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




                   COMMUNITY AND CONSUMER ADVOCATES'
                       PERSPECTIVES ON THE OBAMA
                       ADMINISTRATION'S FINANCIAL
                      REGULATORY REFORM PROPOSALS

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 16, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-61



                  U.S. GOVERNMENT PRINTING OFFICE
53-241 PDF                WASHINGTON : 2009
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001






                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

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

        Jeanne M. Roslanowick, Staff Director and Chief Counsel









                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 16, 2009................................................     1
Appendix:
    July 16, 2009................................................    37

                               WITNESSES
                        Thursday, July 16, 2009

Flatley, Joseph L., President and Chief Executive Officer, 
  Massachusetts Housing Investment Corporation, on behalf of The 
  National Association of Affordable Housing Lenders (NAAHL).....     8
Ireland, Oliver I., Partner, Morrison & Foerster LLP.............     9
Mierzwinski, Edmund, Consumer Program Director, U.S. Public 
  Interest Research Group (U.S. PIRG)............................    11
Murguia, Janet, President and Chief Executive Officer, National 
  Council of La Raza (NCLR)......................................    12
Plunkett, Travis B., Legislative Director, Consumer Federation of 
  America........................................................    14
Taylor, John, President and Chief Executive Officer, National 
  Community Reinvestment Coalition (NCRC)........................    16
Zirkin, Nancy, Executive Vice President, Leadership Conference on 
  Civil Rights (LCCR)............................................    18

                                APPENDIX

Prepared statements:
    Flatley, Joseph..............................................    38
    Ireland, Oliver I............................................    45
    Mierzwinski, Edmund..........................................    55
    Murguia, Janet...............................................    82
    Plunkett, Travis B...........................................    90
    Taylor, John.................................................   142
    Zirkin, Nancy................................................   170

              Additional Material Submitted for the Record

Hinojosa, Hon. Ruben:
    Letter from Americans for Financial Reform...................   189
Watt, Hon. Melvin:
    Written 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...............   190

 
                   COMMUNITY AND CONSUMER ADVOCATES'
                       PERSPECTIVES ON THE OBAMA
                       ADMINISTRATION'S FINANCIAL
                      REGULATORY REFORM PROPOSALS

                              ----------                              


                        Thursday, July 16, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Waters, Gutierrez, 
Watt, Meeks, Moore of Kansas, Clay, Baca, Miller of North 
Carolina, Scott, Green, Cleaver, Moore of Wisconsin, Ellison, 
Donnelly, Carson, Speier, Kosmas, Himes, Maffei; Royce, 
Manzullo, Jones, Biggert, Hensarling, Bachmann, McCarthy of 
California, Posey, Jenkins, Paulsen, and Lance.
    The Chairman. The hearing will come to order.
    We are here today for the second day of hearings on the 
Administration's proposal for a change in the regulatory 
structure, and in particular today, we have advocacy groups of 
various sorts that have focused on consumer civil rights and 
community economic concerns.
    All of the issues that are embodied in this are before us. 
As was the case yesterday, I think we probably have some 
particular interest among many of the witnesses today in the 
proposed consumer agency, but, as I said, all of the various 
aspects of that are before us.
    I will begin. We will have 10 minutes of opening statements 
on each side and then proceed with our panel.
    The need for regulation seems clear, and I think we should 
understand that this is, to a great extent, part of a 
historical pattern. We have a private sector economy in which 
the private sector generates wealth, and we are all supportive 
of that. There is constant innovation in the private sector, as 
there should be. At certain points in history, the level of 
innovation reaches a point where there is almost a qualitative 
change in the way in which certain institutions function.
    Now we should be very clear. None of these institutions, 
none of these new approaches, would survive if they did not add 
significant value in the society because they are voluntary. 
And if they did not add value, nobody would participate and 
provide any funds for them.
    The problem comes when they innovate, provide a great deal 
of benefit, but precisely because they are innovative, occur in 
a regulatory vacuum. There are no rules, and the free market 
clearly needs rules to function well. Rules to give investors, 
the people who will be making the money available, some 
confidence. Rules to protect the great majority of people in 
the business who want to be honest and follow all the rules 
from those who don't.
    We had a situation in the late 19th Century where the 
innovation was large industrial enterprises. If you looked at 
the structure of American enterprise in the 1880's and 1890's, 
it was very different than it was in the 1940's and 1950's. It 
was larger. Those large enterprises were good, because you 
could not have had the degree of industrialization and wealth 
creation that we have had without them. But they operated in a 
regulatory vacuum.
    So after the creation of the large enterprises in the 
latter part of the 19th Century, you had Woodrow Wilson and 
Theodore Roosevelt, in reverse order, adopting rules, the 
Federal Trade Commission, the Federal Reserve system, antitrust 
acts to try to preserve the benefit of those large institutions 
without much of the harm.
    That worked pretty well but it, in turn, led to another 
situation where the newest innovation in terms of its impact 
was the stock market, because with large enterprises, you could 
not have individually financed entities or family financed 
entities. You needed a stock market. The stock market, 
obviously, did a lot of good, but it caused a lot of problems 
because there were no regulations. So in the New Deal you saw 
regulations both in the banking industry and of the equity 
industry. That worked for a long period of time.
    Beginning in the 1980's, into the 1990's, and culminating 
in this past decade, a new round of innovations came up. Banks 
became less important, because there were ways for people to 
aggregate the money and lend it out outside of banks. So bank 
regulation covered less and less of the activity.
    Securitization came into being, which meant that the 
discipline that came from the lender/borrower relationship 
eroded. Derivatives were created without an adequate regulatory 
structure.
    I think we are in the third of those periods that I just 
mentioned, where innovation that essentially does a lot of good 
outstripped regulation by definition. And our job is to try to 
fashion regulations with regard to derivatives; with regard to 
excessive leverage; with regard to loan originations by people 
who have no economic interest in their being repaid; with 
regard to the model in which so many mortgages--such a large 
part of the economy--are held in a split fashion, where there 
are those with ownership interest and those with the control of 
the instrument and they are not always able to work together.
    And it is not that we have had innovations that are bad. It 
is that innovations by definition are unregulated. The lack of 
regulation I believe has caused serious problems. And our job 
is, as it was for Woodrow Wilson, Franklin Roosevelt, and 
Theodore Roosevelt, to come up with rules that minimize the 
damage while maximizing the benefit.
    Now I know--let me say in closing--there were those who 
tell us we will be killing off the innovations by doing this. I 
can save them the time. They don't have to write these 
speeches. They can go back to 1902 and 1903 and dig out what 
people said about Theodore Roosevelt and then later about 
Woodrow Wilson, and they can go back to 1933 and 1934 and be 
right here in the Congressional Record, and they can get all 
the speeches about how regulation will inherently kill off 
these activities.
    Yes, excessive regulation and incompetent regulation and 
foolish regulation can do that, but well-done regulation, as it 
did under Theodore Roosevelt and Woodrow Wilson and as it did 
under Franklin Roosevelt, can help, and that is what we intend 
to try to do today.
    The gentleman from California is recognized for 4 minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    We really do need regulation. And what happens when a 
regulator fails in his task to make certain that you don't have 
overleveraging in the financial institutions is something like 
what happened with AIG. You end up with overleveraging of 170 
to 1.
    Banks typically are regulated to make certain they don't 
overleverage more than 10 to 1. The consequences are 
catastrophic when a regulator misses something like that. The 
consequences also are catastrophic when, for example, GSEs were 
leveraged 100 to 1.
    In this case, the regulators did catch it, but in this case 
we in Congress did not take the decisive action necessary to 
allow those regulators the power to deleverage Fannie Mae and 
Freddie Mac. And, likewise, you have a consequence there of an 
impact to the system, a shock to the system. And with that kind 
of overleveraging in a society, you end up also, of course, 
with a consequence of helping to create a boom or an expansion, 
an overexpansion in housing.
    Now we're here today again talking about the regulatory 
reform proposal issued by the Administration, and, logically, 
the consumer financial products agency is going to be discussed 
here today, as it was yesterday.
    We know what happens when you separate solvent protection 
from consumer protection. We saw it with the regulatory 
structure over Fannie and Freddie. OFHEO focused on safety and 
soundness and for years competed against HUD, who was enforcing 
the affordable housing goals, akin to mission oversight in that 
case so you had that competition. Those affordable housing 
goals pushed by one agency led to the build-up of junk loans in 
Fannie and Freddie, which ultimately led to their demise.
    Going forward, it will be very difficult to create a 
separate regulatory entity, charge it with consumer protection 
oversight, and not expect similar politically driven mandates 
to come further down the road.
    There is a reason why virtually every Federal safety and 
soundness regulator has expressed concern over this proposal 
that we are talking about today. And it isn't because they are 
trying to protect their regulatory turf. It is because it is a 
flawed idea.
    Consumers benefit from a competitive market with adequately 
capitalized institutions that consumers know will be there down 
the road. In many ways, solvency protection is the most 
effective form of consumer protection. Instead of bifurcating 
the mission of the various regulators, we should ensure 
consumers throughout the financial system have the tools 
necessary to make sound, educated financial institutions.
    What we are doing with the plan that is being put forward 
today, I am concerned, is you are going to eliminate choice by 
requiring government bureaucrats to define what are suitable 
financial products. And then it gives each State the ability to 
change those standards.
    To avoid litigation, institutions will have no choice but 
to sell only one-size-fits-all products.
    Also, the plan put forward here that we are discussing 
would add an additional layer of bureaucracy on top of the 
current regulatory patchwork, with broad, undefined, and 
arbitrary powers which would impose requirements that would 
likely conflict with those of other regulatory agencies. So the 
plan invites the kind of turf battles that will undermine 
rather than promote effective consumer protection.
    And lastly, in terms of lawsuits, we know what the 
consequence is going to be of outlawing mandatory arbitration 
clauses. Creating subjective standards for what constitutes 
acceptable products and reasonable disclosures, that is 
inevitably going to lead to more lawsuits.
    So the plan put forward here in this committee today I am 
afraid will impose new taxes and fees on consumer financial 
transactions, increase the cost of borrowing and create a 
government bureaucracy. And, frankly, what we should be doing 
is providing regulators with more investigative and enforcement 
tools, increasing civil penalties, and maximizing restitution 
of victims of fraud. That should be our focus here and we 
should streamline and consolidate regulations of financial 
institutions, including consumer protection, so that no 
institution can game the system.
    Thank you, Mr. Chairman.
    The Chairman. The gentlewoman from California, Ms. Speier, 
for 2\1/2\ minutes.
    Ms. Speier. Thank you, Mr. Chairman, and thank you for 
having the backbone to continue this fight to make sure 
consumers in America have a choice.
    The taxpayers have spent more than $2 trillion to turn 
around an economic crisis that had its foundation in the 
insatiable appetite of Wall Street for the high yields provided 
by mortgage-backed securities and the fees that went with them. 
We got liar loans and no-doc loans and pick-a-payment loans 
that had no relation to the borrower's ability to pay. It 
didn't matter, because the loans were cut up into pieces and 
bundled and rated triple A. Lots of people got rich, and the 
foundation of this economy crumbled.
    Today, we are going to talk about what we can do for the 
consumers of America now that we have taken care of Wall 
Street. We heard yesterday from the banks, both big and small, 
about how they weren't responsible for the current financial 
crisis and consumer protection should be left with the existing 
regulators.
    Well, the existing regulators have had 14 years, and what 
have they done in 14 years to fix the problem? Sixty percent of 
the subprime borrowers would have qualified for cheaper 
mortgages, but they didn't get them.
    They talked about how the consumers must have choice and 
access to innovative financial products, about how a Consumer 
Financial Protection Agency is somehow going to shut down 
access to credit for consumers or drive the price of credit sky 
high, about how they will be subject to 50 standards. These 
arguments are scare tactics intended to delay action until the 
economy starts to recover, as it inevitably will, and the 
political will for bold reform will fade.
    The choice and innovation argument only works when the 
parties involved are on an equal negotiating level. 
Furthermore, what is wrong with plain vanilla? Innovative 
products have equaled paying for the consumers and ripoffs to 
the taxpayers. You can't tell me that a kindergarten teacher 
buying her first home or a firefighter who has been offered a 
teaser rate to transfer a large balance from one credit card to 
another is on an even playing field with the phalanx of lawyers 
deployed by Citibank or Bank of America or Wells Fargo who 
write 30 pages of legalese in print so small that even triple-
strength reading glasses aren't enough to reveal the real 
terms.
    A Consumer Financial Protection Agency will not limit 
creative or innovative products. It will, however, limit the 
ability to run roughshod over the consumers. Terms will have to 
be clear and fully disclosed, and the consumer may have to opt 
in. And although opt in seems to be a dirty word to those in 
the financial industry, it simply means that the consumer will 
actually have to affirmatively agree to the terms.
    I yield back.
    The Chairman. The gentlewoman from Illinois for 3 minutes.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Our financial regulatory system is broken, and our job is 
to clean it up, making it more efficient and effective. 
However, as I expressed during yesterday's hearing, I fear that 
we are moving in the wrong direction when we strip from the 
banking regulators their mission to protect consumers.
    Our country got into this financial mess because there were 
simply too many regulators who weren't doing their job and were 
not talking to one another. So the logical answer to this 
problem of too many regulators not doing their job should be to 
consolidate and require more efficient, frequent, and effective 
regulators.
     Instead, H.R. 3126 in the Administration's proposal goes 
180 degrees in the opposite direction by placing the 
responsibility to protect consumers with a new government 
bureaucracy, an agency that I think should be called the Credit 
Rationing and Pricing Agency.
    And why do I say this? Because this new agency that tells 
consumers what they can and cannot do and businesses large and 
small what they can and cannot offer to consumers can only 
result in one or more of three things: First, many consumers 
who enjoy access to credit today will be denied credit in the 
future. Second, riskier consumers will have access to 
affordable products or plain vanilla products, but who will pay 
for that risk? That is the less risky consumer whose cost of 
credit will certainly increase. And, third, financial 
institutions will be told to offer certain products at a low 
cost to risky consumers, which will jeopardize the safety and 
soundness of the financial institution.
    Secretary Geithner last week couldn't really answer the 
question: Would the safety and soundness banking regulator 
trump a new consumer if the consumer's regulatory policy would 
put the bank in an unsafe territory? Maybe some of our 
witnesses today can explain what would happen in that 
situation.
    In addition, maybe some of our witnesses today can better 
explain why we should keep CRA with a prudential regulator but 
not the consumer protection regulation.
    I am very skeptical that, for consumers, the answer is 
making government bigger and eliminating Federal preemption. I 
think it weakens the system and could very well be detrimental 
to consumers, businesses, and the U.S. economy at a time when 
we can least afford it. We must first do no harm, and we must 
find a balanced approach to financial regulation.
    I think our Republican plan that puts all of the banking 
regulators and consumer protection functions under one roof is 
a better answer for the consumer and really gets to the heart 
of preventing another financial meltdown.
    With that, I yield back the balance of my time.
    The Chairman. The gentlewoman from California, Ms. Waters, 
for 2\1/2\ minutes.
    Ms. Waters. Thank you very much, Mr. Chairman, and members.
    I am still shaken from yesterday when we had the financial 
services community representatives, bankers, etc., come before 
us and take on the consumer financial agency with great 
opposition, giving us 101 reasons why we didn't need it, how it 
was going to cost the taxpayer more money, how it would 
interfere with safety and soundness, and on and on and on.
    But I am even more shaken with what is happening in the 
underground with the huge amount of money that the bankers and 
financial services community representatives are going to spend 
to lobby Members of Congress. I understand they almost have 
hired a lobbyist for each one of us. I never expected, given 
the subprime meltdown and the number of foreclosures we have, 
that we would get that kind of opposition. How soon we forget. 
And I am more concerned that there are Members of Congress who 
are beginning to take on the arguments of the financial 
services industry about why a consumer financial agency is not 
necessary.
    Many of the people who are before us today have been 
fighting as nonprofits against predatory lending, opposition to 
bank mergers, forcing mortgage disclosure. I remember being in 
the fight with some on redlining, fighting to create CRA, 
helping to create the Cooling Off Period, Truth in Lending. And 
they are forever chasing the very-well-heeled financial 
services community, trying to protect the consumers. And now we 
have an opportunity to really show that we want to protect the 
consumers with an agency that will have the word ``consumer'' 
in it, and we have people who are backing off.
    I am even more shocked that, as this chairman has provided 
opportunities for us to interact with the financial services 
industry, it has basically been dishonored. Even yesterday, 
when we were engaged with consumer advocates, one member got up 
and left and went to a fundraiser with the banking community in 
the middle of all of that.
    Well, all I have to say is I am hopeful that our advocates 
will be stronger than ever and that we will fight against this 
opposition. We will respect our consumers. We will not forget 
the still-growing number of foreclosures that are out there 
created by greedy loan initiators, and we will do a job for the 
consumers despite the lobbyists and the money and the 
opposition to this.
    I yield back the balance of my time.
    The Chairman. The gentleman from Texas, Mr. Hensarling, for 
3 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Over the course of these last couple of hearings and 
listening to some of the opening statements, it is clear that 
we are witnessing a clash of principles, and there is much at 
stake. I think the question is, in a free society, how does the 
State best protect consumers rights? Clearly, the right and the 
left do not agree.
    As I listen to my friends on the other side of the aisle, I 
am almost left with the impression that many of them believe 
that every consumer is a hapless fool incapable of discerning 
what is best for she and her family, that creditors are a 
powerful, monolithic evil in our society that only exist to 
victimize consumers.
    The left seems to believe that if only we will empower some 
type of ruling enlightened elite, that only then can consumers 
hope for fairness and justice. But in order to receive all of 
this, somehow consumers are expected to yield their rights to 
the State in order to be protected.
    Most of us on this side of the aisle believe something 
else. We believe that the best form of consumer protection 
comes from competitive markets, competitive markets that are 
vigorously policed for force and fraud. It is not business we 
believe in. It is competitive markets we believe in. And we 
believe in empowering consumers with effective and factual 
disclosure. And we believe fundamentally in the freedom to 
choose, the fundamental economic liberty of every American 
citizen to decide for himself what consumer financial products 
are best for he and his family.
    And that is the difference. I simply cannot understand how 
you protect a consumer by assaulting consumer rights. I simply 
don't get it. I don't understand how passing legislation that 
ultimately will result in less competition empowers the 
consumer. I don't understand how passing legislation that will 
stifle innovation, perhaps the next ATM machine, the next 
frequent flyer mile offering on a credit card--how by stifling 
innovation are you somehow protecting the consumer? I don't get 
it.
    And if we look at the turmoil, the economic turmoil that we 
find ourselves in today, it is the result of one and only one 
product, and that is subprime mortgages, more specifically, a 
subprime ARM. You know, Congress has acted.
    And, besides that, some of the people who took out these 
loans took out loans that they knew any couldn't repay in the 
first place.
    And so I hope that we are not taking advantage of the 
situation. It is more important that we get it done right than 
that we get it done quickly.
    I yield back the balance of my time.
    The Chairman. We will now begin with the panel, and we will 
begin with a man with whose work I am very familiar and of 
which I am very admiring, Joseph Flatley from the Mass Housing 
Investment Corporation.
    Let me say at the outset, any additional material that 
anyone on the panel or on the committee wants to submit for the 
record will be accepted, if there is no objection, and I hear 
none. So the record is open for any submissions.
    Mr. Flatley?

 STATEMENT OF JOSEPH L. FLATLEY, PRESIDENT AND CHIEF EXECUTIVE 
   OFFICER, MASSACHUSETTS HOUSING INVESTMENT CORPORATION, ON 
   BEHALF OF THE NATIONAL ASSOCIATION OF AFFORDABLE HOUSING 
                        LENDERS (NAAHL)

    Mr. Flatley. Thank you, Mr. Chairman.
    My name is Joe Flatley, and I am CEO--
    The Chairman. You better pull the microphone closer, Joe. 
Move the papers. You are so faint.
    Mr. Flatley. Again, my name is Joe Flatley, and I am 
president and CEO of--
    Mr. Meeks. It is not working.
    Mr. Flatley. And I am also--
    The Chairman. Wait, hold on, is the microphone not working 
as someone said?
    Mr. Flatley. The green light is on.
    The Chairman. Pull it very close to you. Just don't do it 
an inch at a time, Joe.
    Mr. Flatley. It will be down my throat in a second.
    Can you hear me now?
    The Chairman. I will ask that we get the electricians in. 
This is not our first problem with the electrical equipment.
    Are any of the microphones working? We will wait a minute 
until they are. Is somebody working on it? We will have to wait 
until they come.
    Mr. Flatley, I don't think we have to look at you. We have 
to hear you. Please come take up the seat right up here and 
turn on the Member's mike and do it from here. I am not going 
to sit around waiting for the mikes.
    I assume that people will forego looking at Mr. Flatley 
while he speaks, because hearing him is more important. And 
please sit down right there, turn on the mike, and start 
speaking.
    If Members insist, we will get a staffer with a big mirror, 
but, until then, Mr. Flatley, please proceed. I am not going to 
hold this up.
    Mr. Flatley. Good morning. My name is Joe Flatley, and I am 
president and CEO of the Massachusetts Housing Investment 
Corporation in Boston. I am also the former chairman and 
currently a board member of the National Association of 
Affordable Housing Lenders (NAAHL).
    You have a copy of my written statement, so I just want to 
summarize and make a few general points.
    First of all, NAAHL supports Chairman Frank's decision to 
preserve the bank regulators' role to enforce the Community 
Reinvestment Act (CRA). CRA is an enormous success story and 
big business, resulting in hundreds of billions of dollars each 
year invested in low- and moderate-income communities. It 
annually funds this money into investment in low- and moderate-
income communities, financing affordable rental housing, home 
purchases, charter schools, day care facilities, and small 
business and micro enterprise loans.
    Second, we believe that the regulators should revise the 
CRA regulations to update the rules so they do not discourage 
bank participation in community development activities that 
work to benefit low- and moderate-income communities.
    Third, any statutory changes in CRA should be carefully 
considered, practical to implement, and should incentivize 
high-impact community development activities that may fall 
outside of a bank's normal course of business.
    Fourth, the new Consumer Financial Protection Agency should 
have the authority needed to put an end to the problem of the 
dual-mortgage market that has contributed to mortgage meltdown.
    If I could add a few general comments about CRA and the 
reason CRA has been such a tremendous success.
    First of all, I think it is important to remember that the 
vast majority of lower-income households are renters, and CRA 
promotes lending and investing in rental housing and community 
development and not just in credit to consumers.
    Second, CRA imposes an affirmative obligation on financial 
institutions and not just consumer protection on what they may 
or may not do.
    Third, despite its flaws, CRA works, and it works in part 
due to the leverage of the bank regulatory agencies.
    So if we are going to revise the CRA statute, we should do 
so very carefully so it would do no harm to a program that has 
been an enormous success.
    I am prepared to take questions.
    [The prepared statement of Mr. Flatley can be found on page 
38 of the appendix.]
    The Chairman. No, we will go to the next witness.
    Mr. Flatley. Okay.
    The Chairman. Is that mike working now?
    Mr. Ireland. Does this mike work?
    The Chairman. Yes, it does. We can resume the regular 
seating order. Mr. Ireland?

 STATEMENT OF OLIVER I. IRELAND, PARTNER, MORRISON & FOERSTER 
                              LLP

    Mr. Ireland. Good morning, Chairman Frank, Mr. Hensarling, 
and members of the committee.
    I am a partner in the financial services practice in the 
Washington, D.C., office of Morrison & Foerster. I previously 
spent 26 years with the Federal Reserve System, 15 years as an 
Associate General Counsel at the Board in Washington. I am 
pleased to be here today to address the Administration's 
financial regulatory reform proposals and, in particular, the 
consumer protection aspects of the proposals.
    The current recession was sparked by problems in subprime 
and Alt-A residential mortgages. As a result, investors lost 
confidence in subprime and Alt-A mortgage-backed securities. 
The loss in confidence spread to other mortgage-backed 
securities, disrupting the flow of funds for mortgage credit 
and leading to a downward spiral in housing prices and a 
panoply of new government programs and extraordinary actions by 
Federal regulators.
    Clearly, these events warrant a rethinking of what has 
worked, what has not worked, and why, in financial regulation. 
The Administration has proposed to create a new stand-alone 
Consumer Financial Protection Agency to protect consumers of 
financial products and services.
    Although I strongly support the goal of consumer 
protection, I believe that creating a separate stand-alone 
agency for this purpose ignores the increasingly vertically 
integrated nature of the market for consumer financial 
services.
    A primary reason for regulating consumer financial services 
is that we believe these services are beneficial for consumers.
    Leading up to the current crisis, excess demand for 
mortgage-backed securities encouraged mortgage origination 
practices that later triggered the panic in the secondary 
market. The relationship between these steps and the mortgage 
lending process was interactive, and neither is fully 
understood by looking at only one step in the process. In order 
to foster an efficient market for home mortgages, it is 
necessary to have an understanding of the entire market, from 
the consumer borrower to the ultimate investor, and the role of 
that market in the economy as a whole.
    The oversight and regulation of each component of the 
market needs to take into consideration its effect on the other 
components. Bifurcating regulation of the market, as is 
contemplated by creation of a dedicated consumer protection 
agency, is likely to create conflicts between the agency and 
prudential supervisors. The expertise of each regulator will be 
less available to the others than under the current regulatory 
structure, making each of their jobs more difficult rather than 
easier and leading to a less efficient, rather than a more 
efficient, market for home mortgages.
    These considerations weigh strongly against creation of a 
separate agency.
    The countervailing argument is, of course, that the current 
system did not work to prevent the mortgage crisis and that 
changes are needed. The mortgage crisis has been a product of 
multiple failures at all levels, both in the public and private 
sectors. The fact that regulators may have made errors suggests 
that steps should be taken to prevent similar errors in the 
future.
    However, my view, it does not mean the architecture of the 
regulatory system is the problem. There is a strong 
relationship between consumer issues, prudential supervision 
and, ultimately, monetary policy. In the end, these interests 
are not in conflict. Rather, they all seek the same goal, a 
healthy economy and a high standard of living for all 
Americans.
    The goal of regulatory policy should be to ensure that 
prudential and consumer interest are harmonized, rather than 
that they are in conflict. The creation of a separate agency is 
a recipe for conflict, rather than harmonization.
    Thank you for the opportunity to be here today to address 
this important issue, and I will be happy to answer questions.
    [The prepared statement of Mr. Ireland can be found on page 
45 of the appendix.]
    The Chairman. Next, Mr. Mierzwinski.

  STATEMENT OF EDMUND MIERZWINSKI, CONSUMER PROGRAM DIRECTOR, 
        U.S. PUBLIC INTEREST RESEARCH GROUP (U.S. PIRG)

    Mr. Mierzwinski. Thank you, Mr. Chairman, Congressman 
Hensarling, and members of the committee.
    I am Ed Mierzwinski of U.S. PIRG, as are several of the 
witnesses here. U.S. PIRG is a founding member of Americans for 
Financial Reform, ourfinancialsecurity.org, a coalition of 
civil society members across the spectrum supporting broad 
reform.
    My written testimony goes into detail about a number of 
aspects of the Obama plan, including its new investor 
protections to provide for greater fiduciary responsibilities 
on broker dealers, its limits on executive pay, and tying risk 
to longer-term-pay incentives rather than the greedy, short-
term incentives that have helped precipitate the crisis.
    I also talk about the aspects of prudential regulation and 
the notion of a new systemic risk regulator. We point out that 
if it is to be the Fed, the Fed needs democratization and 
greater transparency.
    First of all, I also want to mention that one area where we 
think the proposal is extremely deficient is in the area of 
credit rating agencies. There needs to be much more regulation 
of credit rating agencies. We also are disappointed that it 
doesn't include enough on solving the mortgage and homeowner 
and foreclosure crises.
    I want to spend the bulk of my time talking about the 
centerpiece of the reform, and that is the Consumer Financial 
Protection Agency. We look at this as a game changer, as a 
critically important new solution to a failed regulatory 
system.
    The system failed because the regulators had conflicts of 
interest, and the regulators did not impose the civil penalties 
that they had available to them. The regulators did not 
establish rules to protect consumers in the marketplace. Those 
rules could have helped prevent the mortgage crisis, as 
everyone knows.
    Fourteen years after the Congress gave the Fed authority 
over the Homeownership and Equity Protection Act to create 
rules on predatory lending, didn't do anything until after the 
crisis had passed. Complaints about credit cards reached a 
fever pitch while the OCC slept, the overdraft loan problem. 
And so Congress had to step in and act under the leadership of 
Congresswoman Maloney and this committee.
    The regulators finally created some rules on credit cards, 
but the Congress, fortunately, had already suggested the rules, 
and then the Congress went further and made the rules into a 
law.
    The issue of overdraft fees, banks are now making the bulk 
of their income on an unfair business model, overdraft fees 
where the regulators have allowed them to trick consumers into 
using their debit cards even when they have no money in their 
accounts. And the regulators have allowed the banks to change 
the order that deposited checks and items are cleared so that 
consumers will face more overdraft charges at the end of the 
day.
    We have a number of other problems that we describe in our 
testimony, in our written testimony, both this month and last 
month, where the regulators have simply failed to go after the 
banks. So the idea of a new regulator that has only one job, 
protecting consumers, is one of the best ideas this Congress 
has had. It will not have conflicts of interest. It will not 
have two jobs to do. It will focus on consumer protection.
    But you cannot set the new regulator up to fail. You must 
keep it independent, and you must also do the other things that 
the Obama Administration has suggested and that your bill, Mr. 
Chairman, retains. You must keep the Federal law as a floor of 
consumer protection and allow the States to go higher. The 
States are nimbler. Often, they respond more quickly, and they 
provide good ideas to the Congress.
    In my testimony, I outline how in the 2003 FACT Act, 
Congress allowed the States to continue to investigate identity 
theft. Forty-six States and the District of Columbia came up 
with a security freeze model that allows consumers to protect 
themselves. Giving the States the ability to go further is the 
best way that we can protect consumers from new threats, 
because the States can act more quickly.
    And the idea that State attorneys general can enforce the 
law is not balkanization. Providing State attorneys general at 
the enforcement level the ability to enforce the law, that is 
an area where you want competition. You want many enforcers. 
You don't want many rule writers. You don't want many agencies 
where banks can choose to charter shop to avoid regulation, but 
you do want a lot of cops on the beat, and you do want to give 
consumers the right to enforce the laws.
    We wish the bill went further on giving consumers a private 
right of action, but we are very pleased that the new agency 
will have the authority to ban unfair forced arbitration in 
consumer contracts.
    Thank you.
    [The prepared statement of Mr. Mierzwinski can be found on 
page 55 of the appendix.]
    The Chairman. Ms. Murguia.

   STATEMENT OF JANET MURGUIA, PRESIDENT AND CHIEF EXECUTIVE 
          OFFICER, NATIONAL COUNCIL OF LA RAZA (NCLR)

    Ms. Murguia. Thank you. Good morning.
    My name is Janet Murguia, and I am president and CEO of the 
National Council of La Raza (NCLR).
    NCLR has been committed to improving the life opportunities 
of the Nation's 40 million Latinos for the last 4 decades, and 
I would just like to thank Chairman Frank and Ranking Member 
Bachus for inviting us to testify today.
    Our Latino families are experiencing record high 
foreclosures and mounting credit card debt. These are clear 
symptoms of weak oversight and gaps in consumer protections.
    Through our homeownership network, NCLR serves more than 
38,000 home buyers and homeowners every year. But, these days, 
our counselors have shifted their focus from homeownership to 
foreclosure prevention. We are in the trenches every day 
fighting to save homes and build wealth in our community.
    The fact is, though, that our national banking system is 
failing communities of color. All Americans need access to bank 
accounts and credit to move up the economic ladder. A well-
functioning system will put families on a path of financial 
security, not unwieldy debt. It will build wealth that future 
generations can rely on.
    I just want to make three points today. I want to highlight 
the major weaknesses in our current system, ways in which the 
Administration's proposal addresses those weaknesses, and just 
a couple of recommendations to strengthen the reforms.
    In regards to the current system, there is overwhelming 
evidence showing that minority borrowers pay more to access 
credit than their White peers. For example, Hispanic borrowers 
are twice as likely to receive high-cost mortgages. Latino 
credit card users are twice as likely as White cardholders to 
have interest rates over 20 percent. This trend is repeated 
among auto loans, bank accounts, and other financial services.
    This pattern of overpayment, abuse, and discrimination 
disrupts the financial stability of low-income and minority 
communities and impedes their improvement towards the middle 
class.
    Specifically, there are four ways the market fails our 
families: shopping for credit is nearly impossible; borrowers 
are still steered toward expensive products, even when they 
have good credit and high incomes; creditors trap borrowers in 
cycles of debt; and fraud and scams are rampant.
    NCLR applauds the broad reforms proposed by the Obama 
Administration. The market's breakdown has had a devastating 
impact that extends well beyond those initially harmed.
    As the proposed reforms make their way through Congress, 
there are four areas of particular importance to all 
communities of color: The missions of promoting access to 
credit and protecting borrowers are housed in the same 
regulatory agency. We agree. NCLR supports an independent 
regulator that will evaluate new financial products. These 
evaluations must be completed in light of credit needs of 
diverse communities.
    We want to make sure that we are holding all players in the 
market accountable. Deception, scams, and discrimination are 
present in all aspects of the market.
    Emphasizing simple, straightforward banking and credit 
products. This is an important part of this proposal, and we 
want to make sure that it is included.
    The fourth point is making enforcement a priority. The plan 
creates a meaningful way to analyze and respond to consumer 
complaints, protects private rights of action, and creates new 
tools for regulators to assess systemic risk.
    The concepts for promoting greater access to credit and 
increasing protections are not in conflict. Across the country, 
credit unions, community banks, and nonprofits are leaders in 
this area. They are creating alternatives to payday loans, 
offering free checking accounts, and using nontraditional 
credit information to underwrite loans. They do it while 
upholding highest standards of safety and soundness and 
generally offer prime pricing.
    I will just close with three recommendations to further 
strengthen the President's proposal.
    We strongly believe that we ought to create an Office of 
Fair Lending Compliance and Enforcement within the CFPA. Civil 
rights must be prioritized as part of the agency's formal 
structure.
    We ought to help consumers make smarter financial 
decisions. Go beyond the generic financial literacy and 
establish a federally funded financial counseling program.
    Improve data collection. Publicly available data, such as 
those available under HMDA, are valuable tools for holding 
financial institutions accountable.
    Communities of color were clearly targeted by lenders for 
inferior products, even when they had high incomes and good 
credit. Hispanic borrowers continue to face real barriers to 
accessing safe, fair, and affordable credit. We need strong 
regulators that allow borrowers fair and equal access to the 
banking system throughout their life cycle.
    Thank you, and I look forward to your questions.
    [The prepared statement of Ms. Murguia can be found on page 
82 of the appendix.]
    The Chairman. Next, Mr. Plunkett.

STATEMENT OF TRAVIS B. PLUNKETT, LEGISLATIVE DIRECTOR, CONSUMER 
                     FEDERATION OF AMERICA

    Mr. Plunkett. Thank you, Mr. Chairman, and Ranking Member 
Hensarling.
    We have been asked to comment on the full range of 
regulatory restructuring proposals in the Administration's 
white papers, so I will offer comments on four key components 
of the plan.
    First, we support the Administration's fairly strong set of 
proposals on derivatives as an essential first step but urge 
you to strengthen it further by driving as much as possible of 
the over-the-counter derivatives market onto regulated 
exchanges.
    Second, the President's plan should offer much more robust 
reforms of credit rating regulations than it currently does. 
For example, reduce reliance on ratings by clarifying that 
using a credit rating does not afford a safe harbor. The 
investor, whether it is a pension fund, a bank, or a money 
market fund, must remain responsible for conducting their own 
evaluation to determine that the investment is appropriate.
    Our second recommendation on credit rating agencies is to 
increase rating agency accountability by eliminating the 
exemption from liability provided to rating agencies in the 
Securities Act.
    Our third recommendation for reform to the President's 
proposal on credit rating agencies is to strengthen oversight 
by providing either the SEC or an oversight board modeled on 
the Public Company Accounting Oversight Board the full 
complement of regulatory tools, including inspections, standard 
setting, and sanction authority. The regulators, however, 
should not pass judgment on rating methodologies.
    The third major component of the President's plan we are 
commenting on is the excellent proposals to strengthen 
protections for retail investors, in particular to create a 
fiduciary duty to act in the best interest of clients for 
investment advisors by proposing an examination and reform of 
the compensation practices that encourage financial 
professionals to act in ways that do not benefit their clients.
    We do have a recommendation here as well, though. We are 
concerned that the legislation as drafted leaves the SEC with 
too much leeway to adopt a watered-down fiduciary duty 
``light'' that would deny vulnerable investors the protections 
they both need and deserve. The SEC has created this problem 
that has to be fixed, and so Congress is going to have to step 
in to tell them how to do this. Because, at least until now, 
they haven't been willing to do so on their own.
    Finally, we very strongly support the Administration's 
proposal to create a Federal consumer protection agency focused 
on credit, banking, and payment products, because it targets 
the most significant underlying causes of the massive 
regulatory failures that have led to harm for millions of 
Americans.
    Federal agencies did not make protecting consumers from 
lending abuses a priority, as you have heard repeatedly. They 
appeared to compete against each other to keep standards low 
and reduce oversight of financial institutions. They ignored 
many festering problems that grew worse over time. If agencies 
did act to protect consumers--and they often didn't--the 
process was cumbersome and time consuming. As a result, 
agencies did not act to stop some abusive lending practices 
until it was far too late.
    In short, regulators were not truly independent of the 
influence of the financial institutions they regulate.
    It is particularly important that the proposal would ensure 
that consumer protection oversight is no longer subjugated to 
safety and soundness regulation at regulatory agencies. 
Combining safety and soundness supervision with its focus on 
bank profitability in the same regulatory institutions as 
consumer protection magnified an ideological predisposition or 
anti-regulatory bias by Federal officials that led to 
unwillingness to rein in abusive lending before it triggered 
the housing and economic crisis.
    For example, why curb abusive credit card or overdraft 
lending that may be harming millions of consumers if it is 
boosting the bottom lines of the banks you are regulating? This 
is the inherent conflict that the objections I am hearing from 
the banking industry to this proposal don't really address. 
Regulators viewed, often, safety and soundness regulation as in 
conflict with consumer protection. We now know that, had they 
taken the side of consumers, they would have better protected 
the financial institutions they were charged with and consumers 
as well.
    Finally, let me just respond to some of the criticism we 
have heard by the financial industry. They are threatening 
broad-scale ``Harry and Louise'' type ads against this 
proposal. They have offered an elaborate defense of the status 
quo. They are minimizing the harm that the current regulatory 
regime has caused Americans, distorting specifics of the 
proposals and making the usual threats that improving consumer 
protection will increase costs and impede access to credit.
    Let me finish by saying we are in a credit crunch right 
now. We are in an economic crisis right now. The deregulatory 
regime that these institutions championed helped create that, 
and a consumer regulator will help move us away from that.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Plunkett can be found on 
page 90 of the appendix.]
    The Chairman. Mr. Taylor.

    STATEMENT OF JOHN TAYLOR, PRESIDENT AND CHIEF EXECUTIVE 
   OFFICER, NATIONAL COMMUNITY REINVESTMENT COALITION (NCRC)

    Mr. Taylor. Good morning, Chairman Frank, Representative 
Waters, and other distinguished members of the Committee on 
Financial Services.
    I am John Taylor, president and CEO of the National 
Community Reinvestment Coalition (NCRC). I am here representing 
600 organizations from across the country, and my remarks 
reflect their views.
    The current crisis demonstrates the need for comprehensive 
regulatory reform and the establishment of a Federal agency 
focused on consumer protection. If we had adequate protection 
against predatory lending, then we would have not have had the 
current foreclosure crisis.
    The Administration asserts that consumer protection needs 
an independent seat at the table in our financial regulatory 
system and that the Consumer Financial Protection Agency, the 
CFPA, would be that independent seat. We couldn't agree more. 
NCRC strongly supports empowering the CFPA to administer and 
enforce all of the consumer protection and fair lending laws. 
In particular, we agree with the Administration that the CFPA 
must have jurisdiction over the Community Reinvestment Act. We 
urge the House Financial Services Committee to reinsert CRA 
under the CFPA in H.R. 1326.
    Currently, the bank regulatory agencies charged with 
enforcing the CRA have shown a feeble interest in enforcing 
this important legislation. Weakened enforcement and less 
frequent and thorough exams have been the norm.
    CRA grade inflation. Just so you understand, in 1990 to 
1994, 8 percent of the financial institutions in this country 
failed the CRA exams, failed to accurately provide services and 
products to people of low- and moderate-income needs. That was 
between 1990 and 1994.
    From 2002 to 2007, a period of which we had the absolute 
worst lending where we really needed these lenders in these 
communities offering safe and sound and quality products, the 
CRA grades given by these regulators went down from 8 percent 
to 1 percent.
    Near absence of public hearings on mergers. We have had 
over the last 18 years all of 13 public hearings on mergers of 
CRA institutions. The opportunity for the public, for Members 
of Congress, for the press, and others to have a conversation 
about what this merger means for underserved communities, what 
the depositors and others who do business with the institutions 
need to see happen in the event these banks are merged, that 
process has been all but eliminated.
    The bank regulatory agencies have sat idly as they have 
seen a systematic bank withdrawal from low-income and 
communities of color. I mean, why is it that the basic banking 
of choice in minority and low-income communities is payday 
lenders, check cashers, and pawn shops? Because all these 
regulators sat by and allowed all those banking institutions to 
close those branches one after one after one after the next.
    By the way, in case you don't know this, we have gone from 
15,000 financial institutions down to less than 10,000. In that 
same period of time, the number of branches has actually gone 
up but not in low-income and minority communities. And they 
were charged with enforcing that. Twenty-five percent of the 
CRA grade is supposed to be the servicing. What is the history 
of opening and closing branches? Where have the bank regulators 
been? Asleep at the helm.
    Even the Fed's Consumer Advisory Council--this Congress 
passed a law that required them to have a Consumer Advisory 
Counsel to advise the Fed board Governors. I had the honor of 
serving on that Council, but it astounded me to watch all these 
bankers appointed to the Consumer Advisory Council and then 
would be in these debates inside the Federal Reserve with 
bankers to give what is supposed to be a consumer perspective. 
Hello.
    And then, by the way, in case you don't know it, the Fed 
actually has a Bankers Council, made up of all bankers. Maybe 
one they will stop to invite consumers so that the banks will 
have to argue on them.
    When better attempts are made to enforce CRA by one agency, 
such as under the OCC when Eugene Ludwig was the Comptroller of 
the Currency, he actually really began to really take seriously 
CRA and the fair lending laws and to really enforce them, what 
happened? One hundred and twenty national banks changed their 
charter and went over to the Federal Reserve.
    So there is sort of this regulatory arbitrage. You don't 
like how they are enforcing law over here; go over here. OTS? 
Oh, gee, we will make a less frequent exam and we will go up to 
a billion dollars in assets, and we will say you don't really 
have to have the three exams. We will do a streamlined exam.
    There is enough history here. We don't have to doubt it. 
CRA is a stepchild regulation in these regulatory agencies. We 
couldn't need more now an agency that really for the first time 
takes a look at consumer interest, the taxpayer's interest, and 
assures that their rights are protected and that the Community 
Reinvestment Act is enforced.
    Let me--how am I doing for time? I still have some.
    Let me jump ahead and say a couple of things.
    We are very pleased that they have some enhanced data that 
I think will be very helpful to you, to us, and to others in 
looking at what banks do in underserved communities.
    The Chairman. Ten seconds.
    Mr. Taylor. Sorry, Mr. Chairman.
    This is a letter from the U.S. Conference of Mayors, Mr. 
Chairman. Thank you for allowing us to put this into evidence.
    These are--just in the last 2 days--hundreds of letters 
that are coming across the country endorsing CRA in this 
proposal. The NAACP's National Conference, La Raza, all of 
these leading civil rights organizations are supporting CRA. It 
has to be enforced.
    Thank you, sir.
    [The prepared statement of Mr. Taylor can be found on page 
142 of the appendix.]
    The Chairman. Our final witness is Nancy Zirkin, on behalf 
of the Leadership Conference on Civil Rights.

STATEMENT OF NANCY ZIRKIN, EXECUTIVE VICE PRESIDENT, LEADERSHIP 
               CONFERENCE ON CIVIL RIGHTS (LCCR)

    Ms. Zirkin. Thank you, Mr. Chairman, and members of the 
committee.
    I am Nancy Zirkin, executive vice president of the 
Leadership Conference on Civil Rights (LCCR), the oldest and 
largest human and civil rights organization in this country 
comprised of 200 national organizations. We are also a part of 
the Americans for Financial Reform.
    LCCR supports a Consumer Financial Protection Agency 
because it is the key to protecting the civil rights of the 
communities that LCCR represents. Our interest ties into what 
has always been one of the key goals of the civil rights 
movement, homeownership, which is how most people build wealth 
and improve communities. LCCR and our member organizations have 
always worked to expand fair housing and also the credit that 
most people need to buy housing.
    Despite the progress since the Fair Housing Act, predatory 
lending has been the latest obstacle standing in the way, and, 
of course, it is very much the root of the crisis that we find 
ourselves in today. For years, LCCR and our allies argued that 
the modern lending system was working against us.
    Just to be clear, responsible subprime lending is a good 
thing. The problem is that the industry basically threw the 
responsible out of the window by giving countless numbers of 
people loans that weren't realistic or responsible. Even worse, 
many lenders were steering racial and ethnic minorities into 
these loans, even when they could have qualified for 
conventional loans.
    So, for years, civil rights and consumer advocates have 
tried to get help from Federal banking regulators, but they 
ignored us and maintained the status quo. Seemingly, they were 
more persuaded by the industry's platitudes about access to 
credit than the growing evidence of what the credit was 
actually doing.
    Since 1994, for example, the Fed has been able to ban 
predatory loans but waited until a year ago to actually start 
doing so, after most predatory lenders had already skipped down 
and left taxpayers holding the bag.
    The OTS and OCC were no better, even when it came to 
enforcing civil rights laws like the Equal Credit Opportunity 
Act. During the housing bubble years, neither regulator 
referred cases to the Department of Justice. In one instance, 
DOJ had to go after an OTS thrift on its own, Mid-America Bank.
    I have attached a new brief by the Center for Responsible 
Lending to my written statement which will be added to the 
record. The brief contains a lot of compelling horror stories 
about the lack of financial enforcement. And we all know about 
the Treasury Inspector General's report on IndyMac, which 
certainly shows what OTS did--or didn't do, I should say.
    The problem with relying on Federal bank regulators to 
protect our communities is simple. Its structure is inherently 
designed to fail consumers. When regulators are financially 
dependent on the institutions that they police, consumer 
interest will always be squeezed out.
    CFPA will break this pattern. In the same way that our 
Founders realized that sometimes you have to deliberately pick 
interests against each other in order to create a stable 
government, the interest of consumers and civil rights on the 
one hand and bank profitability on the other need to be pitted 
against each other.
    It is obvious that the current system didn't serve either 
interest. That is why LCCR thinks your legislation, Mr. 
Chairman, is so important.
    Speaking of details, my written testimony includes 
recommendations to the bill that we think are essential, and 
also LCCR's Fair Housing Task Force has a series of 
recommendations that we will be sharing.
    Again, thank you for inviting LCCR here today; and I will 
be happy to answer any questions you might have. Thank you.
    [The prepared statement of Ms. Zirkin can be found on page 
170 of the appendix.]
    The Chairman. Thank you.
    I will begin.
    Mr. Ireland, you were at the Fed. In 1994, this Congress 
passed a law, the Homeowners Equity Protection Act, giving the 
Fed the authority to take action restricting abusive mortgages, 
irresponsible mortgages. Nothing happened until Mr. Bernanke 
became chairman and this committee actually--after the current 
majority took over--began to act on it, was promulgated. Can 
you explain why for that period, from 1994 until 1995 to 2007, 
the Federal Reserve did not act on it? Do you recall any 
conversations about why that should or shouldn't happen?
    Mr. Ireland. I don't recall any conversations on that 
specific issue.
    The Chairman. That is the specific issue I am asking about. 
So that is the answer. You are not aware of any conversations 
about whether or not to enforce that--what was your position at 
the Fed?
    Mr. Ireland. I was an Associate General Counsel in the 
Legal Division.
    The Chairman. So if this was to be implemented, would that 
have come under your purview?
    Mr. Ireland. It would have come to the Board. We would have 
looked at it--
    The Chairman. So, apparently, there was not even any 
interest in doing it.
    And the question is, in general, is it your impression that 
consumer issues like this--Truth in Lending, the Homeowners 
Equity Protection Act, other areas that the Fed had--did they 
get equal attention at the Federal Reserve with other 
regulatory duties?
    Mr. Ireland. They got insufficient attention.
    The Chairman. They got insufficient attention. Thank you.
    And I would say this now: It is not simply ideological. 
Sure, there is an ideology. But there is both an ideology and 
an institutional role, and I do not think that it is purely 
personal that they got insufficient attention. When you give 
people a lot of responsibility, they can do some, but they 
can't do them all equally. I think it is very clear that that 
is the explanation, that they--as you acknowledge, and I 
appreciate--got insufficient attention because the primary 
mission was seen as other.
    Now, I do want to address in this time what I think is an 
inaccurate analogy between the Fannie and Freddie situation and 
this one. People have said, well, after all, you had OFHEO and 
you had HUD and HUD overruled OFHEO.
    By the way, I agree with that. In 2004, when Secretary 
Jackson in the Bush Administration ordered Fannie Mae and 
Freddie Mac to substantially increase the number of subprime 
mortgages they bought, I objected. I said at the time--quoted 
in Bloomberg--that it was a mistake. That was not a favor to 
these people to push them into these mortgages. My own view 
consistently was that we should have been doing more rental 
housing. I was frustrated that we couldn't get enough of that.
    And, by the way, when you talk about the housing goals, it 
was the home purchases for people who couldn't afford it rather 
than rental housing that were the cause of these problems.
    But here is the point. Everybody agreed by then that OFHEO 
was too weak a regulator. In fact, in 2005, this committee did 
recommend a change. Now, many of those critical of Fannie and 
Freddie opposed the change.
    Mr. Oxley, looking down on us, put the bill through. There 
was then a dispute among the Republicans in the House, the 
Republicans in the Senate, and the President.
    I must say I am flattered by those who think that I somehow 
was the arbiter of this intra-Republican dispute and that I was 
responsible for the outcome. Would that I was responsible for 
mediating Republican disputes. We wouldn't be in Iraq today. 
But that is another story.
    In any case, what we had was, in 2007, the passage out of 
this committee and onto the Floor of the House a tough 
regulator. And, in fact, people have said, where is your 
regulation of Fannie and Freddie? Well, the fact is that we did 
pass the regulation. Unfortunately, in the United States 
Senate, it was bogged down. It didn't pass until 2008. But 
people have said, how can you do this without doing Fannie and 
Freddie?
    Well, one of the key points that the Bush Administration 
wanted was to put it into conservatorship. We have done that. 
The Fannie and Freddie today is nothing like what it was before 
in part because too long had gone by without legislation and in 
part because of the legislation we adopted.
    But the point is this: The weakness of OFHEO--in fact, 
people have said, well, see, you had a consumer regulator, HUD, 
and a safety and soundness regulator, OFHEO, and that caused 
the problem. But the very people making that argument are the 
ones who argued that OFHEO was too weak a safety and soundness 
regulator. They explicitly, in fact, disavowed the comparison 
between OFHEO and the OCC and the Fed.
    In other words, it is not the case that we tried having a 
separate safety and soundness regulator and a separate consumer 
regulator. Those making the argument today argued correctly 
that OFHEO was not in the class of OCC, was not in the class. 
At first, I didn't think it had to be. I later changed my mind 
by 2005 and thought it should be because of these subprime 
mortgages.
    But the argument that because we had an OFHEO and a HUD 
that means you can't do these together misses the point that 
the big problem was not that you had a separate consumer and 
safety and soundness regulator but that the safety and 
soundness regulator was too weak. And people who argued again 
that it was not comparable to the bank regulators can't use 
that now as an analogy. I think we have tough bank regulation, 
and I think we can have a system in which we also get tough 
consumer regulation.
    The gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Clearly, the thrust of the Administration's plan and as 
illustrated by the chairman's bill is that financial service 
firms produce--I think the Administration used this phrase--
plain vanilla products. Is everybody in favor of the concept 
that financial firms produce at least one plain vanilla 
product? Is that something--is anybody against that? I assume 
that means everybody supports it?
    Ms. Zirkin. Well, if I could comment on that, Mr. 
Hensarling.
    We are in favor of having transparency. We are in favor of 
having a menu of options. Alt-A mortgages were not a menu of 
options.
    Mr. Hensarling. So you are a Baskin-Robbins kind of--
    Ms. Zirkin. We believe that it won't necessarily be only 
plain vanilla, but the consumers must have a choice.
    Mr. Hensarling. Well, if you end up essentially saying that 
you have a semi-safe harbor for a plain vanilla product and you 
don't for any other product--we had testimony here just 
yesterday of a number of banks, including our community banks, 
that you want to have step-up lending, saying they are not 
going to roll out new products because they fear that these 
products will be found unlawful. At least all the people who 
are in production of the ice cream, the financial ice cream, 
are saying, you know what? The incentive structure is we are 
going to produce plain vanilla.
    So if the impact--I know how it may look to you on the 
drawing board, but if the impact is we end up with plain 
vanilla products after--assuming this legislation passes--would 
it change your mind about the legislation?
    Mr. Plunkett. Mr. Hensarling, I don't think that will be 
the impact. The stated goal and the obvious goal is to 
encourage choice.
    Mr. Hensarling. I appreciate that. But, again, there is 
testimony that is different.
    Then I would ask the question, what exactly is a plain 
vanilla product? I had my staff go online, and they pulled up 
hundreds and hundreds of recipes for plain vanilla ice cream, 
the first one being Thomas Jefferson's handwritten ice cream 
recipe. Apparently, the President didn't have terribly good 
penmanship. I have a hard time reading it.
    I have one vanilla ice cream recipe calling for egg whites. 
I have another ice cream recipe calling for egg yolks. I have 
an ice cream recipe, vanilla ice cream, calling for whole milk. 
I have one calling for Eagle Brand milk. Here is one for half-
and-half. One calls for vanilla extract, another for vanilla 
beans, and the list goes on.
    My point is, number one, not even--not even can you define 
precisely what is a plain vanilla product. People are different 
in this Nation. And so now, because people have trouble with 
subprime mortgages, all of a sudden we are going to create this 
huge government leviathan which is going to have the 
opportunity to ban types of mortgage loan, personal loans, car 
loans. They will have the ability to now regulate loan 
servicing, check cashing, debt collection, and the list goes on 
and on.
    Well, let me ask you this. Some people will say, okay, here 
is a plain vanilla product. Credit cards used to be plain 
vanilla products. Now they are very complicated entities. But 
when I look back at a plain vanilla credit card product 20, 30 
years ago, it was one that charged an annual fee, 25, 35, 40 
bucks. There was no cash back. There were no frequent flyer 
miles. Everybody paid the same high interest rates, far higher 
than today. Is that the kind of product that your members would 
like to have?
    Mr. Taylor. Mr. Hensarling, if I may, I think your 
assumption is wrong, and your analogy to food is wrong. All 
that is being asked here is that you take the laws that 
Congress has passed and make sure that there is an agency that 
protects consumers and enforces those laws.
    Mr. Hensarling. Mr. Taylor, it is my time.
    But, with all due respect, you are giving an agency the 
power to ban products, taking away consumer choice. How do you 
protect the consumer by taking away their choice? You may 
disagree, but others believe that you will squash innovation. 
We will not see the next ATM. We will not see the next set of 
frequent flyer miles. And so if you think that the members of 
your organizations are having trouble getting credit now, wait 
until this legislation is passed, and then you will see real 
problems.
    I see my time is up. I yield back.
    Ms. Waters. [presiding] Thank you very much.
    I will recognize myself for 5 minutes.
    Yesterday, in talking with representatives of the banking 
community, we were admonished for not supporting adjustable 
rate mortgages. And basically what they said is, you guys don't 
understand adjustable rate mortgages and how they have helped 
so many people. It is the same argument we get a lot when 
people say we don't understand subprime lending. We have never 
said we are against subprime lending, but there are so many 
iterations on the subjects.
    I would like to ask--perhaps you could help me, Mr. 
Mierzwinski--for a definition of these adjustable rate 
mortgages.
    As I understand it, there are option ARMs, and there are 
products that could reset 6 months, 1 year, 2 years, and when 
the mortgage is negotiated--and many of these adjustable rate 
mortgages. They don't look at whether or not the homeowner will 
be able to afford the mortgage 1 year or 5 months or 5 years 
from the time that they sign on to these mortgages. And the 
formula for the increase possibly in interest rates allows 
something called a margin on top of the interest rates. So you 
could have an increase in interest rate, plus they can mark up 
this mortgage another 2, 3, 4 percent. Could you help us with a 
description of the harmful adjustable rate mortgages?
    Mr. Mierzwinski. Well, Congresswoman, I would say you have 
exactly identified the problem, and the new agency would have 
the opportunity to hold hearings on and to regulate some of the 
most unfair aspects of these mortgages.
    As you pointed out, people were qualified based on their 
ability to make the payments only in the first year, not after 
the option kicked in, the so-called 2/28s or the 3/27s, and the 
regulators looked the other way. We want a regulator that will 
look at the product, and we want a regulator who will then say 
certain aspects of this product, not the product itself 
necessarily, should be made illegal.
    We regulate toasters to make sure they don't catch fire. We 
are not banning toasters with the Consumer Product Safety 
Commission, and we are not banning adjustable rate mortgages 
with the Consumer Financial Protection Agency. We are simply 
saying they have to be safe and we want the innovations to be 
within the circle of safe products.
    Ms. Waters. And, again, when many of these adjustable rate 
mortgages reset, this margin that they put on top of, what I 
understand, the existing interest rates could be flexible in 
terms of how much they charge. They could be 2 percent, 3 
percent, 4 percent. Are you familiar with that?
    Mr. Mierzwinski. Congresswoman, I am generally familiar 
with that, and I can say, again, that there may be unfair 
aspects as to the way that the margins reset, the way that they 
are disclosed to consumers and the calculation of what the 
consumer's interest rate and monthly payment will be and how 
often that they can change. And that is really something that 
the current regulators have not had been on top of. They just 
absolutely have not been on top of it. There is a Wild West out 
there, if you will, and that is why we are looking for a new 
agency to tame the Wild West.
    Ms. Waters. Mr. Ireland, you talked about the complications 
of creating such an agency and you talked about vertically 
integrated markets in harmonization, whatever that is. But I 
want to know about Alt-A loans, because I am very interested in 
regulation of these products that I think have been so harmful 
to our homeowners. Would you discuss for me Alt-A loans and why 
they must be regulated, what went wrong with them, and how they 
were misused?
    Mr. Ireland. The classic Alt-A loan is something called a 
no-doc loan, and it is a loan where you do not obtain the same 
kind of documentation as to income and ability to repay that 
you would on a conventional mortgage. And in a limited number 
of circumstances that may make sense because of the nature--
somebody who is self-employed and the nature of the business 
that they are in.
    The problem we had is that kind of loan was offered to a 
great many more people than it was appropriate for, and we had 
a proliferation of no-doc loans. My father-in-law got a no-doc 
loan, and he had no business with it. We eventually had to bail 
him out of his mortgage.
    So I think you had a product with a limited use that was 
being misused by the lenders who were offering it.
    Ms. Waters. Did any of the regulators say anything about 
that product being misused?
    Mr. Ireland. There was regulatory guidance issued, and I 
think some of the Federal regulators have admitted somewhat 
late in the process about how to address Alt-A and other 
unconventional mortgage products. That probably should have 
been done sooner rather than the time it was introduced.
    Ms. Waters. And would you conclude that is typical of what 
regulators did not do?
    Mr. Ireland. I think regulators were behind the curve on a 
number of consumer issues, particularly the mortgage issue.
    Ms. Waters. And that is why we need some kind of consumer 
protection. Would you agree?
    Mr. Ireland. I would agree that we need to enhance consumer 
protection. I don't think this agency is the best way to do 
that.
    Ms. Waters. All right. Thank you very much.
    Mr. Plunkett. Madam Chairwoman, on Alt-A loans, one thing 
we heard yesterday from the banks was a lot of finger pointing. 
They said, we didn't create these problems. But we do know that 
the national banks regulated by the Office of the Comptroller 
of the Currency did issue a lot of Alt-A loans that do have 
very high default rates.
    Ms. Waters. Thank you very much.
    Mr. Posey?
    Mr. Posey. Thank you very much, Madam Chairwoman.
    The far-reaching tentacles of the proposed Consumer 
Financial Protection Agency would appear to have almost 
completely unfettered jurisdiction over advertisement, 
marketing, solicitation, sale, disclosure, delivery or account 
maintenance or supervising of deposit taking activities, 
extension of credit, loan acquisition, brokering or servicing, 
real estate appraisal, title insurance, credit insurance, 
mortgage insurance, real estate insurance, services including 
title insurance, leasing of personnel or real property, acting 
as an agent, broker or advisor in such activity, credit 
reporting services, guaranteed check services, money 
transaction, business services, stored value instruments, i.e., 
debt cards, certain financial data processing, transmission of 
storage services, debt collection services, investment service 
not subject to SEC or CTFC regulations, financial advisory 
services, credit counseling or tax planning or preparation, 
financial management advice, financial custodial services, and 
numerous other financial activity related services specifically 
identified by some rule that they would develop, which my staff 
has not been able to ascertain yet because that remains 
unclear.
    And so, to paraphrase in another context exactly what 
Congressman Hensarling said before, just what exactly is 
acceptable? Or do we want this agency to list every possible 
transaction in detail that is acceptable and then figure out 
every possible transaction and list it in detail as being 
unacceptable?
    I mean, do we want to turn into omnipresent defenders of 
nonexistent problems not suffered by 90 percent of the people? 
I mean, can't we focus a little bit better on precisely maybe a 
standard of care that should be offered by somebody who is in 
these positions of fiduciary relationships with clients, rather 
than kind of turning the entire business world upside down to 
try and so broadly brush the choices that people have?
    And I see all of you anxiously jumping for your buttons. 
Mr. Plunkett, if you could take a minute, and then we will give 
Mr. Taylor a minute.
    Mr. Plunkett. Thank you.
    For the most part, the new agency doesn't get new 
authority. They get new authority in one area, but this is an 
authority that exists under 17 existing laws or is very similar 
to unfair and deceptive acts and practices authority the 
Federal Trade Commission has or it is regulated at the State 
level. It is mostly a consolidation. It is a streamlining, 
actually. It is not a new layer of bureaucracy at all. And it 
is a minimum standard of the States, where necessary--and I 
think in many cases they won't find necessary--could exceed if 
there is a local problem.
    Mr. Posey. You don't anticipate any new rules being 
written?
    Mr. Plunkett. Well, I think the idea is that, first and 
foremost, it will do research. It will be focused solely on 
consumer protection, and rules should follow good empirical 
knowledge of the marketplace. If we had had that on subprime 
loans, for example, we might have seen some rulemaking earlier 
on.
    Mr. Taylor. I agree. I think all you are talking about is 
having a consumer protection agency that essentially enforces 
the laws that this Congress and various Congresses and 
Presidents have signed.
    Yes, there will be rulemaking, as there is for any other 
agency, but this Congress as well will have an impact on that 
if you perceive that they go too far or not too far. I mean, 
that is the way the system works. This notion--
    Mr. Posey. Now, let me just say--the question that begs for 
an answer--back to Mr. Plunkett's response. Why do we expect a 
new agency of bureaucrats to do the exact same jobs he said 
that 17 agencies of bureaucrats have failed to do properly 
before? What is it about this new brand of bureaucrat that we 
are going to have that--instead of looking for a job 
description, they are going to actually do a job?
    Mr. Taylor. Fair question. And I think the difference is 
you will actually have an agency whose primary focus is to 
ensure that the American taxpayer, the consumers, their 
interests are protected, as opposed to worrying about the bank 
or worrying about--
    Mr. Posey. So in the sake of streamlining, as Mr. Plunkett 
said, do you agree then that if we have this new agency with 
these all-inclusive powers, which are really just powers 
previously delegated to other agencies, we can now get rid of 
the other 17 agencies?
    Mr. Taylor. No. They have other functions to serve. 
Obviously, the bank regulators, monetary policy, safety and 
soundness and other very important roles to play.
    But, clearly, this has been the stepchild of legislation. 
That is why we had all this predatory and abusive lending, and 
that is what this is aimed to stop.
    And I just want to, for Mr. Hensarling as well, none of us 
are opposed to competition. I think competition will remain 
robust. But we should have a free market that has a rule of law 
in it that ensures fairness and doesn't allow for a free market 
that is free to abuse and free to fraud and free to do things 
that hurt consumers, and I think that is what this agency gets 
at.
    Mr. Posey. And I think we agree, but somebody needs to 
define pure vanilla. And the agencies that have those 
authorities now--thank you for your indulgence, Madam 
Chairwoman--should be capable of doing that, we think.
    Mr. Taylor. I wish that were true, sir.
    Ms. Waters. Thank you.
    Mr. Mel Watt.
    Mr. Watt. Thank you, Madam Chairwoman.
    We were down here debating which one of us was more or less 
prepared. So let me start by commercializing a little bit to 
let all of the members of the committee know that this 
afternoon at 2:00 there is going to be another one of these 
hearings focused primarily on the consumer protection, 
financial protection agency as it relates to taking powers away 
from the Federal Reserve and transferring them to this new 
agency.
    And while I don't normally do this, because I think this, 
obviously, will be part of the record in the subcommittee this 
afternoon, I did want to offer for the record a statement that 
has been prepared by Patricia A. McCoy, Director of the 
Insurance Law Center, and George and Helen England Professor of 
Law at the University of Connecticut School of Law, that more 
concisely than anyplace I have seen goes back and talks about 
the regulatory history in which we are operating, how we ended 
up with this race to the bottom, as opposed to having true 
regulation, the regulatory failure of the Federal Reserve, the 
OCC, and the OTS and how the race to the bottom kind of 
encouraged banks or other regulated institutions to seek the 
least common denominator and how this new consumer protection 
agency, financial protection agency would probably address this 
in the best way.
    So if I can get unanimous consent to submit that for the 
record and encourage my colleagues to read it, it is one of the 
best summaries of this I think I have seen.
    Ms. Waters. Thank you very much, Mr. Watt. Without 
objection, it is so ordered.
    Mr. Watt. Now, we had a hearing on this yesterday from the 
financial services industry perspective, and one thing I did 
come away convinced of was that, to the extent that you leave 
consumer protection in the existing regulatory agencies 
responsibility, any responsibility for it, and take part of the 
responsibility and give it to this new consumer protection 
agency, there is possibility for conflict between the existing 
regulators and the new agency.
    Now, their solution to that was not to create the new 
agency. My solution to it is not to leave any of the 
responsibility over on the existing regulators' side or to be 
absolutely clear on what that relationship is.
    So I would like, not here today, but for you all to go back 
and look at the interplay between what we are leaving over 
there on the consumer protection side in the existing 
regulatory agencies and what we are giving to this new agency 
so that we make sure that the possibility of conflicts that so 
many people have complained about don't exist in the consumer 
protection area. Do that outside the context of this hearing.
    Mr. Ireland, the other thing I keep hearing is that there 
is this potential for conflict between consumer protection 
responsibilities and safety and soundness regulators, even if 
you separate these things. Give me one example of where there 
would be a conflict between the consumer protection person or 
agency and an existing regulator on safety and soundness.
    Mr. Ireland. Well, you can--
    Mr. Watt. One concrete example. No theory. Just give me one 
example where you see that would happen.
    Mr. Ireland. I think the State of Georgia's predatory 
landing law--
    Mr. Watt. I am talking about in our Federal structure. Give 
me one example where that would be a problem.
    Mr. Ireland. In our Federal structure today, those 
responsibilities are carried out in the same agencies, and they 
have--
    Mr. Watt. I understand that, Mr. Ireland. That is not what 
I am asking. I am asking--I keep hearing that there is this 
potential for conflict between a consumer protection agency and 
the safety and soundness agency. And I don't understand that. 
Tell me one example where that would play itself out.
    Mr. Ireland. With all due respect, I can give you a 
hypothetical example you asked for.
    Mr. Watt. No. I want a real example, because we are 
operating in the real world here.
    Mr. Ireland. I offered you a real example.
    Mr. Watt. We have had all of these things operating in the 
same agencies and people keep telling me that there is this 
amazing conflict between consumer protection or a potential for 
conflict between a consumer protection agency and safety and 
soundness regulator. I don't see it. And I don't--I just want 
you to give me an example.
    Mr. Ireland. If I, as a consumer protection agency, create 
a mortgage that can't be securitized, I have a problem.
    Ms. Waters. I would love for you to have an opportunity to 
pursue this, Mr. Watt. The time is up. Give him time to think 
about it, and before this hearing is over, he can help you.
    Mr. Watt. We are going to explore that issue at my hearing 
this afternoon.
    Ms. Waters. Mr. Paulsen?
    Mr. Paulsen. Thank you, Madam Chairwoman.
    And maybe one of the areas we could discuss a little bit, 
you could certainly go into Freddie and Fannie a little bit if 
you want to talk about where there is some potential issues 
there that the gentleman was just talking about.
    Let me ask you this, Mr. Ireland. The Fed has often been 
criticized for not acting or acting too slowly in missing or 
issuing, implementing regulations for consumer protection on 
credit cards, on mortgages, etc., etc. Warren Buffet once said 
that the troubles of the mortgage market that you mentioned, it 
is only when the tide goes out that you discover who is 
swimming naked. And is it reasonable to think that a Consumer 
Financial Protection Agency--is it really reasonable to think 
that they would be able to assess the future risks of consumer 
financial products any better than the Federal Reserve or any 
other present regulatory agency if there is to have that focus?
    Mr. Ireland. I think structurally the anticipation would be 
they would not do as good a job. They do not have access to the 
same kind of information.
    Mr. Plunkett. It is not rocket science. There was evidence 
10 years ago that subprime mortgages were defaulting at a 
higher rate than regular mortgages. If those agencies had 
bothered to look, do research that was available in the public 
realm, if it was a priority, they could have done it. That is 
why we need an agency focused just on consumer protection.
    Mr. Paulsen. Going back to what Mr. Posey had mentioned 
earlier, he talked about the 17 different commissions or 
agencies that were charged with this. And it is interesting as 
I talked to one of my banks back home--and I just have this one 
chart and it lists a number of the regulatory burdens and I am 
not going to read every one as he had gone through each of 
these agencies that they have to deal with. But it is extremely 
frustrating I think for a lot of these organizations, because 
we hear about the frustrating flow of credit that has to go to 
small businesses for job creation, which we don't see happening 
right now.
    And this chart clearly shows and illustrates the burden 
that is posed on hundreds--or hundreds of these regulations 
that are posed and many of which are already dealing with 
consumer protection agencies. So I understand the goal of 
having it be smart, having it be strategic to make sure these 
consumers are protected, but I am not convinced that, at least 
given the details that have yet to emerge on this one, the 
devil is in the details, that we are going to be able actually 
fix this; and, if anything, I think we are going to be able to 
potentially make it worse.
    If a bank is engaged in unscrupulous lending, we need to 
find them out. Safety and soundness, most critical, and that 
should be the focus I think of all regulation.
    What I would like to do is actually yield my time to Mr. 
Hensarling, if I could, because I know he had one follow-up 
question.
    Mr. Hensarling. I thank the gentleman for yielding.
    And the gentleman did cover one point when my colleague 
from North Carolina was searching for an example. I mean, 
nobody has to look past the fact that HUD had product approval, 
consumer protection for the GSEs. We had somebody else to serve 
as the safety and soundness regulator. Now we have the mother 
of all bailouts.
    Mr. Plunkett. Mr. Hensarling, that example doesn't really 
work.
    Mr. Hensarling. Mr. Plunkett, you do not control the time 
here. Thank you very much. And I don't think anybody has asked 
you a question at the moment, but I am sure that someone else 
will give you an opportunity to speak.
    So, with all due respect, I believe, as do many others, 
that, frankly, it is a perfect analogy and one why we think it 
is very harmful, very harmful inclusion in this legislation.
    I thank the gentleman for yielding. I will ask another 
question, unless the gentleman wants his time back.
    Ms., is it ``Murguia?''
    Ms. Murguia. Yes.
    Mr. Hensarling. I had a question for you.
    In your testimony, I believe you spoke about the Hispanic 
community needing access to credit for economic upward 
mobility--I don't want to put words in your mouth. That is 
essentially, I believe, what you said--and that there is 
essentially a disparate overpayment by many racial minorities 
on certain credit products.
    Under the legislation that is being proposed, the white 
paper--the White House says that, ``the CFPA should be 
authorized to use a variety of measures to help ensure 
alternative mortgages were obtained only by consumers who 
understand the risk and can manage them.''
    Assuming that is the Obama Administration that wrote this 
paper who would end up appointing the five panel members, this 
seems to open the door to having one group of consumers being 
authorized to have one type of mortgage and another group of 
consumers being authorized to have another. Is that not a type 
of discrimination and does that not trouble you?
    Ms. Murguia. I certainly didn't interpret it that way. I 
think what we are saying is that there are clearly disparities 
that data can support in the system today. We believe this 
agency will help bring more focus, and we are really looking at 
a commonsense standard here. And that is the system is very 
complicated and far too complex for even the savviest of 
consumers to navigate and many rely on professionals to help 
them navigate these systems and many still trust and have 
trusted their loan officers, brokers, and realtors. All we are 
asking for is that there be some standard of accountability, 
some standard of oversight, some standard of transparency to 
make sure that we can have equal enforcement here and lessen 
that disparity.
    Mr. Hensarling. Thank you. And I thank the gentleman for 
yielding.
    Ms. Waters. Thank you.
    Mr. Gutierrez?
    Mr. Gutierrez. Thank you so much.
    First of all, I have a question for the entire panel, and I 
would like a simple yes or no, since I only have 5 minutes. I 
would like to ask you, would you support nonbank financial 
institutions being subjected to the Community Reinvestment Act 
after we establish the CFPA? Just a quick yes or no.
    Ms. Murguia. Yes.
    Mr. Flatley. Yes.
    Mr. Ireland. I don't know how you do that.
    Mr. Gutierrez. Okay. You don't know how you do that.
    Mr. Flatley. Yes.
    Ms. Murguia. Yes.
    Mr. Plunkett. Yes.
    Mr. Taylor. Most definitely.
    Ms. Zirkin. Yes.
    Mr. Gutierrez. Well, thank you. I just wanted to--
    And I want to say to my friend, Janet Murguia, as you know, 
we have been working for nearly a decade on the basic Federal 
consumer protections and disclosures for remittance consumers. 
I think with the CFPA, we have an opportunity to finally put 
those protections in place. And I just want to ask you, do you 
support the idea of giving the CFPA jurisdiction over consumer 
protection aspects of the remittance industry?
    Ms. Murguia. Well, I think that we--we have never--I am 
trying to remember in terms of that.
    Mr. Gutierrez. They don't have a Federal regulator right 
now.
    Ms. Murguia. We need some oversight on remittances. We 
would like to see some ability to regulate that area, and we 
are very interested in making sure someone will take a look at 
that. So I think this would be a good place for that to happen.
    Mr. Gutierrez. What I am going to try to do with the help 
of others is see if we can't, in the context of this bill, put 
those protections in so that they are already authorized to do 
that and to cover that. And they have a Federal--
    I want to say to--I have so many friends up here. I want to 
say to my other friends, to Travis Plunkett and Mr. 
Mierzwinski, thank you. It is great working with both of you on 
the Credit Card Bill of Rights. I look forward to working with 
you on other successful consumer advocacy issues.
    I want to make it clear for the record, you know, that we 
are friends, we are allies, that we work together. Disclosure 
is always the best policy, transparency.
    So I want to ask you both, both of your organizations have 
indicated on several occasions that anything short of a 36 
percent usury cap on all loan products would be ineffective; 
and many times representatives from the CFA have touted 
President Obama's support of a 36 percent rate cap. But, 
unfortunately, the language the White House sent to Congress 
explicitly prohibits the CFPA from implementing usury caps 
without legislation requiring such caps. So, contrary to all 
our hopes and expectations, the Administration essentially has 
handed the issue back to Congress.
    Do you both agree with that basic statement? Do both of 
you, Mr. Plunkett and Mr. Mierzwinski?
    Mr. Plunkett. Yes.
    Mr. Mierzwinski. That is correct.
    Mr. Gutierrez. So we all know that to get it, it has to 
come from Congress. But aside from the 36 percent cap for pay 
loans for military families, which for the record started with 
my amendment in this very committee, Congress has not had an 
appetite for passing usury caps.
    As an aside, I met yesterday--I had an opportunity to meet 
with an Australian senator who also serves as the assistant 
treasurer in the current government, and we discussed payday 
lending there at length. And he indicated to me that they have 
put caps of 48 percent, and the payday industry has somehow 
gotten around them. He indicated that rate caps alone have not 
adequately dealt with the payday industry in Australia, and so 
he says they just simply extend the terms of the loan. But what 
they will be doing soon is experimenting with an ability to pay 
standard in conjunction with a rate cap.
    So I would like to ask both of you, do you think it is a 
good idea for the CFPA to look at and implement ability to pay 
standards for products such as this industry?
    Mr. Plunkett. Thank you, Mr. Chairman. That is at the 
essence of what this agency should be doing.
    Mr. Gutierrez. So you agree?
    Mr. Plunkett. Yes, sir.
    Mr. Gutierrez. I am sorry. Since this is only 5 minutes and 
I want to coordinate my work in 2 weeks during this 5 minutes 
right here--
    Mr. Plunkett. I would just add, on a lot of different 
credit products.
    Mr. Gutierrez. Agreed. On a lot of different credit that we 
should--this ability to pay issue is a really big one.
    Let us just assume for a second that this fine committee 
and the House doesn't adopt the 36 percent cap, which doesn't 
say we are not. Maybe we will have the ability to do that and 
get members here to do what the Senate has failed to do. Do you 
think in terms of payday lending--I want to ask both of you, 
would you support a ban on rollovers for payday lenders, 
eliminate any rollovers for payday lenders?
    Mr. Plunkett. We supported rollover bans and restrictions. 
That have just been--
    Mr. Gutierrez. I am sorry. I just wanted--if I could just 
have 30 seconds? Just unanimous consent?
    Mr. Mierzwinski. I would agree that the rollover bans have 
been evaded. But this agency might be able to figure out a way. 
Even if it is not given the usury cap right, unless Congress 
adds it in, this agency might be able to figure out a solution 
to that.
    Mr. Gutierrez. So I just wanted--because it is 30 seconds. 
You see how 5 minutes goes. When you try to help consumers, 5 
minutes are less than 5 minutes, and they go fast. Anyway, so I 
have 30 seconds.
    So I want to say, so I would like you guys to, please, if 
you can put in writing yes or no, maybe we should extend the 
payment plan from 2 weeks to 3 or 4 months instead of 2 weeks 
back. Maybe we should set a national registry so you can only 
have one payday loan at a time and you can't have two, and we 
can start--and a database to enforce that.
    So that, in essence, if we cannot get this 36 percent, 
which I know is the standard, which both of your organizations 
have established but that we know the President hasn't promoted 
here, isn't in his bill, but we are going to see if we can 
get--I want to see what other things we can do in the interim 
period to help consumers.
    Ms. Waters. Thank you.
    Mr. Royce?
    Mr. Royce. Thank you, Madam Chairwoman.
    I think if we reflect for a minute, it was in 1992 that the 
GSE Act was passed by the Democrat side of this institution, 
and that GSE Act started the affordable housing goals. That was 
the legislation that basically set up a system and HUD did the 
mission enforcement on this in which Fannie and Freddie went 
out and bought subprime loans and Alt-A loans in order--in 
order to meet that requirement.
    Now, we all know that OFHEO was a weak regulator, but I 
don't think that is the point. I mean, HUD was a strong 
regulator here, and HUD was enforcing this mission, and in 
point of fact when we tried to do something about it--and I 
specifically carried legislation on the House Floor in 2005 to 
try to allow OFHEO to become a stronger regulator, to allow 
them to do what the Fed wanted them to do, which was to 
deleverage these portfolios. Because, at the time, they said, 
this is a systemic risk to the entire financial system globally 
because of what is happening with the GSEs being leveraged over 
100 to 1.
    So this was the desire by the regulators who saw the 
problem. But HUD did not see that problem, and our colleagues 
didn't see that problem. The GSE example highlights the 
inherent conflict of interest that arises when you bifurcate 
these regulatory responsibilities as they were bifurcated 
between HUD on one side and OFHEO on the other; and this is why 
all of our safety and soundness regulators, every one of them, 
have expressed concern over the idea being put forward in this 
legislation.
    The altruistic yet misguided affordable housing goals put 
Fannie and Freddie at risk; and, yes, indeed, as the Fed said, 
it put the financial system at risk by 2005 because of the 
political interference in this process that pushed those 
downpayments down to 3 percent, to zero percent. You had 30 
percent of the loans that year being people who were flipping 
homes, never taking possession of those homes, pushing that 
market up, up, up, ballooning that market up, up, up.
    And, yes, the Fed saw that coming, and we weren't able to 
do anything about it because of the political pressure to 
prevent an effective regulator from taking the action 
necessary. And this wasn't realized I think by the general 
public until after the mortgage meltdown.
    You task a separate agency with this mission, then you have 
to expect that altruistic policies, seemingly altruistic 
policies that they put in place are going to lead to unintended 
consequences because the market isn't deciding these factors 
anymore. This is being decided by political pull. This is being 
decided by political interference in the market, which is 
exactly what happened.
    Now, Mr. Ireland, we have the commentary of Sheila Bair, 
head of the FDIC, against this approach of this separate 
agency. John Dugan, head of the OCC, against it. James 
Lockhart, FHFA, he is against this step. Donald Kohn, the Fed's 
Vice Chairman, strongly against this step. They have all 
expressed concern over this idea. Why do you think that is?
    Mr. Ireland. Well, I think that, as I said in my testimony, 
the issues of safety and soundness and the issues of consumer 
protection are not separate issues. You are trying to deliver 
good products, and by separating the functions you tend to 
frustrate that.
    Mr. Watt asked for an example. If you go back to the 
1970's, fixed rate mortgages and a rising interest rate 
environment were a very dangerous product for the safety and 
soundness of financial institutions. And if you have an agency, 
a consumer protection agency that creates a preference for 
fixed-rate 30-year mortgages, you have a safety and soundness 
problem if interest rates rise over time and institutions have 
to fund themselves at higher rates than they are earning on 
those mortgages.
    Mr. Royce. Now let me raise another concern I have here, 
and that is, with the legal liability exposure for businesses, 
that really would be on a massive scale. Right now, we have 95 
percent of the lawsuits worldwide filed here. Maybe we can get 
it up to 99 percent. Maybe we could.
    Mr. Ireland, here are some of the highlights?
    It applies a new and high reasonableness standard for the 
sale of financial products to consumers.
    It leaves open the potential for an increase in statutory 
damages for existing private rights of action.
    It applies a duty of care for financial products. Is it 
good for the buyer, in other words.
    It recommends the elimination of mandatory arbitrary 
provisions in consumer financial products and broker/dealer 
investment contracts.
    Do you share any of my concerns with the amount of 
litigation that is going to come out of this?
    Mr. Ireland. I think that the people who are most likely to 
benefit from this law as originally drafted are the lawyers.
    Mr. Mierzwinski. Madam Chairwoman, can I quickly respond? I 
just want to say that the mandatory arbitration--the Attorney 
General of Minnesota filed a lawsuit against an arbitration 
mill this week where she alleged all kinds of violations of the 
existing consumer laws and that the company was essentially in 
bed with the banks and tricking consumers into signing forced 
arbitration contracts.
    The mandatory--the statutory damages in current law were 
written in 1968 and have been exceeded by inflation by about 5 
times. This is not going to benefit the lawyers. This is going 
to benefit the public.
    Ms. Waters. Thank you.
    Mr. Meeks?
    Mr. Meeks. Thank you, Madam Chairwoman.
    First of all, I want to agree with Ms. Zirkin, who stated 
in her statement that I am not against subprime loans that are 
responsible. Those kinds of loans can help individuals own a 
home, which I still believe is the greatest opportunity for 
wealth creation that we have and will lower the gap between 
those who own and don't have, particularly in regards to 
African Americans, Latinos, etc.
    The problem comes in is where the responsibility leaves, 
and we get into areas of predatory loans. And I think for a 
long period of time many individuals, on this side of the 
aisle, at any rate, were yelling and screaming that we should 
ban predatory lending because predatory lending put many of the 
individuals in the situations that they are currently in.
    Now, if it is someone who is flipping homes, that is a 
whole different person. We are talking about individuals who 
bought these homes, trying to participate in the great American 
dream of homeownership so they can raise their kids for a long 
period of time. And, to me, what we are simply trying to do 
here is to say, yes, we have to have safety and soundness 
regulations, but we also have to have someplace to go where 
there may be some predatory lending going on. This consumer 
regulatory agency can overlook and can oversee what is going on 
so we can make sure that the product is not having a negative 
impact overall.
    For example, there is a debate that is going on as to 
whether or not--you know, yield spread premiums. From my idea, 
we should ban yield spread premiums, because I don't see what 
the utilization of them are except for costing individuals more 
money.
    Now, it would seem to me that we could debate that. Because 
on one side, if you just leave it to the bankers and the 
financial institutions who--they are--part of their role is to 
try to make as much money as they can. But we need someone else 
whose role is to try to make sure that we are not doing it at 
the backs or at the expense of other individuals. And I think 
what the President's plan is simply trying to do is say, let us 
lay it out.
    And what I would think that--I had hoped yesterday and what 
I may comment to those who testified yesterday is, as opposed 
to people lining up dead set against something, I think it 
helps them. It would help their image if they came with some 
recommendations on how we could make sure consumers are also 
protected. Because one of the biggest problems in America right 
now is it is us against them, and we need to find a way to 
bridge that gap. And, to me, it makes sense that this is an 
avenue to bridge that gap so Main Street doesn't think that 
Wall Street is against them.
    But if anytime you talk about something of that nature 
without saying, well, here is my recommendations, how we can 
work it again, then it looks like Wall Street is against Main 
Street. And we have to figure out how we bridge that.
    I thought that Ms. Zirkin's testimony was right on the 
money in that regard. I think that is the direction we need to 
go in.
    I think that the conversation that we also need to have 
is--because I heard some say it needs to be an independent 
agency. And it gets to the question of how do we pay for it. 
Should it be a situation where there is a direct appropriation 
from Congress? Should it be by fee? Who--I hadn't heard that. 
Let me just throw that out. Anyone have any recommendation of 
how we should pay for it?
    Mr. Plunkett. It is a really crucial question, Congressman.
    What the Administration has proposed is a good start. 
First, they allow congressional appropriations but say that the 
main business of the agency should be funded by industry 
assessments. What they see happening is that those assessments 
which are now going to the other banking regulators would then 
be applied to this agency and so there would not be additional 
costs. The consumer groups thinks there needs to be a mix of 
funding so that the agency is not reliant on any one source, So 
it is stable and adequate.
    Mr. Meeks. Everybody agrees with that?
    Mr. Mierzwinski. I would say, Congressman, we totally 
agree.
    For example, just to be clear, OCC and OTS are virtually 
100 percent funded by industry assessments, and that is part of 
the corruption and conflict of interest in the system, because 
banks can charter shop, move around. We think that this agency, 
because you couldn't move around, would not face that conflict 
of interest. But diversifying the funding, not putting all the 
eggs in one basket is the way to go to protect it against 
political or industry interference.
    Ms. Waters. Thank you very much.
    Just one correction before we break and recess for the next 
seven votes. Mr. Royce said that Sheila Bair was opposed to 
this agency. She is not opposed to this agency. She has 
suggested that their primary focus should be on the nonbanks 
that have not been regulated and it should serve as a backup to 
what they are doing in the other regulatory agencies. So it may 
not--many may not agree with that, but that is a difference 
between her being against the establishment of this agency and 
her deciding that it should do something else.
    Mr. Hensarling. Parliamentary inquiry, Madam Chairwoman. 
Whose time is this coming out of?
    Ms. Waters. The Chair yields itself adequate time.
    Therefore, we will stand in recess until we complete the 
7th vote and we will return. Thank you.
    [recess]
    Mr. Watt. [presiding] I do need to officially adjourn the 
last hearing that never got officially adjourned. There was a 
full committee hearing in this room, and we got called for 
votes, and it never came back together to officially adjourn 
that hearing. So let me just do that first.
    The full committee hearing from this morning is officially 
adjourned.
    [Whereupon, at 12:37 p.m., the hearing was adjourned.]


                            A P P E N D I X




                             July 16, 2009

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

