[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
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53-241 PDF WASHINGTON : 2009
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
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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
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