[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
FEDERAL REGULATOR PERSPECTIVES ON
FINANCIAL REGULATORY REFORM PROPOSALS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 23, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-77
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Washington, DC 20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on:
September 23, 2009........................................... 1
Appendix:
September 23, 2009........................................... 47
WITNESSES
Wednesday, September 23, 2009
Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance
Corporation.................................................... 6
Bowman, John E., Acting Director, Office of Thrift Supervision... 8
Dugan, Hon. John C., Comptroller, Office of the Comptroller of
the Currency................................................... 7
Smith, Joseph A., Jr., North Carolina Commissioner of Banks, on
behalf of the Conference of State Bank Supervisors............. 10
APPENDIX
Prepared statements:
Marchant, Hon. Kenny......................................... 48
Bair, Hon. Sheila C.......................................... 49
Bowman, John E............................................... 65
Dugan, Hon. John C........................................... 98
Smith, Joseph A., Jr......................................... 132
Additional Material Submitted for the Record
Written statement of the National Association of State Credit
Union Supervisors (NASCUS)..................................... 157
Foster, Hon. Bill:
Written statement of the Illinois Bankers Association (IBA).. 163
Price, Hon. Tom:
Written statement of the Georgia Bankers Association (GBA)... 165
Letter from the Retail Industry Leaders Association (RILA) to
Hon. Timothy F. Geithner, Secretary of the Treasury, dated
September 22, 2009......................................... 169
Bowman, John E.:
Written responses to questions submitted by Representative
Bean....................................................... 173
Written responses to questions submitted by Representative
Manzullo................................................... 177
Dugan, Hon. John C.:
Written responses to questions submitted by Representatives
Bean, Foster, and Manzullo................................. 182
FEDERAL REGULATOR PERSPECTIVES
ON FINANCIAL REGULATORY
REFORM PROPOSALS
----------
Wednesday, September 23, 2009
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 2:21 p.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Kanjorski, Waters,
Maloney, Watt, Moore of Kansas, McCarthy of New York, Lynch,
Miller of North Carolina, Scott, Green, Cleaver, Klein,
Perlmutter, Foster, Minnick, Adler, Kosmas, Himes, Peters,
Maffei; Bachus, Castle, Royce, Manzullo, Biggert, Capito,
Hensarling, Garrett, Neugebauer, Price, McHenry, Marchant,
McCarthy of California, Jenkins, Lee, Paulsen, and Lance.
The Chairman. The hearing will come to order. At the
request of the Minority, we will have opening statements. And
the gentleman from Delaware is recognized for 2\1/2\ minutes.
Mr. Castle. Thank you very much, Mr. Chairman. I will
probably be briefer than that.
I would like to thank the regulators who are here. Mr.
Geithner this morning referenced the fact that while he
recognizes there is some disagreement, he believes that it is
protecting your territory, if you will. And I guess to some
degree that is part of it. But I opine that I think it goes a
little beyond that. I think we are very interested in what you
have to say.
I don't think there is any disagreement amongst any of us
here that we do need to tighten the regulation of our financial
services in this country. But how we do it and the creation of
a new authority to look at products or whatever is a matter
that is very important. Perhaps it needs to be done, but at
least it is very important in terms of what we are doing. So I
look forward to your testimony. I look forward to your reform
recommendations, and I hope that we can continue to work
together to make a difference.
There was also yesterday a memorandum I think circulated
among the Democratic Members about the CFPA bill, and we are
very interested in that, in exactly where that is going. That
is the bill in general. I am not sure what is in the memo per
se. But that is something else we have to pay attention to.
But we appreciate you being here and look forward to your
testimony, and hopefully together we can do whatever is in the
best interest of the country.
I yield back, Mr. Chairman.
The Chairman. The gentleman from Georgia is recognized for
2\1/2\ minutes.
Mr. Scott. Thank you very much, Mr. Chairman. Thank you for
this hearing.
I want to start by thanking you, Ms. Bair, for your quick
response and coming to the phone and talking with us about the
particular situation in my home State of Georgia, where, as you
know, unfortunately we almost got a double tragedy, of course,
with the flooding that is going on there now, but, of course,
with our flood of bank foreclosures. And I appreciate your
comments on that and doing everything we can to stem the tide
of losing banks. That is an unfortunate thing that my State,
unfortunately, leads the Nation in this regard.
I guess my major concern that I want to certainly put
before this panel today, and I will get to some of it in my
questions, simply that the fact that there needs to be a
heightened awareness and interest and emphasis placed upon what
we are doing and must do to reclaim the confidence of the
American people in our economic system. We have, I think,
played a much heavier hand and placed a greater interest on
dealing with our banks, Wall Street, who are apparently getting
well now, under the belief that as we move forward with
unfreezing the credit markets and making sure that we help bail
out Wall Street, we have forgotten to place the necessary
emphasis on doing something to help Main Street, to help
people. So now here we are with unemployment hovering at 10 and
11 percent, and in some communities they are at Depression
levels.
I think there ought to be something for us to discuss today
on what we are going to do as we move forward to make sure we
are getting jobs created in this country, because that, in all
reasoning, is the key to getting our economy back moving. It is
jobs. Unemployment continues to go up. And as we spoke, Ms.
Bair--and unfortunately home foreclosure rates are continuing
to go up.
So the fundamental question becomes to me is there seems to
be a freezing of the arteries within the banking system. We
need to get to the fundamental reason why banks are not
lending, why are they not lending, especially to small
businesses which create the jobs?
And with that I will yield back the balance of my time.
The Chairman. The gentleman from New Jersey is recognized
for 2\1/2\ minutes.
Mr. Garrett. I thank the chairman, and I will just be
brief.
Just a couple of points. One is to follow up on the point
that Mr. Castle was raising a moment ago. We find ourselves on
this side of the table in somewhat of a quandary as to where we
should go for the expertise in the reform that we are looking
to do for this country. And I preface that by saying that
contrary to what some people would like to say, some people
have said earlier this morning, that there are some out there
who see no need whatsoever for reform in this marketplace,
there is no one, there is no one on either side of the aisle
who believes that no reform is necessary. Everyone agrees that
mistakes were made in the past, and we need to sit down and
hopefully in a bipartisan manner try to fix the situation. But
doing so, those of us somewhat laymen in these topical areas
look to those who sit on that side of the table for the
expertise in order to bring us this.
Earlier, as Mr. Castle said and as I said during the
earlier hearing, as I am sure was pointed out to you, the
Treasury Secretary makes the point that when we hear from the
regulators, that they have their own particular areas of--their
own particular areas of interests and concerns, their own turf
battles that they are working on. The question that I couldn't
put back to him was that if that is the case, then why in the
world would the Administration be suggesting that we should
actually expand that authority and expand that power to those
very same bureaucrats, if you will, or regulators, if all they
are interested in is looking at their narrow area of
responsibility? I wasn't able to give that question to the
Secretary, but I will allow you to touch upon that if that is
an area.
And the other question, I guess, I would like to hear from
you is we now have several different proposals. We have the
Administration's proposal coming out. And I understand the
chairman has said with regard to CFP, trying to narrow that in.
And I think the chairman has gone at least in the right
direction of that as to who they would apply to.
Mr. Hensarling from Texas was trying to hear from the
Secretary whether we really are going to narrow that into, as
to which financial institutions should be covered and what have
you. I would be curious from the panel as well as to where the
panel comes in on those issues as well, whether the chairman is
going closer in the direction to where we were originally, that
this should really be looking at banking institutions and the
areas where the problems were in the first place and not in the
rest of the financial market; or is the Administration correct
and just say this is much broader than that, and we should be
applying a program of reform to an area that really the
problems didn't originate from and start trying to impose bank
regulations on an area where we know that those bank
regulations didn't work in the past. I appreciate your
testimony.
The Chairman. I will recognize myself now for 4 minutes.
That will use up our time, and then the gentleman from Texas
will use up time from the other side in total.
I will be dealing with some of the consumer issues. And let
me say to my friends, the regulators, I welcome a chance to
have a serious conversation with you about consumer affairs. I
must tell you that I don't remember too many of those in the
past. It does appear to be of minute interest in consumer
affairs from some of you, consumer protections.
But I want to talk about the continuing problem we have
dealt with before. The gentleman from Georgia alluded to it. I
appreciate the fact that those of you who are regulators here
have been urging the people who work for you, the examiners, to
encourage responsible lending. But I am afraid from all the
information I get that we are not there yet.
Now, I understand that there is the problem of a culture in
which you work. I think it is probably the case that no
examiner in history has been in serious trouble for a loan that
didn't get made. There have been examiners who have found
themselves in difficulty because they were accused of allowing
loans to be made that shouldn't have been made. I have sympathy
for the people who do these jobs, and they are sometimes caught
in the shifting winds. But I just emphasize again--and I
appreciate that, Chairman Bair, you attended a meeting in
Nevada recently, very much appreciated by Congresswoman
Berkeley and the others from Nevada. And we have this
constant--many of us across the aisle, we are told by the
community bankers that they find the examiners difficult in
terms of the lending. And you say, and I believe you
completely, that you were trying to ease that.
I just would emphasize that it takes constant work. We are
trying to change culture and change incentives. We need to keep
doing this, because the sense that the regulators on the
ground, your representatives on the ground, are not in sync
with what you are saying in Washington continues. I am sure it
is not entirely fair, but when you go into our line of work,
you waive your right to not deal with things that are unfair.
And perception is part of reality. So this is really very, very
important for us, for you to do.
Secondly, obviously the Chair has a serious responsibility
with regard to the fund, and I do believe that there have been
unduly alarmist views about the insurance fund. And I welcome
the chance, Chairman Bair, for you to address that and reassure
people.
We have been at this for a very long time. The deposit
insurance has been one of the great successes in regulation and
economic activity, and we will continue that. I will say--and
this is a choice for you to make--I understand that there is a
need for increased funding. It does seem to me that it would be
procyclical in the wrong way to raise the assessment now. There
have been people who say if you don't raise the assessments on
the banks, you are subsidizing the banks. No, let us be very
clear. No one is talking about anything other than a loan to
the fund.
Now, where the money comes from will still be discussed.
But it seems to me the case is overwhelming for there to be
loans to the fund to be paid back by the banks in their
assessments, but in the future; that is, to make it
countercyclical rather than procyclical. This is not the time
to raise the assessments on the banks. We will have money lent,
I hope, to the fund, which will be paid back out of
assessments. And if we are successful with our regulation, and
things work well, and the economy works well, we may well get
another period where--I don't know how long it was we didn't
have any bank failures, 10 years or more. If we get back into
such a period, as we all hope we do, the assessments, the loans
can then be paid back under existing assessments without any
increase.
So I do want to refute the notion that by forgoing an
assessment increase today and instead borrowing the money, we
are somehow letting the banks off the hook. We are simply
saying that, yes, we understand that the banks will have to pay
for this, but it will be far better from everybody's standpoint
to defer that repayment until the better time that we hope is
coming.
My time has expired.
The gentleman from Texas.
Mr. Neugebauer. Thank you, Mr. Chairman. I yield to the
ranking member.
Mr. Bachus. I just wanted to acknowledge that there are two
funds at the FDIC, and one is the contingent loss fund of $30
billion that you do never hear about. And I don't--obviously
there are challenges, but I appreciate the chairman mentioning
that.
Mr. Neugebauer. I thank the ranking member, and I thank the
chairman for holding this hearing today. Obviously, there is a
lot of discussion out there about regulatory reform. And I
think everyone agrees there were some flaws in the current
system, and we need to look at ways to make the system better.
I think while we have--different ideas have been put
forward on how best to accomplish that, and quite honestly, as
we had Treasury Secretary Geithner in here, he has a different
perspective particularly when it comes to consumer protection.
In fact, to be blunt, he wants to fire our witnesses from the
consumer protection. And I don't know how you feel about being
fired, but that is his proposal.
And so the question I had for him today, and Chairman Frank
indicated earlier that you have a lackluster performance in the
consumer protection area, and the question is, if you think
that you need to continue to hold that role, why do you think
that you should do that? And evidently your testimony
previously has been that you think that bifurcating that is not
a good process. I tend to agree with that. But I think one of
the questions that you all are going to have to answer is
what--why should you get to keep that if, in fact, you missed
the boat in this previous round?
One of the things that we are moving down a road that I
think many of us are concerned about is that we seem to be
moving to consumer protection, but many of us think that we are
taking away consumer choices. I think we have to be very
careful with that, because the consumers are--quite honestly,
when given the right information, are very smart, and I think
disclosure helps them make the choices in their best interests.
I don't think they particularly want the Federal Government to
do that.
I think one of the things that--the analogy that I would
use here is that we seem to be moving in a direction where
little Johnnie gets hurt on the playground, and so we go and
remove the playground so that Johnnie doesn't get hurt again.
The truth is Johnnie likes the playground. Consumers like the
choices they have. They like a lot of the financial products
that they have, and they are very concerned that the Federal
Government is about to take the playground away, and I don't
think that they support that. I don't support that.
But what we do need to do is make sure that we have a
regulatory structure that protects the investments of the
people who are involved in those transactions, but also
provides a robust financial market for consumers to be able to
have good choices for their products.
The Chairman. The time for opening statements has been
consumed. And we will now begin with the Chair of the Federal
Deposit Insurance Corporation, Chairwoman Bair.
STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, FEDERAL
DEPOSIT INSURANCE CORPORATION
Ms. Bair. Thank you, Chairman Frank, Ranking Member Bachus,
and members of the committee. I appreciate the opportunity to
return this afternoon to continue testifying on reforming the
Nation's financial regulatory system.
Differences in the regulation of capital, leverage, and
consumer protection and the almost complete lack of regulation
of over-the-counter derivatives created an environment in which
regulatory arbitrage became rampant. Reforms are urgently
needed to close those gaps. At the same time, we must recognize
that much of the risk in the system involved firms that are
already subject to extensive financial regulation.
One of the lessons of the past few years is that regulation
alone is not enough to control imprudent risk taking with our
dynamic and complex financial system. So at the top of the
must-do list is a need to stop future bailouts and reinstill
market discipline. The government needs a way to say no. We
need a statutory mechanism to resolve large financial
institutions in an orderly fashion that is similar to what we
have for depository institutions. While this process can be
painful for shareholders and creditors, it is necessary, and it
works.
Unfortunately, measures taken during the year, while
necessary to stabilize credit markets, have only reinforced the
doctrine that some financial firms are simply ``too-big-to-
fail.'' In fact, the markets are more concentrated than before.
We also need disincentives for excessive growth in risk-
taking. We need a better way of supervising systemically
important institutions and a framework that proactively
identifies risks before they threaten the financial system. We
have called for a strong oversight council with rulemaking
authority. It would closely monitor the system for problems
such as excessive leverage, inadequate capital and overreliance
on short-term funding, and have a clear statutory mandate to
act to prevent systemwide risks.
Finally, the FDIC strongly supports creation of a Consumer
Financial Protection Agency as a stand-alone Federal regulator.
As embodied in H.R. 3126, the agency would eliminate regulatory
gaps between bank and nonbank financial products and services
by setting robust national standards for consumer protection.
However, it is essential to focus examination and enforcement
on the nonbank sector to protect consumers from some of the
most abusive products and practices. We believe this bill would
be even stronger if amended to include a well-defined mechanism
that provides oversight of nonbanks in partnership with State
regulators.
To be sure, there is much to be done if we are to prevent
another financial crisis, but at a minimum we need to scrap the
``too-big-to-fail'' doctrine, set up a strong oversight council
to prevent systemic risk, and create a strong consumer watchdog
that offers real protection from abusive financial products and
services.
Thank you.
[The prepared statement of Chairman Bair can be found on
page 49 of the appendix.]
The Chairman. Comptroller Dugan.
STATEMENT OF THE HONORABLE JOHN C. DUGAN, COMPTROLLER, OFFICE
OF THE COMPTROLLER OF THE CURRENCY
Mr. Dugan. Chairman Frank, Ranking Member Bachus, and
members of the committee, I appreciate this opportunity to
continue where we left off last time in discussing the Treasury
Department's proposal for regulatory reform.
As I testified in July, the OCC supports many elements of
the proposal, including the establishment of a council of
financial regulators to identify and monitor systemic risk and
enhanced authority to resolve systemically significant
financial firms.
We also believe it would be appropriate to extend
consolidated supervision to all systemically significant
financial firms. The Federal Reserve already plays this role
for the largest bank holding companies, but during the
financial crisis, the absence of a comparable supervisor for
large securities and insurance firms proved to be an enormous
problem. The proposal would fill this gap by extending the
Federal Reserve's holding company regulation to such firms
which we believe would be appropriate.
However, one aspect of the proposal goes much too far,
which is to grant broad new authority to the Federal Reserve to
override the primary banking supervisor on standards,
examination, and enforcement applicable to the bank. Such
override power would alter our present working relationship
with the Federal Reserve that works very well and fundamentally
undermine the authority and accountability of the banking
supervisor.
We also support the imposition of more stringent capital
and liquidity standards on systemically significant financial
firms. This would help address their heightened risk to the
system and mitigate the competitive advantage they could
realize from being designated as systemically significant.
Similarly, the OCC supports the proposals calling for more
forward-looking loan loss provisioning, which is an issue that
I have spent a great deal of time on as co-Chairman of the
Financial Stability Board's Working Group on Provisioning.
Unfortunately, our current system unacceptably discourages
banks from building reserves during good times when they can
most afford it, and requires them to take larger provisions for
loan losses during downturns when it weakens vulnerable banks
and inhibits needed lending.
And we support the proposal to effectively merge the OTS
into the OCC.
Finally, we support enhanced consumer financial protection
standards and believe that a dedicated consumer protection
agency, the CFPA, could help achieve that goal. However, we
have significant concerns with the parts of the proposed CFPA
that would consolidate all financial consumer protection
rulewriting, examination, and enforcement in one agency, which
would completely divorce these functions from safety and
soundness regulation.
It makes sense to consolidate all consumer protection
rulewriting in a single agency with the rules applying to all
financial providers of a product, both bank and nonbank, but we
believe the rules must be uniform, and that banking supervisors
must have meaningful input into formulating them, and
unfortunately, the proposed CFPA falls short on two counts.
First, the rules would not be uniform because the proposal
would expressly authorize States to adopt different rules for
all financial firms, including national banks, by repealing the
Federal preemption that has always allowed national banks to
operate under uniform Federal standards. This repeal of the
uniform Federal standards option is a radical change that will
make it far more difficult and costly for national banks to
provide financial services to consumers in different States
having different rules, and these costs will ultimately be
borne by the consumer. The change will also undermine the
national banking charter and the dual banking system that has
served us well for nearly 150 years.
Second, the rules do not afford meaningful input from
banking supervisors, even on real safety and soundness issues,
because in the event of any dispute, the proposed CFPA would
always win. The new agency needs to have a strong mechanism for
ensuring meaningful bank supervisor input into the CFPA
rulemaking.
Finally, the banking agencies should continue to be
responsible for examination and enforcement, not the CFPA. I
believe there are real benefits to an integrated approach to
consumer compliance and safety and soundness exams, a process
that I think has worked well over time. Moreover, moving bank
examination and enforcement functions to the CFPA would only
distract it from its most important and most daunting
implementation challenge, which is establishing an effective
enforcement regime for the shadow banking system of the tens of
thousands of nonbank providers that are currently unregulated
or lightly regulated, like nonbank mortgage brokers and
originators. We believe the CFPA's resources should be focused
on this fundamental regulatory gap rather than on already
regulated depository institutions.
Thank you.
[The prepared statement of Comptroller Dugan can be found
on page 98 of the appendix.]
The Chairman. Mr. Bowman.
STATEMENT OF JOHN E. BOWMAN, ACTING DIRECTOR, OFFICE OF THRIFT
SUPERVISION
Mr. Bowman. Good afternoon, Chairman Frank, Ranking Member
Bachus, and members of the committee. Thank you for the
opportunity to testify today.
When I testified here 2 months ago, my remarks concentrated
on addressing real problems underlying the financial crisis. In
my written testimony today, I debunk the myth of regulatory
arbitrage by the industry.
In my brief remarks here this afternoon, I would also like
to emphasize that we will not solve the potential problems of
tomorrow by merging regulatory agencies. There are five reasons
why consolidation would neither solve those problems, nor
promote efficiency, especially if the thrift charter is
preserved.
First, as you know, the OTS conducts consolidated
supervision of thrifts and their holding companies. Although I
do not believe the OTS is the proper regulator for systemically
important conglomerates, I think it makes perfect sense for the
agency to continue to supervise thrift holding companies,
particularly for the many local consumer and community lenders
across America who should not be asked to bear the cost and the
inefficiency of a separate holding company regulatory scheme.
Although larger thrifts tend to get the headlines, the
overwhelming majority of thrifts are small, conservative
lenders that offer home mortgages, car loans, and other day-to-
day financial services to people in towns and cities, suburban
and rural, across the country. Quite a few are community-based
mutual institutions--much like the Bailey Building and Loan in
the movie, ``It's a Wonderful Life''--that had been integral
parts of their communities for decades. They did not contribute
to the financial crisis, and they should not have to pay for
it.
The health of the financial services industry is improving,
but it is by no means robust. The transition cost of thrifts
converting to a different supervisor and a separate holding
company regulator would be an unnecessary burden at a difficult
time.
My second point also relates to the fact there is no
efficiency to be gained by merging regulatory agencies that do
not fit together. Currently, thrifts report their financial
status to the OTS through quarterly thrift financial reports,
while banks file call reports under consolidation proposals.
Either thrifts would need to spend money to overhaul their
financial reporting systems, or the consolidated agency would
need to operate and maintain two different reporting systems.
Either approach would undercut efficiency.
The third point is that trillion-dollar megabanks have
almost nothing in common with small community thrifts. If these
different types of businesses were supervised by a single
regulator, the needs of the community-oriented majority could
be too often overlooked by a bureaucracy forced to focus on the
institutions that pose the greatest risks to the financial
system.
A fourth point is that multiple viewpoints among regulators
foster better decisionmaking. OTS's leadership of banning
unfair credit card practices is just one example. Remember that
countries with a single monolithic bank regulator fared no
better than the United States during this financial crisis we
are currently undergoing.
My fifth and final point dovetails with the first two.
Consolidating agencies would take years, cost the industry
millions of dollars, and generate upheaval in the day-to-day
supervision of the financial institutions. All of this would be
done to achieve a forced fit of fundamentally different
agencies that regulate the fundamentally different charters and
institutions; in effect, trying to pound a square peg into a
round hole with no efficiencies or other benefits for
taxpayers, consumers or the industry.
To reiterate my remarks to this committee 2 months ago, the
proposed consolidation could not address the problems that
caused the financial crisis or could cause the next one.
Thank you again, Mr. Chairman. I am happy to respond to
your questions.
[The prepared statement of Mr. Bowman can be found on page
65 of the appendix.]
The Chairman. Next--and I am very proud that we have
maintained the rule here of including our State colleagues in
banking, insurance and in regulation and securities. There are
people who consider you State regulators a nuisance, but we
think you are an important part of the system. So we have Mr.
Joseph Smith, who is the North Carolina Commissioner of Banks,
and he is here on behalf of the Conference of State Bank
Supervisors.
STATEMENT OF JOSEPH A. SMITH, JR., NORTH CAROLINA COMMISSIONER
OF BANKS, ON BEHALF OF THE CONFERENCE OF STATE BANK SUPERVISORS
Mr. Smith. Chief nuisance, right. Good afternoon, Chairman
Frank, Ranking Member Bachus, and distinguished members of the
committee. I appreciate the opportunity to continue our
discussion of financial services regulatory reform.
First and foremost, the decisions that you make will
determine the industry's structure and its impact on
communities, small businesses, and consumers across the
country. My colleagues and I are very concerned that we could
end up with a highly concentrated and consolidated industry
that holds too much sway over the Federal Government and is
unmoved by the needs of consumers and communities.
The States have made the industry--that is, the financial
services industry--more diverse and accountable. You see this
in the fact that the States have chartered over two-thirds of
the Nation's 8,000 banks, and you see this in the fact that the
States serve as incubators and models for consumer protection.
We hope that we can agree that the outcome of reform cannot
be less diversity and less accountability, and yet we are
hearing proposals that will undermine both diversity and
accountability, proposals that will drive us towards greater
centralization and consolidation. In our view, a consolidated
banking system and industry would be in conflict with the
health of our State and local economies and would further erode
public confidence.
I would like to make a few brief points on some specific
issues and proposals. First, it is important to preserve the
role of State law and the role of the States to set and enforce
tougher consumer protection standards. Nationally chartered
banks must not be able to hide behind preemptive regulatory
declarations, declarations that are directly contrary to long-
standing congressional intent. We oppose any effort to
undermine the provisions in H.R. 3126, preserving the ability
of the States to set and enforce tougher consumer protection
standards.
Second, creating a single monolithic regulator as a means
of improving financial regulation relies on the faulty
assumption that regulator consolidation leads to a safer and
stronger banking system. Such a structure would diminish
regulatory accountability and discipline. It would lead to
further industry consolidation and facilitate regulatory
capture by the Nation's largest financial institutions. A
single Federal regulator, a regulator that both charters and
examines national banks and examines State-chartered
institutions, would irreparably harm the dual banking system
and the diversity that is the hallmark of that system.
Finally, regulatory reform must directly address and end
``too-big-to-fail.'' This means regulatory safeguards to
prevent growth driven by excessive risk-taking and leverage, a
clear path for resolving large interconnected institutions, and
no discretionary safety net. Only in this manner will we be
able to preserve the financial system's stability and protect
taxpayers from potential unlimited liability from failed firms.
As always, sir, it is an honor to appear before you. Thank
you very much. I look forward to answering your questions.
[The prepared statement of Mr. Smith can be found on page
132 of the appendix.]
The Chairman. Thank you.
I will begin the questioning. And I know that there are
questions that some of the regulators have about their
authority and whether it is turf or not. So, Mr. Bowman, you
spoke out against the abolition of the OCC and the OTS and
their becoming one national entity. You thought that was a
mistake.
Mr. Dugan, what do you think about the proposal to replace
the current OCC and OTS with one national bank supervisor?
Mr. Dugan. Mr. Chairman, as I put it in my written remarks
from last time--
The Chairman. I apologize for not reading them, Mr. Dugan.
I do not always do my homework. Pull the microphone a little
closer, please.
Mr. Dugan. Sorry.
I support the proposal in that kind of consolidation.
The Chairman. Mr. Bowman, you don't agree with the argument
that this is consolidation, it doesn't make sense? I am
wondering whether--let me say there does seem to be some
analogy here with the consumer protection. That is, people seem
to be in favor of other people losing their jurisdiction much
more than they are of their own. That is not surprising.
But to Mr. Bowman, the arguments against the consumer
agency are the same as against a consolidation, which most
people think is more the OTS moving into the OCC. You do not. I
am not surprised. I just want to say I do think institutional
position does have some impact on people's views on this.
Let me ask you further on the question of the importance of
leaving the consumer function with the safety and soundness
regulator. Now, I have agreed with that to some extent; not the
consumer function, that is why one of the differences that I
have with the Administration had to do with the Community
Reinvestment Act. That does seem to me to be very much, when we
talk about volumes of loans, etc., safety and soundness. But I
am a little troubled by the implication that a good enforcement
of the credit card law or rules about truth in lending or
others, that those somehow would implicate safety and
soundness. Is that the argument, that we are afraid that if
people enforce consumer protection laws too vigorously, this
will call into question safety and soundness?
Mr. Dugan?
Mr. Dugan. No. That is not exactly what I meant. What I
meant was as we do our supervision for safety and soundness, we
often find consumer protection issues and vice versa. And I
attached a bunch of real-world examples.
The Chairman. That is fine.
Will there be anything preventing you from telling the
agency--it did seem to me the way this is presented--and I will
tell you this gets into the discussion--that there is somehow
something risky about separating consumer protection for safety
and soundness, because obviously safety and soundness is of
prime importance. So you are not suggesting that this is going
to be riskier. When you say you don't want safety and soundness
separated from consumer protection, you are not suggesting that
this would in any way undercut safety and soundness?
Mr. Dugan. There are some places it could undermine safety
and soundness in the Administration's proposal because--
The Chairman. Which parts?
Mr. Dugan. To the extent that there is a dispute about
whether there is a safety and soundness issue, the way it is
currently drafted, the CFPA would always win.
The Chairman. Okay. So our proposal, which is going to have
a way in which that is decided between the agencies--and I want
to deal with this. But you do believe that safety and
soundness--I guess the implicit point there is that too
vigorous a protection of consumer rights might somehow
implicate safety and soundness; otherwise you would have a
dispute. And your problem is it is one-sided.
Our proposal will--and by the way, people have described us
as moving away. I haven't moved away from anything. I didn't
have anything to start with. I never liked ``plain vanilla.''
As I have said, I remember the days when the bars had to serve
food if they were going to serve liquor, and they served some
of the most God-awful food known to human beings. And I think
trying to force someone to do good is a very, very
qualitatively different and, I think, often futile effort
rather than preventing them from doing bad. I have never been
much of a compulsory do-gooder. But if we were to have a
mechanism which allowed for a fair resolution and even maybe
weighted more towards the bank regulators of a dispute, would
there still be a safety and soundness issue?
Mr. Dugan. I think that would help, but that is not the
only issue.
The Chairman. I understand that. And I understand that--
Chairwoman Bair, again, do you see--is it a safety and
soundness issue if we separate out consumer protection from
you?
Ms. Bair. I think it is an examination quality issue.
The Chairman. Okay. But is it a safety and soundness issue?
Ms. Bair. Well, I think there could be conflicts.
The Chairman. But if we resolve the conflicts. It might be
if there was a conflict between the two?
Ms. Bair. As an insurer for all banks, you do need to have
some emphasis on safety and soundness, too. The government is
ultimately at risk for the viability of the institutions.
The Chairman. I understand that, but I do think it is
important for the safety and soundness regulators to be able to
say, wait a minute, you have gone too far. Although do you
think in general that vigorous consumer law enforcement
undercuts safety and soundness?
Ms. Bair. No. Just the opposite. I think a good quality
consumer compliance examination function complements and
supports safety and soundness.
The Chairman. My time has expired. The gentleman from
Texas.
Mr. Neugebauer. Thank you, Mr. Chairman.
I want to go back to some of the comments I made in my
opening statement. Chairman Bair, we will start with you. What
was the FDIC doing in relationship to consumer protection, say,
over the last 5 or 10 years? In other words--because quite
honestly, as I said, some folks don't think you all were doing
anything.
Ms. Bair. The first thing I would like to say is we don't
have the authority to write consumer rules. We have never had
that. That has always been vested in the Federal Reserve Board.
Two years ago, I came to this committee and asked for the
ability to do that. Mr. Dugan did the same thing.
I will be happy to give you our comment letters to the
Federal Reserve Board on subprime lending, on yield spread
premiums, on credit cards, and on overdraft protection. We have
vigorously pressed for a number of years for stronger consumer
protections in key areas. My examiners are only as good as the
rules they have to enforce. So that is that.
Number two, in enforcing the rules we do have, we have done
a reasonable job. Could we do better? Yes. That has been one of
the things that I have tried to do as Chairman of the FDIC. We
have increased the number of our compliance examiners, we have
increased and streamlined our General Counsel section that
brings these enforcement cases, and overall, we do have a
pretty good record. I am happy to give you the numbers
concerning our enforcement cases if you would like.
We care about consumer protection. We care about protecting
bank customers. No, we don't want to lose that. And if you want
to call that turf, that is fine, but that is who we are.
Mr. Neugebauer. Thank you.
So your response, let me be clear, is that in response to
the consumer protection, you weren't doing anything, what you
are saying is in that area, for example, FDIC, you do not feel
like you had any jurisdictional authority to address consumer
issues?
Ms. Bair. We feel we did not have strong enough rules
against abuses like overdraft protection and credit card and
subprime lending. Our subprime lending cases were brought as
safety and soundness cases because those weren't prudent loans
either. But we didn't have rules in place to tackle it from a
consumer protection standpoint.
Mr. Neugebauer. Mr. Dugan, is that your position as well?
Mr. Dugan. It is similar. We also did not have any
rulewriting authority in this area. But we did have
considerable examination and enforcement responsibilities with
respect to the rules that were on the books, and we think we
did a decent job with that.
I would make one other very fundamental point, though. A
number of the problems that caused the crisis, while consumer
protection contributed to it, a big chunk of that was pure and
simple underwriting problems. A big chunk of that was outside
of the banking system. And we did not have any authority over
that in terms of examining and supervising it, and even the
rules that were adopted didn't apply to them. And so you had
this uneven world where you had two different systems applying
to the regulated and the unregulated, and that was a
fundamental problem.
Mr. Neugebauer. Thank you, Mr. Dugan.
Mr. Bowman?
Mr. Bowman. Yes. Two examples. First, we do have some
rulewriting authority in terms of consumer complaints, and we
took the lead in coming up with an unfair and deceptive acts
and practices rule that related to credit card practices and
other activities. Second, we have additional authority as it
relates to deceptive advertising and issues like that, which we
have used to enforce consumer rules and regulations against
those institutions we regulate and their holding companies.
Fair lending referrals to the Department of Justice have
been fairly constant throughout. In the last couple of years,
formal enforcement actions brought against our institutions are
up somewhat dramatically as a result of increased consumer
complaints that we are receiving.
But I would share Comptroller Dugan's concern about the
number of consumer complaints and abuses that existed outside
of the regulated depository institution area where we don't
have the authority to regulate or oversee. One of the
advantages, in my opinion, of something like the Consumer
Financial Products Agency, would be a uniform set of
regulations that would be applicable to all providers of
consumer products and services.
Mr. Neugebauer. My time is limited. So what I hear you all
saying is, if you had the rules, if you had a uniform set of
rules, that individually your agencies are capable of enforcing
that and making that a part of your standard regulatory
process. But what you are saying, in defense of what others
have said about taking that just totally away from you, is that
you haven't really been given the opportunity to execute that
with the proper rulemaking authority. Is that what I am hearing
you say?
Ms. Bair. I think the examination and enforcement apparatus
with regard to banks is already in place. Give us stronger
rules, and you can immediately leverage those resources. I
would absolutely echo what Comptroller Dugan said, especially
that many consumer abuses in mortgages occurred outside
regulated depository institutions. If we have strong rules, we
have the examination forces and capabilities to enforce them.
With the existing rules, we have had 639 total formal and
informal consumer actions since 2006. We also have had another
91 referrals to the Department of Justice for fair lending. We
have a good record of enforcing the rules that we have in place
now.
The Chairman. The gentleman's time has expired. I am going
to recognize the gentlewoman from New York, and I will ask her
to just give me 30 seconds of her time.
If I could just say that I am a great admirer of Chairman
Bair and of Mr. Dugan. In fact, I actively urged your
continuation in your reappointment. But I have to be honest
with you, in all the conversations we have had, I do not
remember either of you ever coming to me and saying, here is
this consumer problem. You have come to me, as you should, with
problems in the regulatory area, in the financing area, etc.,
but I do not recall either of you ever coming to me and saying
that you didn't have strong enough rules. I do not recall
either of you ever coming to me and saying, here is a defect in
consumer protection, as you often did in your general area.
Ms. Bair. Mr. Chairman, I will provide my previous
testimony. We have absolutely testified about the need for
additional consumer protection authority.
The Chairman. I will apologize if that is the case, because
my recollection is that you have been much more energetic with
us on those other areas and not on consumer protection. But--
Mr. Dugan. I would be happy to respond to that as well.
The Chairman. The gentlewoman from New York.
Mrs. McCarthy of New York. Thank you, Mr. Chairman. I
appreciate the hearings from this morning and this afternoon,
and I appreciate the testimony that we have been hearing.
This is a learning curve for a lot of people. Hopefully, a
lot of people are watching this on TV so they can actually hear
what went down over the past year. And to be very honest with
you, it is a learning session for many Members. We sit here on
the committee, but there are many Members who are sitting
outside that really have no idea what we are talking about.
These are difficult subjects. And if you are not in the
financial world, it is extremely difficult for the average
person to even pick this up.
Now, I guess the questions that I want to go to, again, go
to the Consumer Financial Protection Agency and what the rules
and regulations are going to be. There are many who feel we
definitely need something like this, and I am one of them. But
we also want to make sure as we do this, we are not going to
strangle those corporations that we are trying to help, so they
are healthy. It is a fine line when you start to think about
it.
But I guess one of the things that I would like to have an
answer--and I apologize if it was in the full context of your
words--but how would a conflict between the agency and a
regulatory be solved? And who is going to be on the top of that
to make those decisions when you bring all these together?
Ms. Bair. I think subprime is an example. Early on, when
subprime expanded, it was viewed positively. Lenders that were
making these loans were getting some plaudits in the media and
elsewhere because they were broadening homeownership. As we saw
later, these loans didn't perform, and they weren't serving
anyone's interest because long-term, they weren't affordable.
There can be differences in perspective on this, and you
need synergies between the two. You need both perspectives to
be able to evaluate a practice. This is one example of where a
tool originally introduced in the nonbank sector spilled into
banks. This tool, a type of mortgage product that was
originally touted by those offering it as a way to expand
homeownership, really ended up hurting a lot of people. But
early on, nobody caught it on the safety and soundness side or
the consumer protection side. This type of thing can happen in
benign environments if a product appears to look good. With a
low teaser rate, you can buy a house for a couple of years and
figure it out later. Or you can have have a very low
downpayment. Ultimately, we saw that did not work.
In more benign times, you can get into a situation where a
product that looks on the surface like it is going to be
proconsumer is actually not. If you look deeper in terms of
underwriting quality, it is not in the consumer's long-term
interest and certainly not in the lender's long-term interest.
Mr. Dugan. I would just echo those remarks. If you only
have one set of views, I think you can have problems in
emphasizing that aspect of it if you don't have them both
blended together and balanced, one against the other, when you
have an issue like that. Nontraditional mortgages, the payment
option mortgages, were something we identified very early on as
having both safety and soundness problems and underwriting
problems. We began to try to take action in the national
banking system, as my fellow banking regulators did. We
couldn't get at the place that was really cranking them out
because we didn't have rules that applied in that area. So I
think you would need a mixture of the two, and the notion that
you can completely separate them gives us pause.
Mrs. McCarthy of New York. One of the other things I just
want to bring up, and, Chairman Bair, we had talked about this.
If you watch TV, and it doesn't matter whether it is early in
the morning or late at night or the middle of the day, we are
still seeing a tremendous amount, in my opinion, of predatory
lenders on TV. I know it is not particularly in this committee
that we can deal with it, but this is a perfect example where I
see the two entities of different parts of the government
aren't working together.
We are here talking about--talking about giving consumers
protection, and it is blasted all over the TV, it is on every
telephone pole in my area: We will get you insurance, we will
get you your loan for your house, no downpayment. How far have
we actually come on protecting our consumers?
Ms. Bair. Congresswoman, that is right. Banks are not doing
this. If they were banks, we could stop it. We have both rules
now. The Fed finally moved forward with rules under the Home
Owner's Equity Protection Act and we have an enforcement
mechanism for banks. The nonbank sector is lightly regulated or
virtually unregulated in many, if not most, of these areas, and
it is a daunting task to try to identify those people, get them
registered, get them licensed, and have some type of
examination and enforcement mechanism. That is really where the
void is, and that is where the focus of this new agency should
be. That, in and of itself, is a daunting task.
So we think the best leverage in examination and
enforcement resources is for this new agency to write rules for
everybody, but on the enforcement side focus on nonbank
financial service providers that, you are absolutely right, are
still out there.
Mrs. McCarthy of New York. I thank you all for your
testimony.
The Chairman. The gentleman from Delaware.
Mr. Castle. Thank you, Mr. Chairman.
Chairman Bair, you have opined in the past at some time or
another that the creation of the CFPA may not solve the
fundamental causes of the mortgage crisis, and that concerns
me. You had a lot of entities that weren't even banking
entities issuing mortgages. Obviously earnings statements by
the people obtaining the mortgages weren't always obtained.
There are a lot of fundamental problems with that, and my
concern is that if we are to create this particular new agency,
and it doesn't have the authority to deal with those problems
or the mechanical ability to deal with those problems, that
would be an issue.
But I am also concerned what happens if we don't create the
agencies in terms of how do we catch these problems that
apparently we didn't catch before. I would be interested in
your comments on that.
Ms. Bair. You need the CFPA because you need strong rules
across-the-board for banks and nonbanks. There has been a lot
of arbitrage between the more heavily regulated banking sector
and the nonbanking sector. Unless you have a new agency that
not only writes rules for both banks and nonbanks, but also has
some viable examination and enforcement mechanism for the
nonbank sector, you are not going to address the problem. We
can keep regulating banks and deploy more examiners. But if
somebody else can offer a loan that is completely outside that
framework, you are not going to solve the problem. Banks will
lose more market share or this will put competitive pressure on
them to lower their standards, which is exactly what happened
with subprime mortgages.
There really needs to be a laserlike focus on the nonbank
sector. You don't fix that problem unless you make sure you
have both rules and enforcement mechanisms that apply across-
the-board.
Mr. Castle. In short, it is the nonbank sector that is the
disturbing part of it as far as you are concerned?
Ms. Bair. Yes. You have to deal with that, or you are not
going to solve the problem.
Mr. Castle. Thank you.
Mr. Dugan, how important is uniformity in setting the
standards for national banks? And what do you see as some of
the problems raised by the Administration's proposal to
establish a Consumer Financial Protection Agency which at the
same time allows the 50 States to set their own standards for
national banks operating within their borders? It seems to me
you are getting into a double structure there, and I would be
interested in your comments on that.
Mr. Dugan. You put your finger on a very important point.
As we were just talking about, there has been a rulewriting gap
in not having uniform standards. The notion of having a new
agency that could set some uniform rules at the national level
is a very powerful and good thing.
But in the same breath, I think you undermine this
principle by then inviting the States to add additional rules
on each of these areas. And in a world in which the delivery of
financial products and services, particularly national banks
that operate across State borders, it is a technology that
doesn't respect boundaries. If you have ATM cards or credit
cards or debit cards or instant credit checks, you have a world
in which you touch many States, and the efficient delivery of
it requires a single set of rules.
That is what has allowed a lot of these products to
flourish, and I think the danger you would have is twofold by
having many different standards apply. First, you would have a
lot more cost in figuring out how to comply with 50 different
rules on how to disclose things, an account opening, interest
rates, or rules on compensation.
Second, you create tremendous legal uncertainty and
exposure in different areas by having different rules and not
knowing which States' rules would apply. And the problem is
that those costs will get passed on to consumers either in the
form of higher prices or less availability of the products and
services.
Mr. Smith. Excuse me, Representative Castle, may I respond
to that as well?
Mr. Castle. Let me ask another question, Commissioner. You
can respond to that one and the one I am going to ask next, if
you will. This is to Mr. Dugan as well.
Do you think that the creation of CFPA will result in less
competition and higher costs, which you just indicated it
would, but would force the multi-State banks to operate in,
say, one bank, just California and New York or whatever--one
State, excuse me, California, New York or whatever it may be.
Are you going to see more of that if this were to--
Mr. Dugan. I don't know if that would happen, but I think
you can have circumstances where rather than incur the
compliance costs of a bunch of different rules, they would take
a particular large State, and, if it had a different rule, try
to conform their systems to that one State, even if it is
different from the rules adopted at the national level pursuant
to notice and comment pursuant to all the deliberative process
that the new CFPA would have. It would undermine that thought.
I think you could have a real issue there.
Mr. Castle. Commissioner Smith, you have a little more
time.
The Chairman. Well, I would ask unanimous consent to--he is
a State bank supervisor representative, and it is a very
relevant question. I would ask unanimous consent that he get an
additional minute to respond to the question.
Mr. Smith. I will try.
First of all, sir, if I might say so, we have just had a
financial meltdown under subprime. The States were all over
subprime for years. No one has ever said, to my knowledge, that
the State regulation caused the subprime crisis. In fact, if
anything, the State regulation was on top of the subprime
crisis before anybody else.
It is astonishing to me to hear the regulators of
enterprises that have lost billions of dollars somehow related
to subprime say they weren't involved then. This is an
astonishing proposition.
It seems to me in cases where there are appropriate Federal
standards or where Federal standards are enforced, the States
have other things to do right now than fry these fish. We will
work with the Federal Government. We have worked with the
Federal Government on the SAFE Act. We thank you for adopting
that. Forty-nine States have adopted similar legislation to
license mortgage originators so that we can get our arms around
this issue, and we have been doing this stuff for years. So I
think it is really quite unfair to say that allowing States to
have higher standards to protect consumers somehow damages the
financial system.
The Chairman. Well, it is an appropriate segue to the
gentleman from North Carolina, who has been a leading activist
here in the subprime crisis, and I am about to recognize him.
I would just say to my friend, no one ever said this was
the answer to the subprime crisis. The answer to the subprime
crisis was the subprime bill that we passed. That is what we
thought was the answer to that. This was never meant to be the
answer to that. The gentleman may have forgotten that we did
pass the subprime bill.
The gentleman from North Carolina.
Mr. Miller of North Carolina. Thank you, Mr. Chairman.
There is a division in the existing law between safety and
soundness regulation and consumer protection regulation.
Chairwoman Bair said that you had testified or that you had
commented as part of the public comment period when the Fed
adopted rules that applied to institutions for which you all
have principal safety and soundness responsibility--and
actually, Comptroller Dugan, you did as well--you commented not
for stronger rules, but for weaker rules. You opposed in the
public comments many parts of the credit card regulation.
Mr. Dugan, I understand that you don't have rulemaking
authority. You didn't have rulemaking authority. You do have
the authority to bring enforcement actions. The great, great
bulk of credit card business was with national banks. It is now
like the top 3 banks have 75 percent of the business. It was a
little bit less sometime back, but it has always been dominated
by national banks. And there were no enforcement actions. Now--
yes, sir? Am I missing something?
Mr. Dugan. Yes. First, you are missing something. We
brought a number of enforcement actions against credit card
banks, particularly the subprime credit card lenders, where we
brought so many enforcement actions against them that they
stopped doing business as national banks.
Second, we enforced the rules that applied to credit card
companies. The rules that you are talking about, the
suggestions and the practices that caused Congress to pass a
statute that applies to them, we will enforce those, too. But
we can't make up rules. In fact, we are prohibited from
adopting anything that looks like a rule if it is given to
another agency by statute.
Mr. Miller of North Carolina. Well, the statute now is that
you can enforce the Federal Trade Commission's unfair and
deceptive trade practices--acts and practices rule, and you can
do that by enforcement action.
Mr. Dugan. But we can't write a rule under that. Only the
Federal Reserve can. We have requested that authority.
Mr. Miller of North Carolina. You can bring enforcement
actions with respect to specific practices as a violation of
the--
Mr. Dugan. We do. And we have brought 11 of them in the
last 9 years against significant companies, and we have issued
guidances related to it, but we can't define them as a matter--
The Chairman. Just to clarify, that was 11 in 9 years?
Mr. Dugan. Those kind of specific enforcement actions.
Mr. Miller of North Carolina. That is more than I thought
you had brought. But did you bring any enforcement actions with
respect to charging the double-cycle billing, for charging
interest on a balance that had already been paid off?
Mr. Dugan. Double-cycle billing was expressly permitted by
regulation, by the Federal Reserve. There is no way we could
have brought an action against them as an unfair and deceptive
practice that the regulation permitted.
Mr. Miller of North Carolina. Okay. Raising the interest
rates on an existing balance. That was expressly allowed?
Mr. Dugan. If it is adequately disclosed to consumers that
can happen to their balances when they do something, it is not
an unfair and deceptive practice to raise it. It is now
unlawful to do that because Congress acted.
Mr. Miller of North Carolina. Right.
Mr. Dugan. But that rule was not in place.
Mr. Miller of North Carolina. Okay. You have said on
several occasions that there were a great many practices that
you simply stopped banks from doing by dissuading them from
doing it as part of your supervision.
Mr. Dugan. Right.
Mr. Miller of North Carolina. Given what has gone on in the
economy in this decade, can you give us some idea of the kinds
of things you have talked them out of doing? Given what
happened and what was allowed, what did you talk them out of?
Was it human trafficking? Conflict minerals? What did you talk
them out of?
Mr. Dugan. Okay. I will give you a couple of examples, and
then I will also say that a bunch of the practices, the very
worst subprime mortgage lending, was not occurring inside
national banks or State banks for that matter. It was in
unregulated State entities where the States were in charge of
them. And the numbers show that.
In terms of the things that we have leaned on people,
payday lending was something where the payday lenders tried to
get ahold of national banking franchises to run payday lending
operations in them, and we stopped it. We stopped them from so-
called renting the national bank charter to do that. I
mentioned subprime lending and credit cards, where we saw a
number of abuses that caused real problems. Both on the
consumer protection side and the safety and soundness side, we
came down very hard on it, and we essentially ended that
practice for the monoline stand-alone subprime lenders in the
credit card business. I can provide you other examples and
specific cases and would be happy to do that for the record.
Mr. Miller of North Carolina. My time is nearly up.
The Chairman. I will take the last 20 seconds to say, I
would note, Mr. Dugan, you mentioned the failure to do the
subprime regulation in the nonbanks. The authority to do that
was lodged in one those safety and soundness regulators whose
autonomy you are protecting, the Federal Reserve. Your proposal
would keep that in the Federal Reserve, your position. Because
the Federal Reserve has made your consumer protections, and you
have said leave them with the safety and soundness regulator.
The fact is, as Mr. Miller also pointed out, you said, well, we
couldn't do that; the Federal Reserve gave them the permission
to do it. So the consequence of what you are saying, don't give
any enforcement powers to this, the Federal Reserve refused to
use the enforcement powers, and you are for the status quo with
the Federal Reserve.
Mr. Dugan. That is not what I am saying. What I was saying
was--
The Chairman. Excuse me, Mr. Dugan, it is when you say that
we should not create a consumer agency--
Mr. Dugan. I didn't say that.
The Chairman. --and give it enforcement powers. You did say
that. You said we shouldn't give the consumer agency the
enforcement and examination powers. They should be left with
the safety and soundness regulator. That includes the Federal
Reserve, whose inaction you have frequently cited.
Mr. Dugan. I am sorry if I created a misunderstanding. What
I was trying to say was we should give the new CFPA rule-
writing power--
The Chairman. And not examination and enforcement.
Mr. Dugan. --and examination enforcement with respect to
nonbanks.
The Chairman. Right. But not with respect to banks, which
is where the credit card issue came in. You cited an example of
the credit card situation where you were in fact debarred from
taking action, when Mr. Miller asked you, because the Federal
Reserve, a safety and soundness bank regulator, explicitly
allowed the banks to do it. And according to your position,
that status quo would continue.
Mr. Dugan. No, because I think the new CFPA would write the
rules, would have that issue--
The Chairman. But there were rules that were written that
the Fed wouldn't use. Do you think the Federal Reserve has done
a good job in consumer protection?
Mr. Dugan. No, what I am saying is that 75 percent of those
credit card companies are regulated by national banks, 25
percent--
The Chairman. And the regulations allow them to do all
those things.
The hearing will now recess. We will return after the
votes.
[recess]
Mr. Kanjorski. [presiding] The committee will be in order.
Mr. Scott of Georgia is recognized for 5 minutes.
Mr. Scott. Thank you, Mr. Chairman.
Let me ask, it is a great pleasure to have the three of you
here, who are our primary regulators in our system. But I would
like to take the gist of my questions on the state of the
economy now. Because in the final analysis, a major reason why
we are putting these financial reforms in place is to, quite
honestly, save our economy and our financial system.
But if I am the American people out watching us and trying
to glean something from what is a very complex, complicated
issue, our report card for the American people would get an
``F'' right now.
And I want to ask you, Ms. Bair, Comptroller Dugan, Mr.
Bowman, and also you, Mr. Smith, why are we at the state that
we are after spending $700 billion in TARP money, $700 billion
in bailout money, $700 billion in economic recovery? We are
looking at almost $2 trillion that we directly put out within
the last 7 or 8 months, and yet, as you and I have discussed,
Ms. Bair, and I would like for you to lead off, because the
indicators are not very good for us. Home foreclosures are
still ratcheting through the roof. Bank closings are at a
record rate, especially in my home State of Georgia.
Unemployment is at 10 percent, and in some areas at Depression
levels. Banks that we are supervising and you are regulators of
are not lending, particularly to small businesses, therefore
bringing out bankruptcies there.
So to me, the American people are probably saying, what
good does it do for us to be sitting up dealing with these
regulatory reforms when, in fact, where is the report on what
we have been doing? Why is it that we can't see the jobless
numbers go down? Why is it that banks are not moving to
mitigate loans? Why is it that banks are not restructuring? And
at the same time that this is happening, many of them are going
back to their same old ways of bonuses and salaries.
The American people have a right to be very angry. So could
you please respond to why we are in the state we are in? And
what are we doing to get these banks to unleash this money and
make loans and mitigate loans so that people can--we can really
stimulate the economy and keep people in their homes? I think
if we do that, that is the way in which we are going to stop
all of these bank foreclosures and small businesses going into
bankruptcy.
And Ms. Bair, I would particularly like for you, because we
moved to give the FDIC the authority and funding to move within
the foreclosure area particularly to deal with this area, could
you really tell us how we are progressing there, and why we are
not doing more?
Ms. Bair. Well, a couple of things. Regarding loan
modifications, that is something certainly we advocated. And
some of the work we did with the IndyMac loan modification
program was used by Treasury and HUD to launch their own HAMP
program. This is not something we are doing, though we support
it and have tried to provide technical assistance.
They estimate they can get about 500,000 loans modified in
the near future. It is making a dent, but it was never meant to
be the complete cure. It is not, but it can help a significant
number of folks stay in their homes.
To get banks to lend, we have taken a number of steps. We
are asking our examiners to do a lot. There was some bad
lending going on. There was some lending based on rising
collateral values that shouldn't have happened. So, because
there was too much credit out there, there needed to be some
type of pull back. But the challenge is to make sure it doesn't
pull back so far that the credit-worthy loans, the prudent
loans, are not being made.
We have tried to strike this balance with our examiners. We
want our banks to lend. We want prudent lending. But, we don't
want them to overreact. There are a lot of cross-currents.
There are a lot of people saying that regulation wasn't tough
enough; we need to be tougher. And there are other people
saying, you are being too tough. It is a hard balance to
strike.
We have tried to provide clarity in a number of key areas.
We have said very specifically that we want commercial loans
restructured also. We want small business loans restructured,
too. Loss mitigation is a good business practice, whether it is
for residential mortgages or commercial mortgages. That needs
to be disclosed and done properly. We want the appropriate
loans restructured. We don't want good loans written down just
because the collateral value has fallen. We don't want that to
happen. We have made that very clear.
Mr. Scott. I know my time is running out. It is about to
run out, too. But I did want to get to, why are so many banks
closing, especially in the State of Georgia? What is there? Is
there something we can point to that is going on in Georgia to
explain why so many of these banks are closing?
Ms. Bair. There are a lot of banks in Georgia. It was a
boom area. Now, many of the boom areas are bust areas. There is
residential mortgage distress and a lot of commercial real
estate distress as well. In Georgia, like other parts of the
country, it is broader economic problems that are feeding
losses on bank balance sheets, which is driving closures as
well.
One of the best things you can do for the banking system,
especially community banks, is to get the economy going again
quickly, keep the unemployment rate down, get those retailers
back in business, and get those hotels full again. Those are
the kinds of things that will help banks as well. In Georgia,
bank closures were a symptom of a lot of banks existing in the
State, plus it was a great boom area. And as in other areas,
like Florida, southern California, and Nevada, Georgia is
having a severe bust now.
Mr. Scott. I would just like to ask unanimous consent just
for 30 more seconds. Is that possible?
Mr. Kanjorski. The price is you are going to assume the
Chair right after your next question.
Mr. Scott. Okay. I will be willing to pay that price. Thank
you.
Mr. Dugan, I wanted to go to one specific thing. You and I
have discussed this, I believe, in my office. And I wanted to
know, have we made any progress? Because I think there is so
much more our banks can do that they are not doing in terms of
lending. But there is a practice that is going on within the
banking system that I think that we do need to address. I spoke
to you about that, and I wanted to know if we have moved on
that. And that is this, that we have been receiving some
complaints from some of our constituency that when they have
multiple services at these banks where one will have their
savings account, their checking account, and then they will go
borrow maybe a home equity loan, and then--or another loan, but
without any acquiescence to the customer, the bank has the
right, apparently, which I think is wrong, to without any--with
total disregard to the customer, to go into one of the other
accounts, get money out of that account to pay for something in
the other account. It puts that customer and that consumer at a
very disadvantage without having a notification, without
knowing. He may think he has so much money there, but the bank
has already gone in and got it to pay something else, maybe the
home equity loan. And I was wondering, I know you were
concerned about that, and I wanted to find out if you moved on
that and what we need to do to stop that.
Mr. Dugan. I am not sure that we have seen that as a
rampant problem in the system. There are some rights related to
set off when you have some issues, but I don't believe that
banks can routinely use one account to pay the debts of another
bank. But I will get back to you on that, on where we are on
that, if I could, for the record.
Let me just also say that earlier this week, I did spend
some time with Georgia community national bankers in Atlanta,
and would just echo all of the comments that my colleague just
said about the situation in Georgia and some of the issues that
they have.
Mr. Scott. All right. I just want to say, we need your help
in Georgia. And we want to stop this trend of banks foreclosing
and a lot of the other things that are going. So I appreciate
your attention on these two matters. Thank you.
Mr. Bachus. Mr. Chairman, one thing, I hope you will allow
some of the people on the other side some liberal time, by
which I mean I am not protesting the additional time, but I
would allow that courtesy to be extended on--
Mr. Kanjorski. If it is Mrs. Biggert, we are going to allow
her 18 minutes.
Mr. Bachus. Thank you.
Mr. Kanjorski. The gentlelady from Illinois, Mrs. Biggert,
is recognized.
Mrs. Biggert. Thank you, Mr. Chairman.
I am not one of many words. That is why you said that.
Chairman Bair, I have had some of my community bankers come
in to see me, and they have some real concerns, particularly
with where they have been required to reserve 3 percent of all
of their fully performing construction loans and land
development loans. And so that has significantly impaired their
CPA capital ratio so that they have been rated barely
adequately capitalized. And then, in turn, they were told,
well, now you can't get any TARP money or to withdraw their
application because of the just barely adequately capitalized.
And they are concerned that if they had gotten TARP funds, they
would be well capitalized and not in danger of becoming
undercapitalized.
And the other issue that they worry about is there might be
these special assessments that they would have from the FDIC.
What should I tell them to do?
Ms. Bair. We understand the additional stress that another
special assessment would create. So we are actively considering
other options. The FDIC Board will be meeting next week and
will be voting on some options for public comment. We very much
understand the stress that another special assessment could
place on smaller institutions. We are looking at this issue
very carefully and evaluating other options as well.
On the TARP, obviously the TARP is not an FDIC program.
There is an interagency process where the primary regulator
will make an initial set of recommendations to an interagency
group, and then make recommendations to the Treasury
Department. The standard remains viability without the funding.
This is a difficult determination to make. If that test is not
passed--if there is a question about that--then it is a very
difficult judgment to make. We have suggested a matching
program so that banks can show a strength in their ability to
raise nongovernment money on at least a dollar-for-dollar
basis. That might be another way to build some flexibilities
into the program.
I can't respond to the 3 percent reserving requirement. I
am unaware that we have a carte blanche rule like that. I can
check that and get back to you. The general rule is, if it is a
performing loan and if the borrower has the documented capacity
to continue making the loan--has the income, the balance sheet
to support continued payments--then generally it should not be
classified. I can talk with our staff, and if there is a
specific instance you would like to bring to our attention, I
can have our supervisory staff address that.
Mrs. Biggert. Have you explored the idea of a shared equity
loss program and where the FDIC would match private equity and
increase capital? In other words, instead of having them go
under and then bring in somebody with the 90 percent, would
that be a way of--
Ms. Bair. Well, we have a statutory prohibition against
providing open bank assistance unless there is a systemic risk
determination, which is hard to do with the smaller
institutions. We have made a systemic risk determination with
the Treasury and the Federal Reserve Board to undertake a
troubled asset relief program--the PPIF or legacy loan program.
We just did a test sale of a legacy loan mechanism with our
receivership assets. And we are now looking at how we might use
that for open institutions.
I think it is a matter of evaluating what the criteria
should be for institutions that are viable and have franchise
value or would be viable with this additional help and can
raise private capital. I think there is a good case to use such
a mechanism if they can meet that criteria. However, we do have
strong statutory restrictions against providing open bank
assistance. And we do not have authority to make a direct
capital investment in an open bank.
Mrs. Biggert. Then just a quick question for several
people, but beyond the authority to write and enforce Unfair
and Deceptive Practices Act rules and enforce mortgages and
credit card rules, did any of you actually write consumer
protection rules? And who wrote them? And who currently writes
them, the consumer protection rules and regulations?
Ms. Bair. As both Comptroller Dugan and I have said, the
OCC and the FDIC do not have authority to write UDAP rules. We
don't. We have asked. We really have. We can provide our
testimony and show you we have asked for that authority.
Mrs. Biggert. Did you have any say? I guess the answer is
the Fed, but--
Ms. Bair. The Federal Reserve Board had that rulemaking
authority. We filed comment letters with the Federal Reserve
Board encouraging them to promulgate rules. We have never had
the authority to do that ourselves, to write rules.
Mrs. Biggert. All right. Thank you. I yield back.
Mr. Scott. [presiding] The gentleman from Texas, Mr.
Hensarling, is recognized.
Mr. Hensarling. Thank you, Mr. Chairman.
Last month, The Wall Street Journal had a rather disturbing
article, which I assume you are familiar with. I will quote
from it: ``Treasury Secretary Timothy Geithner blasted top U.S.
financial regulators in an expletive-laced critique last
Friday, as frustration grows over the Obama administration's
faltering plan to overhaul U.S. financial regulation, according
to people familiar with the meeting.
``Mr. Geithner told the regulators Friday that `enough is
enough,' said one person familiar with the meeting. Mr.
Geithner said regulators had been given a chance to air their
concerns, but that it was time to stop, this person said.
Friday's roughly hour-long meeting was described as unusual not
only because of Mr. Geithner's repeated use of obscenities but
because of the aggressive posture he took with officials from
Federal agencies generally considered independent of the White
House.''
The article asserts that at least three of the four of you
were in attendance at that meeting. Assuming that to be true
for our first three panelists, is The Wall Street Journal story
accurate?
I will start with you, Chairman Bair.
Ms. Bair. Congressman, I don't like to comment, I am sorry,
on private meetings. I will tell you, though, that any input we
provided to Congress has been independent. I used to work for
Congress. I understand being an independent agency. When you
ask for my views, I am going to give them to you. And I also am
giving you my views based upon what I think are the best
mechanisms to put in place from a regulatory reform standpoint
and a consumer protection standpoint.
Mr. Hensarling. Thank you.
Comptroller Dugan?
Mr. Dugan. I would agree with that. I would say there was a
candid exchange of views, and it hasn't in any way affected my
job and my duty as Comptroller to call these issues as I see
them and be fully independent, as Congress has expressly
provided with respect to my agency and the other agencies up
here.
Mr. Hensarling. Mr. Bowman?
Mr. Bowman. I would agree with both of those statements.
And I really think that our opinions of our respective
independence from the White House and/or the Treasury, can be
found in our respective testimonies both here and in the
Senate. And I think that really does speak for our position on
where we go and how independent we are.
Mr. Hensarling. I thank you.
Clearly, I didn't hear it was inaccurate, but I respect
that you wish to keep it confidential. I understand that.
But I do think it is important that this committee hear
your commitment to independence. Your opinion, and I have
disagreed with your opinions on many occasions, and I assume
that on future occasions, I will disagree again. But it is a
terribly important opinion. It is a terribly relevant opinion.
And this committee needs to know it is an independent opinion.
And I am not quite sure how one proves a negative, but with
articles like this, you can understand a number of us on the
committee remain concerned.
Perhaps this will be a bit simpler question to answer. The
CFPA, as presently constituted in the Administration's White
Paper and in Chairman Frank's bill--and I know we have this
memo floating around ostensibly from Chairman Frank to members
of his committee. I haven't heard the chairman either verify or
deny the accuracy of that memo. So, theoretically, the bill may
change. But again, I don't know the accuracy of this memo.
My question is this: The CFPA as presently constituted, in
your professional opinion, could it or would it lead to less
credit and more costly credit for families and small businesses
in our economy?
Again, I suppose going left to right to make it easy,
Chairman Bair? Apparently, it wasn't that easy of a question.
Ms. Bair. With so many of these issues, it depends on who
is the head of the agency and how it is structured, and I think
that the structure is in flux: Chairman Frank's observation
about placing the focus prohibiting bad practices as opposed to
identifying and enforcing good practices may help address that
concern.
Mr. Hensarling. So is it fair to say, potentially yes, but
you don't know?
Ms. Bair. Yes.
Mr. Hensarling. Comptroller Dugan, do you have an opinion
on the matter?
Mr. Dugan. I think part and parcel of it is this repeal of
uniform standards for national banks and for Federal thrifts.
And as I testified or mentioned earlier, I do think that could
lead to the kind of increased costs that could in turn increase
potential litigation exposure, that could in turn result in
increased costs to consumers of financial products, but also
restricted availability of products and services.
Mr. Hensarling. So, as presently written, your answer would
be yes. Is that a fair assessment?
Mr. Dugan. Yes, with the preemption piece in it, yes.
Mr. Hensarling. Mr. Bowman?
Mr. Bowman. I agree with both of the responses. It could
result in additional costs and a reduction in credit. But we
will see what it looks like at the end of the process.
Mr. Hensarling. Just so you don't get lonely, Commissioner
Smith, we will let you answer the question as well.
Mr. Smith. I will give you the best answer, which is that,
when we adopted State legislation to address predatory lending,
we were called reverse redliners. It was said we were reducing
credit availability at the time we did it. And I wish we had
reduced it sooner, because what happened was the result of the
loans that were made during the period I am talking about,
which was 2005 to 2007, let's say, was that millions of
families went out of their homes. So the answer to the question
may well be, yes, there would be less credit. The question
really is whether that is a bad thing or not.
Mr. Scott. The gentleman's time has expired.
I recognize the gentleman from Missouri, Mr. Cleaver, for 5
minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
I have a couple of questions. My primary concern in this
regulatory reform is the whole issue really of not so much
``too-big-to-fail,'' but ``too-interconnected-to-fail.'' I am
not sure that they are not synonymous. And I am not sure how
that is being dealt with. But that is another issue for another
committee hearing, I think.
It may be important for me to focus on the issue of whether
we need a regulator, which is why I think you are here. Do any
of you know who Dennis Blair is? He is the Director of National
Intelligence. And the reason that he is there is because, after
9/11, we discovered, to our dismay and to our great pain and
embarrassment, that we had agencies not communicating with one
another. We had the FBI and the CIA, both having intelligence
on the 9/11 terrorists, and they were not sharing. And so, in
an attempt to correct a problem, we now have a Director of
National Intelligence who is the cop, so we don't have those
problems again.
Any time we have a crisis and we can identify a problem,
don't all of you agree, do all of you agree that then we need
to make some adjustments? Who believes that we should not make
an adjustment?
Ms. Bair. We all support reform very vigorously.
Absolutely.
Mr. Dugan. We agree with that. And even though I would say
that, in a crisis, it brings regulators more together to have
to share than--
Mr. Cleaver. Yes, but the question, Mr. Dugan, is what
brings them together, the crisis and the declaration that we
should come together?
Mr. Dugan. I would say, first of all, we have to work
together on a bunch of things because we have to put out common
rules on things. And John Bowman and I are both on the FDIC
Board. We vote on things like the assessment that we were
talking about earlier. So we inevitably have a lot of
interaction with each other, unlike some other regulatory
agencies.
And I think the caldron and the crucible of a crisis brings
you even more together. But I think it is also true that this
crisis has identified issues that need to be addressed through
changes in the regulatory framework and structure, which I
think we all support.
Mr. Cleaver. Okay. So how do you think the average U.S.
citizen will respond if the chairman of the committee hits the
gavel and says, okay, everybody has learned how to function
better, we are not going to have any reform in spite of the
fact that the world economy almost ran off a cliff? How many of
you think that the American citizens are going to say, oh, that
is good?
Ms. Bair. No one, sir.
Mr. Dugan. No one, sir.
Mr. Cleaver. So we need to do something, you would agree.
Who would independently move? We have 3 banks controlling 75
percent of the credit card debt in this country. There is
something wrong with that. Do you agree? More than 75 percent
of the credit card debt held by 3 companies?
Mr. Dugan. It is more than 3, because the banks that we
supervise, national banks, have about 75 percent depending upon
how you count it, and it is more than 3 banks.
Mr. Cleaver. So Wells, Bank of America, and J.P. Morgan.
Who else?
Mr. Dugan. Actually, Citi is bigger into credit cards than
Wells is. And then U.S. Bank is, and then you have American
Express and Discover. It is dominated by a smaller group of
providers than other financial services. That is definitely the
case. But it is a business of scale. And because it demands
such an investment in systems and products, it naturally leads
to larger providers.
I think you have to watch that in terms of any time you
have a smaller number of people providing the same product, you
get into questions over time of whether it raises competition
questions. But there are certain products that lend themselves
to having more or fewer providers in it.
Mr. Cleaver. One final question: Was it 9 cases in 11 years
or 11 cases in 9 years?
Mr. Dugan. The latter. Under UDAP. That is right.
Mr. Cleaver. Is that good or bad?
Mr. Dugan. I would say two things. Number one, first of
all, we are supervisors. We see these institutions every day.
And we get a lot of things done before you ever get to the
question of a formal enforcement action. We do it through our
normal supervision. We do it through matters requiring
attention. We do it through informal actions. And that is the
advantage of having supervisors in there. They can get
corrective action taken right away when they see things before
they turn into enforcement kinds of problems, number one.
Number two, as we talked about earlier, some of the
practices that people complained about were not illegal. And we
couldn't make them illegal because we didn't have the power to
write rules with respect to them.
Mr. Scott. The gentleman's time has expired.
Now we will recognize the gentleman from Georgia, Mr.
Price.
Mr. Price. Thank you, Mr. Scott. I appreciate that.
I want to thank you all for your patience. My friend from
Missouri says we have to do something. We have to do something.
Is it possible do the wrong thing? Is that possible? Everybody
agrees.
Mr. Dugan. Yes.
Mr. Price. We can do the wrong thing.
Mr. Dugan. Right.
Mr. Price. So the goal of this committee obviously ought to
be to do the right thing, and not just do anything at all or
something. And I think we need to remember that as we try to
devise a system that is more responsive and works better for
people as opposed to the one we currently have and also the one
we might be reinforcing with some current rules.
Mr. Dugan and Mr. Bowman, I want to talk a little bit
about, please, the new recent guidance that the OCC and the OTS
have put forward, the ban on no-interest/no-payment activity
promotions that are done oftentimes by retailers. Some
retailers say that their no-interest/no-payment for a period of
time comprises a significant portion of their business,
sometimes up to 20 percent. The repayment on those is in many
instances very, very high. It works well. It works well for
people, and it works well for the retailers. Why would you do
that?
Mr. Dugan. We have something called our account management
guidance that applies to all credit card providers. We were
seeing some real problems in our portfolio about people not
making consumers even pay a very small amount due. This was
masking losses over time that they were continuing to report as
income. It was a truly unsafe and unsound practice, and it was
also resulting in consumers getting deeper and deeper into
debt.
Mr. Price. So the information that I have from retailers
that they have a payment rate of over 90 percent, or
approaching 90 percent on no-interest/no-payment credit for a
period of time, is that not accurate?
Mr. Dugan. Well, I have seen the letter that they provided,
and we will respond to the particulars of the letter. And I
would be happy to do that. I think the particular point we
would make is we are treating them exactly the same way we
treat other credit card providers.
Mr. Price. That is my concern.
Mr. Dugan. We are trying to get indications that the
customer can repay the loans. We are not saying that they can't
do no-interest. But they have to make some regular payments,
repayments to demonstrate the capacity and ability to repay to
address safety and soundness.
Mr. Price. This one-size-fits-all notion tends to result in
decreased flexibility and decreased responsiveness to the
consumer. And Washington can run the whole show, there is no
doubt about it. But it may result in a system that is not as
helpful for the American people.
Mr. Bowman?
Mr. Bowman. I wouldn't add anything more to what Mr. Dugan
has said. The attempt is to ensure, first of all, that the
consumer appreciates the obligation to repay. Ninety percent of
them do, according to the letter that we received. The goal is
to keep the examiners mindful of the particular product, the
consumer and the institution mindful of what it is they have
and the ability to ensure that repayments are provided for.
Mr. Price. So you both are telling me then that it is
possible that this ban isn't an absolute ban?
Mr. Dugan. What I would like to do is respond in detail to
each of the items in the letter. And I think that can give some
color to it.
Mr. Price. Great. I look forward to that.
Chairman Bair, as my friend from Georgia said, we are
having awful, awful problems down there. And I am not convinced
that the FDIC isn't contributing to the awful problems that we
are having. In many instances, the banks that I have talked to
that the FDIC has come in and taken over, the consequences of
that are real. There are real-life consequences to the people
in those communities. Some of these small community banks where
they have performing assets, performing loans, they have been
asked by the--they have been demanded by the FDIC to increase
their capitalization.
And they do so. And still they dot every ``i'' and they
cross every ``t,'' and then the knock comes on the door on
Friday afternoon. The consequences to these decisions that the
FDIC takes are massive, and they are not necessarily favorable
to the community and to the individuals in those communities.
We have had this conversation before. And we have been assured
of flexibility and responsibleness and reasonableness by the
FDIC personnel. I understand it is a tough job. But we are
killing communities. We are killing communities with action
that, from many individuals' perspectives, doesn't need to be
taken.
Ms. Bair. The process close a bank is made by the
chartering authority. So, for a State bank, it is made by the
State bank supervisor. For a federally-chartered institution,
it is the OTS or the OCC. There is a dialogue, obviously, with
the FDIC, in alerting us to the possibility that a bank could
fail, in preparing for the closure and monitoring the
resolution process. But, the resolution process is governed by
a strict statutory regimen of Prompt Corrective Action. This
was an outgrowth of the savings and loan crisis where Congress
rightfully felt that there had been too much forbearance. And
it is true that once an institution becomes nonviable, the
longer you wait for it to be closed and resolved, the higher
the costs will be, because it will continue to lose money. Such
institutions are not doing much healthy lending anymore, and
will continue to lose franchise value. We take this very
seriously.
I am painfully aware of the concerns and the drama
surrounding the closure of an institution. But in these
instances, this needed to be done.
We make every effort to market and sell the bank in advance
of the resolution. And usually for a community bank, we have
been successful in selling it to another community bank,
another bank servicing that area which is healthier and is in a
better position to provide credit services and deposit services
to the community. We can't always do that. In most cases, we
have been successful.
Mr. Price. The problem with that is oftentimes those
individuals who come in know nothing about the community. There
are no relationships. And in the process of doing that--and
again people who have dotted every ``i'' and crossed every
``t,'' jumped through all the hoops and thought they were
moving in the right direction based upon the FDIC, then they
are removed, and folks who come in are from somewhere else, and
the local community is without a local lender.
Ms. Bair. We try to avoid that. We absolutely try to avoid
that. If there are specific resolutions which you would like to
talk about later, I would be happy to do that. But if an
institution has insufficient capital and it cannot raise new
capital, there is not much we can do about it.
Mr. Price. That is not the case.
I appreciate that, Mr. Chairman.
Mr. Scott. Chairman Bair, and just before I get to Mr.
Green, as we both pointed out, we both represent Georgia. There
is a particular problem with Georgia. And some of us feel very
strongly, as the gentleman from Georgia, Mr. Price, has said
that there is more that the FDIC can do to help us in Georgia.
And there are things that they might not be doing that are
helping to cause the problem in Georgia.
There are just too many banks closing in the State of
Georgia, and we want to put a stop to that. I would appreciate
it, and I am sure the people of Georgia would appreciate it
very much if the FDIC could review how they are dealing with
the banks in Georgia to work with a plan to see if we can't
stop this very terrible pattern. Because it is just not fair
nor right. Thank you. Thank you for that. I wanted to get that
out.
I now recognize the gentleman from Texas, Mr. Green, for 5
minutes.
Mr. Green. Thank you.
Mr. Price, did you get your concern addressed? Because I
see that the two of you are very much concerned about this.
Would you need an additional 30 seconds? You are good? Okay.
Thank you.
Let me thank all of you for appearing today. And I would
like to first mention to you that ``too-big-to-fail'' in my
world is the right size to regulate. Not only is it the right
size to regulate, but as you approach becoming ``too-big-to-
fail,'' I think you are the right size to regulate. I
absolutely think that we must find a way to avoid another AIG.
I cannot imagine doing nothing and allowing circumstances to
manifest themselves again such that we will have another AIG.
It would be unconscionable for us to do nothing. And it would
be unconscionable for us to, under the guise of doing
something, do nothing. It would be unconscionable for us to
allow the paralysis of analysis to prevent us from doing
anything. We do have to act.
And I think that when Mr. Cleaver, in his defense, talked
about doing something, I would hope that it would be presumed
that he was talking about doing the right thing, as it has been
said. I rarely find him suggesting that we do the wrong thing,
in his defense.
So having said this, let me just ask a few questions to see
if we can agree on some things that are floating around that
are not necessarily entirely true. CRA: Did the CRA cause the
economic crisis that we are having to contend with?
Chairwoman--by the way, I would have had Chairwoman, not
Chairman, but if you--
Ms. Bair. Just not ``Chair Bair.'' I don't like that.
Mr. Green. Did it cause the crisis?
Ms. Bair. No, it did not. No.
Mr. Green. Comptroller?
Mr. Dugan. No, it did not.
Mr. Green. Acting director?
Mr. Bowman. No, it did not.
Mr. Green. Commissioner?
Mr. Smith. Absolutely did not.
Mr. Green. Did not. The CRA did not cause the current
crisis. And I would hope that would echo through the halls of
Congress such that at least we can put that to rest.
Did overregulation of the market create the problem that we
are trying to contend with, an overregulated market? In words
that may not be suitable, but did a lack--did laissez-faire,
the lack of laissez-faire create the problem?
Chairwoman Bair?
Ms. Bair. No, a lack of laissez-faire did not cause the
problem, no.
Mr. Dugan. I agree.
Mr. Bowman. I agree.
Mr. Smith. I have already testified that I don't think that
is the case.
Mr. Green. Okay. I just want to build this record, because
we continually hear that it was an overregulated market that
created the circumstance. We continually hear that it was the
CRA that created the circumstance. And at some point, people
who are involved, engaged, and who study these things, their
opinions ought to count for something.
Notwithstanding your opinions, by the way, my belief is
that we have entered an era of time where there is no
indisputable truth. We will find some person in some distant
corner of the world who differs with you, and we will find a
way to give this person credibility such that this person will
carry as much weight as all of you who study these things quite
regularly. And I consider you experts to some degree.
Moving along, with reference to a Consumer Financial
Protection Agency, whether we bifurcate or consolidate, leaving
that aside, bifurcation, the question of bifurcation, should we
have a consumer protection agency? Because, and I ask this
because, quite frankly, there are some who contend that there
is no need for a consumer protection agency, that things will
work themselves out if we just allow time to pass, as opposed
to do something with the passage of time.
Chairwoman Bair, do we need a consumer protection agency?
Ms. Bair. Yes, I think we do.
Mr. Green. Comptroller?
Mr. Dugan. To go back and touch on your earlier question,
there was a rule-writing gap, and there was an implementation
gap so that different firms were treated differently with
respect to consumer protection. And I think a CFPA is a way to
get at that.
Mr. Green. I take it from this you would say yes, but I
understand that there may be--we all have different opinions
about how it should come into being. But are we at a point
where we can say we need to do this?
Acting Director, please, sir?
Mr. Bowman. The answer is yes.
Mr. Green. And Mr. Commissioner?
Mr. Smith. Yes. But I think, in fairness to myself and my
colleagues at the table here, that each of us has reservations
about the current proposal.
Mr. Green. I understand. That is why I took bifurcation and
consolidation off of the board. My time is up, but as I leave
you, I just want to say this: We are charged with the
responsibility of, in some sense, being the watchdog for the
public. We have a duty to act positively, to try to avoid
unintended consequences. But if we don't act, our inaction will
become our action. And that inaction is going to create another
circumstance that we will have to cope with in the future.
Thank you, Mr. Chairman.
Ms. Waters. [presiding] Thank you very much.
Mr. Royce.
Mr. Royce. Thank you.
Let me ask a quick question. This has to do with something
that I remember the Federal Reserve bringing to us in, I think
it was about 2004, where they laid out a concern they had with
the Government-Sponsored Enterprises. And their worry was that,
unless they could regulate for systemic risk and have the
ability to reduce the portfolios some, they were worried that
with a $1.5 trillion portfolio, and a mandate that we had built
up over the years that half of it had to be subprime and Alt-A
loans and so forth, that it was leveraged 100 to 1, and so they
were saying, we could have a systemic risk problem if we don't
have sufficient regulation to allow us to address this. Do you
think that could have been a contributor to the problem in
terms of what happened in the GSEs? If I could ask the panel?
Ms. Bair. Yes, I think the GSEs did contribute to the
problem.
Mr. Dugan. I would agree that was a contributing factor.
Mr. Bowman. Agreed.
Mr. Smith. Agreed.
Mr. Royce. And I guess that comes around to one of the
problems with the CRA, because under the CRA, there was
leverage in order to get to that goal. Those who were pushing
the CRA saw a certain advantage in terms of having that
subprime portfolio held by Fannie Mae and Freddie Mac.
But in any event, let me go down a line of questions,
because with distance comes some perspective on some of these
issues. And I wanted to quote from something Ms. Bair said. She
said we need to develop a resolution regime that provides for
the orderly wind down of large, systemically-important
financial firms without imposing large costs to the taxpayers.
In contrast to the current situation, this new regime would
not focus on propping up the current firm and its management.
Now, if we take Treasury Secretary Geithner's reform proposal,
it reads, and it comes from a different direction it seems to
me, it says the regime also should provide for the ability to
stabilize a failing institution by providing loans to the firm,
purchasing assets from the firm, guaranteeing the liabilities
of the firm, or making equity investments in the firm.
And this sounds like you and the Secretary have different
ideas on the options that should be available to regulators
when it comes to resolving a failed institution. So I would ask
if you believe what the Treasury Secretary is suggesting
amounts to granting permanent bailout authority, or is there a
distinction that I am missing? Because as I read it, it
suggests, or he suggests that we grant authority to prop up
failed institutions, as we have in recent months, without
necessarily moving them through an unwinding process.
And here is why I think it is important. I think if there
is any ambiguity as to what would happen should an institution
run into trouble, then the market is going to view that
institution as government-backed, as was the case with Fannie
and Freddie. And if that is the perception by the market, then
you are going to have a moral hazard problem. And that is why I
feel that is something we should avoid going forward.
And I was going to ask you, Ms. Bair, about my concern
about that.
Ms. Bair. I agree with you. It needs to be quite clear that
shareholders and creditors will take losses if these big firms
become nonviable and have to be closed. It should be a wind
down, not a conservatorship or Government-run enterprise. It
needs to be quite clear what will happen. You will not get
market discipline back until this is clear. Recent measures
have exacerbated the problem. Some people joke now we have more
GSEs because of these. We are part of these programs, and we
support these programs, but we didn't really have an option.
But going forward we should have a resolution mechanism in
place that works for large, interconnected financial
institutions that allows them to be closed. It is very
important to be able to tell the public: no more AIGs. It just
shouldn't happen.
Mr. Royce. I appreciate that. Now, my last question I would
like to ask the panel about the costs associated with the
Consumer Financial Protection Agency if we do not do that under
the existing safety and soundness regulators, if we go out and
set up a separate agency, a bifurcated agency. Who ultimately
will bear the costs of creating and funding this agency? I
don't think it is hard to imagine that the costs would be
passed on by the institutions in a competitive market that
those costs would end up going onto the customers. So you
increase operating and compliance costs and you increase the
eventual costs to the consumer. So it seems to me more logical
that you would handle that within the--under the safety and
soundness regulator, because you would also have the sharing of
expertise that regulator has. And so I was going to ask that
question.
Mr. Dugan. As you said, we do have a regime already in
place. We already examine people, we already have a system for
doing it, and we do combine our supervision for consumer
protection and safety and soundness. It is more efficient and
will be less costly to get the same level of coverage than it
would be to have a whole separate agency. Now, in terms of who
gets assessed for it, it was not entirely clear how that would
work in the Administration's proposal. And there are other
proposals to have the Federal Reserve pay for some of it. So I
don't know how that is all going to shake out. But in terms of
the costs to consumers, I think they would be higher.
Mr. Royce. Thank you, very much.
Thank you, Mr. Chairman.
Mr. Green. [presiding] Mr. Klein is recognized for 5
minutes.
Mr. Klein. Thank you, Mr. Chairman.
And thank you all for your service. Tough responsibilities
right now, but we appreciate you taking this on and sticking
with it. I would like to just approach this in a before, you
know, before all this occurred and what brought us up to this
point, and then currently, what are we doing, and then going
forward? Just the before, very simply, back home where I am
from, and I think around the country, people are upset. They
are anxious. They are frustrated. They know a lot of money went
out, and they don't see it translating into bank loans to them,
or frustrated in dealing with lending capacity. And I think
that--I want to spend a minute on that.
The current, of course, relates to, what do we do right
now? What can we do to get the economy going? And we all
understand it is about liquidity. If we think about the RTC a
number of years ago, ultimately we got through that because
there was access to capital. And whether a building was worth
$1 million and sold for $500,000, there was a market, at some
free enterprise point buyer and seller, and they came through
that. On a going forward basis, a lot of discussion today, and
we do appreciate your recommendations on what is being
proposed. Chairman Frank has a number of suggestions which I
think are worth considering, but we will have those continuing
discussions over the next few weeks.
But what I want to focus on for a few minutes is just an
echo of what you have heard all day today. And that is--I am
from Florida.
Ms. Bair, you have heard my comments before on this, and I
appreciate the opportunity to state it again.
That is the access to capital, the strictness and the
rigidity, if you will, the inflexibility of banks dealing with
existing loans, and defaults based on covenants.
I had somebody come in my office today, he even said I
could use his name, Wayne Cotton from Design Flooring
Distributors in Fort Lauderdale. He had a little over $1
million line of credit, steady as you go, for all these years.
He is a leader in the community on a lot of levels. He has
buildings to back up and everything else. And because his
receivables are down and he is in the building business, if you
will, he does interior work, the bank said, we are calling the
loan. He got a letter. It said, pay up. Here is the date you
have to pay up, and that is it. It is one of our major banks, a
bank that took TARP money. And he is as frustrated as all get
out, as you can only imagine. And to me, the question is this.
Why is it that some of these concepts of borrower capacity, the
individual borrower, personal guarantee, whatever it may be,
the idea of substitute collateral, being able to put other
collateral in place so maybe his receivables and that
commitment is down, but maybe the loan can stay in place if
there is some type of substitute collateral that can be
applied? Why not the principle, and it is not tangible, but the
principle of ``time heals?'' Over time, particularly in real
estate, some of this will return to some point.
We are not getting the banks to consider many of these
principles at all. A little bit of sitting down with common
sense across the table and saying, all right, you have a
problem here, your collateral base is down a little bit, but
maybe if you put near piece of real estate in here that has
this amount of equity in it, we can still make this work
instead of us calling the loan. And there is no ability to
refinance, no ability to find another loan. So can you just
share with me those two or three principles why is it that
can't be integrated or introduced and the examiners consider
that or encourage that kind of behavior with the banks? Start
out with Ms. Bair, if you don't mind.
Ms. Bair. We especially encourage our banks to work with
their individual borrowers and provide flexibilities. These are
individual credit determinations. I don't know the specific
circumstances, obviously, but we do encourage banks to work
with their borrowers. This is a very difficult judgment,
though, for both banks and examiners to be making because we
can't let the banks indefinitely defer loss. If the loan has
gone bad, a bank should recognize it now, not later. There are
those countervailing pressures, and there are critics on the
other side as well. It is a very difficult balance.
But, we have a very clear policy. We have said this
numerous times to our examiners and to our banks. We want them
to work with their borrowers--their commercial borrowers, as
well as their residential borrowers. Even if they have some
credit distress, banks should try to restructure the loan or
provide some relief, rather than just foreclosing or cutting
off the loan. Where that makes sense from a loss mitigation
standpoint, it needs to be appropriately disclosed and
reported. But we absolutely encourage them to work with those
borrowers and show flexibility.
Mr. Klein. And I cannot tell you enough how that is not in
any meaningful sense translating into the local Florida
market--where I am from. I can just speak to my local market in
south Florida. It is just not happening enough. And I am seeing
a little bit of movement, but we have 90 percent of the way to
go. And it is just holding back everything in the economy from
small businesses. SBA loans, we waived the fees. Ninety
percent--if I was in a bank, I would say, wow, that is a good
quality loan. Why aren't banks taking up SBA loans?
Ms. Bair. That I don't know. I have been hearing this. I
heard this during my trip to Las Vegas.
I am actually going to be in Florida in a couple of months,
and I am going to be meeting with some bankers. I am hearing
that small business lending is absolutely key. It is an area
where community banks in particular are the lifeblood for small
businesses. This has been raised with me. I am concerned about
it. I am going to be looking into it more. I can only tell you
what we have done now. We have tried to convey to our banks the
need for flexibility and our support for prudent lending. If
there is more we can do, we want to.
Mr. Klein. Mr. Dugan?
Mr. Dugan. I would agree with everything Chairman Bair
said. I just spent some time with a group of Florida bankers in
a meeting earlier this week and heard some of the same issues.
We do not tell bankers not to make particular loans. A banker
makes a judgment, and I am pretty sure it wouldn't shock you to
know that sometimes the regulators get blamed for loans not
being made when--
Mr. Klein. More from the borrower's side--
Mr. Dugan. We are in a deep recession. Florida is a place
where there has been a lot of trouble with commercial real
estate. I think there has been a risk-preferring posture that
has gone to risk-avoiding, and that is partly due to the
economy and to where people are as much as it is due to
examination policies.
But I quite agree that if the borrower can show ways that
they can repay the loan, then that is something we encourage
our people to work with. But I do have to caution you that time
does not always make things better; sometimes time makes things
worse. And we get, as Chairman Bair said, quite criticized, and
our resolution costs go up. Our Inspectors General fault us for
not acting swiftly enough. You mentioned the RTC; that was all
after-the-fact, postclosure stuff, where all that stuff ran
through it. So it is a complicated balance. We strive hard to
do it. We hear you. We will keep at it.
Ms. Waters. [presiding] Mr. Bachus.
Mr. Bachus. Thank you.
One thing that we have not--I don't think has come up is
the effect of the unregulated subprime affiliates of depository
institutions, and I know, Comptroller Dugan, you--at one time,
the OCC issued a list of how many of the subprime lenders that
failed actually were not regulated by either Federal or State
regulators. Would you like to comment on that and the effect
that has?
Mr. Dugan. I don't think there is any serious question that
the overwhelming proportion of subprime loans that have caused
the worst problems, the highest foreclosure rates were in
nonbanks; that is, entities that were not regulated by banking
regulators. And we have data, and we--
Mr. Bachus. It was very impressive.
Mr. Dugan. We will be providing some additional statistics.
If you look at the worst foreclosure rates in the worst cities,
it was not from the regulated institutions. It is the flip side
of people who think that the CRA has caused the problems, which
is only done in banks, CRA lending, and the data just does not
show it. And it is why we believe having a rulewriter that can
write rules that apply the same to banks as well as nonbanks,
and why the importance of having new Federal attention being
paid to nonbanks to bring their compliance level up to the
level of banks is so important. That is the powerful part of
the idea behind a CFPA.
Mr. Bachus. And I am not sure it has to be done through
that agency. It could simply be that the existing agencies
could take responsibility. But someone ought to be regulating
that market. And we have passed registration for mortgage
originators. But does anyone else want to comment on that?
Mr. Smith. I do think the money for those loans had to come
from somewhere. Most of the originators weren't banks
themselves, they weren't mortgage lenders themselves, they were
funded by somebody, so I am interested in those statistics.
I do think the power of the CFPA is exactly what the
Comptroller says, which is it will apply to everybody across-
the-board in the same way the SAFE Act promises to apply
regulation, license your kind of regulation across-the-board as
well.
Mr. Bachus. But if you had underwriting standards, and you
said, we are going to regulate underwriting standards, you
could--
Mr. Smith. Whoever was providing the money--someone
provided financing to these alleged unregulated subprime
originators.
Mr. Bachus. I understand that, but I think even banks--and
one of the problems was not only were they unregulated subprime
lenders, but they were also--the depository institutions
purchased them. And it was actually Wachovia who did that, Bank
of America, Merrill Lynch. You could go on and on.
Mr. Smith. Somehow the regulated institutions filled with
Ph.D.s and so forth were fooled by the people I did deal with,
because I do regulate the mortgage market, many of whom hadn't
completed high school.
Mr. Bachus. Right. Also regional banks. We had regional
banks that did not do the subprime business because they
couldn't originate them, and they didn't buy affiliates who
did. And because of that, they were shut out of the mortgage
business, and they went into a concentration of real estate.
And now they are commercial real estate, and now that is their
problem. But it was a problem over here that actually created
that problem.
Mr. Bowman, the House Republicans have proposed the most
sweeping consolidation of regulators under one regulator with
different charters, which is a different approach. I do want to
say this, and I want to acknowledge your testimony. I think you
do make--your argument has merit that you are really not
addressing the arbitrage when you just go from 54 to 53,
although I guess you could make the argument that you--but it
certainly is--I think you do make--your argument has merit.
One thing you say here that I think has--I have not heard
before, but I think it is something that should be pointed out,
the OTS did not regulate the largest banks that failed. The OTS
regulated the largest banks that were allowed to fail, and that
is one distinction. There were other, much larger institutions
that were not allowed to fail. And I do think that there are--
your argument at least--I think it deserves consideration.
Mr. Bowman. Congressman, thank you.
I would like to add that in terms of the concept of
arbitrage in general, we also do not believe that financial
institutions, depository institutions and their holding
companies go out and select a regulator, be it a State
regulator or one of the Federal regulators, based upon what
they hope to be a series of less than vigorous enforcement
supervision. We just don't think that happens. We think it is
an argument that doesn't hold a lot of water at the end of the
day.
Mr. Bachus. All right. And you do get facts and figures--
you had people moving from the OTS to the OCC. You had them
moving. And they can also move from State to State, which you
pointed out.
Mr. Bowman. That is exactly right.
Mr. Bachus. So I do think that you make a good point, and I
think it is something that as we move forward, we--and as we
try to decide that. The OTS has been to a certain extent, I
think, maybe the sacrificial lamb in all that, I think.
Mr. Bowman. Thank you.
Mr. Bachus. And then there are other arguments that you
made that I am not sure that most Members, including me, have
considered, and that is many of the members were concentrating
not only in real estate, which obviously was a major problem,
but were also concentrating in California, those institutions
that failed. And that was just as Atlanta--the other earlier
conversations--Atlanta was a boom area, and your institutions
happened to be in those areas that went up very fast and came
down very fast.
Ms. Waters. Thank you very much, Mr. Bachus.
I will recognize myself for 5 minutes. Let me thank our
panelists for being here today. Thank you for your patience.
I would like very much to talk about the Consumer Finance
Protection Agency, and I would also like to talk about the
plight of small banks and regional banks, but I don't have
enough time to do so. So I have decided that I am going to
spend some time talking about the plight of minority banks, and
before I do that, let the record show that my husband is an
investor in a minority institution, and also let me disclose
for the record that our broker, Merrill Lynch, has been taken
over by a systemically important bank, the Bank of America. So
I guess I better disclose that also.
Now, having said that, the OTS and the FDIC are required to
provide assistance to minority-owned banks under section 308 of
FIRREA. The law requires banking regulators to preserve the
present number of minority banks; preserve the minority
character--or preserve the minority character of these banks in
cases involving mergers or acquisitions of minority banks;
provide technical assistance to prevent the insolvency of
institutions that are not currently insolvent; promote and
encourage the creation of new minority banks; and provide the
training, technical assistance and education programs.
The Federal Reserve and the OCC are not statutorily
required to assist minority-owned banks, but you do have
policies and programs to assist minority-owned banks. This
appears to me to be opportunities that may be missed. Given
what I have just read, what I have just indicated, I don't
understand what you do to assist minority-owned banks in the
ways that are described by law. And I would like to ask each of
you if you could tell me if this is an area that perhaps you
would just like to improve, if you haven't done a lot, or that
you have done a lot, and I just don't know about it.
I will start with Ms. Sheila Bair.
Ms. Bair. We have an annual conference for minority
depository institutions. We bring together technical experts
and sources of capital investment, regulators speak, and we
provide technical assistance. We have a program at Historically
Black Colleges to help train bank management and to support
careers with minority depository institutions.
In terms of a resolution function, again, the resolution
process is governed by Prompt Corrective Action, which is
triggered by capital levels at banks, and is a very strict
process. There is not a lot of flexibility there.
Ms. Waters. What do you do to promote and encourage the
creation of new minority banks?
Ms. Bair. We don't charter banks, but as part of the
deposit insurance application process, we would weigh heavily
in the balance of serving unmet needs in particular
communities. We have had a few minority depository institution
(MDI) failures and have actively recruited other MDIs to bid.
We let them know about these situations. Acting Director Bowman
and I personally intervened with Dwelling House in Pittsburgh
to try to stabilize the situation and made some calls, and
unfortunately we couldn't find an MDI acquirer. But it is
something I have a personal interest in and a commitment to.
And certainly if there are other ways we should be addressing
this, I would be open to suggestions.
Ms. Waters. I would like to know--while I am talking with
you, let me talk a little bit about the opportunities that are
being created as you dissolve and take over banks. You have
some way by which you are selling off or asking the management
of assets of those banks. You have other things that you are
doing. Is there anything included in your efforts to include
minority-owned banks in any way?
Ms. Bair. Well, if there is a minority depository
institution that will be closed, our resolution staff will get
on the phone and actively recruit other minority depository
institutions and ask them to review the institution to bid. I
think there were two situations where we had an MDI failure and
were able to sell it to another MDI.
Ms. Waters. What about nonminority-owned banks that are
being taken over? How do you outreach to banks or organizations
that would like to take over failed banks?
Ms. Bair. Well, I personally have had several meetings with
those who have a particular interest in investing in MDIs. As
part of our preresolution marketing process, we actively reach
out to other MDIs to bid on MDIs that are going to fail.
Somewhat related, we also have a good contractor outreach
program. We have a very good record on minority contractors.
Through a variety of outreach tools, we do have a strong
commitment in this area. And again, if there are other things
we can do, I would be open to suggestions.
Ms. Waters. I think I have heard you talk about this
before. This week we have the annual legislative conference of
the Black Caucus in town, and we have money managers and
minorities and financial services, various financial service
organizations, and this is the number one topic because of the
bailout, because of the $700-and-what billion that the citizens
have made available to save the financially--the systemically
important institutions. Minorities are complaining about a lack
of involvement and opportunities across-the-board, from the
Treasury to the FDIC to--you name it, and I just wish we had
something to tell them this weekend.
Ms. Bair. Congresswoman, we do have a good record. I have
gotten a lot of positive feedback on our programs. If there are
individuals who are complaining that they don't think there is
appropriate access or education, I would like to know that,
because I have gotten a lot of good feedback about our
programs, and I think we have a very good story to tell on our
minority contracts. We are happy to give those numbers to you.
Again, if there are other things we can be doing, we are open
to suggestions, but I have gotten a lot of positive feedback on
our outreach efforts.
Mr. Bowman. Congresswoman, if I could also add that we at
the OTS in April of this year put together the Minority
Depository Institution Advisory Committee, which is made up of
12 members, not all of whom are parts of existing minority
depository institutions, but are other members of the
community, including those that may or may not be a source of
financing going forward. We have now met 4 times. We have
discussed many different issues, including the very issues that
you are asking about in terms of assistance: how to bring
minority investors into the system; and how to bring additional
capital that they would bring with them. We have going at the
present time probably three different fairly active discussions
with three groups of minority investors who are interested in
looking at all institutions, not just minority institutions
that are on the verge of failure or possible failure, but other
institutions as well.
Ms. Waters. If I may, there is a constant complaint about
the inability to raise capital with these small and minority-
owned banks. And they say, why can't we go to the Fed, why
can't we be considered just as the systemically important banks
are being considered for capital, for loans? What do you tell
them when you meet with them about access to capital other than
going out and finding private investors? Of course they are
looking for that, and they are simply not looking for it from
minority investors, they are looking for capital, period. What
do you tell them, and how do you assist them in accessing
capital?
Mr. Bowman. I think Chairman Bair referred to an instance
at one of our institutions in Pennsylvania where she and others
worked very hard to assist the minority institution in locating
available capital. Ultimately, for a variety of reasons, it
just was not there.
The availability of capital today for all of our
institutions, except some of the larger ones, is very, very
difficult to come by regardless of who the investor might be or
who the interested parties might be. The ability of any
institution to raise capital continues to be a problem.
Ms. Waters. Well, I guess, again, if I may, what the small
and minority banks are saying is just as the bailout assisted
the big banks, that are ``too-big-to-fail,'' why can't
government come up with a program to assist small and minority-
owned banks? And they remind us that they are not the ones that
had the subprime meltdown, they weren't doing that kind of
lending, yet they stand on the sidelines and they watch as the
very people who caused the problem are assisted because they
are ``too-big-to-fail.''
What can you think about, what possibly could happen for
getting capital for these small and minority-owned banks? What
kind of--would you, for example, be an advocate for assisting
minority-owned banks with bailout money in different ways than
is being done now?
Mr. Bowman. Certainly.
Ms. Waters. Well, why don't you?
Mr. Bowman. We can have some of those conversations with
the people who have the money, which includes Secretary
Geithner and Chairman Bernanke. We can also have conversations
with the Congress who can appropriate money.
Ms. Waters. Well, here is what you can do. You can tell
them that there is a law, FIRREA, that you are charged with
preserving the present number of minority banks, preserving the
minority character of these banks, providing technical
assistance to prevent the insolvency, promote and encourage the
creation of new minority banks, and provide the training,
technical assistance and education; and you can tell them that
this is all smoke and mirrors unless you have access to
capital, and you think that something different ought to be
done. Can we talk about that at some point, how we can assist
these banks?
Ms. Bair. As regulators, we cannot be a source of capital.
The FDIC is specifically prohibited by statute from making
investments in open banks. So I think the TARP program is
probably the most immediately available source if you are
looking for government sources for capital. And certainly we
can continue to do what we can appropriately. We have something
called bank match where private investors who are interested in
investing in smaller banks can go to our Web site.
Ms. Waters. Let me ask you this, Ms. Bair: Is it possible
that when you take over a bank and you have these assets to be
managed, is it possible that some of these small and minority-
owned banks could be a part of managing the assets of the
failed banks? You have to contract it out to somebody, right?
Ms. Bair. Well, we sell the assets. Most of these assets
are sold when the bank fails.
Ms. Waters. You sell them rather than manage them; is that
right?
Ms. Bair. Yes, that is right. So the acquirer will be the
manager. We do have some assets that are harder to manage, and
I believe we do have minority contractors helping with that. I
can get those numbers for you. And we certainly are open to
others who have an interest. I have met with a variety of
groups who have interest. Mickey Collins, who is going to be
talking to your caucus on Friday, has an extensive minority
contractor outreach program. We want to make sure they
understand the door is open, how the process works, the process
of applying, and what opportunities exist.
Ms. Waters. So you are selling the nonperforming assets or
the performing assets of the banks that you take over, and the
minorities who have been applying to purchase assets, I suppose
there have been some, have been able to access those
opportunities at this time?
Ms. Bair. It is a competitive bidding process, so whomever
has the best price wins the bid. But, yes, I can think of at
least two situations where a minority depository institution
has been the successful bidder.
Ms. Waters. Thank you.
Are there any other ideas that you would like to share
that--about how you can carry out FIRREA for the OTS and the
FDIC? Any other ideas that you may have? And for the Federal
Reserve and the OCC that are not statutorily required to
assist, you are attempting to do something, I am told?
Mr. Dugan. Absolutely. And two points. We have a very
active minority outreach technical assistance program that we
take very seriously, and we participate actively in the
conference that the FDIC sponsors each summer. We work with our
minority institutions in a variety of ways, including, where
appropriate, to try to match them up with other investors. For
example, in the post-Katrina situation, we worked to match
minority institutions up with potential investors at that time.
And it is true we are not technically covered by that
provision, but we try to act as if we are. We certainly would
have no objection to being included in the same language. So I
will be happy to provide more details on exactly the types of
things that we have been doing, which, as I said, have been
quite active.
Mr. Bowman. Congresswoman, your question is exactly the
kind of questions we are posing to our Minority Depository
Institution Advisory Committee, asking them for some additional
insight and ideas that might help other minority depository
institutions going forward. And we would be happy to share the
results of some of those discussions with you if you would
like.
Ms. Waters. Okay. I was just--my staff who works on this
just passed me a note about the Temporary Liquidity Program.
That is under what, FDIC?
Ms. Bair. Yes, that is a debt guarantee program and a
transaction account guarantee program.
Ms. Waters. Would you explain to me how you use this
program to guarantee debt? As I understand it, the banks sell
debt and raise capital. How does the program work?
Ms. Bair. We are winding it down actually. It is scheduled
to expire October 31st. This is an emergency program we put in
place early last October after the Lehman situation when the
market was seizing up. It allowed most bank holding companies
and thrift holding companies, for a temporary time period to
issue debt, unsecured debt, that was guaranteed by the FDIC for
a fee. We have collected over $9 billion so far from charging
our guarantee fee. We have had no losses on the debt program.
Also, as part of that, we added a transaction account
guarantee. This was particularly helpful for the smaller banks.
This enables participating banks to cover noninterest-bearing
transaction accounts with unlimited deposit insurance--
insurance without caps. That program will go to June 30th.
Ms. Waters. Should it be extended?
Ms. Bair. We have extended it until June 30th of next year.
It is Congress' call if it should go beyond that. Congress sets
our deposit insurance limits. This is something we did under a
very extraordinary systemic risk procedure, which I am advised
that we don't have the authority to make permanent. But we have
extended it to June 30th of next year, and hopefully we will be
stabilized by then.
Ms. Waters. Is this something we should explore for
assistance to the small and minority-owned banks between now
and June 30th?
Ms. Bair. They have until June 30th of next year. It would
be an open question whether they would feel there was a need
after that. It does cost; obviously we charge a premium for it,
because there are losses associated with that particular
program. But, again, our deposit insurance limits typically are
defined by Congress. We did this in an extraordinary process.
So it really would be Congress' call whether the program
should be extended beyond June 30th. A lot of banks are feeling
that they will be able to exit it and will not need it after
that.
Ms. Waters. Let me just close by saying I know that you
have had a number of seminars around the country. I understand
there was one in Irvine, California, and that you have a
database of minority-owned banks that invited small banks--that
was invited to that conference?
Ms. Bair. Yes.
Ms. Waters. We were not aware of it, and some of our small
banks were not aware of it.
I would like to--at some point in time, would each of you
perhaps meet to talk about how we can perhaps share some
information? And I would like to know more about how your
programs work under FIRREA in particular, who the people are,
how the programs are executed. And perhaps I can visit your
institutions and you can have me talk with your people. They
can talk with me about how they do this, and how it all works,
and perhaps we can see how we can use some of our experiences
to advise you about some possibilities for being more effective
with FIRREA and other programs that are not necessarily under
FIRREA.
With that, thank you very much. The Chair notes that some
members may have additional questions for this panel which they
may wish to submit in writing. Without objection, the hearing
record will remain open for 30 days for members to submit
written questions to these witnesses and to place their
responses in the record.
With that, this hearing is adjourned. Thank you very much.
[Whereupon, at 5:31 p.m., the hearing was adjourned.]
A P P E N D I X
September 23, 2009
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