banking agencies for 
decades.
    We have found the Fed staff and the Governors to be 
intelligent, knowledgeable, and respectful of our views. One of 
the strengths of the proposal to create the new agency is that 
it will consolidate entire divisions and will retain their 
experience and knowledge.
    There have been successes over the years, but as 
Congressman Green pointed out, they have tended more to be 
reactive than proactive measures. At the end of the day, in 
example after example described in my written testimony, at the 
Fed and the other agencies, consumers have usually come up 
short, trumped by an excessive faith in the free market, an 
overreliance on more disclosures, and an antipathy to taking 
measures opposed by industry.
    This is ironic because listening seriously to consumer 
concerns can help bolster safety and soundness. It was consumer 
advocates who pointed out that credit card debt was wreaking 
havoc on family finances and was unsustainable. It was the 
consumer advocates, not the banking agencies, who complained 
repeatedly about mortgages that people could not afford to pay, 
again and again, year in and year out, and nobody was 
listening. It is just one of many similar warnings. In 2003, a 
New York attorney, Ruhi Maker, vented her frustration at the 
Fed's Consumer Advisory Council: ``Consumer advocates are from 
Mars and bankers are from Venus. I sometimes feel that way. 
There are parts of the country where I really feel it is going 
to be a nightmare.'' This was in 2003.
    ``I think the horse is out the barn door and, you know, I 
hope I am wrong, I really hope I am wrong, but I think it's in 
the interest of the financial institutions to figure out how to 
fix this problem which some unregulated institutions created, 
but which then the financial institutions went and purchased.'' 
But those concerns and many like them year in, year out went 
unheeded.
    Mars and Venus, men and women, consumers and bankers. We 
think about things differently. We focus on different problems.
    As former Federal Governor Mishkin testified last week in 
saying he believed the Fed should give up its role as the 
consumer protection regulator, ``The skills and mind-set 
required to operate as a consumer protection regulator are 
fundamentally different from those required by a systemic 
regulator.'' I would say the same is also true of the mind-set 
of a prudential regulator. Precisely because consumer 
protection is complementary to safety and soundness, we need a 
new agency that will focus on the individual, asking questions 
from their perspective, about whether products are fair and 
contribute to or harm family financial stability. It will spot 
problems early, before they present safety and soundness 
concerns for an entire portfolio or an entire institution.
    The balanced proposal for a consumer financial protection 
agency ensures that the agency will consider real safety and 
soundness concerns.
    First, and most importantly, one of the five commissioners 
will be a prudential regulator. That commissioner, present at 
the creation, will ensure that prudential concerns are 
integrated into the fabric of the agency's work.
    Second, the agency has a statutory mandate to coordinate 
with the banking agencies. Not every disagreement is a serious 
conflict, but the agency will have every reason to listen to 
legitimate prudential concerns like fraud, money laundering, or 
operational issues.
    Third, the proposal requires the Consumer Financial 
Protection Agency and banking agencies to share confidential 
examination materials so that each can see the concerns that 
have been raised from the other's perspective.
    Finally, Congress will be exercising oversight. With the 
history of the Federal Trade Commission in mind, and a 
prudential regulator on the board, the agency will do 
everything in its power to minimize conflicts.
    Change is always difficult. There are always reasons for 
tinkering and not making important structural changes. Our 
coalition firmly believes that we will all be better off with a 
system that takes consumer protection seriously, that listens 
fully to both Mars and Venus.
    Thank you for this opportunity to testify and I welcome 
your questions.
    [The prepared statement of Ms. Saunders can be found on 
page 183 of the appendix.]
    Chairman Watt. Thank you for your testimony, Ms. Saunders.
    Mr. Carr, you are recognized for 5 minutes.

 STATEMENT OF JAMES H. CARR, CHIEF OPERATING OFFICER, NATIONAL 
            COMMUNITY REINVESTMENT COALITION (NCRC)

    Mr. Carr. Good afternoon, Chairman Watt, Ranking Member 
Paul, and other distinguished members of the subcommittee. My 
name is James H. Carr, National Community Reinvestment 
Coalition. On behalf of the Coalition, I am honored to speak 
with you today.
    NCRC is an organization of more than 600 community-based 
associations that promote access to basic financial services 
across the country for working families. NCRC is also pleased 
to be a member of the new coalition, Americans for Financial 
Reform, that is working to cultivate integrity and 
accountability within the financial system.
    Members of the committee, the collapse of the U.S. 
financial system represents a massive failure of financial 
regulation that suffered from a host of problems, including 
regulatory system design flaws, gaps in oversight, conflicts of 
interest, weaknesses in enforcement, failed philosophical 
perspectives on the self-regulatory functioning of the markets, 
and inadequate resolution authority to deal with problems after 
they have occurred.
    At the request of the committee, I will devote my time 
today to one issue, and that is consumer protection. Safety and 
soundness and consumer protection are often discussed as 
separate issues, yet the safety and soundness of the financial 
system begins with and relies on the safety and soundness of 
the products that are extended to the public.
    If the extension of credit by a financial firm promotes the 
economic wellbeing and financial security of the consumer, the 
system is at reduced risk of failure. If the financial products 
exploit consumers, even if they are highly profitable to 
financial institutions, the system is in jeopardy of failure.
    Unfortunately, for more than a decade, financial 
institutions have increasingly engaged in practices intended to 
mislead, confuse, or otherwise limit a consumer's ability to 
judge the appropriateness of financial products offered in the 
market and make informed decisions. In fact, the proliferation 
of unfair and deceptive mortgage products led directly to the 
current foreclosue crisis and massive destruction of U.S. 
household wealth, which currently stands at about $13 trillion.
    The tricks and traps, as it has been described by Elizabeth 
Warren, used to trap consumers into high-cost abusive financial 
products, greatly complicated if not impaired the ability of a 
consumer to make an informed financial decision about the most 
appropriate product for their financial circumstances.
    Nowhere was this irresponsible and reckless behavior by 
financial institutions more prevalent than in communities of 
color. For more than a decade, Federal agencies, independent 
research institutes, and nonprofit organizations have described 
and discussed the multiple ways in which people of color have 
been exploited financially within the mortgage market.
    The result today, the foreclosure crisis is having its most 
damaging impact on communities of color in two ways: first, 
people of color are experiencing a disproportionate level of 
foreclosures; and second, they are most negatively harmed by 
rising unemployment.
    The Obama Administration recently proposed a sweeping 
reform of the financial system. A core element of the 
President's plan is the establishment of the Consumer Financial 
Protection Agency. House Financial Services Chairman Frank has 
proposed a similar agency in his legislation, H.R. 3126. A 
consumer protection agency is long overdue.
    Currently, the financial regulatory agencies compete with 
one another for fees paid by institutions that they are 
entrusted to regulate. The winning bid is the regulator that 
promises the least amount of consumer protection.
    Although competition is an essential element in a free 
market, oversight and enforcement of the law is not, nor should 
it be, available for purchase in a free market. In fact, 
regulation is one of the few instances in which a monopoly 
market will result in the most efficient and desired result. A 
consumer financial agency, as outlined by both the President 
and the Chairman, would achieve a commonsense goal, and that is 
to provide standard products to eliminate unnecessary confusion 
for consumers on routine transactions.
    The concept of a standard product seems to be an anathema 
to some observers, but it is worth remembering that a 30-year 
fixed rate mortgage has been for more than half a century, and 
remains today, the gold standard loan product. It was created 
to help the Nation recover from the collapse of the previous 
major fall of the housing and credit markets during the Great 
Depression. In short, sometimes a good standard is the best 
innovation.
    In order to be most effective, the new consumer financial 
protection agency must examine lending at a community level as 
well. Highly segregated communities of color are the primary 
targets for unfair, deceptive, and predatory lending. As a 
result, the agency must have the knowledge, experience, and 
resources to address this critical reality.
    Moreover, prohibiting reckless and irresponsible products 
is only half the challenge in making sure there is equal access 
to reliable financial services. Many financial firms simply 
deny access to financial services completely. America has a 
long, unfortunate history of redlining.
    The Act that most significantly can address that issue at a 
community level is the Community Reinvestment Act. That law was 
included in the consumer protection agency proposed by the 
President, and we recommend that it be included in the bill 
that is being considered by this House.
    In conclusion, there has and will continue to be 
considerable pushback against the idea of a consumer financial 
protection agency, primarily from financial institutions. Their 
argument is that such an agency will stifle innovation, limit 
access to credit, and discourage lending to families most in 
need.
    These arguments should be considered as having the same 
merit as the declaration that the markets are self-regulating. 
We have seen the folly of self-regulated markets, and the 
American people are paying an extraordinary price for failed 
consumer protection.
    Thank you very much. I look forward to your questions.
    [The prepared statement of Mr. Carr can be found on page 48 
of the appendix.]
    Chairman Watt. Thank you so much for all of your testimony.
    And we will now go to questioning by the members. It is my 
policy to go last on the last panel, since I have to be here 
anyway. So with that in mind--before I do that, though, I did 
want to commend to the members' attention the historical 
analysis that Professor McCoy has done. You would do well to 
read her entire testimony, not just the 5 minutes that she 
abbreviated here. It is about the best analysis of how we got 
here that I have seen floating around.
    So the gentleman from New York, Mr. Meeks, is recognized 
for 5 minutes.
    Mr. Meeks. Thank you, Mr. Chairman, and thank you for your 
testimony here today.
    You know, my district in New York is the number one in 
foreclosures in the City of New York. I am noticing a certain 
trend, and I am wondering if you can tell me your opinion on 
this and whether a consumer agency would be able to intersect.
    Here is what I am finding: number one, that individuals who 
have taken out mortgages--and some of the financial 
institutions had skin in the game, they didn't just take it and 
securitize it away--that those individuals' incomes and the 
credit they received seemed to match more or less the mortgages 
that they were receiving. Those who went to mortgage brokers or 
some others and their incomes did not match, those were simply 
sold away, because they weren't going to keep them, so it 
didn't matter.
    And so there are two things that are happening. Either 
individuals are now in upside-down mortgages, and the banks are 
not refinancing them; or they just simply--if they had 
adjustable rates, and they adjusted, they can't afford them and 
they are thrown out of their homes.
    So what I am concerned with in your vision when we move 
forward with a consumer financial protection agency, that this 
would be an area of which they could specialize and look in to 
see if, in fact--or tracking, if you will--to see if in fact 
there is a pattern.
    I mean, for years we have been talking here about predatory 
lending. And there has been no one that I know of that we could 
go to, to focus on, to stop predatory lending. I can recall on 
this committee we could go--we would be talking time after time 
after time to a person, at the person, but yet no result.
    So in your mind's eye, would a consumer financial 
protection agency also be an adequate agency to look at issues 
such as predatory lending and put an end to it?
    That would be my first question.
    Ms. McCoy. It would be a very important piece of the 
puzzle.
    What we need to stop is this two-tier system where the 
sensible loans are the ones held in portfolio and the reckless, 
dangerous loans are the ones sold through securitization. 
Having one uniform standard for all loans, whether they are 
securitized or not, would definitely help that problem. But 
here the bank regulators would continue to have a role even if 
the agency is created, because the bank regulators can make 
sure that banks are not rewarded with lower capital 
requirements for securitizing bad loans. So they can partially 
buttress safety through capital treatment, and they should.
    Mr. Carr. I would agree with that.
    I would add, however, that the first step in enforcement is 
actually knowing there is a problem. And one of the great 
opportunities of this new agency is to have a staff steeped in 
the ability and understanding of consumer issues such that they 
can examine the trends and practices, and patterns and 
practices, to bring forth really powerful studies with a 
Federal imprimatur.
    Mr. Meeks. Before I run out of time, refute this argument 
for me. Some have said that with the agency, we would need to 
look at a vanilla product, we would have to put 20 to 25 
percent down; and as a result, I know, therefore the 
availability of credit, and particularly in minority 
communities, to own a home--which I still believe is the way we 
create wealth--would become smaller and thereby the gap between 
the haves and have-nots would become greater.
    How would you answer that?
    Mr. Carr. It is a frivolous argument, the idea that somehow 
every single consumer is different from one another.
    There is a difference to offering one product to every 
single consumer in the market as opposed to having standard 
products that are based on individuals' income, their wealth, 
and certain other types of financial circumstances to create 
classes of standard products.
    And one can be very nimble, very innovative, with standard 
products. In fact, there are a lot of them that actually exist. 
The problem was they could not compete with the reckless 
subprime loans that were actually priced at a much higher 
premium by the investment banks.
    So the idea that somehow you lose innovation because you 
introduce standards is a frivolous argument.
    Chairman Watt. The gentleman's time has expired. The 
gentleman from Texas is recognized for 5 minutes.
    Dr. Paul. I thank you, Mr. Chairman. I have a question for 
Mr. Carr on how optimistic he might be about what we are trying 
to do.
    I tend toward pessimism at times; and I think the problem 
is almost bigger than what we are dealing with here, and we are 
just dealing on the edge of the basic problem. So the system 
that we have had has been around a long time. We have had a 
system--some people refer to it as capitalism that was 
unregulated.
    I happen to think that it doesn't have much to do with 
capitalism; it has to do with corporatism, where corporations 
seem to get the benefits of some of the programs that are 
designed to help the poor. We have multiple programs that have 
been going on for a long time designed to help the poor, and 
yet sometimes I think that is so superficial. The poor seem to 
become more numerous and the poor--especially since the crisis 
has hit; but it is always on a pretense to help the poor, and 
yet the corporations stand to make the money.
    So they make the money and they have the power and they 
have the insight with some of our financial institutions, 
including the Federal Reserve; and when the bubble forms, they 
benefit, and nobody complains too much if it seems to satisfy a 
lot of people.
    But when the bust comes, then we have a bailout. Who does 
the bailout serve? Do we immediately go out and bail out the 
people that we tried to get houses for? No. We immediately go 
out and bail out the system. So--the system is so deeply 
flawed, so they make the money when the bubble is being formed 
and they get bailed out when the bubble bursts.
    We come along with a new system that we hope will work. But 
for housing programs, for instance, you know, we want houses 
for the poor people, but developers make a lot of money, 
builders make a lot of money, mortgage companies make a lot of 
money, the banks make a lot of money. And all of a sudden the 
system doesn't work very well and the poor get wiped out and 
they lose their houses.
    So if we don't address that major problem, the structure of 
the system, this corporatism which has invaded us, how can this 
idea that, well, we will regulate a little bit in order to 
protect the consumer--I guess I am rather cynical, and I want 
you to tell me whether you share any of that concern, whether 
my cynicism sometimes is justified or not.
    Mr. Carr. Congressman, I appreciate the question because I 
agree with much of what you have just said.
    One of the problems that we have in this country is that we 
have the financial system operating on one side of the ledger 
and we have special programs for the poor on the other. The way 
the poor became solid middle class in this country was by 
having a financial system that built their wealth and public 
policies working with that financial system, coming largely out 
of the Great Depression, that built the vast majority of our 
middle class.
    We do not have that now. Instead, we have a banking system 
that looks at consumers and says, how can we exploit them? And 
that is problematic, and until we change that system such that 
when a bank and our financial institution is reaching to a 
consumer specifically to promote the economic mobility of that 
consumer and build their wealth--if that is not their goal, if 
that is not what is going to be accomplished by their product, 
the poor will remain poor and all the Federal subsidies in the 
world won't help them.
    That is why it is so critical to put into place an agency 
that actually combines the knowledge, the collective wisdom of 
people who actually understand the banking system, the 
financial system, and understand it is their mission to promote 
the economic mobility of this country. Because once they are 
working together, there will be no conflicts of promoting 
wealth and stability within working families, with safety and 
soundness of the financial system.
    And then, Congressman, the other programs that you have 
talked about, that have failed so miserably so often, those 
programs will now have a foundation by which they can actually 
enhance what is happening. But if the markets don't work for 
the general public, poverty will never be resolved.
    Dr. Paul. One other quick question. Would you have any 
objection, personally, to us knowing what is going on at the 
Federal Reserve and have an audit of the Federal Reserve?
    Mr. Carr. I am not familiar with the Federal Reserve's 
audit.
    Dr. Paul. I am finished. I yield back.
    Chairman Watt. The gentleman's time has expired.
    The gentleman from Texas, Mr. Green, is recognized.
    Mr. Green. Thank you, Mr. Chairman. I thank the witnesses 
for appearing.
    I have a question with reference to the Fed continuing to 
perform the function of consumer protection. And I would like 
for each of you to give me a reason why the Fed should not--
this consumer protection agency should not be in the Fed. And I 
would like for you to discount--it is exceedingly important 
that you do this--discount past performance. Do not let that be 
your reason, discounting past performance.
    Why would we not want the Fed to have custody, care, and 
control of this agency? Ms. McCoy, we will start with you.
    Ms. McCoy. Thank you, Congressman Green.
    The reason why the Fed would not do as good a job as the 
agency is that it approaches safety and soundness issues, which 
is one of its core concerns, through the vantage point of 
banks. It is concerned about their solvency. The banks, in 
turn, report quarterly profits, and that tends to produce a 
short-term vantage that the Federal Reserve often shares.
    And that is true not only for the Federal Reserve. It is 
true for the Comptroller of the Currency and the Office of 
Thrift Supervision. And this is a structural and cultural mind-
set that will not change.
    Mr. Green. Thank you.
    Ms. Saunders?
    Ms. Saunders. I was basically going to say the same thing. 
I think the questioning here today has pointed out how many 
people coming from consumer organizations sit on the Board of 
Governors, have ever sat on the Board of Governors, even have 
had a significant role on the Consumer Advisory Council.
    I actually drafted a section of my testimony focused on the 
CAC and how it promotes industry views more than consumers'. It 
just pervades the agency. Whether we add the words ``consumer 
protection'' to the line in the statute or not, it is always 
going to be a small part of the overall function of the Federal 
Reserve, and it is so dominated by bankers and focused on 
banking and those concerns that it is going to look at things 
from that perspective and miss important questions if you look 
at it--focus solely on the consumer.
    Mr. Green. Mr. Carr?
    Mr. Carr. I would just reinforce the past two comments, 
that it is just a structure that does not and will not work. In 
fact, you said, without looking in hindsight or 
retrospectively, it is really hard to do that.
    You just asked a question right in the depths of the 
greatest recession we have had in a half century. We know that 
much of the damage was brought to Black and Latino communities. 
How many civil rights actions are currently active by the Fed? 
And the answer was, we are not sure.
    I can't look backward, but can I look back just an hour?
    I think we need an agency that understands that economic 
opportunity and economic mobility is imperative for this 
country; and that if you can't respond to that in the depth of 
this crisis, how can you be given the mantle to make sure that 
those rights are ensured?
    Mr. Green. Thank you, Mr. Chairman. I yield back.
    Chairman Watt. I thank the gentleman.
    The gentleman from Missouri is recognized for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman. It won't take the 
entire 5 minutes.
    This is for the three of you, or either of the three of 
you. My assumption--well, I don't want to assume.
    Do you believe that we absolutely must include the 
Community Reinvestment Act in this legislation, assuming of 
course that we can somehow prevent illegal immigrants who work 
for ACORN from benefiting, do you think that this has to be an 
inseparable part of this new consumer protection agency?
    Ms. McCoy. Congressman, by the way, Kansas City was my 
``big city'' when I grew up.
    Mr. Cleaver. Where are you from?
    Ms. McCoy. Lawrence.
    Mr. Cleaver. Lord help us.
    Ms. McCoy. Exactly.
    I think it makes sense for the Community Reinvestment Act 
to be part of the new agency because the agency is so concerned 
with access to credit and credit quality. And those two things 
are at the core of CRA.
    Ms. Saunders. My organization does not really work on CRA 
issues. But I can tell you that as I was writing my testimony 
and the particular history on Rent-a-Bank, payday lending where 
the banks are lending their preemption rights to the payday 
lenders, I was struck--I had help on the testimony from Jean 
Ann Fox at the Consumer Federation. I was struck by the 
important role that CRA played in eventually bringing--
eventually, it was one of the rare successes, all four of the 
banking agencies, to realize that this was not appropriate and 
shutting it down.
    Mr. Cleaver. Mr. Carr.
    Mr. Carr. Yes.
    First of all, I am on the executive committee of Americans 
for Financial Reform. It is the official position of the 
organization that CRA should and must be included in the new 
consumer protection agency.
    Second of all, I will go back to something I said in my 
opening comments. The goal of that agency is to ensure access 
to safe and sound products, and it can't do so to minority 
communities if it is only looking at individuals, because the 
financial system doesn't treat individuals the same in minority 
communities. They treat them as markets.
    And so getting at systemic issues of failing to lend--
failing to lend, as opposed to using exploitive products--the 
Community Reinvestment Act is the only real act that really 
promotes and holds banks and other financial institutions--
well, banks now, hopefully other financial institutions--
accountable for proactively lending in communities and not 
ignoring the legitimate credit needs.
    So if it is not in that agency, we have left a major piece 
of support for minority communities out.
    The second thing is that we should understand that that 
agency will have that accumulated knowledge and expertise of 
researchers, data--how will it in any way enhance their jobs to 
have the people who look at things at a geographic and at a 
market's level--systemic market level not part of those daily 
conversations, sharing of information and, ultimately, the 
creation of products and the enforcement of the law?
    It must be in order for that agency to work as it is 
designed. It must be able to look at broad-based community 
lending.
    Mr. Cleaver. You don't all have to answer. Just give me 
some signal.
    Based on your answer, then, you would support a civil 
rights division of the financial consumer protection agency?
    Ms. McCoy. I would.
    Ms. Saunders. That is also part of, I think, an official 
position of Americans for Financial Reform, which we--
    Mr. Cleaver. Yes. I know yours. Thank you very much.
    I yield back the balance of my time, Mr. Chairman.
    Chairman Watt. The gentleman from Minnesota is recognized.
    Mr. Ellison. Thank you, Mr. Chairman.
    And also I want to thank all the panelists. You all have 
done a remarkably excellent job, and I appreciate the time you 
have taken.
    Let me get right to my point. One of the things I have been 
trying to focus on yesterday and today is to ask some of the 
people who represent the Fed--and even yesterday, the bankers--
about this issue of what takes precedence--what will take 
precedence, what has taken precedence--prudential regulation or 
consumer interests?
    Based on the long amount of time that has transpired 
between the Fed having the authority to make rules regarding 
good mortgages and the time they actually came up with 
something--credit cards, overdrafts, all of this stuff--does 
the length of time that has transpired give us any indication 
as to how the Fed has grappled with these two conflicting 
portfolios and which one has prevailed?
    Do you understand my question?
    Ms. McCoy. I do, Congressman.
    I want to relate a personal experience that--I was on the 
Consumer Advisory Council of the Fed from 2002 to 2004, and 
this was exactly the period when we--consumer advocates were 
urging the Fed to adopt the unfair and deceptive rules that it 
delayed until 2008.
    We pressed for 3 years with no success to have that rule 
adopted. We were told endlessly why the Fed could not do it, 
would not do it; and I have to say, I was so frustrated because 
we were not listened to.
    Subsequently, a Fed staffer said, ``You were right, we were 
wrong, but we didn't listen to you because you only told 
stories of individual consumers.''
    Mr. Carr. Congressman, if I could just--
    Mr. Ellison. Mr. Carr, please.
    Mr. Carr. I think we should recognize that it took until 
the middle of 2008 to actually release final regs on HOEPA to 
deal with this issue. And even at that time, some of the most 
egregious predatory practices still weren't purged.
    For example, yield spread premiums, which are basically 
kickbacks, were still allowable, as well as weaknesses on 
issues such as assignee liability, prepayment penalties. And 
this is knee deep into the crisis. Those issues have now only 
recently been taken on again.
    Mr. Ellison. Ms. Saunders?
    Ms. Saunders. If I could just add, in addition to the 
length of time which, of course, says something about 
priorities, what triggered the action? It wasn't just how long 
it took, it is that nothing happened until Chairman Frank and 
others said, ``Use it or lose it.'' And they were under threat 
of losing that authority and Congress was considering credit 
card bills and predatory lending bills and it was clear that 
they were under the gun and they had to do it. And in the end, 
you know, that is what it took, a threat, an ultimatum to get 
action.
    Mr. Ellison. Thank you for elaborating on that.
    Do you see any reason why there couldn't be joint exams 
with prudential and consumer regulators? Because some people 
seem to be really concerned about a potential conflict between 
the two.
    I mean, I don't see it as a huge problem. I see it--first 
of all, I see conflicts as having happened already; they just 
were resolved in the way you all just described in favor of the 
prudential regulator, in favor of the industry. So now there 
might be a fair chance for the consumer, and that might somehow 
manifest into a conflict that we can see.
    But I guess my question is, if there is a potential 
conflict, can you envision a few ways in which these things 
might be worked out?
    Ms. McCoy. I can.
    First of all, I think joint examinations are entirely 
feasible. There are other parts of financial services 
regulation where it happens very well, such as an insurance 
regulation.
    But let me suggest this. We know on very rare occasions 
that agencies do have irreconcilable conflicts. For example, 
under Gramm-Leach-Bliley, the SEC and the Federal banking 
regulators couldn't agree on the push-out provisions. And a way 
to resolve that is to allow them, the agency, to refer the 
matter to GAO. It does a report to Congress, and Congress is 
advised of the issue and if GAO's recommendation is to the 
resolution. I think that is a great tiebreaker.
    Mr. Carr. Congressman, if I could just say for 5 seconds, I 
think the absence of conflict would be a failure of mission, 
which is exactly what we have right now.
    One would expect that given the types of deceptive and 
exploited practices happening, you would be having lots of 
conflicts for the last decade. The absence is a problem.
    Mr. Ellison. Thirty seconds, Mr. Chairman, or no?
    Chairman Watt. Yes.
    Mr. Ellison. Just to sort of wrap up, have you all thought 
about how we might fund the agency?
    Ms. McCoy. I was saying before the hearing that funding is 
a really hard issue to figure out, and I don't have a good 
solution except to say that the agency needs adequate funding, 
which the SEC has not had. And the funding system needs to make 
certain that the agency does not become captive to large 
financial services providers. Those, to me, are the two 
overriding goals.
    Mr. Ellison. And if we cannot get this independent 
regulatory board, which I believe we need and I support fully, 
can we at least change the situation so that the bankers don't 
have their advisory board at the Fed and then have half an 
advisory board on the consumers?
    Chairman Watt. I take it that is a rhetorical question of 
this panel?
    Ms. McCoy. Even if the consumers have their own board and 
there are no bankers on it, that will not solve the problem. It 
is just not enough.
    Mr. Ellison. Thank you.
    Chairman Watt. The gentleman's time has expired.
    I will recognize myself for 5 minutes to conclude this.
    Ms. Saunders, I think you may have addressed some of the 
concerns that I was beginning to feel about the potential for 
conflict between a new consumer regulatory agency and leaving 
some consumer responsibilities, consumer protection 
responsibilities. You pointed out some things in the 
legislation that--I am a cosponsor of that--I was not aware of. 
It would be helpful, I think, if you--all three of you--looked 
closer at that because what we do not need is conflict between 
consumer regulation in one place and consumer regulation in the 
other place.
    And I think we may have addressed it appropriately in the 
statute. Ms. Saunders seems to suggest that in her testimony. I 
take it you stand by that?
    Ms. Saunders. I do.
    I would also like to point out, though, that the proposal 
is basically to remove pretty much all of it into the new 
agency. The Fed would retain backup enforcement authority.
    Chairman Watt. But then I am thinking that maybe if there 
is a potential for conflict, we may need to be removing even 
more of it. That was the conflict that I--now, the second 
question that the industry has raised over and over again, this 
potential for conflict between consumer and prudential. I keep 
having trouble identifying even what that is all about.
    The regulator, Ms. Duke, didn't suggest that that potential 
existed today, but the industry keeps telling me that there is 
a conflict between consumer regulation and prudential 
regulation.
    And is anybody able to tell me one instance where that 
would raise its head?
    Ms. Saunders. I was actually looking for those examples in 
industry testimony yesterday as I was preparing, and the ones 
that I came up with from their examples--interesting that Mr. 
Ireland did not repeat them this morning when you challenged 
him--one was check hold times.
    Now, the Expedited Funds Act actually is not one of the 
ones being proposed and given to the new agency. It would stay 
with the Fed. But let's assume that it was going.
    The idea is that the banks say, ``We have operational 
issues on how we clear checks and we have fraud issues and we 
just can't speed it up.'' And of course the consumer is saying, 
``We want our money now.''
    Why couldn't this agency take that into consideration? 
Nobody wants fraudulent checks cleared. Like any other agency, 
it is going to balance the issues.
    Chairman Watt. If you really got to a fork in the road 
where you had a real conflict, which nobody has really been 
able to identify to me--it is even hard for me to imagine who 
would--I guess then the question becomes, who takes precedence, 
the consumer or the bank?
    How would you resolve that?
    Ms. Saunders. In the end, somebody has to decide; and the 
structure of this agency is that the agency decides. But it has 
a regulator on the board and Congress looking over its 
shoulder, and I am confident that it is not going to ignore 
serious safety and soundness issues.
    Chairman Watt. Final point and final question, because I do 
confess to a level of ambivalence on this CRA issue that 
Representative Cleaver raised. I am still somewhat ambivalent.
    I understand your position that an integral part of CRA 
should be in this consumer agency, but I would hate to think of 
a scenario in which CRA responsibility and duties don't 
continue to reside over on the regulatory side also, because I 
would hate for them to say, you know--that is not our thing 
anymore to oversee that.
    So let me get you all to just think about that a little 
bit. Not that I am--the legislation that we introduced kept it 
where it is in the existing regulators. There may be some way 
to accomplish what you all have suggested would be the 
legitimate consumer regulatory part of it through some language 
to make sure that they are monitoring it, and still give the 
primary responsibility to the regulators who are out there 
pushing the banks and financial institutions regularly through 
their examination process. But that is--I am--my jury is still 
out on that; and I would love to hear more.
    But we have run out of time, unfortunately, and my time has 
expired.
    The Chair notes that some members may have additional 
questions for this panel, which they may wish to submit in 
writing or which maybe have been raised today; and we would 
welcome your written responses to--such as the last one that I 
raised. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    We thank you all so much. All of you were just outstanding 
witnesses, and your written testimony was outstanding also. I 
have commended it--put Ms. McCoy's testimony, in fact, in the 
hearing record of the full committee this morning; and we will 
make sure that the other two written testimonies get circulated 
widely also.
    We thank you for your participation, and with that--with 
nothing further for the good of the cause, as they say in my 
church--the hearing is adjourned.
    [Whereupon, at 4:27 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             July 16, 2009


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