[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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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

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

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    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.]
















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                           September 23, 2009

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