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





                      PERSPECTIVES ON THE CONSUMER
                      FINANCIAL PROTECTION AGENCY

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 30, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-81




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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 30, 2009...........................................     1
Appendix:
    September 30, 2009...........................................    65

                               WITNESSES
                     Wednesday, September 30, 2009

Bowdler, Janis, Deputy Director, Wealth-Building Policy Project, 
  National Council of La Raza (NCLR).............................    14
Burger, Anna, Secretary-Treasurer, Service Employees 
  International Union (SEIU).....................................    15
Calhoun, Michael, President and Chief Operating Officer, Center 
  for Responsible Lending........................................    10
Himpler, Bill, Executive Vice President, the American Financial 
  Services Association (AFSA)....................................    49
John, David C., Senior Research Fellow, The Heritage Foundation..    12
Menzies, R. Michael S., Sr., President and Chief Executive 
  Officer, Easton Bank and Trust Co., on behalf of the 
  Independent Community Bankers of America (ICBA)................    44
Pincus, Andrew J., Partner, Mayer Brown LLP, on behalf of the 
  U.S. Chamber of Commerce.......................................    45
Shelton, Hilary O., Director, Washington Bureau, National 
  Association for the Advancement of Colored People (NAACP)......     9
Yingling, Edward L., President and Chief Executive Officer, 
  American Bankers Association (ABA).............................    47

                                APPENDIX

Prepared Statements:
    Bowdler, Janis...............................................    66
    Burger, Anna.................................................    74
    Calhoun, Michael.............................................    76
    Himpler, Bill................................................   112
    John, David C................................................   123
    Menzies, R. Michael S., Sr...................................   130
    Pincus, Andrew J.............................................   139
    Shelton, Hilary O............................................   147
    Yingling, Edward L...........................................   151

              Additional Material Submitted for the Record

Written statement of the Credit Union National Association (CUNA)   159
Written statement of the Mortgage Bankers Association (MBA)......   164
Written statement of the National Association of Federal Credit 
  Unions (NAFCU).................................................   197
Written statement of the Network Branded Prepaid Card Association 
  (NBPCA)........................................................   199
Written statement of Professors of Consumer Law and Banking Law..   202
Burger, Anna:
    Additional information provided for the record in response to 
      a question from Representative McHenry.....................   218
    SEIU report..................................................   219

 
                      PERSPECTIVES ON THE CONSUMER
                      FINANCIAL PROTECTION AGENCY

                              ----------                              


                     Wednesday, September 30, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:07 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Waters, Gutierrez, 
Watt, Moore of Kansas, Hinojosa, Clay, Baca, Miller of North 
Carolina, Scott, Green, Cleaver, Bean, Ellison, Wilson, 
Perlmutter, Donnelly, Carson, Speier, Minnick, Adler, Driehaus, 
Kosmas, Himes, Maffei; Bachus, Castle, Royce, Lucas, Manzullo, 
Biggert, Capito, Hensarling, Garrett, McHenry, Campbell, 
Marchant, McCarthy of California, Posey, Jenkins, Lee, Paulsen, 
and Lance.
    The Chairman. The hearing will come to order. I want first 
to welcome some visiting Parliamentarians. We have members of 
the Parliament we are particularly glad to welcome from Kosovo 
and Mongolia, two nations that were not allowed to have elected 
free Parliaments for some time. We are delighted that this 
progress of self-governance has reached them, and we welcome 
them as our guests. Our colleague, the gentleman from North 
Carolina, Mr. Price, Representative David Price, who works on 
behalf of the House Democracy Partnership, has sponsored them.
    Our hearing today is open. We are dealing with the Consumer 
Financial Protection Agency and we will have a couple of 
panels. This is a hearing on a particular legislative draft. It 
is, we will just say preliminarily, the third iteration. The 
Administration had a proposal. I, as a courtesy to them, 
introduced their proposal with some changes, but not a lot. 
Since that time, we have had the benefit of a lot of 
conversation.
    Today's legislation reflects further conversation, but it 
is the starting point, not the endpoint of a markup that will 
occur the week after next. We will be having a hearing, is it 
tomorrow, on derivatives? Is that the hearing? Yes. We will 
have hearings this week on particular pieces of legislation.
    The history was the Administration made some proposals. We 
on our side modified them after a lot of conversation, in the 
case of derivatives, conversation with the Agriculture 
Committee, which shares jurisdiction with us.
    In the week after next, after these two hearings, we will 
be proceeding to markups. We did mark-up and the House passed 
the compensation piece of our approach here.
    So for those who were wondering what was happening, two 
very significant pieces of this will begin the markup process 
on the second week. As to Floor time, the leadership of the 
House is still deciding the form in which these will go to the 
Floor on the timing, but we will begin when we get the next 
markup schedule and we will proceed. And we will have finished 
marking-up, I believe, certainly by early November, probably 
late October, because we are seriously into the markup phase.
    Now, we will begin the hearing today on the Consumer 
Financial Protection Agency. This was a proposal that the 
Administration made that I greatly welcome. Consumer protection 
has been in the hands of the Federal bank regulators, and I 
think it is fair to say that no calluses will be found on the 
hands of those in the Federal bank regulatory agencies who had 
consumer responsibilities, because there is no evidence of any 
particular hard work. The single biggest chunk of that 
authority is with the Federal Reserve.
    I am somewhat interested to see that many members on both 
sides, especially on the Republican side, recently have become 
very critical of the Federal Reserve. There is a consensus that 
we have to restrict the Federal Reserve's power under section 
13(3). There is a consensus that we will increase auditing over 
the Federal Reserve. But there appears to be an exception on 
the part of some of my colleagues.
    The Federal Reserve's lackadaisical record in consumer 
protection does not appear to have engaged the same degree of 
skepticism. Thus, we hear a lot of calls for removing power 
from the Federal Reserve. But when it comes to consumer 
protection, I think they have demonstrably been at their 
weakest. I think they have done a good job in some other areas. 
Somehow that gets left out.
    If this bill passes, and I hope it will, it will take power 
from the Federal Reserve and take funding from the Federal 
Reserve, because we do not think the banks, which have to 
contribute in assessments to various agencies, should be 
charged extra for this. And, in fact, a substantial part of the 
funding for this agency will come from the Federal Reserve. The 
Federal Reserve will be ceding a lot of power that is not used 
very much, and funding will come with it.
    So, again, I would urge people who want to be appropriately 
careful in the evaluation of the Federal Reserve not to leave 
out an area where the Federal Reserve seems to have become 
lazy. Let me just say that it is true that recently the Federal 
Reserve has done some consumer activity. In every case--and I 
mean this quite literally--where the Federal Reserve has in 
recent years done anything for consumer protection, it has done 
so after this committee in particular initiated action.
    There was a long period when the Federal Reserve did 
virtually nothing. In 1994, Congress gave the Federal Reserve, 
under the Home Ownership and Equity Protection Act, the 
authority to regulate mortgages of all kinds, whether they were 
in the banking system or not. Mr. Greenspan consciously and 
deliberately refused to use that. The Federal Reserve had the 
power to promulgate a code of unfair and deceptive practices 
for banks. In fact, in 2004, when the control of the currency--
although it was in the Bush Administration, it was a Clinton 
Administration holdover appointee, Mr. Hawk, promulgated a very 
sweeping preemption that knocked State enforcement entities 
out, and it was criticized largely at the time by, for example, 
Sue Kelly, who was then the Republican Chair of the Oversight 
Committee. One of the problems was that the Federal regulators 
had nothing to put in place of the State consumer protections 
they had abolished.
    And I asked the new Comptroller of the Currency, Mr. Dugan, 
what he was going to do about it. He said, I have this problem; 
the Federal Reserve has the power to promulgate the unfair and 
deceptive practices code, and they haven't done it and won't do 
it. In fact, a Governor, Ned Gramlich, one of the few consumer-
oriented officials at the Fed over the years, tried very hard 
to get Mr. Greenspan to use that power, to use the power under 
the Home ownership and Equity Protection Act, to use that power 
under the statutes giving him those powers.
    Now, the Federal Reserve has since acted only after this 
committee, particularly after 2007--frankly, when the Majority 
changed hands--that we took action. The Federal Reserve took 
action on mortgages after this committee acted. The Federal 
Reserve took action on credit cards after this committee acted.
    Under the leadership--and let me say at this point, I want 
to express the great sorrow and condolences for a member of 
this committee, to one of our most active members, the 
gentlewoman from New York, Mrs. Maloney, who suffered the 
tragic loss of her husband. And to Carolyn Maloney, as she 
grieves, we should just note that it was her initiative on 
credit cards and on overdrafts in both of those cases that led 
to Federal action. So I think the record is very clear and I 
don't say this--this is not a personality defect in the 
regulators, although in Mr. Greenspan's case, I think it was, 
as he has acknowledged, excessive by the ideological rigidity. 
It is the case that if your primary responsibility is the 
safety and soundness of the banking system in administering 
banks and providing the assurance that they live up to the 
fundamental economic statutes, then consumer protection suffers 
very, very deeply. And this bill would remedy that.
    The gentleman from Alabama is now recognized for 3 minutes.
    Mr. Bachus. I thank the chairman. And let me start by 
expressing our heartfelt condolences of all of the Republican 
members to Mrs. Maloney on the passing of her husband, Clifton. 
Our thoughts and our prayers are with her and her family during 
this difficult time.
    And I would also like to join the chairman in expressing 
our greetings to our colleagues from Mongolia and Kosovo. I am 
glad that they are here. Welcome.
    The Chairman. If the gentleman would yield briefly. Stop 
the clock, please. And we will start it over for the gentleman 
so that he has his full 3 minutes. I would just say that I 
apologize to our colleagues from Kosovo and Mongolia. I assume 
that their English is much better than our Serbo-Croatian and 
Mongolian. But I do have to say it is unfair for them to hear 
as their first two spokespeople of the American Congress, 
myself and the gentleman from Alabama. Let me just assure you, 
your ability to understand will go up from here, I say on 
behalf of myself and my colleague.
    The gentleman is now recognized again for 3 minutes.
    Mr. Bachus. Yes, we do have some English speakers who will 
be speaking later on.
    I thank you for having today's hearing, Mr. Chairman, and I 
look forward to hearing the perspectives from our witnesses on 
the merits or possible demerits of creating the Consumer 
Financial Protection Agency. And I think we can do a better job 
of protecting the consumer. I think we all agree on that and we 
should.
    However, the Administration's proposal, I think, is 
conceptually flawed. Since the Treasury Department submitted 
the legislative language to Congress 3 months ago, we have 
heard from a host of community bankers, credit unions, 
accountants, small business owners, and Federal financial 
regulators that this, what could prove to be a massive new 
regulatory bureaucracy, will create more confusion for our 
consumers, more government spending, but, more importantly, 
less innovation and less creation of credit and less consumer 
protection.
    I know some of our witnesses today have said some of that 
credit has been a bad thing, but I think ultimately that choice 
should be left to the individual as long as it is under 
acceptable terms.
    In deference to this widespread public and official 
opposition, I do commend Chairman Frank for releasing, last 
Friday, a new working draft that attempts to narrow the scope 
of an overly broad proposal by the Obama Administration. 
However, I think that what his proposal does is basically 
tinkering around the margins of a fundamentally flawed 
proposal, and it is not a solution. What is needed is an 
entirely different approach.
    The Chairman. That is 3 minutes. If the gentleman wants 
more time, we will--
    Mr. Bachus. No, that is fine.
    The Chairman. It was only 2 minutes? I am sorry. It should 
have been 3 minutes. I apologize. I ask that we start again for 
the gentleman with 3 minutes. I apologize. The gentleman has an 
additional minute.
    Mr. Bachus. Thank you. Fortunately, there are a number of 
alternatives that would achieve the goals of empowering 
consumers and combating abusive practices without limiting 
credit, without imposing excessive compliance and litigation 
costs on small businesses, without creating a new government 
bureaucracy, and without undermining safety and soundness 
regulation.
    For example, the House Republicans have introduced, I 
think, a strong proposal on consumer protection through 
regulatory consolidation, and we would like the witnesses to 
comment on our proposal if they have read it.
    I think this is absolutely the wrong time to create a new 
government agency empowered not only to ration credit, but, 
most importantly--and I don't know that anyone has paid a lot 
of attention to this, other than some of our colleagues and 
some of the regulators--it gives this agency the power to 
design financial products offered to consumers, and that is a 
striking expansion of government's role.
    Every day we hear about struggling families, families with 
good credit histories who are denied credit so that they can 
own a home. And I think this only makes things worse.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman from North Carolina, Mr. Watt, 
for 1 minute.
    Mr. Watt. Thank you, Mr. Chairman. I just--I doubt that 
anybody will get to the end of this process and say that we 
have not had enough discussions or hearings about any aspect of 
this--these proposals that the Administration has sent over.
    There are two parts to this. The regulated entities, the 
ones that say they have had consumer regulation in the past, 
whom we haven't seen much of, are concerned that their existing 
regulators ought to continue to have that authority. But there 
is a whole other set of unregulated entities out there that we 
need to make sure that the Consumer Financial Protection Agency 
is set up to write rules for, examine, enforce rules, in 
addition to figuring out what the relationship should be 
between this new CFPA and the existing regulators.
    So I don't want to lose sight of that and hope we can bring 
some clarity to that as we go forward.
    The Chairman. The gentleman from Delaware, for 1 minute.
    Mr. Castle. Thank you, Mr. Chairman.
    I believe consumers should be protected from deceptive 
practices with regard to financial products. Not only should 
institutions provide adequate disclosures, but consumers should 
also have the basic financial literacy to understand the 
contracts into which they enter.
    For these reasons, I believe consumer protection reform 
must be enacted. However, I do have reservations about the 
Consumer Financial Protection Agency, as proposed.
    First, a majority of the subprime mortgages that 
contributed to the financial crisis originated outside the 
traditional banking sector and were virtually unregulated. As 
currently written, does CFPA focus its resources and scope 
enough on this problem area?
    Second, should we provide existing regulators with checks 
and balances over the CFPA director in the rulemaking process 
if safety and soundness concerns are raised?
    Finally, if part of the goal of this bill is to streamline 
consumer protection laws, why are we eliminating Federal 
preemption, thereby allowing States to go beyond Federal law to 
create a patchwork or further gaps in consumer protection 
rules.
    I hope today's hearing will provide further insight on 
these issues. And I yield back the balance of my time.
    The Chairman. The gentleman from North Carolina, Mr. 
Miller, for 2 minutes. I am sorry, there was a mistake. The 
gentleman from Texas, Mr. Green, for 1 minute.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Chairman, I am in support of a Consumer Financial 
Protection Agency. I think that this is the right time to do 
it. In fact, my suspicion is that if we don't do it now, we may 
not find a right time to do it. I think that there are many 
issues that have to be delved into, and I look forward to it.
    I think the chairman has already demonstrated that he is 
sensitive to a good number of issues. We are no longer having 
the plain vanilla requirement. There are entities that have 
been exempted, and I think that by working through the process, 
we can get to safety and soundness, as well as consumer 
protection. And they are not inconsistent with each other.
    I thank you for the time, Mr. Chairman, and I yield back.
    The Chairman. The gentleman from California, Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman.
    Regulators have discussed at length the problems with 
separating safety and soundness from consumer protection 
regulation. They have talked about the problems that are going 
to arise from this model, even saying it will weaken protection 
for consumers.
    We also know this proposed consumer agency will increase 
costs. Last week, the regulators acknowledged that the ultimate 
cost for funding this agency will fall on consumers. They will 
see the cost of credit go up and the availability of credit go 
down. But the failure of this proposal to adequately preempt 
State laws is equally disconcerting.
    Our architects of this Republic added the commerce clause 
to the Constitution precisely to prevent a fragmented economy. 
They envisioned one national market, not a market where local 
and State governments with conflicting State laws could 
strangle free trade among the States. We have seen the ill 
effects of this type of patchwork regulatory system in our 
insurance market. I think it would be a grave mistake to move 
forward with that failed model for the rest of the financial 
services sector. I yield back, Mr. Chairman.
    The Chairman. The gentleman from Texas for 2 minutes, Mr. 
Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    As I read the bill summary of the new CFPA law, it reminds 
me of a title of one of my favorite Led Zeppelin works, ``The 
Song Remains the Same.''
    If in doubt, read the bill. Section 131(b)(1), 136(a)(1) 
shows that we still have an agency that can outlaw products and 
practices that are determined to be ``unfair,'' ``abusive,'' or 
do not substitute ``fair dealing'' totally in their subjective 
opinion.
    Are subprime loans inherently abusive? Tell that to the 
millions of Americans who have homeownership only because of a 
subprime loan. Are payday loans inherently unfair? Tell that to 
the millions of Americans who use them to avoid an eviction 
notice or prevent the utilities from being shut off.
    What is different? Now a single unelected bureaucrat, as 
opposed to five unelected bureaucrats, will have the power to 
decide whether the Rodriguez family in Mesquite, Texas, can 
obtain a mortgage; whether the King family of Athens, Texas, 
can get a car loan; or whether the Shane family of Kaufman, 
Texas, can even get a credit card to buy their groceries.
    For those who persist in wanting to, by government fiat, 
restrict credit opportunities in the midst of a national credit 
crunch, when that particularly impacts low- and middle-income 
families, the bill is well-designed to achieve those goals.
    What else remains the same? Product approval can still 
trump safety and soundness. Clearly, taxpayers are left out of 
the equation. Preemption remains--multiple standards that add 
cost and uncertainty. Taxing the agency--it still retains the 
power to essentially tax the industry, taxes that are passed on 
to consumers in the form of higher fees and less credit. Plain 
vanilla goes from mandatory to highly, highly suggested.
    The bill supposedly is about consumer protection. The best 
way that we can protect consumers is with competitive markets 
that encourage product innovations, give customers choices, and 
prevent fraud and deception. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Kansas, Mr. Moore, for 2 
minutes.
    Mr. Moore of Kansas. Thank you, Mr. Chairman.
    Last year's financial crisis exposed an out-of-date 
regulatory structure in need of a complete overhaul. The 
proposed Consumer Financial Protection Agency is a key 
component of the proposal to create stronger oversight of our 
financial system. I commend the chairman for the improvements 
he made that revised the draft bill released last week.
    In today's hearing, I hope we will explore some of the more 
difficult questions on CFPA: one, transferring consumer 
protection enforcement away from bank regulators; and two, the 
proper role of States' enforcement of policymaking power in 
relation to the new Federal agency.
    I welcome the chairman's ideas on coordinated exams and a 
dispute resolution mechanism. I hope these and other ideas 
generate a discussion of not if, but how best to implement the 
CFPA to fully protect consumers.
    And I yield back my time. Thank you, sir.
    The Chairman. The gentleman from New Jersey, Mr. Garrett, 
for 2 minutes.
    Mr. Garrett. Thank you, Mr. Chairman, and the ranking 
member, for holding this important hearing today. Last week, 
the chairman circulated a new discussion draft of legislation 
to create a whole new Federal agency to oversee all individuals 
in their financial decisions.
    Now, there are some new provisions in this draft that seek 
to clarify what products and what agencies and entities are 
covered. Most changes really are pretty much cosmetic and 
little more than attempts to make it a little bit more 
politically palatable for some of the concerned Members of the 
other party to pass it.
    This legislation still separates consumer protection from 
safety and soundness regulation, much like Fannie Mae and 
Freddie Mac did. And we all know how that turned out. This 
legislation still creates an uber regulator with essentially no 
bounds or limits on authority. This legislation still limits 
consumer choices and reduces consumer credit. And this 
legislation still does absolutely nothing to address the 
problems that caused our financial collapse. So this 
legislation really hasn't changed that much, and my opinion of 
it really hasn't changed that much either.
    It is simply another example of something taxpayers can't 
afford, simply another example of government overreach, simply 
another example of increasing the power of the Federal 
bureaucrats at the expense of the individuals. It is also 
really another example of the Federal Reserve being held out as 
a personal piggybank, if you will, of the current powers that 
be in Washington, D.C.
    So maybe to some, the idea of creating a whole new entity 
in the Federal bureaucracy, with dubious benefits to society, 
sounds like a political winner, but it is clear that the more 
people concentrate on the consequences of that idea, the less 
likely it will be.
    We really must not push through a bad idea that will limit 
consumer choice and credit availability and encourage and 
increase costly and unnecessary litigation and potentially 
decrease the safety and soundness of our very basic banking 
system in this country.
    Thank you, Mr. Chairman. With that, I yield back.
    The Chairman. The gentleman from Minnesota, Mr. Ellison.
    Mr. Ellison. Thank you, Mr. Chairman.
    One of the most important causes of the financial crisis 
was the complete and utter failure of our system of consumer 
financial protection. The most abusive and predatory lenders 
were not federally regulated, while regulation was overly lax 
for banks and other institutions that were covered.
    To address this problem, we need a new agency dedicated to 
consumer financial protection, a Consumer Financial Protection 
Agency. Of course there are some who would like to keep the 
same regulators on the job and thereby duct-tape together the 
shards of a broken system.
    Anyone who wants to take this bankrupt approach should read 
the Washington Post article from this last Sunday, which I will 
submit for the record, that discussed the Fed's failures to act 
on consumer protection.
    Those failures were so great that even former Fed Chairman 
Alan Greenspan has backtracked and said the Administration's 
proposal is probably the ``right decision'' regarding a 
Consumer Financial Protection Agency. Of course, that initial 
proposal was not perfect, but we will continue to work on it 
over the weeks ahead. I yield back. Thank you.
    The Chairman. The gentleman from Alabama is recognized for 
the final minute.
    Mr. Bachus. I thank the chairman.
    Every day we hear about struggling families, families with 
good credit histories who are denied credit, so they can own a 
home, buy a car, start a business, or send their children to 
college.
    We can protect those consumers and we can do that without 
limiting their options for borrowing, investing, and saving, as 
this proposal would do. We can also do that without putting the 
government in the job of designing financial products, 
something that was never intended. We can better protect 
consumers without imposing new taxes and fees on their 
financial transactions, something the Administration has 
proposed without increasing the cost of borrowing or creating a 
new bureaucracy.
    And finally, Republicans and Democrats can work together to 
find practical solutions that will allow our markets and our 
financial institutions to function effectively, and, at the 
same time, protect consumers.
    Thank you, Mr. Chairman.
    The Chairman. We will now begin with the hearing. All 
witnesses and members will be, if there is no objection, given 
the right to insert into the record any additional materials. 
So no one needs to ask for any special permission. The record 
will be open.
    And in particular, since we are under the 5-minute rule, I 
would advise openness, as you may be given questions which the 
members will ask you to answer in writing. I would ask you to 
give priority to answering those in writing so that we can 
incorporate any such answers into the hearing record.
    We will begin with Hilary Shelton, who is the director of 
the National Association for the Advancement of Colored People, 
the NAACP.

 STATEMENT OF HILARY O. SHELTON, DIRECTOR, WASHINGTON BUREAU, 
  NATIONAL ASSOCIATION FOR THE ADVANCEMENT OF COLORED PEOPLE 
                            (NAACP)

    Mr. Shelton. Thank you, and good morning. Thank you, Mr. 
Chairman, Ranking Member Bachus, and members of the Committee 
on Financial Services for inviting us here today. I appreciate 
the opportunity to share with you the views of the NAACP on the 
creation of a Consumer Financial Protection Agency, or CFPA.
    I would also like to begin by thanking you, Chairman Frank, 
for all you have done, and continue to do, to help all 
Americans obtain access to capital and financial security. In 
fact, NAACP members from across the Nation who were fortunate 
enough to hear your presentation at our Centennial Convention 
in New York this summer are still talking about the need for 
this new agency and its promise to our communities.
    The NAACP is very supportive of the creation of a strong 
and effective CFPA with the protection of civil rights and a 
directive that it seek to eliminate discrimination as a core 
part of its mandate. For too long, racial and ethnic 
minorities, the elderly, and others have been targeted by 
unscrupulous lenders and underserved by traditional financial 
institutions.
    The result of this lack of standard rule and the strict 
enforcement of the rules that we do have has been the financial 
stagnation, and, in too many cases, the economic ruin of 
people's lives, families, and entire communities. When they 
have been engaged, too many regulators have spent too much time 
in recent years asking what is the effect on the financial 
industry, without asking what is the effect on the consumer?
    One result of these misplaced priorities, as we have seen, 
has been an almost complete collapse of not only our Nation's 
economy, but the near ruination of the global financial system 
as well. Examples of financial abuses, targeting racial and 
ethnic minorities abound, especially in the mortgage arena, 
where predatory lenders consistently target certain groups and 
communities, and by abusive credit card companies and 
exploitive payday lenders.
    In my written testimony, I provided the committee with 
numerous examples of studies that conclusively show not only a 
targeting of certain groups by financial services, but also the 
disparate impact this unscrupulous, wealth-stripping behavior 
has had on individuals, families, and, indeed, whole 
communities.
    In the interest of time, I will not go into detail here. 
Suffice it to say that the evidence that racial and ethnic 
minorities have been targeted by abusive financial services is 
strong and conclusive, and their eradication is a top civil 
rights issue of our day.
    As envisioned, the CFPA would provide the government with 
the tools necessary to help all consumers investigate and be 
treated fairly by what is often a confusing and potentially 
ruinous environment. It would support, if not require, 
regulators to become more protective of consumers, and it would 
make civil rights protections more a key element in the 
regulation and oversight of financial services.
    It is also because of the systemic discriminatory and 
abusive lending practices that we were pleased to see a strong 
support of our provisions in the latest draft of CPA's 
legislation that creates an Office of Fair Lending and Equal 
Opportunity and makes the fight against discrimination part of 
the mandate of the new agency.
    These provisions will go a long way towards putting some 
teeth into the laws that are already on the books and to 
protecting consumers, all consumers, as they attempt to 
navigate our Nation's financial services.
    One area where the NAACP would like to see the current CFPA 
proposal strengthened is that we would like to see regulation 
of the Community Reinvestment Act, the CRA, fall under the 
CFPA's jurisdiction. We need to renew, reinvigorate, modernize, 
and expand CRA, and I appreciate the comments of the chairman 
last week when he said that he too is serious about updating 
this important law.
    I would suggest that perhaps in the course of reauthorizing 
CRA, this committee consider putting authority of this 
important law under the newly created and robust CFPA.
    In order to fully address the needs of local communities, 
many of which are represented by the NAACP, the CFPA should be 
able to review and enforce lending laws at that level.
    Mr. Chairman, it is our belief that a strong CFPA will go a 
long way towards addressing the very real needs of enforcement 
and regulation in the financial services arena.
    However, let me make it clear that we have no illusions 
that this new agency will fully address all of the needs and 
shortcomings that continue to plague our communities and, 
indeed, our Nation. We still need strong laws to address many 
of the problems that allow unscrupulous lenders to continue to 
operate.
    Specifically, the NAACP will continue to fight for 
aggressive antipredatory lending laws, as well as curbs on 
abusive payday loans, and real assistance for homeowners facing 
foreclosure.
    In that vein, I look forward to continuing to work with 
you, Mr. Chairman, as well as all the other members of this 
committee, to enact strong legislation to help all Americans 
gain the American dream of economic security.
    Thank you very much. And I look forward to your questions.
    [The prepared statement of Mr. Shelton can be found on page 
147 of the appendix.]
    The Chairman. Next, Michael Calhoun, president and chief 
operating officer of the Center for Responsible Lending.

  STATEMENT OF MICHAEL CALHOUN, PRESIDENT AND CHIEF OPERATING 
            OFFICER, CENTER FOR RESPONSIBLE LENDING

    Mr. Calhoun. Chairman Frank, Ranking Member Bachus, and 
members of the committee, thank you for your work over the last 
year as you have dealt with one of the largest financial crises 
our country has ever faced. Most of the witnesses today, from 
both panels, acknowledge that poor oversight and weak consumer 
protection were major causes of our present crisis.
    The question is how to improve them. And an appropriate 
test is what would have happened over the last 10 years if 
proposed reforms had been in place. The CFPA bill that is 
before this committee would have prevented the worst of what we 
are experiencing now. However, some of the proposals to weaken 
it would have exacerbated the last crisis and would make it 
likely that we will repeat these mistakes in the future. In 
other words, done wrong, we can make things even worse for 
consumers and the whole economy.
    There are four critical things we have to get right. First, 
we need to create an independent agency. As we have learned, if 
financial products are not sound, the markets built on them 
cannot be sound.
    Second, we need to cover products, not labels. We need to 
make sure to prevent the gaps and unlevel rules that 
contributed so much to the current crisis.
    Third, we need to be careful not to insulate abusive 
practices with preemption. This was done over recent years with 
mortgages, credit cards, and debit cards, all with disastrous 
results.
    And fourth, we need to provide effective enforcement. There 
has been case after case in recent years where, when standards 
were enacted but without enforcement, they created an illusion 
of protection that was worse and more dangerous than none at 
all.
    I was struck, Mr. Chairman, by your comments about the 
impact of Mr. Greenspan's approach at the Fed to not enact 
consumer protections. That takes me to what is the core issue I 
want to ask you to focus on, and that is the preemption that 
has been raised. Imagine what would have been the case if Mr. 
Greenspan would have had not only the authority to not act, but 
also the authority to wipe out all State protections and to bar 
all States from stepping in to protect the abuses that we saw.
    We should remember, it was the States who led the way in 
addressing the ability to repay, finding loans that were being 
made repeatedly to customers who had no ability to stay in 
those homes. It was the States who addressed broker kickbacks 
where the brokers received payments to steer people to higher-
priced loans, even though in 2001, HUD took action to actually 
protect those kickbacks. So I think it is also important to 
know the details of the preemption in this bill.
    The sweeping scope of present financial preemption is a 
recent and isolated phenomenon, as the chairman mentioned. In 
2004, the Federal banking agencies took preemption to a whole 
new level as they competed with each other to be attractive to 
the institutions they regulated, who they referred to in 
official documents as their customers.
    The bill makes a return to preemption as it was 5 years ago 
and it relies on you, the Congress, not agencies, to prescribe 
preemption. States still cannot set usury limits for mortgage 
loans, credit cards, or other credit under this bill as it 
currently reads. There are, however, proposals to greatly 
increase preemption beyond current levels and make all rules of 
the CFPA preemptive. This would wipe out State consumer 
protection laws and a wide array of transactions, and weaken 
overall consumer protection.
    If that had been in place over the last year, we would have 
faced an even greater disaster. We would have seen, again, no 
opportunity for States to detect problems and test solutions, 
and no enforcements of State civil rights laws.
    Finally, we need to make sure there is effective 
enforcement for this bill. Looking at the overdraft area, the 
Fed acknowledged, in 2001 and 2004, major problems with 
overdraft loans. It issued best practices that said you should 
not be applying these to debit cards. You should protect people 
from outrageous fees or from repeated fees.
    One bank submitted a request for approval of their 
overdraft program. The OCC refused to give that approval and 
the bank asked, ``Are you going to enforce these guidelines 
against us?'' And the OCC said, ``We will only enforce those 
things that are law. These are not law. Do what you will.''
    Fast forward, 8 years later, $80 billion of overdraft fees 
later. For the American public, we now have proposals that the 
Fed may act.
    We look forward to working with the committee to establish 
an effective CFPA that is enforceable and efficient. Thank you, 
Mr. Chairman.
    [The prepared statement of Mr. Calhoun can be found on page 
76 of the appendix.]
    The Chairman. Next, Mr. David John, who is the senior 
research fellow at the Thomas A. Roe Institute for Economic 
Policy Studies at the Heritage Foundation.

    STATEMENT OF DAVID C. JOHN, SENIOR RESEARCH FELLOW, THE 
                      HERITAGE FOUNDATION

    Mr. John. Thank you for having me. And it is a delight to 
be a part of this panel. I think we all agree on the problem. 
The area that I am going to disagree is the solution. I 
thoroughly agree that consumer regulation has been faulty and 
has been a cause of some, if not all, of the disruptions that 
we faced in the last year. I also agree that the various 
financial regulators have not given the consumer regulation the 
emphasis it needs.
    However, I believe that a far better approach would be to 
coordinate the consumer activities of existing State and 
Federal and financial regulators by creating a coordinating 
council designed to promote equal standards of consumer 
protection, using agencies' existing powers and perhaps 
additional powers passed by the States.
    Critics of the current regulatory system justified the need 
for a CFPA by citing instances where different agencies apply 
different regulatory standards to similar products, or fail to 
apply any standards at all. And they point to unregulated 
entities or products that took advantage of consumers.
    But these are problems that can just as easily be solved by 
a coordinating committee as they can by anything else. The 
council, which would be actually similar to your Consumer 
Financial Protection Oversight Board, in your most recent 
draft, would consist of one representative from each Federal 
agency, regulatory agency, and elected representatives from the 
councils of the various types of the State regulators.
    In addition, it would have a fully participating chairman 
appointed by the President, a board of outside experts who 
would monitor consumer regulatory activities and issue reports 
on that. Staffing would come from within the agencies, except 
for a very small support staff for the chairman and advisors.
    The inclusion of State regulators the council would make 
coverage even more universal than it would be under the 
proposed CFPA. Standards agreed to by the council would also 
apply to insurance companies, which are exempted from the CFPA 
approach, and as States move to license in the unregulated 
mortgage brokers and others who are often responsible for 
abuses in mortgage lending. Instead of a one-size-fits-all 
policy dictated by Washington, States would continue to have 
some flexibility in implementing regulations, subject to the 
oversight of the council and its expert advisors who would 
issue public statements and studies to make sure that consumers 
and legislators were aware of States with poor coverage or 
enforcement. Likewise, poor Federal agencies.
    The failure to act could make loans from State-regulated 
entities in those States that failed to work properly 
ineligible for securitization or sale to investors in other 
States. This approach would preserve State regulation of those 
entities that are currently State-regulated, rather than 
attempting to federalize all aspects of consumer financial 
relationships.
    The council would also include both the SEC and the CFTC, 
thus closing gaps in the CFPA, as proposed, including the 
regulation of retirement savings accounts, which are also 
becoming ever more complex and difficult for consumers to 
understand.
    The council would be responsible for developing broad 
standards for consumer regulation, while leaving the writing 
and enforcement of specific regulations to those agencies with 
responsibilities in that area. This ensures that the 
regulations would take into consideration the operational 
realities of regulated institutions as well as any special 
characteristics of regional markets.
    Another key advantage to the council is that by using 
existing regulators in their current authority, the regulators' 
individual efforts can be better monitored than the results of 
a proposed vast new bureaucracy with vague and almost unlimited 
powers.
    Through proper congressional oversight and reports from the 
new council's expert advisors, Congress and State legislators 
could better pinpoint successes and failures than it could by 
attempting to keep track of the efforts of one massive agency.
    I have proposed--there is a footnote on page 6 that a 
mechanism similar to the Uniform Commercial Code be used to 
recommend policies and specific regulatory and legal language 
to the individual States to ensure that the proper standards 
are kept and met. I believe that this approach would have a 
much better opportunity to solve some of the problems that have 
been raised here, and will be raised here later, than a 
proposed new agency. Thank you.
    [The prepared statement of Mr. John can be found on page 
123 of the appendix.]
    The Chairman. Next, we will hear from Janice Bowdler, who 
is the senior policy analyst at the National Council of La 
Raza.

 STATEMENT OF JANIS BOWDLER, DEPUTY DIRECTOR, WEALTH-BUILDING 
       POLICY PROJECT, NATIONAL COUNCIL OF LA RAZA (NCLR)

    Ms. Bowdler. Good morning. Thank you. I would like to thank 
Chairman Frank and Ranking Member Bachus for inviting NCLR to 
share perspective on this issue. Latino families have been 
particularly hard hit by the implosion of our credit markets. 
Lax oversight allowed deceptive practices to run rampant, 
driving Latino families into risky products and ultimately 
cyclical debt. In fact, Federal regulators routinely missed 
opportunities to correct the worst practices.
    Congress must plug holes in a broken financial system that 
allowed household wealth to evaporate and debt to skyrocket.
    Today, I will describe the chief ways our current 
regulatory system falls short, and I will follow with a few 
comments on the CFPA. Most Americans share a fundamental goal 
of achieving economic security they can share with their 
children. To do so, they rely on financial products--mortgages, 
credit cards, car loans, insurance, and retirement accounts. 
Unfortunately, market forces have created real barriers to 
accessing the most favorable products, even when families are 
well-qualified.
    Subprime creditors frequently targeted minority communities 
as fertile ground for expansion. Subprime lending often served 
as a replacement of prime credit, rather than a complement. 
With much of the damage coming at the hands of underregulated 
entities, gaming of the system became widespread. Despite the 
evidence, Federal regulators failed to act.
    This inaction hurt the Latino community in three distinct 
ways. Access to prime products was restricted, even when 
borrowers had good credit and high incomes. This most often 
occurred because short-term profits were prioritized over long-
term gains. Lenders actually steered borrowers into costly and 
risky loans, because that is what earned the highest profits. 
Disparate impact trends were not acted upon.
    Numerous reports have documented this trend. In fact, a 
study conducted by HUD in 2000 found that high-income African 
Americans, living in predominantly black neighborhoods, were 3 
times more likely to receive subprime home loans than low-
income white borrowers. Regulators failed to act, even when 
Federal reports made the case.
    And shopping for credit is nearly impossible. Financial 
products have become increasingly complex, and many consumers 
lack reliable information. Many chose to pay a broker to help 
them shop. Meanwhile, those brokers have little or no legal or 
ethical obligation to actually work on behalf of the borrower. 
Regulators dragged their feet on reforms that could have 
improved shopping opportunities.
    If our goal is to truly avoid the bad outcomes in the 
future, the high rates of foreclosure and household debt, 
little or no savings and the erosion of wealth, we have to 
change the Federal oversight system. Lawmakers must ensure that 
borrowers have the opportunity to bank and borrow at fair and 
affordable terms.
    We need greater accountability and the ability to spot 
damaging trends before they escalate. Some have argued that it 
is the borrower's responsibility to look out for deception. 
However, it is unreasonable to expect the average family to 
regulate the market and in effect to do what the Federal 
Reserve did not.
    The proposed CFPA is a strong vehicle that could plug the 
gaps in our regulatory scheme. In particular, we commend the 
committee for including enforcement of fair lending laws in the 
mission of the agency. This, along with the creation of the 
Office of Fair Lending and Equal Opportunity, will ensure that 
the agency also investigates harmful trends in minority 
communities. This is a critical addition that will help Latino 
families.
    We also applaud the committee for granting the CFPA strong 
rule-writing authority. This capability is fundamental to 
achieving its mission.
    Also, we were pleased to see that stronger laws are not 
preempted. This will ensure that no one loses protection as a 
result of CFPA action. As the committee moves forward, these 
provisions should not be weakened.
    And I will close just by offering a few recommendations of 
where we think it could be strengthened. A major goal of CFPA 
should be to improve access to simple prime products. Obtaining 
the most favorable credit terms for which you qualify is 
important to building wealth. This includes fostering product 
innovation to meet the needs of underserved communities.
    We need to eliminate loopholes for those that broker 
financing, and for credit bureaus. Real estate agents, brokers, 
auto dealers, and credit bureaus should not escape greater 
accountability. And we need to reinstate a community-level 
assessment. Without it, good products may be developed but will 
remain unavailable in entire neighborhoods. Including CRA in 
the CFPA will give the agency the authority necessary to make 
such an assessment.
    Thank you. And I would be happy to answer any questions.
    [The prepared statement of Ms. Bowdler can be found on page 
66 of the appendix.]
    Ms. Waters. [presiding] Ms. Burger is recognized for 5 
minutes.

    STATEMENT OF ANNA BURGER, SECRETARY-TREASURER, SERVICE 
              EMPLOYEES INTERNATIONAL UNION (SEIU)

    Ms. Burger. On behalf of the 2.1 million members of SEIU 
and as a coalition member of the Americans for Financial 
Reform, I want to thank Chairman Frank, Ranking Member Bachus, 
and the committee members for their continued work to reform 
our broken financial system.
    It has been a year since the financial world collapsed, 
showing us that the action of a few greedy players on Wall 
Street can take down the entire global economy. As we continue 
to dig out of this crisis, we have an historic opportunity and 
a responsibility to reform the causes of our continued 
financial instability, and protect consumers from harmful and 
often predatory practices employed by banks to rake in billions 
and drive consumers into debt.
    The nurses, the childcare providers, janitors, and other 
members of SEIU continue to experience the devastating effects 
of the financial crisis firsthand. Our members and their 
families are losing their jobs, homes, health care coverage, 
and retirement savings.
    As State and local governments face record budget crises, 
public employees are losing their jobs and communities are 
losing vital services. And we see companies forced to shut 
their doors as banks refuse to expand lending and call on lines 
of credit.
    At the same time, banks and credit card companies continue 
to raise fees and interest rates and refuse to modify mortgages 
and other loans. We know the cause of our current economic 
crisis. Wall Street, big banks, and corporate CEOs created 
exotic financial deals, and took on too much risk and debt in 
search of outrageous bonuses, fees, and unsustainable returns. 
The deals collapsed and taxpayers stepped in to bail them out.
    According to a recent report released by SEIU, once all 
crisis-related programs are factored in, taxpayers will be on 
the hook for up to $17.9 trillion. And I would like to submit 
the report for the record.
    The proliferation of inappropriate and unsustainable 
lending practices that has sent our economy into a tailspin 
could and should have been prevented. The regulators' failure 
to act, despite abundance of evidence of the need, highlights 
the inadequacies of our current regulatory system in which none 
of the many financial regulators regard consumer protection as 
a priority.
    We strongly support the creation of a single Consumer 
Financial Protection Agency to consolidate authority in one 
place, with the sole mission of watching out for consumers 
across all financial services.
    I want to thank Chairman Frank for his work to strengthen 
the Proposed Consumer Financial Protection Agency language, 
particularly the strong whistle-blower protections.
    We believe to be successful, the CFPA legislation must 
include a scope that includes all consumer financial products 
and services; sovereign rulemaking and primary enforcement 
authority; independent examination authority; Federal rules 
that function as a floor, not a ceiling; the Community and 
Reinvestment Act funding that is stable and does not undermine 
the agency's independence from the industry; and strong 
whistle-blower and compensation protections.
    We believe independence, consolidated authority, and 
adequate power to stop unfair, deceptive, and abusive practices 
are key features to enable the CFPA to serve as a building 
block of comprehensive financial reforms.
    Over the past year, we have also heard directly from 
frontline financial service workers about their working 
conditions and industry practices. We know from our 
conversations that existing industry practices incentivize 
frontline financial workers to push unneeded and often harmful 
financial products on consumers.
    We need to ban the use of commissions and quotas that 
incentivize rank-and-file personnel to act against the interest 
of consumers in order to make ends meet or simply keep their 
job.
    The CFPA is an agency that can create this industry change. 
Imagine if these workers were able to speak out about practices 
they thought were deceptive and hurting consumers, the mortgage 
broker forced to meet a certain quota of subprime mortgages, or 
the credit card call center worker forced to encourage 
Americans to take on debt that they cannot afford and then they 
threaten and harass them when they can no longer make their 
payments, or the personal banker forced to open up accounts of 
people without their knowledge.
    Including protection and a voice for bank workers will help 
rebuild our economy today and ensure our financial systems 
remain stable in the future.
    Thank you for the opportunity to speak this morning. The 
American people are counting on this committee to hold 
financial firms accountable and put in place regulations that 
prevent crises in the future. Thank you.
    Ms. Waters. Thank you very much.
    [The prepared statement of Ms. Burger can be found on page 
74 of the appendix.]
    Ms. Waters. I will recognize myself for 5 minutes. And I 
would like to address a question to Mr. David C. John, senior 
research follow, Thomas A. Roe Institute for Economic Policy 
Studies, The Heritage Foundation.
    I thank you for participating and for the recommendation 
that you have given, an alternative to the Consumer Financial 
Protection Agency. You speak of the consumer protection agency 
as a huge bureaucracy that would be set up, that would harm 
consumers, rather than help consumers, and you talk about your 
council as a better way to approach this with lots of 
coordination and outside input.
    It sounds as if you are kind of rearranging the chairs. 
Basically, what you want to do is leave the same regulatory 
agencies in place who had responsibility for consumer 
protection but did not exercise that responsibility. Why should 
the American public trust that, given this meltdown that we 
have had, this crisis that has been created, that the same 
people who had the responsibility are now going to see the 
light and they are going to do a better job than starting anew 
with an agency whose direct responsibility is consumer 
protection?
    Mr. John. Well, Madam Chairwoman, when you establish a new 
agency of this type, the first thing you are going to do is to 
move numbers of people into a new agency. You are going to 
disrupt existing patterns of activity, you are going to find 
yourself with people who are supposedly regulating. But the 
reality is, they are far more concerned about finding things 
like where their desk is and who their new reporting 
relationship is, and etc., etc.
    What I am proposing is very simple. As the chairman pointed 
out, when Congress has moved the regulators and indicated to 
the regulators that they have not met their responsibilities, 
they have done a fairly good job at coming up with alternate 
proposals and actually doing their job.
    Now, I would suggest that the coordinating council that I 
propose actually will serve the same purpose on a continuous 
basis. It keeps the regulators, the individual regulators in 
place, and I think it is very key that the consumer regulators 
have a good idea of what is going on within the financial 
institution that they regulate.
    Regulating a bank is vastly different than regulating a 
credit union, which is vastly different than regulating a 
securities house, etc., etc.
    Moving everyone into one--under one roof doesn't 
necessarily improve the coordination or improve the activity. 
It just changes things.
    Ms. Waters. Well, if I may, we just heard testimony about 
some of the abuses that really do need to be attended to. In 
this meltdown and this economic crisis that we have, as it was 
pointed out by one of our presenters here today, certain 
communities were targeted. I think it was pointed out by Ms. 
Bowdler, senior policy analyst, National Council of La Raza. 
Ms. Bowdler, do you think that these communities that have been 
targeted, who are suffering still today with foreclosures, who 
have been paying too high interest rates, were the recipients 
of predatory loans, do you think they would be satisfied with a 
coordinating council rather than a consumer protection agency?
    Ms. Bowdler. No, I don't think that more of the same is 
going to get us the results that we want. I think what we need 
is a better way to connect families to the products that they 
actually qualify for, which means developing new products in 
some cases, but it also means getting the good guys into our 
neighborhoods and making sure that they are actually competing 
for the business of our families, which they haven't been 
doing.
    Ms. Waters. Thank you very much.
    Mr. Castle, for 5 minutes.
    Mr. Castle. Thank you, Madam Chairwoman. Just this one 
little bit aside from all this, I have always felt this was a 
two-way street, and I think all you made some pretty good 
points, but I also am very concerned about the consumers and 
what they know and don't know. And this is not just a subject 
of this committee, it is in another committee I serve on, the 
Committee on Education and Labor, but I think that we need to 
do a lot more financial literacy.
    I have heard from your testimony that there are many people 
who would have been qualified for prime loans and didn't get 
them because somebody sold them something or whatever it may 
be. But the bottom line is, if people have knowledge about what 
they are negotiating for, those problems would be not 
eliminated obviously, but could be reduced greatly. And I think 
we need to stress that as we go forward in dealing with this 
problem, which I consider to be a great problem.
    I also, for the first time in my office, am starting to 
hear complaints about people not being able to get credit 
cards. And I worry sometimes about when we do these things 
there is a negative side to it that we have not contemplated 
and we need to be careful as we make changes. So I just point 
those things out as we go forward.
    I happen to agree with Mr. John with respect to the 
council, I don't think it is more of the same, I think it is 
probably the way to go. But I want to ask the question based on 
that, if there is a Director of CFPA who had the exclusive 
authority to promulgate the consumer protection rules, and on 
that particular CFPA we would have the existing regulators who 
are able to advise a Director but there is no formal 
consultation process or requirements for the regulators to have 
a say in the rulemaking process, should we consider providing 
existing regulators with some kind of check and balance, or 
checks and balances, or veto power over the CFPA Director in 
the rulemaking process of safety and soundness concerns are 
raised for example.
    That is an area I don't think we can ignore. I throw that 
out to whomever wishes to take a stab at it. Mr. Calhoun?
    Mr. Calhoun. Yes, if I may respond on two counts. One it 
seems to me if we were starting from scratch, and that might be 
a good place to think about here, it is hard to see that five 
separate consumer protection agencies are less government than 
one combined one. And in terms of the council, we tried a 
version of that over the last few years, the agencies did issue 
joint guidance. And it proved to not be a workable process.
    For example, looking at subprime loans, despite all the 
requests from this committee and all the reports of problems in 
subprime lending, it was not until July 2008 that the joint 
agencies finally issued guidance on subprime loans, and then it 
was unenforceable. They issued guidance 10 months earlier on 
alternative loans and overlooked subprime loans. And the 
problem with the council was it became the least common 
denominator, there were holdouts.
    Mr. Perlmutter. Can you pull your microphone closer, 
please?
    The Chairman. There is a conversation going on in the back 
of the room that will stop and people will leave. People will 
not stand and have conversations while we are having a hearing.
    Mr. Castle. I was a little worried the chairman didn't like 
my question.
    Mr. Calhoun. Or my answer.
    Mr. Castle. My concern though is should they be in the room 
on the questions of safety and that kind of thing. That is what 
they are responsible for and I am concerned that decisions 
could be made by a council that could be disrupting to the 
overall balance of the financial systems in this country.
    Mr. Calhoun. We supported the addition of the oversight 
board that is in the current draft and the requirement for 
consultation and for transparency to make sure that happens.
    Mr. Castle. Mr. John?
    Mr. John. I agree actually that the existing regulators and 
especially the prudential regulators who have a much better 
idea of what is going on within their particular industry, 
especially if you create some siloed outside CFPA, must have a 
very strong input and not just an advisory input but the 
ability to call a halt if absolutely necessary. We have already 
seen in a number of cases where regulators have left, shall we 
say, the realm of reality.
    Now let me also respond to Mr. Calhoun. What I am proposing 
actually doesn't exist. What exists at the moment is just an 
informal agreement. What I am talking about is a formal 
structure with a formal chairman, a formal staff, a formal 
group of advisers who would have specific responsibilities and 
would hopefully meet some of the problems that we have had so 
far.
    Mr. Castle. I am not going to have time for another 
question, but I will throw out a couple of thoughts in the 
remaining seconds I have. I am concerned that the legislation 
as currently drafted is not focused enough on the products and 
services that contributed to the financial crisis and perhaps 
in terms of its reach. I am not an expert in all the details of 
it, but that does concern me.
    I have heard some of you mention preemption in what you 
are--I am also concerned about the confusion that eliminating 
preemption could bring into a system in terms of getting 
products out and is that going to end up being positive or 
negative.
    So these are things that I intend to continue to keep my 
eye on. I yield back the balance of my time.
    The Chairman. I will begin with Mr. John, and to clarify 
what you said, what you are talking about then would be not the 
existing informal arrangement but in effect a new agency with 
staff?
    Mr. John. Yes. What I am talking about, it is not a new 
agency, it is a new coordinating council of the--
    The Chairman. Well, would it have staff?
    Mr. John. Yes.
    The Chairman. Would it have new legal authority?
    Mr. John. I beg your pardon?
    The Chairman. Would it have new legal authority?
    Mr. John. It would have the authority to issue--
    The Chairman. Would it have legal authority that does not 
now exist?
    Mr. John. It would have limited authority.
    The Chairman. But it would have some authority. Well, the 
point I am making is it is another new agency, so the question 
is we seem to be agreed that we need a new agency with staff 
and with new statutory powers, correct?
    Mr. John. Well, my agent--what I am proposing--
    The Chairman. Does it have new staff and new statutory 
powers?
    Mr. John. It would have very small staff and work as FFIEC 
does. Mainly using--
    The Chairman. It would have a staff.
    Mr. John. --assisting staff, yes.
    The Chairman. And would it have additional statutory 
powers?
    Mr. John. It would have a very limited statutory authority.
    The Chairman. It will be taking people from the existing 
agencies. So again I just am struck that you are proposing a 
new agency.
    I am sorry, there appears to be a problem with the clock 
here. I don't see how I could be a minute-and-a-half over 
already. I am sorry?
    I apologize. Mr. Castle, I am sorry, time expired and I 
began. So then I used a minute-and-a-half, so give me 3\1/2\ 
minutes.
    The next question I do have is about preemption, and the 
argument is that if we do not have a total preemption of the 
sort that the Comptroller and the head of the Office of Thrift 
Supervision promulgated in 2004 we would have total chaos or 
serious confusion.
    Mr. John, in the period before that much broader preemption 
went into effect in 2004, have you documented serious problems 
with conflicting mandates? Because it wasn't until 2004 that 
the Comptroller of the Currency and head of the Office of 
Thrift Supervision engaged in field preemption. Previously, 
there was case-by-case preemption. In the period before that--
and they also blocked visitorial authority. Have you any 
studies of serious confusion in the pre-2004 period?
    Mr. John. I have not done any studies on that.
    The Chairman. Are you aware of any that anybody has done?
    Mr. John. I am not aware of any. However, I would point out 
in many cases it was after 2004 that, for instance, San 
Francisco and various others entities starting looking at ATM 
fees.
    The Chairman. I understand that, but of course the point 
was even before 2004, the bank regulators had the authority 
case-by-case to preempt any of those.
    Mr. John. Yes.
    The Chairman. And I think that helps make the case as well. 
In the pre-2004 period, it seems to me people who tell us we 
have to maintain the field preemption exclusion of regulators 
from the States being involved that came in 2004 have some 
burden to show us that there was serious problems before that. 
And frankly, I think the absence of any evidence is a pretty 
good sign that was not the case. The standard before 2004 was 
that if there were conflicting things that the national 
regulators thought were a problem, they could preempt them 
case-by-case and we could still have other forms of preemption.
    Second, I did want to talk about Mr. Castle's point that we 
were not dealing with the causes. This committee passed and 
this House passed, in a more partisan voice than I wish, very 
severe restrictions on subprime mortgages. So we have already 
done that. And as I have previously mentioned to him, we plan 
to incorporate them. I know he likes to forget that. But the 
fact is, over the objection of most people on the Republican 
side who said we were restricting credit unduly to low-income 
people, we passed very specific legislation which would 
restrict subprime mortgages and administering that would be 
part of the charter of this organization. It would also deal 
with other nonbank entities.
    Look, I think we should be very clear. If only banks had 
been involved in the financial lending business, we would not 
be in the situation we are in. We would not have had the 
subprime mortgage problem. There are abuses with check cashing, 
there are some abuses in payday lending, so this is not an 
anti-bank entity at all. Indeed, I think much of what this 
entity will do will be to enforce on nonbanks the rules that 
have guided banks, particularly the community banks. That 
doesn't mean there have been no bank problems. There have been 
some, but I don't know why the gentleman from Delaware keeps 
arguing that we are leaving these other things out. They will 
be very explicitly covering nonbank competitors of the banks, 
and I think that will be enhanced.
    On another point, though, I do agree with him--the 
gentleman from Texas, Mr. Hinojosa, the gentlewoman from New 
York, Mrs. McCarthy, and the gentlewoman from Illinois, Ms. 
Biggert, have been working together on financial literacy. We 
have had trouble figuring how to deal with this 
institutionally. One of the things that we expect to be a major 
part of this new agency is a significant emphasis on financial 
literacy, I think there is broad agreement. As I said, I think 
the gentlewoman from Illinois has been a part of that.
    I now recognize Mrs. Capito.
    Mrs. Capito. Thank you, Mr. Chairman. I would like to thank 
the panel. Mr. Shelton, I would like to ask you a question. I 
am concerned, I live in a more rural area, where we really are 
community bankers and our local lenders are the ones who are 
face-to-face with constituents every day. And they have voiced 
concerns about this because of--concerns of losing the 
flexibility that they believe, and I believe they do as well, 
offer at the local level to be able to forge financial products 
that meet an individual situation more on a case-by-case kind 
of situation. So I want to get to the issue of choice and 
choice of financial products, and I am wondering if you have 
any concerns since really the not so implicit premise of this 
is that consumers, some of them are simply not sophisticated 
enough or knowledgeable enough to invest in certain products or 
have certain products offered to them. Do you have any concerns 
that this might lead to some more insidious kind of redlining 
where there is a double standard or even one standard that only 
could be applicable maybe to a more sophisticated or wealthier 
borrower?
    Mr. Shelton. No, not at all. The biggest problem right now 
is first the lack of access of capital in the communities you 
are talking about. Some of the biggest challenges we have are 
issues not clearly covered by this bill, are issues very much 
like payday lending, some of those concerns. Too often in the 
communities that we serve there are so few legitimate financial 
lending institutions available that they find themselves being 
victimized by 456 percent APR when they go to, for instance, a 
payday lending facility in the local community. So the idea is 
to make sure: one, there is capital available in those 
communities; two, it is done in a fair way; and three, there is 
oversight to make sure the same consumers you are talking about 
don't get taken advantage of in the process.
    What we saw happening as we saw the economic downturn is 
very well, even with the policies and oversight available to us 
now, there are many consumers who are actually led into 
products that they could not sustain. And we want to make sure 
there is oversight and transparency there as well. Brokers sat 
down with racial and ethnic minorities, sat down with the 
elderly and very well discussed products that they did not get 
full disclosure on how those products would actually function. 
As a result, tragedy occurred. There are many Americans who 
owned their own homes that went to refinance. For instance, 
elderly to buy new storm windows to address issues of climate 
change, or new roofs to address leakage of an aging house found 
themselves not only going into debt, but also going into debt 
at a rate they were not aware they would be going into because 
there was not full disclosure or full oversight.
    So we very well argue that we need the products, we need 
the oversight, and we need a clear agency whose primary 
function is to provide some protection of the consumers as we 
enter these very challenging products.
    Mrs. Capito. Mr. John, I would like to give you a chance to 
respond, because I believe you might have a different view on 
what this could do to consumer choice, particularly in the 
level that Mr. Shelton is addressing where they might not have 
a lot of options available and maybe at the lower economic 
scale. If you could--
    Mr. John. I am very concerned, I am one of your 
constituents, I live in Harper's Ferry, and we have a very 
limited selection of financial institutions that are available 
to us in the Eastern Panhandle.
    One of the things we have been very concerned about is the 
fact that when you go into a small lender or something along 
that line or small bank that you--if you are directed only to a 
specific level of products, whether this is by government fiat 
or whether it is by encouragement or anything along that line, 
often people don't have the idea of what they are going to see. 
And we have had situations in--people I know in our communities 
who have been unable to get certain types of products because 
they are just not available, period. And what we do need 
desperately is an additional level of financial literacy, which 
Mr. Castle referred to.
    If our schools taught what is necessary, if we found 
ourselves where new products would be available, for instance, 
some of the credit card products have fewer lower costs, some 
of the mortgage products, not necessarily the ones that sold to 
the people you are representing, have much lower costs than 
some of the traditional products.
    The last thing that needs to happen here, whether it is by 
the council or a regulator, is to find ourselves eliminating or 
reducing incentives for new products and further improvements 
for consumers.
    Mrs. Capito. Thank you. I think my time has expired.
    The Chairman. The gentleman from North Carolina.
    Mr. Watt. Thank you, Mr. Chairman. Let me see if I can 
squeeze three different things into this. Mr. John, first, the 
one thing I did like about what you were talking about is that 
there seemed to be implicit in it a strong support for State 
involvement in this inclusion of State regulators on the 
council--I am on page 3 of your testimony--States would 
continue to have flexibility in implementing regulations. 
Regulation of those entities that are currently State regulated 
would be preserved under your approach.
    I assume that implicit in that is a strong support for the 
proposal insofar as maintaining State standards here, not 
preempting those standards at the Federal level; is that 
correct or am I missing something here?
    Mr. John. I believe that States should have--
    Mr. Watt. I am just asking you, am I correct about that? 
Would you support, all things else aside, you seem to be a 
strong supporter of State involvement, would you support if we 
have a consumer protection agency of some kind, either yours or 
whatever, nonpreemption or preemption of State law?
    Mr. John. No.
    Mr. Watt. Okay. You think we ought to preserve the State 
law and continue to enforce it, right?
    Mr. John. I believe that we need to have the States 
continue to have control over the entities that they have been 
regulating.
    Mr. Watt. All right. Let me then go to Mr. Calhoun. We have 
gotten bogged down into the issue of whether this agency exists 
for and whether some other agencies--the existing regulators 
are going to regulate, continue to regulate consumer issues for 
existing regulated banks, but there is a whole world of 
entities out there that are not existing, regulated banks. Mr. 
Shelton seemed to be saying that he didn't think this applied, 
but I don't think that at all. I think this consumer financial 
protection agency would have full application to check writing, 
payday lenders, the whole range of things that were not under 
Federal regulation.
    Do you see anything in this proposal that would not give 
the CFPA that authority?
    Mr. Calhoun. I think it is in the proposal, and I think the 
recent changes to the bill before the committee make that even 
clearer and that is one of the most critical things. Going back 
if I may say, the problem has been lack of oversight. We have 
had--
    Mr. Watt. I understand that, but you--we need this consumer 
protection agency, even if we resolve this dispute about the 
regulated banks versus nonregulated, we need it for that 
purpose is the point I am trying to make.
    Mr. Calhoun. Yes.
    Mr. Watt. Is that correct?
    Mr. Calhoun. I agree.
    Mr. Watt. Now, the third issue I want to deal with is this 
whole preemption issue. You and I worked through this or tried 
to work through it on the predatory lending front, trying to 
find the appropriate balance about what got preempted and what 
did not get preempted. One approach that I want to sound out on 
you publicly today, and I haven't thought it all the way 
through, is similar to the approach that we used in the 
predatory lending area of actually going through and specifying 
some things that are not preempted, unfair and deceptive, State 
unfair and deceptive trade practices laws, State fraud laws. 
There was a list of them that we came up with. I don't have the 
list in front of me right now, civil rights laws, things that 
we know if a State legislates in, we ought not be preempting 
their standards because quite often a lot of those standards 
are set at the local level; is that correct?
    Mr. Calhoun. Yes.
    Mr. Watt. Would that be an approach that might be an 
acceptable approach for us to start looking at in this context?
    Mr. Calhoun. It is something we certainly would work with 
you on. I think the key point, as the chairman made, is that 
the test up until 2004 was basically the Barnett Bank case of 
1996, and it was that States can't enact laws unless they are 
significantly impaired. And then in 2004, we had regulatory 
competition over who could have the most preemption. Our 
biggest concern, and there is one point I want to make, there 
are proposals out, not just to preserve existing preemption, 
but to use this bill to greatly expand existing preemption by 
making all CFPA rules preemptive. We think that undercuts the 
benefit of the agency.
    Mr. Watt. Thank you, Mr. Chairman. I yield back.
    The Chairman. The gentleman from Texas, Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. Clearly myself and 
a number of people on our side of the aisle continue to be very 
concerned about handing what we view as rather draconian powers 
to an unelected representative to decide upon subjective terms 
what financial products that our fellow citizens can enjoy. 
Clearly, many of you on the panel today don't seem to have that 
same concern.
    I guess my first line of questioning then would be--I have 
heard a number of people talk about unfair and fair, but again 
those are very nebulous and amorphous terms. Mr. Calhoun, I 
believe I heard you say if the CFPA had been in existence a 
number of years ago, we probably would not have had this 
economic turmoil. I for one believe if it had been in effect a 
number of years ago, we probably wouldn't have ATM machines, 
frequent flier miles, and the list goes on.
    But the first question I would have, given that incredible 
draconian powers are being suggested to be transferred to this 
government agency, is what are your views on what is fair and 
unfair? For example, payday lending, is payday lending per se 
unfair, Mr. Shelton? Yes, no, no opinion?
    Mr. Shelton. Well, I do have an opinion. The first part of 
the opinion--
    Mr. Hensarling. I am sorry, you do or do not?
    Mr. Shelton. I have an opinion. My opinion is very well 
that payday lending is absolutely necessary which is why the 
demand is so high. However, payday lending is extremely unfair 
in that the APR if you factor throughout most States ends up 
being astronomical.
    Mr. Hensarling. So I am sorry, it is needed, but it is 
unfair?
    Mr. Shelton. Absolutely, in an unfair way.
    Mr. Hensarling. If it is unfair, it could be outlawed by 
the CFPA so they could outlaw something that is needed.
    Mr. Shelton. Well, outlawing and regulating can be two 
different things. What we are looking for is compliance among 
those to provide--
    Mr. Hensarling. But I assume your association is where the 
proposed statutory language, does it not say that this agency 
would have the power to make these products unlawful, maybe 
they wouldn't? Does it not have the power?
    Mr. Shelton. Sure, sure. Some of the products should be 
made unlawful.
    Mr. Hensarling. Well, let me ask you about that. I come 
from Dallas, Texas, where a $200 Ace Cash Express payday loan 
would carry $60, 76 total finance charge, which would be 30.4 
percent. Is that unfair? If you were advising the CFPA, which I 
believe is going to have some kind of advisory council, would 
you advise them to make this product unlawful?
    Mr. Shelton. If we are talking about an APR of 30 percent? 
Then I would say it should be considered fair.
    Mr. Hensarling. How about 40 percent, 50 percent?
    Mr. Shelton. I think you are running too high, then. I 
think even the Federal Government and this particular committee 
basically set a 36 percent cap on loans for people in the 
military. We think that is a good fair place to begin the 
conversation.
    Mr. Hensarling. Let me ask you this question Ms.--is it 
``Bowdler'' or ``Bowdler?''
    Ms. Bowdler. ``Bowdler.''
    Mr. Hensarling. I am sorry, I will go to you next. I saw 
your hand up.
    Let's talk about credit cards for a moment. This committee 
has moved on legislation, passed into law that sense we will 
prescribe universal default. Now clearly, if one looked in the 
marketplace you could find credit cards that had universal 
default provisions that had lower interest rates than cards 
that didn't carry universal default. Is universal default 
unfair or abusive? And if my facts are correct that one could 
have received a credit card with a lower percentage rate had it 
been in there, is it still unfair and abusive?
    Ms. Bowdler. That is not really the approach that NCLR 
would recommend taking when it comes to those kinds of 
products.
    Mr. Hensarling. Can you pull the microphone a little 
closer?
    Ms. Bowdler. Yes. That is not really the approach we would 
recommend taking. What we recommended in our testimony is that 
we need to spot trends that have disparate impact. So if we 
look at the use of various products and it is having routinely 
a negative affect on our community then what we would rather 
see is that products that have a less disparate impact be 
promoted.
    Mr. Hensarling. So you don't necessarily know whether it 
would be fair or unfair; you would look at its disparate 
impact.
    Previously we have had testimony, I believe probably a few 
years ago, from a representative of the U.S. Hispanic chamber 
who said a large number of their members capitalize small 
businesses with credit cards. And so if the CFPA were to outlaw 
certain credit cards and that led to less capital for small 
businesses which employed fewer Hispanics, would that be of 
concern to you and your organization?
    Ms. Bowdler. Outlawing products--NCLR has never advocated 
for the banning of any products from the market. I understand 
that the CFPA has that power. That is not--again, that is not 
our approach. But what my concern is, is that there are a lot 
of good credit cards, good mortgages, good short-term loans 
that are gathering dust and never see the light of day because 
bad practices actually replace them in the market. So if we can 
get incentives to get those more positive products that 
actually build wealth in small businesses, in modest income 
homes, that is what we want to do.
    The Chairman. The gentleman from Kansas.
    Mr. Moore of Kansas. Thank you, Mr. Chairman.
    Mr. John, on page 4 of your testimony, you say the CFPA 
proposed list was filled with poorly considered departures from 
existing law and practices that are as likely to damage 
consumers' interest has improved them. You suggest a council of 
consumer financial regulators would be sufficient.
    Do you really think existing law and practice, in your 
words, worked to prevent the financial crisis last year, sir?
    Mr. John. For one thing, I think there are some different 
causes of the financial crisis and that just focusing on 
consumer activities and consumers lending is somewhat 
misleading. If the laws that exist on the books, and this 
includes both State laws and Federal laws, had been properly 
enforced and had been carefully considered, meaning the 
coverage of things like unregulated mortgage brokers and things 
like that had been covered by some of the States, I think that 
would have gone a long way toward preventing some of the 
consumer products breakdowns that caused the situation. As I 
say, I think there was a lot more than just that.
    Mr. Moore of Kansas. What laws were not enforced that 
should have been enforced and who was to have enforced those 
laws, sir?
    Mr. John. I think an article from the Washington Post from 
Sunday has already been cited here. I was deeply disturbed, for 
instance, to see a Washington Post article last December which 
pointed out a low-income immigrant couple who were moved into a 
multi-hundred thousand dollar housing loan despite the fact 
they had a very low income. We could go through the list. And 
the list would be very long, both on a State and a Federal 
area.
    One of the problems the chairman has pointed out very 
effectively is that this is not one of the key responsibilities 
of the regulatory agencies. Now, I think you can make it a 
responsibility and make it an emphasis just as easy with a 
coordinating council as you can by massively disrupting the 
whole consumer regulatory system by creating a new agency.
    Mr. Moore of Kansas. But you do think existing law and 
practice worked to prevent the financial crisis last year?
    Mr. John. I think existing law and practice, had it been 
properly enforced and properly expanded, would have worked, 
too.
    Mr. Moore of Kansas. Thank you, sir. The provision I like 
about the current CFPA draft, the provisions I like are the 
consolidated rulemaking for consumer protection laws, expanding 
financial literacy efforts and, most importantly, from my 
perspective, strong oversight of nonbank firms, many in the 
mortgage market that issued too many loans families couldn't 
afford. As a former district attorney for 12 years, I had to 
prioritize resources to ensure the most urgent threats were 
focused on, and I believe the same lessons apply to CFPA.
    Starting with Mr. Shelton and quickly going down the line, 
if you had to choose the larger threat to financial stability, 
the lack of supervision of nonbank firms, especially those that 
made predatory subprime loans or consumer protection or 
protection enforcement of banks, which would it be?
    Mr. Shelton. I would have to say the latter, consumer 
protection.
    Mr. Calhoun. I think you have to balance all of them. And 
there has been discussion of the role of banks. I think it is 
important to remember they did the lion's share of the so-
called Alt-A loans which would have larger defaults at greater 
taxpayer cost than even the subprime loans.
    Mr. John. As I have said, I think the causes of the 
financial problems were far too serious and far too confusing 
to just limit it to those two.
    Ms. Bowdler. I don't think that you can separate those, 
those work like yin and yang, the fact that you had unregulated 
entities flooding the market and the absence of banks that had 
the most favorable products lead to a perfect storm. You need 
both.
    Mr. Moore of Kansas. Thank you.
    Ms. Burger. I agree you need both.
    Mr. Moore of Kansas. The last question, setting aside the 
current CFPA draft, what steps could be taken to ensure Federal 
bank regulators did their job on consumer protection? FDIC 
Chairman Sheila Bair has proposed that the CFPA could be given 
backup authority where they could intervene case-by-case if 
they saw lack of enforcement by bank regulators. Another idea I 
might suggest is a stronger ``use it or lose it'' authority 
requiring bank regulators to either enforce consumer protection 
laws or lose that authority. After being graded by the CFPA or 
the GAO, if a bank regulator fails to fully enforce consumer 
protection laws, they would automatically lose that authority 
to CFPA.
    Mr. Calhoun, would this use it or lose it approach ensure 
that regulators do a better job, do you believe?
    Mr. Calhoun. We think that at the end of the day, the CFPA 
needs to have enforcement authority. As we detail in our 
written testimony, there have just been repeated instances over 
the last 6 and 8 years where regulators have turned their backs 
on enforcement, and the most striking example was the OTS, 
which allowed several of its institutions to back-date their 
capital reports and those firms subsequently collapsed at 
substantial cost to the taxpayers.
    So you need someone whose focus is both on consumer 
protection and enforcing it. It does need coordination. We 
support that.
    Mr. Moore of Kansas. Thank you, sir. Mr. Chairman, I yield 
back.
    The Chairman. The gentleman from North Carolina, Mr. 
McHenry.
    Mr. McHenry. Thank you, Mr. Chairman. Clearly, increasing 
accountability is necessary, that goes without saying. Consumer 
protection goes with that increased transparency and 
accountability.
    Ms. Burger, for nonprofits which conduct financial literacy 
credit or housing counseling on behalf of the CFPA or any 
government agency, what degree of accountability and 
transparency should we require of them?
    Ms. Burger. I think that there should be transparency for 
them as well. And one of the things that I actually suggested 
in my testimony was the whole issue about compensation for 
front-line workers as well, because one of the things that we 
have discovered over the last number of months that we have 
been really looking at what the impact of the credit crisis on 
our members has been is that front-line workers are often 
compensated at such a low base pay that the only way they can 
survive and support their families is try to exceed their 
quotas and be paid by bonuses, and the bonuses actually 
encourage them to push products that are unfair, unsustainable 
for working families. We think one of the things we should look 
at within this bill is a way of really looking at compensation 
reform, not only at the top of the financial industry but at 
the bottom of the industry as well.
    Mr. McHenry. So those who are providing credit counseling, 
for instance, on the front lines, you have concerns about their 
pay. And the question I have is in--with these recent 
revelations about ACORN, do you think they should be precluded 
from being a participant in the CFPA program?
    Ms. Burger. We think that there should be, as is being done 
right now, a thorough investigation of ACORN. I think they have 
an independent investigator right now and that we should make 
that decision afterwards. I do think that there should be total 
transparency for any agent--for any nonprofit or for-profit 
that would be getting Federal dollars to provide counseling.
    Mr. McHenry. Do you think the failure in ACORN, from your 
analysis, is that a failure of pay?
    Ms. Burger. I did not take part in the analysis of ACORN. I 
think that ACORN as an organization over the years has done a 
lot of great work in low-income communities. There is an 
investigation going on right now and we should make sure that 
violations never take place in the future.
    Mr. McHenry. Okay. As of today, the U.S. Census Bureau, the 
IRS, and even Bank of America have severed ties with ACORN. And 
according to yesterday's, actually the day before yesterday's 
report from the Chicago Sun Times, the SEIU has given ACORN $4 
million. Could you clarify to me the extent of your financial 
and programmatic ties to ACORN?
    Ms. Burger. SEIU has also cut all ties to ACORN.
    Mr. McHenry. They have?
    Ms. Burger. We have. In Illinois, I believe that I am 
correct, that the ACORN institution, the consumer protection, 
the community organization in Illinois cut its ties to ACORN 2 
years ago. And so in Illinois, there were no ties in the last 2 
years between any SEIU work and ACORN.
    Mr. McHenry. Okay. What was the extent of your financial 
ties with ACORN?
    Ms. Burger. I will get that information for you for the 
record.
    Mr. McHenry. Because in Illinois, for instance, there was a 
tie based on location, even the fact that their e-mail 
addresses that were shared on your Web sites for the other 
organization.
    Ms. Burger. My understanding is that in Illinois, their 
offices happened to be next door to each other, not 
cohabitated, but I will get that information for you.
    Mr. McHenry. Okay, thank you. In the same building, I think 
it was a different floor of the same building.
    Mr. John, in terms of the larger issue of the CFPA, can you 
regulate consumer protection from financial institutions 
without a safety and soundness mission as a part of that?
    Mr. John. No. When it comes right down to it, if you don't 
focus on the safety and soundness aspects of products and 
proposed regulations of those products, you are very likely to 
find a situation where a practice is encouraged which may be 
detrimental to the financial institution and therefore to the 
customer.
    Mr. McHenry. Thank you. I yield back.
    The Chairman. I recognize the gentleman from Missouri, but 
I ask him to yield me 15 seconds to say to Ms. Burger--you 
mentioned cutting ties with ACORN 2 years ago.
    Ms. Burger. In Illinois.
    The Chairman. That beats the Bush Administration, which 
continued to fund ACORN every one of its 8 years. So you were 
ahead of the Bush Administration, which in its last 2 years, 
was giving ACORN a couple million dollars while you were 
cutting ties.
    Ms. Burger. I just wanted to make the point that in 
Chicago, the organization once upon a time was ACORN, that 
community organization cut its ties to National ACORN, too.
    The Chairman. Again, the Bush Administration, to the day it 
went out of office--ACORN got $14 million from the Bush 
Administration. So they make you look like a pica.
    Mr. Clay. Thank you so much, Mr. Chairman. Thank you for 
the clarification on the status of ACORN in both 
Administrations. I appreciate that candor.
    Let me ask Mr. John, under systemic reform, the Federal 
Reserve has asked for additional authority to protect 
consumers. We know what their record has been over the last 
decade as far as protecting consumers when big banks like Wells 
Fargo and Citibank formed offshoots and companies for the sole 
purpose of setting up subprime mortgage companies and targeting 
black and brown communities. And we know the devastation that 
occurred under that scenario and those communities are still 
suffering to this day.
    But do you feel as though we should give the Federal 
Reserve additional authority or should the CFPA or some similar 
agency have the authority to protect consumers under scenarios 
like this?
    Mr. John. Well, the Federal Reserve authority for systemic 
risk is something that I have written against, simply because I 
believe that a is no-win situation. It is not possible to 
protect against systemic risk. There are political problems, 
there are economic problems, etc.
    In the specific case that you mentioned, which was the 
setting up of subsidiaries, I think the Federal Reserve made a 
very serious error in not following through on that. And one of 
the things that I would hope is that in the council that I am 
proposing, the staff would note that, that it would become an 
issue, and there would be a report sent to this committee which 
would hopefully hold a hearing on that. The most effective 
oversight is not going to be a big regulator or a small 
regulator or anything like that, it is going to be those of you 
who are going to ask nasty questions.
    Mr. Clay. Well, thank you for that response.
    Let me hear from the other panelists. Ms. Bowdler?
    Ms. Bowdler. Just to add to that, even if we had a council 
of some sort, what I think would be missing and what has been 
missing from existing mandates on the regulators is the 
requirement to look specifically at what is going on in 
underserved communities. That is important because as we have 
all already said, our communities were targeted, both passively 
and actively, in different ways. I am happy to talk more 
specifically if somebody wants me to on that.
    What you can have is a situation where entire communities 
are devastated and in our case entire generations of Latino 
wealth are in jeopardy. But it doesn't rise to the level of 
endangering the actual safety and soundness of the system and 
therefore never gets picked up. That is what we had. So we need 
to have somebody who specifically is looking at what is going 
on with vulnerable populations, minority communities, 
immigrants, the elderly, etc., those of modest means. Those are 
the most vulnerable among us and those trends will be missed 
unless there is a specific charge to look at them. In the new 
jobs legislation with the Office of Fair Lending, we think will 
have that.
    Mr. Calhoun. If I can add, the question boils down to who 
do you the Congress want to trust carrying out this authority. 
For me a telling statistic, we heard about the disparate 
lending practices, but if you look from 2002 to 2008, the OCC 
did not make a single referral to the Department of Justice for 
equal credit violations. Do you want to trust authority back to 
them or do you want to try a different approach?
    Mr. Clay. Sure. Mr. Calhoun, how do you envision a new 
agency like the CFPA, what would be their mission with the 
whole financial literacy piece? Do you envision any role?
    Mr. Calhoun. I think that is a key part, it is not a 
solution by itself but it is a key part and it would be a key 
part of this agency's work.
    Mr. Clay. Thank you so much. I yield back.
    The Chairman. The gentleman from Texas, Mr. Marchant.
    Mr. Marchant. Thank you, Mr. Chairman. My preference on 
this particular item would be to go with a council. I would 
like to explore a little bit of the idea of the council with 
you. Would you make the council be the--would they accept 
complaints from the public under your concept?
    Mr. John. I would see actually that the individual 
regulator should accept the complaints from the public and the 
like. One of the problems is that the individual regulators, 
whether under this system or under the CFPA as far as I can 
tell, is not an ombudsman, that they basically look for abusive 
practices and abusive situations and then go to correct them. 
They are not there to litigate specific complaints by 
individual consumers.
    Mr. Marchant. So that would answer my second question, you 
would give them the power to investigate systemic abuse of 
consumer financial--the financial system?
    Mr. John. Absolutely.
    Mr. Marchant. Would you give them the ability to make 
recommendations to the regulators?
    Mr. John. Absolutely.
    Mr. Marchant. Would you give them the power to create a 
consumer protection protocol, examination protocol for the 
respective regulators so that they could incorporate that 
protocol into their regular examination.
    Mr. John. Yes, absolutely.
    Mr. Marchant. Do you envision, and this question is for the 
rest of the panel as well, this council or agency having the 
ability to go to FHA, Fannie Mae, and Freddie Mac, who now 
originate currently 90 percent of the mortgages in the United 
States, and redo their documents to reflect their documents or 
would you allow their documents to remain intact?
    Mr. John. I don't see--I would allow them to remain intact. 
It is really the Federal Housing Finance Agency that has the 
authority over that type of area.
    Mr. Marchant. Well, many of the Alt-A loans and many of the 
subprime loans that were made in 2007 and 2008 were actually 
originated and insured by--not originated by but were insured 
by and were done on Fannie Mae and Freddie Mac forms.
    Mr. John. Yes, but at the same time it becomes somewhat 
difficult to have one agency basically going through and 
regulating another agency. I think that gets a little bit--
    Mr. Marchant. But a council could look at those documents 
and say, the consumer needs to be better informed here.
    Mr. John. Yes.
    Mr. Marchant. And they could make a complete examination 
without having the authority to change those documents?
    Mr. John. That is correct.
    Mr. Marchant. Would any of the rest of you like to address 
that whole Fannie Mae, Freddie Mac?
    Ms. Bowdler. I just want to add one quick thing, and I am 
going to start to sound like a broken record here, but Fannie 
and Freddie is a perfect example. Fannie and Freddie had really 
great prime products that were flexible, the 30-year fixed, 
they had all sorts of variations that would meet a wide range 
of credit needs. Those were not the products that actually made 
it down to retail, and they had a hard time competing on the 
regular market. And the reason was because they took longer to 
originate. In some cases, they may have actually required 
manual underwriting.
    Somebody, Mrs. Capito mentioned community banks earlier. 
They have the same problem where because they were doing all 
the right things, because their process takes a little longer, 
maybe doesn't turn as much of a profit, they get pushed to the 
back. So in that case you can see how in one institution they 
had these solid products. We would like to see them put them 
more forward, put added incentives so those were the ones being 
pushed at retail, but they weren't, they were gathering dust in 
the back. And instead, you had products that were quicker and 
easier to originate that proliferated throughout the market 
because they earned higher profit going back to points around 
compensation systems.
    Mr. Marchant. But many of those loans were made and insured 
by Fannie Mae and Freddie Mac.
    Ms. Bowdler. They have multiple--all these institutions 
have within them a wide range of products. So they will have a 
product that I--again just speaking for the clientele that we 
work with--that could have worked for Latino families, but 
maybe it required manual underwriting or didn't pay as high of 
a commission and so it wasn't put out there in a big way.
    The Chairman. The gentleman from North Carolina, Mr. 
Miller.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. Mr. 
Castle said in his opening statement that the worst subprime 
loans, the bulk of the bad subprime loans were not made by 
depository institutions that were fairly closely regulated but 
by nondepository institution, independent lenders.
    Mr. John, you testified a few months ago before the 
Investigations and Oversight Subcommittee, of the Science and 
Technology Committee, which I Chair, on the role--and one issue 
that came up was the role of the Community Reinvestment Act. 
Mr. Castle is right, a relatively small number of the bad 
subprime loans were made by depository institutions subsequent 
to the Community Reinvestment Act. And in fact a study by the 
Federal Reserve Board found that only 6 percent of all the 
subprime loans were made in assessment areas or in the 
neighborhoods where CRA encouraged lending--or to borrowers 
that CRA encouraged lending to. And you agreed then that CRA 
had a negligible effect in the subprime crisis and the 
financial crisis generally. Is that still your view?
    Mr. John. Absolutely.
    Mr. Miller of North Carolina. Mr. Calhoun, I ask you 
because I know you have been here for the 6\1/2\ years that I 
have been here, you have been sitting at this table when I have 
been sitting at this table. So has Mr. Shelton, for that 
matter. The industry is now saying that they support consumer 
protection, but not a consumer protection agency. Steve 
Bartlett was quoted recently saying they support the ``CFP,'' 
but not the ``A.'' That is not entirely consistent with my 
recollection. My recollection is that they opposed every 
consumer protection bill, the predatory mortgage lending 
legislation that I introduced, the credit card legislation that 
Ms. Maloney introduced, the overdraft bill that Ms. Maloney 
introduced. They commented publicly opposing rules that 
protected consumers further.
    Is that your recollection? Do you recall industry pushing 
for stronger consumer protections?
    Mr. Calhoun. They have usually disagreed with the proposals 
that have been before this committee and before the regulatory 
agency.
    Mr. Miller of North Carolina. Mr. Shelton, do you remember 
them pushing for stronger consumer protections?
    Mr. Shelton. No, I do not, sir.
    Mr. Miller of North Carolina. Now the argument is, it 
should just be enforced better. I know that right now there are 
sentencing hearings going on all over America where the 
defendant is saying the problem was they had a permissive 
parent and their parent really should have set limits. But do 
you recall the industry at the time saying that their 
prudential regulators should come down harder on them, should 
be stricter on them, that their prudential regulator was 
entirely permissive and indulgent? Mr. Calhoun, do you recall 
that?
    Mr. Calhoun. No. In fact, the record is clear that 
institutions, Countrywide being one of the notable ones, the 
largest mortgage lender, went and pressured their regulators to 
ease up and in fact switched regulators because they thought 
the original regulator had gotten too strict with them.
    Mr. Miller of North Carolina. Mr. Shelton, is that similar 
to your recollection?
    Mr. Shelton. That is my recollection as well.
    Mr. Miller of North Carolina. Ms. Bowdler, I am kind of 
leaving you out, you have been here. Is your recollection of 
this consistent with theirs?
    Ms. Bowdler. Yes.
    Mr. Miller of North Carolina. A final point, I am struck by 
the arguments against CFPA that they could do something stupid, 
they could regulate, they could prohibit something that 
actually is good. The Food and Drug Administration prohibits 
patent medicines mixed up in bathtubs that actually don't cure 
cancer as advertised but are toxic, but they also, the FDA, 
could prohibit statin drugs. I am now 2 years older than my 
father was when he died from a heart attack, I am on a pretty 
stiff dose of a statin drug, and I have high hopes that I will 
stay around for a really long time, to be annoying to a lot of 
people for a really long time.
    The Food and Drug Administration could prohibit statin 
drugs, but it would be stupid to do so. Does anyone think the 
Food and Drug Administration should be abolished because they 
could prohibit medicines that were actually beneficial and 
therefore allow patent medicines mixed up in bathtubs to come 
back on the market? Does anyone wish to argue for that 
position?
    I see that no one does. Mr. Chairman, I yield back.
    The Chairman. Well, if the gentleman would yield briefly to 
me for his remaining time. He may have been a little unfair to 
some of the business organizations with regard to consumer 
protection laws, noting that they always oppose them. That is 
often their initial response, but it has been any experience 
that once they have been adopted, several years later they are 
quite fond of them, particularly when people have proposed any 
enhancement of them. So there is a kind of retroactive falling 
in love with them especially when we have had them in place and 
then talk about maybe building on them.
    The gentleman from California.
    Mr. Royce. Thank you. Mr. John, should every State be 
allowed to prohibit statin drugs? Maybe that is the question we 
should ask ourselves next.
    Let me take, Mr. John, something you wrote, most Federal 
laws specify a national standard that States must observe, but 
the CFPA would explicitly subordinate Federal regulations to 
stronger State laws. You said a strength of the financial 
market is the ability to offer standardized products that 
reduce costs to both firms and consumers.
    However, in this paper you wrote some months ago, you laid 
out a little problem. Under the CFPA national firms could face 
up to 51 separate consumer regulatory regimes complete with 
disputes about whether the applicable standards that applies is 
the one from the State where a consumer who has made a purchase 
lives or the State where the firm is physically located or the 
State where the Internet site that was used is registered. So 
instead of one product, you have a whole host of products here 
sold across State lines.
    The question I would ask you is, who would ultimately pay 
the price for these inefficiencies?
    Mr. John. That is easy, it is the consumer when it comes 
down to it. One of the problems we have been facing and the 
chairman pointed out that there were a few problems with State 
preemption prior to, I believe in 2005 or 2006 or so. However, 
we didn't have the same level of extremely activist attorneys 
general, most of whom are seeking to be senators or governors, 
who actively seek out situations and actively promote more than 
reasonable solutions to them. So we are much more likely in the 
current situation to have attempts by various ambitious State 
officials to move into and obstruct national markets.
    Mr. Royce. But couldn't companies just create these 
multiple variations that meet this myriad of State requirements 
without passing that on to the consumer? Why would it be passed 
on to the consumer?
    Mr. John. There is a need to make a profit. There is a 
responsibility to one's shareholders, of course.
    In some insurance situations, they actually have done a 
number of different variations to meet specific State 
requirements and the like, and the net result has always been a 
higher cost to the consumer.
    Mr. Royce. I think there is a broad agreement that the 
current State-based insurance system is inefficient; the 
studies that I have seen have a tag of about $10 billion cost 
to the consumer. It also hampers U.S. competitiveness. I am 
thinking about the Schumer-Bloomberg study and other studies. 
The lack of a centralized regulator with the ability to look at 
the entire U.S. market, certainly those were the concerns that 
the Treasury Department laid out in their regulatory reform 
proposal.
    So as we are working to streamline and consolidate 
regulatory authority in the insurance portion of our financial 
system, especially in light of some of the problems with AIG 
and so forth, it appears we may be taking a step back, then, in 
the rest of the financial services sector with this CFPA. Let 
me ask you, do we run the risk of replicating many of the 
problems that have arisen in the insurance market throughout 
the financial services sector with this legislation if we go 
down this road?
    Mr. John. That is specifically my concern, yes.
    Mr. Royce. Would you like to comment for a minute just 
about some of the difficulties? Maybe you could expand on the 
problems with bifurcating solvency protection from consumer 
protection, put safety and soundness on one side and consumer 
protection on the other. Many of the regulators have explained 
the problems with separating these two missions. We saw that 
model over Fannie and Freddie. Could you give us some insight 
on that front?
    Mr. John. Well, I have mentioned this briefly in the past. 
One of the strong situations that I think is not necessarily 
going to pop up immediately, but it is definitely going to be 
the situation if you do create a CFPA, is that there will be a 
siloization; that the Chairman's Advisory Board is a good step, 
but the Chairman's Advisory Board is not sufficient to prevent 
that siloization. So essentially the consumer regulations of 
the future, whether that is 5 years, 10 years or 2 years down 
the line, are going to be made without a direct input or a 
direct one-on-one understanding of how particular regulated 
financial institutions work.
    One of the things that deeply concerns me about this whole 
situation is that if a CFPA focuses explicitly on the largest 
types of financial institution, i.e. the banks, the special 
characteristics of smaller types of financial institutions, 
such as credit unions, are likely to be ignored or placed in a 
secondary basis. And that is going to cause problems for 
consumers. It is going to cause problems for financial 
institutions of different types, etc. You are going to see a 
homogenization, which is very dangerous.
    Mr. Royce. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Georgia, Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    I would just like to kind of focus my remarks on unintended 
consequences, one-size-fits-all dangers of this, as well as the 
confusion between State and Federal laws as we move forward. It 
is an important legislation.
    Let's take my first problem of unintended consequences and 
whether or not this would work, particularly with some unique 
situations. I am sure you all are familiar with the Farm Credit 
Administration. The Farm Credit Administration is very, very 
unique. They already have what they call a borrowers' bills of 
rights, which basically covers much of what we are attempting 
to do in this bill, resulting in if they were into this 
duplicatory obligations, burdensome regulatory concerns as 
well.
    Consumer lending is a very, very small part of what they 
do. Mortgage lending, for example, is only allowed in 
communities with less than 2,500 individuals. Their products 
were not anywhere near the toxic level that caused the problem 
in the first place.
    So my question is, would not we be doing a better service 
here if we allowed the farm credit to continue to operate under 
its own current regulatory process away from this legislation?
    I take it all of you agree that it would be the best thing 
to do in this situation, to allow farm credit. The reason I 
mention that is, also, farm credit does not come under the 
jurisdiction of financial services. It is an agricultural area. 
And I am simply saying that it makes sense--this is a complex, 
complicated area, covers a lot of the waterfront when we are 
dealing with the financial services industry. And it might be 
wise as we move forward with this to look inward-outward 
instead of outward-inward. And I think that what I am getting 
from the committee here is that you agree that the Farm Credit 
Administration should be left away from this or doing what they 
are doing with the bill of rights; weren't a part of the 
problem in the first place; and this would be a duplication.
    Mr. Calhoun. Congressman Scott, I would like to express 
concerns about creating these exemptions because of the 
difficulties that has created in the past. One of the biggest 
examples was, just a few years ago, in fact even when we were 
looking at the predatory mortgage bill hear this committee, 
there were efforts to exclude FHA with the argument that FHA 
loans are a very small part of the market. They were about 2 
percent a few years ago, and they were the generally safer 
loans.
    However, in the last year, we have seen the very subprime 
lenders invade FHA. You can go on the Web sites and see ads 
for, here is how you transfer your business. And there are 
subprime lenders who have literally converted into FHA lenders. 
One of the beauties of and I think real core strengths of this 
bill is it looks at products, not the label that is put on the 
product or the label that is put on the financial services 
provider, because that has created a lot of problems. In this 
specific limited exception, it may be okay. But these 
exceptions have created a lot of dangers in the past.
    Mr. Scott. I think my point is, to allow them to operate 
under their current regulatory reform and to monitor the 
situation if that is not sufficient, then we can come back and 
address it. This Draconian approach here makes a lot of 
duplication.
    Mr. Calhoun. I think the bill would allow that to happen. 
But I think it needs to be careful how it is used.
    Mr. Scott. Absolutely.
    Let me ask one other question about the States. States are 
currently licensing providers that I think results in some 
confusion as it applies to what we are currently trying to do. 
And under the bill, H.R. 3126, it grants authority to the CFPA 
to establish new baseline rules, a prospect that would see a 
number of State laws rendered mute. So the question becomes, 
how would the CFPA decide which laws and regulations to leave 
in place and which to pre-empt?
    Would the CFPA have to show a record of compliance or a 
failure of enforcement by State authorities in order to preempt 
State laws? And then finally, comparison with State laws are 
not often apples to apples, and so if you could comment on 
that, that would be helpful.
    The Chairman. I am sorry. There will be no time to comment. 
Members have to understand, if you ask a question after the 
light is on, you will have to get the answer in writing. It is 
40 seconds in. We won't have to time to get an answer.
    Mr. Scott. I will be glad to get it in writing, Mr. 
Chairman.
    The Chairman. The gentleman from Texas.
    Mr. Green. Thank you, Mr. Chairman.
    And I thank the witnesses for appearing.
    Mr. John, thank you for your creative concept. I would like 
to visit with you for a moment about it. You have indicated 
that the council, and this is in your testimony, would be 
charged with creating uniform standards for examination of 
financial institutions. But you also indicate that these 
standards would not be imposed. My assumption is, if they are 
not imposed, they would be recommended. And the question 
becomes, how would the recommendation become a standard that 
would be enforced?
    Mr. John. The recommendations would be enforced through a 
combination of two things. One would be, if a regulatory or a 
statutory change is needed at the State level--
    Mr. Green. How do you get the regulator to embrace the 
standard that is recommended? Because the agency that you are 
proposing cannot impose standards. It can merely say, here is a 
thought. How would you get the thought to become a reality 
within the regulator?
    Mr. John. It would be a very simple matter that, in the 
event that the regulator does not adhere to a particular 
standard, understanding of course there may be specific 
adjustments necessary for--
    Mr. Green. I have to ask you to move it a little faster.
    Mr. John. The bottom line is that it is your 
responsibility.
    Mr. Green. Congress? So let me get it right. Hold on. Your 
agency recommends--well, you have a board that works with the 
president of this agency that you are recommending.
    Mr. John. Right.
    Mr. Green. And they make recommendations to these various 
regulatory agencies. And if the agency does not abide by the 
recommendation, then this council would then make the 
recommendation to Congress, and Congress would then move on it?
    Mr. John. The regulatory board would, for one thing, the 
agency that is in question would have been a part of the 
process--
    Mr. Green. I understand. But ultimately, it would take an 
Act of Congress to act on the recommendation if the 
recommendation is not adhered to?
    Mr. John. It would be a matter for Congress to put pressure 
on the agency just as you would put pressure on the Federal 
Reserve for--
    Mr. Green. Well, the way we put the pressure on some of 
these agencies has been to threaten legislation, and thus we 
then go through that process, and then they have this epiphany.
    But what you are saying is that it will take an Act of 
Congress to do something ultimately if the regulator doesn't do 
it. And that means that you have to have a Congress that is 
willing to act, which means that we would have to go through 
all that we are going through right now to try to simply get an 
agency in place.
    What you are doing is putting all of this back within the 
purview of the Congress of the United States of America, which 
is where we are right now in terms of trying to establish the 
agency because you don't give any authority to impose the 
regulations on the various regulators.
    Now, let me go to another point. With reference to what you 
are proposing, you have indicated that there should be one 
representative from each Federal Agency and elected 
representatives from councils among the various States.
    Mr. John. Right.
    Mr. Green. Would we have at least one from each State? Is 
that what you are saying?
    Mr. John. No, that is actually not what I am proposing. 
What I did not want to have happen here is that you would have 
300 State representatives out-voting six Federal regulators.
    Mr. Green. How many would you have from each State?
    Mr. John. We would have roughly one--no, it is not one from 
each State. It is one representing, for instance, the State 
credit union regulators; one representing the Congress and 
State bank supervisors; one representing the various insurance 
regulators; etc.
    Mr. Green. And would they all have voting power?
    Mr. John. Yes. But the goal here is not to have things that 
were done by votes.
    Mr. Green. I understand. But they would have the authority 
to vote?
    Mr. John. Yes.
    Mr. Green. And it would be the vote of this body that would 
ultimately decide whether or not a recommendation would be 
adhered to?
    Mr. John. Yes.
    Mr. Green. And how many total would we have on this body?
    Mr. John. Frankly, it depends on whether Senator Dodd's 
approach--
    Mr. Green. Let us talk about your approach. This is your 
recommendation.
    Mr. John. Yes. But the thing is, the testimony specifically 
says that the number could vary depending on whether regulators 
are merged or not merged--
    Mr. Green. I understand. But how many are you envisioning?
    Mr. John. I am not envisioning a particular number. I 
recognize that this is all part of the existing regulatory 
restructuring process.
    Mr. Green. I thank for your information.
    Let me just share with you that it seems to me that this is 
going to be a rather awkward way of doing business, and it 
brings us right back to where we are now, needing congressional 
oversight to get something done.
    And I yield back.
    The Chairman. The gentleman from Missouri.
    Let me just say, we are going to finish up with this panel, 
and then we will go right into the second panel at 12:30, 
about, it looks like because there are going to be votes about 
2:00, and we are going to go until then. So let us move right 
along.
    The gentleman from Missouri.
    Mr. Cleaver. I will save my questions for the next panel. I 
would ask Ms. Burger, do you think that ACORN was involved in 
any way with the provocative testing of an Iranian missile on 
this past Saturday?
    Ms. Burger. No.
    Mr. Cleaver. Thank you.
    I will reserve my questions for the next panel.
    The Chairman. I thank the gentleman.
    And I now recognize the gentlewoman from Illinois.
    Ms. Bean. Thank you, Mr. Chairman.
    And thank you to our witnesses for bringing your expertise 
to us today on this important issue.
    There seems to be general consensus that Federal consumer 
protection laws were not adequately updated through rulemaking 
by the Federal Reserve. And some feel that is because the other 
responsibilities that the Fed has took priority over consumer 
protections, which is why so many of us do support the creation 
of a CFPA that would put the consumers' interest first, 
prioritize that so that we would have effective and consistent 
protections.
    Do you believe--and I guess I will direct this to Mr. 
Calhoun first--that the CFPA would do a better job of updating 
the rules and providing more robust consumer protections than 
the Federal Reserve?
    Mr. Calhoun. Yes. And if they don't, I think the Congress, 
you will take action as you have done with other agencies that 
you have delegated authority to who have not used that 
authority.
    Ms. Bean. Okay. Are there others who would like to comment 
on that?
    Ms. Burger. I think that what we really need is an agency 
that actually looks at the interests of the consumer first as 
opposed to last or never. And I think that the whole purpose of 
this is so that we actually have someone who is an agency that 
is making sure that the products available to consumers, that 
the consumer is protected.
    Ms. Bean. Ms. Bowdler?
    Ms. Bowdler. A lot of the conversation in the hearing so 
far has been on everything that the CFPA would supposedly 
prohibit or ban from the market when, in fact, we think this is 
an opportunity to promote and advance really good products and 
make sure they get to the consumers. So I hope we can talk more 
about all the promotion and advancement that they are going to 
do as well.
    Ms. Bean. Okay. Mr. Shelton?
    Mr. Shelton. I would only add that I can give you many, 
many examples of, in the past, of how organizations like ours 
have talked to regulators, have talked to various associations 
about the kind of exploitation we have seen of our members and 
our constituents, and then very well, under the existing 
construct, there has been little to no response. We do need an 
agency that will specifically focus in on the issues of 
concerns of the consumers of the United States, not putting the 
banks and others first.
    I can tell you stories about us taking our predictions 
about the foreclosure crisis 3 years ago to very high-ranking 
members of the Bush Administration, and very well, in each and 
every one of those agencies, we were told, and I will capsulize 
by saying that we would let the market work it out. And indeed 
the market working it out led to the crisis that we are still 
trying to get out of.
    Ms. Bean. Thank you.
    I would also like to ask--first of all, I would like to 
concur. I think that is why so many of us do support the 
creation of a CFPA. But we also feel that those robust consumer 
protections that we are expecting them to create, that we 
should feel comfortable, then, that banks and thrifts that 
operate nationally should be able to operate under that single 
set of robust protections, which will allow streamlined 
compliance and reduce costs to customers.
    Let me move to another question. Given the States' 
experience with nonbank actors, how large of an examination and 
enforcement staff would be needed at the CFPA to actively 
enforce the nonbank sector? I will start with Mr. Calhoun 
again.
    Mr. Calhoun. I don't have an exact number for you, but a 
substantial part of the problem as has been discussed today has 
been in the unregulated sector, and again, I think that there 
are ways, though, to encourage compliance and streamline this. 
CRL is an affiliate of self-help; 80 percent of our employees 
work solely on providing credit and expanding access to credit. 
So we will be subject to the CFPA, and we encourage it to be 
done on a streamlined basis.
    I am concerned, though, about unlimited preemption because 
the power to act is also the power to not act, as we saw with 
the Fed, and the power to insulate abusive behavior. I have 
fears about putting all our eggs in one basket. And if one 
person authorizes a practice, it can prohibit anyone else, any 
State from providing any protections and wipe out existing 
protections.
    Ms. Bean. That is exactly what we are expecting the CFPA to 
do, to create a high standard that can apply universally and 
nationally for all, also recognizing that, even from testimony 
from some of the groups that are here today, many reports 
indicate that over two-thirds of the subprime mortgages that 
created the problem were done by nonbank lenders that were 
regulated by the States.
    Let me ask, do you believe the CFPA would have the ability 
to actively examine and enforce consumer protection laws on 
both banks and nonbanks? And wouldn't it be more effective to 
put coverage where there hasn't been and leave those examiners 
that are already in place to do what they have been doing? Is 
he allowed to answer?
    Mr. Calhoun. I will be very quick. I think the bill is 
right in giving enforcement and supervisory, even for banks, to 
the CFPA, but to require careful coordination and to especially 
make sure for community banks that it does not create a 
regulatory burden.
    Ms. Bean. Thank you.
    I yield back.
    The Chairman. The gentleman from Minnesota.
    Mr. Ellison. Thank you, Mr. Chairman.
    Let me pick up right there, Mr. Calhoun.
    I have been in conversation with a number of community 
banks, and some of them have been concerned that they are going 
to get another layer of regulation. But isn't it also true that 
they are competing with people who haven't had any regulation, 
and therefore, CFPA could help level the playing field?
    Mr. Calhoun. I think community banks, including Self-Help, 
our financial institution lost a lot of their market share to 
people who were offering abusive products. Abusive products 
crowded out the good products, and quite frankly, they have 
gotten the least amount of assistance from the bailout. The 
community banks have been sort of in the middle, have gotten 
the worst of the competition, and the worst of the assistance 
from the bailout.
    Mr. Ellison. I saw some other heads nodding.
    Ms. Bowdler, do you think that the CFPA could be beneficial 
to community banks?
    Ms. Bowdler. Yes, absolutely. Again, a lot of the products 
that are offered there, those are the kinds of--those are the 
kinds of products and practices that we want to promote. There 
is a lot of concern about the inefficiencies that this might 
create, but it is really hard to imagine less choices being 
available to our families or the market operating even more 
efficiently for our families.
    Again, in my written statement I walk through how exactly 
that has been happening, but they have not had choices, and the 
market has not been working well for them. So this is an 
opportunity again to get those good practices and good products 
out there and give them a chance to compete, which they have 
not had.
    Mr. Ellison. Let me ask you this. There has been an 
argument out there that the CFPA should only apply to presently 
unregulated entities. I found a little information that I want 
to ask you about, and it suggests that while there is no 
question that independent mortgage finance companies were major 
players in the subprime marketplace, the affiliates of national 
banks and other insured depositories also played an important 
role. Indeed, HMDA data show that depository institutions and 
their affiliate subsidiaries originated 48 percent of the 
higher-priced loans in 2005 and 54 percent of the higher-priced 
loans of 2006. Can somebody help me understand what this means, 
for the record?
    Mr. Shelton. I can simply begin by saying it has been very 
difficult in the more recent present to tell the difference 
between the regulated financial services institutions and those 
that are unregulated. So, very clearly, we need a more robust 
oversight process that very well includes a consumer protection 
agency.
    Mr. Ellison. Ms. Burger?
    Ms. Burger. And I would also just say that even those, the 
financial institutions that were regulated, have regulators 
that were looking at them from the perspective of what was good 
for the institutions and not what was good for the consumers. 
We still need a consumer protection agency that actually looks 
at the products from the perspective of the consumer. And that 
is why they should be included.
    Mr. Ellison. Ms. Bowdler?
    Ms. Bowdler. Yes. That kind of structure actually allowed a 
bifurcated outreach strategy, especially to minority and low-
income communities. So we saw an example--I read about it in my 
testimony--where in conversations with a major lender, we found 
that their subprime wholesale unit, which offered exclusively 
subprime products, 80 percent, 90 percent of their lending was 
going to African Americans, while their retail unit went 
predominantly to their white bank consumers. It allowed them to 
actually split these outreach--
    Mr. Ellison. Kind of a Jim Crow within one institution.
    Ms. Bowdler. And we have seen it in other whistleblower 
cases. In Wells Fargo v. Baltimore, there was a big New York 
Times article about this. Other places where we see that--
employees are actually coming forward, much as Ms. Burger 
describes, saying, this was our strategy. As soon as we create 
loopholes, we are going to give people the opportunity to just 
shift the way they do business a little bit or shift their 
label.
    Mr. Ellison. And I just want to give a little voice to the 
point that Ms. Burger made which is that low-level employees 
are saying that we are enforced and incentivized to push more 
accounts, to not relieve people of unfair overdraft fees, and 
this is part of the issue that we need to consider.
    I am running out of time. So I just want to ask this. Do 
you think that it is essential for the CFPA to have supervisory 
and enforcement powers in addition to rulemaking authority? 
Both the Fed and the OCC failed to exercise their powers with 
respect to consumer protection over the nonbank affiliates of 
national banks. How do we know that they wouldn't drop the 
proverbial ball again if they retain their supervisory powers?
    Mr. Calhoun. I think definitely yes. And particularly in 
light of the fact that, it hasn't been discussed today, this 
bill does not have a private right of action. CFPA rules cannot 
be enforced by individual consumers. We think that should be 
changed, but it makes it all the more important that you have 
as many other enforcement mechanisms as possible.
    Mr. Ellison. Anybody else? I think I am done.
    The Chairman. The others, we encourage you to answer in 
writing. And I also want to note while we have general leave, 
approximately 100 professors of consumer law and banking law 
from universities from a large number of States have submitted 
a letter in support of this agency and some of the specifics, 
and it will be part of the record.
    And the gentlewoman from California will be our last 
questioner.
    Ms. Speier. Thank you, Mr. Chairman.
    I guess I have one overriding question. At what point does 
the bill become so watered down that it is not worth pursuing? 
And I ask that question not facetiously, because one of the 
interests that are being promoted is that we preempt all State 
regulation. And while the bill right now does not have 
preemption, if we move in that direction, is that going too 
far? At that point, do you walk away from the table and say, 
this isn't a consumer-friendly bill?
    Mr. Calhoun. I will start with that. The bill currently 
pushes preemption back close to what it was in 2004. So the one 
issue is, do you roll back some of what many of us believe was 
excessive preemption that led to the problems that we have now, 
not just the mortgages, but in credit card overdraft.
    There is a second question that there are proposals to 
actually increase the amount of preemption that we have in the 
bill and, specifically, to make any rule of the CFPA 
preemptive, even though most of its authority comes from 
statutes such as truth in lending which today are not 
preempted. States are allowed to build on those protections. 
And I think, importantly, truth in lending is a good example. 
There has been virtually no State activity, although it is 
permitted, because you have comprehensive regulation. States 
like North Carolina moved in and Georgia attempted to move in, 
in predatory mortgage lending, due to the failure of the 
Federal regulators to take action. When Federal regulators have 
taken action, typically States adhere to those standards 
because they are beneficial to the community in that State.
    But I think that is the line that it crosses. If it becomes 
fully preemptive, it undercuts current protections in a wide 
array, consumer car purchases, furniture purchases across-the-
board, payday lending, all of that could be swept aside by a 
single administrator.
    Ms. Speier. Let me move on to payday lending, because in 
the bill, it prohibits the CFPA from establishing a usury 
limit. Now, I feel pretty passionately about that issue, I 
realize. But nonetheless, why would we want to tie the hands of 
a consumer protection agency from actually putting in place a 
usury limit of let us say 36 percent?
    Mr. Calhoun. I think again that is particularly troublesome 
if you put it in the context that the consumer protection 
agency could wipe out other State protections, for example, in 
the field of payday lending. Then the usury prohibition in the 
bill becomes even more problematic.
    Ms. Speier. It doesn't offend you that we are tying the 
hands of the consumer protection agency on one of the biggest 
financial boondoggles and most egregious conduct by the 
financial services industry and basically saying that this 
consumer protection agency can't even deal with that issue? 
Anyone else have any--
    Mr. Shelton. Let me just say, on behalf of the NAACP, we 
were probably more in agreement with you that very well--we 
have seen so much exploitation across the country and what 
happens in local communities where we don't have a very clear 
standard set forward on to prevent the exploitations that we 
have experienced in the past. So very well, it does raise 
concerns, and it is something that we would love to see 
discussed further.
    Ms. Speier. I yield back.
    The Chairman. If the gentlewoman would yield her remaining 
time--and I appreciate her raising that question. While there 
is no usury flat prohibition, I believe that you could not deal 
with unfairness without taking into account duration, interest 
rate, etc., and I believe the legislation should be clarified 
to make it clear that that could be an element in an overall 
judgment this was an unfair and abusive practice. So that will 
be.
    Ms. Speier. I have an amendment in mind.
    The Chairman. It wouldn't be a flat across-the-board thing, 
but it is clearly an element--as with our credit card bill. 
Interest rates--we can set a flat number, but interest rate 
calculations were part of the bill in terms of deciding what 
was fair and not fair, retroactive interest rate increase, etc. 
So I agree that is an important point. I thank the witnesses 
and the members, and I ask the second panel to come forward.
    Let us move quickly, please. You can have all the 
conversations outside. Will the witnesses please take their 
seats? I appreciate the patience of the witnesses. And we will 
begin with Mr. Michael Menzies, who is the president and CEO of 
the Easton Bank and Trust company, testifying on behalf of the 
Independent Community Bankers of America.
    Mr. Menzies?

 STATEMENT OF R. MICHAEL S. MENZIES, SR., PRESIDENT AND CHIEF 
EXECUTIVE OFFICER, EASTON BANK AND TRUST CO., ON BEHALF OF THE 
        INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA)

    Mr. Menzies. Chairman Frank, thank you so much.
    I am Mike Menzies, president and CEO of Easton Bank and 
Trust in Easton, Maryland. We are a $160 million State-
chartered community bank. And I am proud to be chairman of the 
Independent Community Bankers of America representing our 5,000 
community-bank-only members at this very important hearing. 
There are 8,000 community banks in this country, Mr. Chairman, 
most of which are below a billion dollars in total assets.
    Community banks do not have 50,000 ATMs; 5,000 branches; 
100,000 employees as their primary assets. They have only one 
real asset that they own, their relationship with their 
customer. That relationship must be strong enough to overcome 
overwhelming odds regarding product prices, product offerings, 
convenience and size and economies of scale.
    The only thing I can do to compete in this industry is to 
serve my customer better than the competition. That means I 
must serve and protect and know and own that relationship. If I 
don't do that, then I lose the only asset which produces a 
return to my 100 stockholders, my associates, and my community.
    Community banks do not have geographic reach into every 
State of the land or huge legal departments that operate under 
the theory that forgiveness is easier than permission. We 
cannot afford to place consumer protection beneath any other 
core value. Community bankers across the country have made it 
clear that a new regulator for them is not the answer to 
protecting consumers. Adding to their regulatory costs and 
burden will not help community bankers protect consumers better 
and will make it harder for community banks to offer the 
variety of competitive products at better rates and terms that 
customers expect and deserve.
    To protect consumers, Congress should address the 
overleveraged, ``too-big-to-regulate,'' ``too-big-to-fail'' 
firms whose concentration risks have cost taxpayers over $10 
trillion in net worth. Congress should also address the many 
nonfinancial banking institutions that are unencumbered by most 
forms of government regulation or accountability.
    An important part of the solution to the ``too-big-to-
fail'' problem is contained in the Bank Accountability and Risk 
Assessment Act of 2009, introduced by Representative Gutierrez, 
and we urge the committee to incorporate this measure into any 
broader financial regulatory reform proposal it considers in 
the future.
    Mr. Chairman, we deeply appreciate the steps you have taken 
to improve the CFPA, most notably by removing the plain vanilla 
product mandate and the reasonableness standard which would 
invite litigation and create tremendous uncertainty. To be 
sure, community banks offer a consumer basic products whenever 
it is appropriate. But simpleness as a doctrine should not be 
promoted at the expense of a consumer's unique and individual 
needs.
    ICBA remains very concerned with the overall approach. 
While we appreciate efforts to encourage coordination, we 
object to the separation of consumer protection compliance from 
safety and soundness regulation. For community banks, the 
prudential regulators have done an excellent job of enforcing 
consumer protection in a way that protects the safety and 
soundness of the bank and the integrity of its customers.
    Also, an agency with the sole focus of consumer protection 
will not likely write rules for a community bank that 
adequately considers safety and soundness. If a bank regulator 
is not equally interested in safety and soundness of the 
lender, it is likely to promulgate unnecessarily burdensome or 
contrary rules to those issued by the prudential regulator.
    The chairman's discussion draft also modifies the 
leadership structure of the CFPA, creating an autonomous 
director while establishing an advisory board with essentially 
no authority. ICBA is concerned with this approach which lacks 
substantive checks and balances and provides no meaningful 
voice for community bank viewpoints in the agency's decision-
making process.
    In conclusion, ICBA agrees that a lack of sufficient 
regulatory oversight, particularly among unregulated mortgage 
lenders and ``too-big-to-be-regulated'' entities led to 
significant abuses of consumers. However, we disagree with the 
response that places community banks into an entirely new 
regime with only vague limits and checks on its powers instead 
of focusing on the real regulatory gaps and augmenting the 
existing system. We really look forward to working with this 
committee to improve our financial system to better protect 
consumers while not restricting the ability of community banks 
to serve their customers.
    Thank you, Madam Chairwoman.
    [The prepared statement of Mr. Menzies can be found on page 
130 of the appendix.]
    Ms. Bean. [presiding] Thank you for your testimony and we 
will now go to Mr. Andrew Pincus from Mayer Brown on behalf of 
the U.S. Chamber of Commerce.

  STATEMENT OF ANDREW J. PINCUS, PARTNER, MAYER BROWN LLP, ON 
             BEHALF OF THE U.S. CHAMBER OF COMMERCE

    Mr. Pincus. Thank you, Madam Chairwoman.
    I want to thank Chairman Frank and Ranking Member Bachus 
for the opportunity to testify here on behalf of the U.S. 
Chamber of Commerce. The Chamber strongly supports the goal of 
enhancing consumer protection. Consumers need clear disclosure 
and better information, they need more vigorous, effective 
enforcement against predatory practices, and they need the 
elimination of regulatory gaps that allow some financial 
service entities to escape the regulations that are applicable 
to their competitors.
    The Chamber opposes H.R. 3126 because it believes the bill 
will have significant and harmful unintended consequences for 
consumers, for the business community, and for the overall 
economy. Last week, the Chamber released a study by Thomas 
Durkin, an economist who spent 20 years at the Federal Reserve. 
He concluded that H.R. 2136 would reduce consumer credit and 
would likely increase the cost of credit that is available. 
Small businesses' access to credit would be hurt as well.
    We appreciate the recognition in Chairman Frank's September 
22nd memo of a number of the specific concerns that the Chamber 
has raised about H.R. 3126. But the difficulty of transforming 
principles into legislative language in this very complicated 
area of the law and the need for careful assessment of the 
impact of proposed provisions is demonstrated by the fact that 
the changes made in the revised bill do not resolve the 
concerns that the Chamber has expressed. Let me give a few 
examples. One critical issue is whether ordinary retailers and 
merchants that extend credit to their customers were covered by 
the original bill. The revised bill does provide that the 
agency will not have authority regarding credit issued directly 
by a merchant or a retailer. But a business that merely accepts 
credit cards could still be classified as a covered person on 
the ground that it indirectly engaged in financial activity, 
which is one of the grounds for a covered person under the 
bill, or that it was providing a material service to the credit 
card network.
    Accountants, lawyers, and tax preparers have expressed 
concern about their status under the bill. The revised bill 
does contain an exemption for these professionals but provides 
that the exemption shall not apply to the extent such a person 
is engaged in the financial activity or is otherwise subject to 
the existing Federal consumer laws. That means that any 
activity by an accountant or a lawyer that falls within the 
broad financial activity definition, for example, providing tax 
planning, advice in connection with estate planning would 
trigger the applicability of the statute.
    The revised bill's exemptions for real estate brokers and 
auto dealers suffers from the same flaw; the exemptions don't 
apply if the Realtor or the auto dealer is engaged in financial 
activity or is otherwise subject to the laws.
    In addition, even the limited protection provided by these 
exemptions doesn't cover activities in which these individuals 
routinely engage. For example, the real estate broker exception 
doesn't include negotiations relating to financing. And the 
auto dealer exemption does not apply to leased transactions and 
excludes all activities relating to the arranging of financing. 
That means auto dealers likely will be covered by the statute 
for all activities other than all cash vehicle sales.
    Another aspect of H.R. 3126 that provoked considerable 
concern is section 132(b), which would have required businesses 
to determine the extent to which consumers comprehended 
particular information. Although that provision has been 
removed from the revised bill, new language has been added to 
section 138.1 making it unlawful for any person to engage in 
any unfair, deceptive or abusive act or practice. This new 
provision imposes broad liability on anyone, not just a covered 
person, any time there is a determination in hindsight that the 
person's conduct was unfair or deceptive or abusive, even if 
there was no regulation requiring a particular disclosure or 
prohibiting the particular practice.
    The revised bill does not include the provision of H.R. 
3126 that imposed the plain vanilla product requirement, but 
the agency could impose that very same requirement through its 
broad authority to prevent abusive acts or by invoking its fair 
dealing authority. And States would be free to impose a plain 
vanilla requirement even if the agency did not do so.
    Next, separating the regulation of financial products from 
safety and soundness threatens consumers as well as the 
stability of the financial system. Although the bill creates a 
dispute resolution process, that process doesn't apply to the 
adoption of regulations by the agency which would still be 
entirely separated from the safety and soundness regulators.
    And finally, at a time when harmonization has been 
identified as a priority by all stakeholders, the proposed 
agency will do the opposite. It rolls back 150 years of banking 
law by subjecting national banks to State regulation, and it 
gives the States independent power to interpret and enforce the 
new separate standards, even if they adopt an interpretation 
different from the agency's. Again, thank you for the 
opportunity to testify, and I look forward to answering the 
committee's questions.
    [The prepared statement of Mr. Pincus can be found on page 
139 of the appendix.]
    Ms. Bean. Thank you.
    We will now move on to Mr. Yingling, president and CEO of 
the American Bankers Association.

STATEMENT OF EDWARD L. YINGLING, PRESIDENT AND CHIEF EXECUTIVE 
          OFFICER, AMERICAN BANKERS ASSOCIATION (ABA)

    Mr. Yingling. Thank you, Madam Chairwoman.
    When I testified here in July, I asked the committee to 
look at this issue not only from the point of view of 
consumers, whose concern should be paramount, but also from the 
point of view of community banks, the great majority of which 
had nothing to do with causing the financial crisis, which are 
struggling with a growing mountain of regulatory burdens.
    Recently, I asked the ABA staff to determine the total 
amount of consumer regulations to which banks are subjected. 
The answer is 1,700 pages of fine print, and that is just in 
the consumer area. Since the median-sized bank has 34 
employees, that means the median-sized bank has 50 pages of 
fine print for each employee. That means that half the banks in 
the country have more than 50 pages per employee in the 
consumer area alone.
    I want to express our appreciation for the consideration 
many members of this committee have given to the situation of 
traditional banks and to the unnecessary burden that would be 
placed on these banks.
    While there are many causes of the financial crisis, 
failures of consumer protection in the mortgage arena certainly 
contributed. As Congress moves to strengthen consumer 
regulation, however, it is important to focus on what the 
problem areas were. The two areas that have been identified as 
needing reform are the need for more direct focus by regulators 
on consumer issues and the need for more enforcement on 
nonbanks. The ABA agrees that reforms are needed in these two 
areas. On the other hand, in our opinion, no real case has been 
made for changes to other areas.
    The first area is requiring additional enforcement on banks 
and credit unions. While the argument is made that Federal 
regulators should have developed stronger regulations and 
sooner, there is little indication that once the regulations 
are issued, they are not enforced on banks and credit unions.
    The second area is giving the CFPA vast new powers. It is 
not clear why new authorities are needed. As has been talked 
about earlier this morning, the Fed had the mortgage regulatory 
authority and has the clear authority to address credit card 
issues, which is already done, and overdraft protection, which 
is in process. In fact, the expanded use of UDAP by the Fed 
creates a powerful tool in addition to specific consumer laws.
    The CFPA, unfortunately, goes well beyond addressing the 
two weaknesses identified. The Administration's proposal 
unnecessarily imposes new burdens on banks and creates an 
agency with vast new powers. We are pleased that the chairman's 
discussion draft addresses several issues the ABA has raised 
and seeks to lessen the additional burdens on community banks.
    One of our major concerns with the CFPA as proposed is that 
it would not adequately focus on the nonbank sector where the 
subprime mortgage crisis really began. The discussion draft 
rightly focuses regulation more on nonbanks than the original 
proposal did.
    The ABA still has major concerns in three areas.
    First, the ABA supports the preemption of State laws under 
the National Bank Act. We believe, without such preemption, we 
will have a patchwork of State and local laws that will confuse 
consumers and greatly increase the cost of financial services.
    Second, as I just stated, there has been little 
justification for the broad new powers given the CFPA. The 
draft removes two of these explicit powers, plain vanilla 
products and requiring communications to be reasonable.
    However, even with those changes, the proposed CFPA will be 
given unprecedented powers. Vague legal terms, such as 
``abusive'' and ``fair dealing'' will create great uncertainty 
in the markets because no one will know what the new rules of 
the road will be. This will undoubtedly cause firms to cut back 
on the extension of credit and to avoid offering new products.
    From the broader perspective, the delegation authority of 
the CFPA is so vast that it renders all previous consumer laws 
enacted by Congress, including the recently enacted credit card 
law, mere floors. Several members of the committee have rightly 
raised concerns about this broad delegation.
    Third, the ABA opposes the creation of an entirely new 
agency on the fundamental principles that: first, you cannot 
separate the regulation of products from the entity; and 
second, that safety and soundness and consumer protection are 
too intertwined to be separated. ABA is committed to working 
with Congress to strengthen consumer protection while avoiding 
undermining the availability of credit and imposing new 
unnecessary costs on consumers and financial service providers. 
Thank you.
    [The prepared statement of Mr. Yingling can be found on 
page 151 of the appendix.]
    Ms. Bean. Thank you.
    And now we will hear from Mr. Bill Himpler, executive vice 
president of the American Financial Services Association.

   STATEMENT OF BILL HIMPLER, EXECUTIVE VICE PRESIDENT, THE 
         AMERICAN FINANCIAL SERVICES ASSOCIATION (AFSA)

    Mr. Himpler. Thank you, Madam Chairwoman, and members of 
the committee.
    I appreciate the opportunity to give the finance company 
perspective on the proposal to create a CFPA. In light of the 
revisions put forward last week, I would like to thank the 
Chair, Mr. Frank, for his willingness to listen and consider 
different perspectives on this very important proposal.
    At the same time, we have noted that Mr. Frank was quoted 
as saying last week that Congress would enact death panels for 
nonbanks. I think this quote is indicative of the sense in 
Washington that many have that State-regulated correlates to 
unregulated. Therefore, I would like to take a minute to set 
the record straight regarding the regulation of consumer 
finance companies.
    Finance companies have been around for over 100 years. They 
come in many shapes and sizes. Some are independently owned and 
specialize in personal loans to consumers and businesses. 
Others are captives that provide financing to vehicles or other 
products manufactured by their parents, and I can assure you 
that finance companies are already heavily regulated.
    In addition to being subject to Federal consumer protection 
laws, such as TLA and ECOA, finance companies are licensed and 
regulated by States and abide by the consumer protection 
statutes in all the States in which they do business. Like 
banks, finance companies undergo regular and vigorous 
examination by State regulators. These companies have been 
successful at meeting the credit needs of communities in part 
because they are subject to oversight by State regulators who 
have familiarity with local situations and issues faced by 
lenders and consumers. State regulators frequently are among 
the first to identify emerging issues, practices or products 
that may need further investigation.
    AFSA strongly supports the efforts by this committee to 
improve consumer protections for financial service consumers. 
However, we do have a philosophical difference about how to 
achieve this goal and remain concerned that the proposal would 
reduce and perhaps eliminate a critical source of consumer 
credit for the following reasons.
    First, the CFPA would try to fix what is still working and 
use a one-size-fits-all approach, as mentioned by Mr. Scott, to 
financial service products. For instance, it makes no sense to 
compare terms such as APR for a 30-year fixed mortgage with 
those of short-term installment loans used to buy a new washer 
or dryer. Many of the companies that would be subject to these 
intensified requirements, greater restrictions, and higher 
compliance costs would be those who didn't contribute to the 
mortgage crisis at all.
    Second, there is no guarantee that the CFPA would be better 
able to weed out bad practices in the financial services sector 
than existing agencies. Policymakers should not be tricked and 
trapped into thinking that more bureaucracy is what is needed 
to improve consumer protection.
    What is more, putting an untested, inexperienced agency in 
charge of consumer protection for the entire financial 
marketplace could exacerbate existing problems rather than 
reducing them.
    Third, if the CFPA were to become a reality, financial 
services customers are likely to have less borrowing 
flexibility, even with the elimination of the the plain vanilla 
requirement. The new regulator would still retain expansive 
rulemaking authority and the ability to determine allowable 
consumer products.
    Under CFPA's jurisdiction, finance companies will face 
considerable compliance costs that will get passed on to 
borrowers, imposing a new tax on consumers at a time when they 
can least afford it.
    Fourth, AFSA believes that consumers will be better served 
by a regulatory structure where prudential and consumer 
protection oversight is housed within a single regulator. FHFA 
Director James Lockhart recently cited the separation of these 
functions as one of the primary reasons for the failure of 
Fannie and Freddie.
    For the reasons I have just stated, AFSA believes the 
creation of CFPA will not fulfill the goal of improving 
consumer protection for financial services customers. It is 
hardly in the consumers' best interest to add new layers of 
bureaucracy, reduce credit choices, and raise prices for 
financial services.
    In addition, I would like to point out that if the proposal 
focuses on nonbanks, it could reduce and perhaps eliminate many 
finance companies, which are a critical source for credit for 
consumers and small businesses. Take for example, an 
unanticipated car repair. Vehicles play a critical role in 
sustaining employment because most Americans still use cars to 
get to work. Without the ability to borrow money from finance 
companies, repairs necessary for such transportation may not be 
possible for many less-advantaged Americans.
    Ultimately, if installment lenders, auto lenders and other 
finance companies are required to shoulder much of the 
compliance burden resulting from CFPA, it will undoubtedly 
affect their ability to provide safe, convenient, and 
affordable loans just as we are starting to get the economy 
back on track.
    Thank you, Madam Chairwoman, and I look forward to 
answering any questions.
    [The prepared statement of Mr. Himpler can be found on page 
112 of the appendix.]
    Ms. Bean. Thank you all for your testimony.
    And now to begin questions, I will turn to the gentlewoman 
from California, who is recognized for 5 minutes.
    Ms. Waters. Thank you very much.
    And I thank our panelists for being here today.
    I don't know if you have heard about the fact that, in my 
office, we got very much involved in loan modifications because 
we were receiving so many complaints. Not only complaints from 
my district, but everywhere I go, whether it is at church or at 
a social event, American Airlines that I travel, the workers 
there, everywhere, I am bombarded with people who are in 
mortgages that they can't afford for whatever reason. They lost 
their job. They got into a predatory loan. And we are 
overwhelmed because we do help. We help connect people with 
servicers. We help to interpret to servicers the problems that 
people have. We get waivers from constituents so that we can 
talk about their loans and help guide the servicers and make 
sure the servicers are taking everything into account.
    But I just want to share something with you, why I am so 
exercised about having a consumer financial protection agency. 
I want to tell you about Mrs. Himpler. This is one of the 
hundreds that we are working with. She is a 77-year-old woman, 
of course, who called our office. She has a fixed income of 
$1,025 a month, which she earns from a widower's pension. When 
she took out the loan 2 years ago, her income was only $950 per 
month. She was approached about refinancing her home. Her home 
was worth $248,000 at the time. I guess they appraised--she 
owed rather, $248,000. The home was appraised at $480,000. The 
loan amount was $336,000. They gave her a refi, and they 
charged her $70 a month for her refi, and this is the way it 
operated. It was a variable rate mortgage. She pays $70 a month 
in 2011. Her payment will reset to $2,973.44 a month. The loan 
will reset again in 2012 to $3,067.84 a month. And finally the 
loan will reset a third time to $3,825.20 a month in 2017. What 
are we supposed to do with this kind of mess?
    Mr. Himpler, you represent GMAC Financial as part of your 
industry group. This was one of those loans that was made by 
Paul Financial. It was one of those warehouse mortgage lenders. 
But they sold it to GMAC. I guess GMAC and others are happy to 
accept these kinds of loans because they know that they are 
going to get the house. They know that they are eventually 
going to get this house, that this 77-year-old woman will die 
before she is even able for the third reset. What are we 
supposed to do, Mr. Himpler? What are we supposed to do?
    Mr. Himpler. Well, let me ask first, did I hear you say 
your constituent's name was Ms. Himpler?
    Ms. Waters. No. I am sorry. That is your name.
    Mr. Himpler. I just thought it was a really interesting 
coincidence.
    Ms. Waters. No. Please--that is a mistake. But that is not 
the point. The point is, this is a predatory loan that I am 
confronted with time and time again, and you come here to tell 
us about why a consumer protection finance agency is not wise 
thinking. What should we do?
    Mr. Himpler. Our position at AFSA is that finance companies 
face heavy regulation at the State level. At the State level, 
consumer credit administrators in 2008 alone have brought 7,000 
enforcement actions in the mortgage sector alone, as compared 
to what Mr. Calhoun made mention of with respect to OCC 
enforcement actions taken to the Attorney General, the 
Department of Justice. We think that, as my colleague Mr. 
Calhoun made mention, that you have very strong State statutes 
to protect against the very abuses--
    Ms. Waters. My time is out. And I see where you are going. 
No, we are not--I am not here to complain about the State 
statutes. I am here to talk about trying to protect consumers 
from the Federal--I want you to help me with this loan. I want 
you to get the servicer on this loan on the phone with me and 
Ms. Jones, who is 77 years old, who has been--spent $70, is now 
going to reset and reset and reset. I want you to help me 
modify this loan. That is all I want from you today. Thank you.
    Ms. Bean. The gentleman from Texas is recognized for 5 
minutes.
    Mr. Hensarling. Thank you, Madam Chairwoman.
    I guess I want to start out with a rhetorical question. I 
heard that one of my colleagues said we really have nothing to 
fear from the CFPA and used the comparison to the FDA allowing 
statin drugs on the market, that even though they might have 
had the power to keep them off the market, they allowed them. I 
think I would be interested to actually conduct the research to 
find out how many people might have actually lost their lives 
waiting for the FDA to approve that drug.
    Prior to coming to Congress, I was a member of the board of 
directors of the American Cancer Society in Dallas, Texas. And 
I can assure you there are a number of families in the Dallas 
area who are convinced they lost their loved ones waiting for 
the FDA to finally approve cancer treatments.
    So I also am curious, if we had a CFPA, how many homes 
would be lost, how many small businesses would be compromised 
as we sit around waiting for the CFPA to decide whether or not 
people have the liberty in a free society to decide what kind 
of credit cards, home loans, and auto loans they have.
    And that is a rhetorical question.
    I have heard some on the other side of the aisle earlier 
today say that the primary reason or certainly a significant 
reason that we have economic turmoil is because people I 
suppose in financial institutions represented by your 
organizations steered consumers into risky products because 
there was high profit to be found.
    I guess the first question I have is, how much more profit 
do you make on a defaulted loan as opposed to one that remains 
in compliance?
    Mr. Menzies, let us start with you. When the customer 
defaults, do you make more profit?
    Mr. Menzies. Pretty simple answer, you don't make any money 
on a defaulted loan, and you lose a relationship. So when you 
underwrite a loan, you don't underwrite a loan with the hopes 
that it will default and you can go collect legal fees and that 
sort of thing.
    But, Congressman, let's understand what really caused the 
crisis. Do we believe that it was community banks and lenders 
who live with the people that they lend to? They go to Rotary 
with them. They sit on the hospice board with them. They live 
with them.
    Underwriting products and sticking them into SIVs on Wall 
Street that are then rated by rating agencies that don't know 
what they are looking at and selling to investors that don't 
understand what they are buying; do we really believe that the 
community banking industry was a player in that game?
    Mr. Hensarling. Mr. Menzies, speaking for myself, the 
answer is ``no.''
    Given the limited time I have, let me skip ahead. I think I 
have heard in your testimony--I don't have it right in front of 
me--that not withstanding the chairman's new bill, that you 
still had concerns--I suppose we are no longer in the mandatory 
plain vanilla, but maybe possibly highly suggested plain 
vanilla. I am paraphrasing what I think I heard in your 
testimony. Do you still have concerns that the regulator will 
essentially steer you to standardized products?
    Mr. Menzies. I don't think we have done a very good job of 
explaining to this committee and to Congress that community 
banks are not in the product business. We don't sell products.
    Mr. Hensarling. So is it fair to say that you--
    Mr. Menzies. We try to create solutions. And if this 
legislation takes away our ability to create a solution to 
satisfy the need of a consumer, if it is a product-driven 
approach to dealing with this problem, we are going to lose the 
competitive advantage that community banks have to create 
solutions for people in need.
    Mr. Hensarling. So is it fair to say that you still retain 
that fear?
    Mr. Menzies. Absolutely.
    Mr. Hensarling. I met with some community bankers over the 
congressional recess in August. One described to me a very 
customized--you don't like the term ``product,'' but I don't 
have another term at the tip of my tongue--a very customized 
product for a lady who was trying to buy school supplies for 
her children as the children returned to school. And they 
customized a product totally for her, and I don't remember all 
the details, somehow tied to the paycheck, 6-month payout, 
different provisions, that would allow her to push the loan 
back.
    My community banker in Kaufman County, Texas, said under 
this legislation, I don't think I could have offered that 
product. And so I am describing, I suppose, a relationship-
driven credit opportunity that you would fear might disappear 
under this legislation.
    Mr. Menzies. We believe we have to maintain the flexibility 
to offer solutions and choices to small businesses and to 
consumers. We do not believe you can standardize or vanilla-
ize, or whatever, financial products and serve the needs of 
America's communities.
    Mr. Hensarling. Thank you, I am out of time.
    Ms. Bean. The gentleman from North Carolina, Mr. Watt, is 
recognized.
    Mr. Watt. Thank you, Madam Chairwoman.
    Let me start by expressing publicly what I have expressed 
to a number of your representatives privately, which is just an 
absolute sense of exasperation for the positions that you all 
have taken on this, which really have been--we are going to 
oppose this and oppose it and oppose it. And we are going to 
make all kinds of discussions for not doing this. We are going 
to lay down on the road and we are really not going to come and 
sit down and talk about how to resolve the issues. There are 
some issues that I think need to be resolved and I just am just 
exasperated at the approach the industry has taken on this.
    And here today, you all tell me, Mr. Yingling, that there 
is no real case for change here. After all of the experiences 
that we have been through that demonstrate the case for change, 
to hear testimony that says there is no case for change having 
been made--
    Mr. Yingling. Congressman, I never said that.
    Mr. Watt. --it is exasperating to me.
    Mr. Yingling. I never said that.
    Mr. Watt. Go back and listen to what you said.
    Mr. Yingling. No, that is not what I said.
    Mr. Watt. I am not going to get into an argument. Let me 
tell you I hear you all say that you are concerned about one-
size-fits-all, but there is not but one size to safety and 
soundness. When we say protect consumers, there is no size 
differential that we are talking about here for community 
banks.
    If the shoe doesn't fit, then you won't wear it. Just like 
in safety and soundness, if the shoe doesn't fit a particular 
bank, if you are providing services and nothing is going wrong, 
the notion that behind every tree there is some big boogeyman 
that is going to make you do something different is just--I 
don't understand that. The standard that says go out and 
protect consumers is no more one-size-fits-all than a standard 
which says go out and assure safety and soundness in the 
industry.
    The double standard that you are talking about that would 
require this agency to have some kind of oversight panel when 
there is nothing that exists with the other regulatory agencies 
is just beyond me. I don't understand that.
    We put--the proposal puts a council there that they consult 
with. There is no veto authority that anybody has if the Fed 
determines that you are taking some kind of action that is 
unsafe and unsound. Yet you would continue to make this agency 
a stepchild in the whole regulatory structure. I think that is 
exactly what the public is saying is unacceptable. And I don't 
understand what your position is.
    You tell me there are 1,700 pages. Well, let's write into 
the authority of this agency the authority to go in and review 
those 1,700 pages and reduce them.
    Part of the reason we have 1,700 pages now is because you 
have consumer protection spread out all over every agency in 
the regulatory framework. You say it is acceptable to go out 
and impose this agency on non-banks, yet something is wrong 
with the agency when we try to do exactly the same thing for 
bank entities. I don't understand this, and I am exasperated by 
it. And I am disappointed.
    Go ahead and say whatever you want to say in response to 
that, but I can't tell you how exasperated I am with the 
posture you all have taken on this. With consumers out there in 
the public demanding that we do something to protect them, you 
all are saying that we ought to be catering to your industry 
still. And I think that is unacceptable.
    Ms. Bean. Time has actually expired.
    Mr. Yingling. May I respond?
    Ms. Bean. A brief response.
    Mr. Yingling. Well, first, Congressman Watt, there is 
nobody who has worked harder in this Congress to try to resolve 
these kind of issues than you have. So we don't want you 
exasperated.
    Mr. Watt. Which is exactly why I am exasperated.
    Mr. Yingling. I know it is. If you interpreted what I said 
as that changes are not needed, that is not what we are saying. 
What I am trying to say is that the focus of such change needs 
to be on the two factors that really seem to cause the problem 
primarily.
    One is a lack of focus within the regulatory agencies on 
these issues, which is really what happened.
    Two, that the enforcement part of it, the enforcement part 
of it, was on the non-bank side, not on the bank side.
    What I said which was, I am afraid easily misinterpreted, 
was if you look at the actual authority, the actual authority 
wasn't the problem. The Fed had the HOEPA authority; the 
regulators have the authority Under Unfair and Deceptive 
Practices, UDAP, to address all these issues, and they haven't. 
So it is an issue of focus, not an issue of powers, in my 
opinion.
    Ms. Bean. Time has expired.
    The gentleman from Minnesota, Mr. Paulsen is recognized.
    Mr. Paulsen. Thank you, Madam Chairwoman.
    Mr. Menzies, maybe I can start by asking you a question. 
During the debate that we had in the committee here on the 
Credit Card Act, there was significant discussion and actually 
concern on both sides of the aisle regarding possibly 
accelerating the implementation of the deadlines that were put 
in the bill.
    I was working on an amendment with Mr. Moore of Kansas to 
make sure there was proper time to implement the legislation as 
it went forward.
    Now, even though the law is on the books and the Federal 
Reserve Board, just on Monday now, introduced 800 pages of 
proposed rules, there is talk of Congress accelerating these 
dates and deadlines even further.
    Since we are talking about consumer products today and 
credit products, from your perspective what does speeding up 
these deadlines mean to small issuers that have had concerns 
about the legislation as it has been moved forward?
    Mr. Menzies. Congressman, the simple answer is that it 
could cause small issuers just to exit the business and sell 
portfolios to the larger issuers, which would create more 
consolidation in the industry, which we don't believe is 
healthy.
    The more detailed answer is that the new legislation is 
complex and comprehensive when it comes to dealing with 
changing the statements, changing the disclosures, testing the 
new systems. It represents a major reconfiguration of the 
credit card requirements. And we are hopeful that community 
banks can make it by July of next year, which, if I am correct, 
is the currently scheduled kick-in date for this new 
legislation.
    If the legislation is moved forward too quickly and 
community banks are unable to reconfigure to deal with an 
advancement of the legislation, then that part of the business 
could result in them saying, well, I will just exit the 
portfolio business and sell it to a larger aggregator, which we 
don't belive is in the interest of the consumer.
    Mr. Paulsen. Well, I thank you for that and that is 
something we will have to pay closer attention to on this 
committee. In particular, I know the chairman has made some 
announcement recently that he may move the deadlines up 
further. But to think of losing smaller issuers in terms of 
exiting the business altogether, I don't think that is good 
from a competitive standpoint or more consolidation as well.
    I remember the regulators who sat at that table were 
testifying specifically about the implementation dates that are 
on the books already, and so I think we need to be really 
prudent and cautious about that.
    Mr. Yingling, maybe I can just offer you an opportunity, we 
kind of ran out of time on your last series of questions there, 
but you referenced focusing on two different factors: the lack 
of focus that was currently going on in the regulatory 
environment as well as the enforcement side.
    Can you expand a little bit about the enforcement side, and 
right now with the proposal of CFPA sort of having separation 
of enforcement versus the oversight?
    Mr. Yingling. It seems to me there is a lot of consensus 
around the fact that there is not--
    Mr. Green. Would you pull your microphone a bit closer, Mr. 
Yingling?
    Mr. Yingling. It wasn't on--that there was not an adequate 
focus on consumer issues. And if you would look at the history, 
particularly the history of what caused this crisis, you can go 
back to a point in time and say, if the Fed had implemented 
HOEPA in an aggressive fashion, with the powers in HOEPA, from 
the consumer side we would not have had the degree of problem 
we had.
    One of the weaknesses that the Fed had to face at that 
point was that HOEPA gave them at the Federal level no 
enforcement over the non-banks. So with the mortgage brokers, 
even though HOEPA technically would have applied to them, the 
enforcement would have been left to the State level. And in 
that case, we know that the enforcement was inadequate.
    So if you look at that history, it seems to me that you 
draw the conclusion that the problem is a lack of focus at the 
Federal level on consumer issues, and an inability to ensure 
enforcement at the State level. In many cases, there is good 
State enforcement but, clearly, in the mortgage area there was 
not.
    What I was attempting to say in my testimony--and maybe 
didn't say it very well--was I don't think the case has been 
made that there aren't enough powers out there. The regulators 
have all the laws that you all have enacted, and there are a 
lot of them, the 1,700 pages of regulations I talked about. 
Plus they have a new aggressive tool that the Fed used in the 
credit card case, the Unfair and Deceptive Acts and Practices. 
You combine those, then I think that the power is there; and if 
it is not, you all can enact new laws.
    So what I am trying to say is, if you focus on the 
problems, the problems are a lack of focus at the Federal level 
and a weakness in certain mechanisms for enforcing at the State 
level.
    Ms. Bean. I will now recognize myself for 5 minutes.
    My first question is to Mr. Yingling in follow-up to 
Congressman Hensarling's question about what does one earn more 
or less relative to a delinquency versus a foreclosures?
    My question is in relation to servicers. I certainly agree 
with Mr. Menzies's contention that community banks aren't going 
to earn more in that situation. But can you please comment on 
how much more servicers make servicing a delinquency or 
servicing delinquency versus foreclosure?
    Mr. Yingling. I don't know the full answer to that, Madam 
Chairwoman. I would have to come back to you. I do think we 
have issues, and servicing was designed for servicing. And 
nobody ever anticipated--unfortunately, they should have--that 
servicing would be doing what it is trying to do today, which 
is to rework literally millions of loans. We all know that--
    Ms. Bean. Let me interrupt you and ask you this way: Are 
you saying that there aren't occasions where servicers are 
making more when property is foreclosed than if they continue 
to service them in delinquency?
    Mr. Yingling. No. I think the servicing process has a lot 
of incentives and nooks and crannies and bottlenecks, because 
it wasn't set up for this.
    Ms. Bean. So you have no knowledge of how that compares to 
some of the incentives that were put in place by the 
Administration to incentivize loan modifications?
    Mr. Yingling. Not off the top of my head, but we will get 
you that.
    Ms. Bean. Let me move to Mr. Pincus.
    Are you aware of Federal consumer protection laws that set 
a nationally uniform standard for nonfinancial-oriented 
products that the States cannot exceed?
    Mr. Pincus. Yes, Congresswoman. I can think of two off the 
top of my head: one, the Consumer Product Safety Commission 
statute, which does preclude State action when it acts with 
respect to some kind of a safety concern; and two, the National 
Highway Traffic Safety Administration, NHTSA, also with respect 
to auto safety issues, has a preemption standard.
    Ms. Bean. So having nationally uniform standards is 
something that has been done before, and, by not rolling back 
those same protections in the financial arena wouldn't be 
unprecedented.
    Mr. Pincus. Yes, it would. And just to comment on some 
statements earlier, I think this bill moves way back from any 
standard of preemption in recent times for the national max. It 
is not close to what was in effect before 2004. There is much 
less Federal uniformity under this approach.
    Ms. Bean. Thank you. I yield back and I now recognize the 
gentleman from my neighboring district in Illinois, Congressman 
Manzullo.
    Mr. Manzullo. Thank you, Madam Chairwoman.
    I look at you four, and some people think that the existing 
regulatory agencies are very cozy with you and give you all 
kinds of passes, are not concerned about the thousands of hours 
that you may spend in audits, and think that organizations like 
the FDIC give you a pass on soundness and safety, such as the 
latest one requiring assessments 2 years in advance and 
destroying liquidity within community banks.
    I say that facetiously, because, being very close to the 
community banks back home, which had not been a problem and did 
not cause this meltdown, all of a sudden we see that simply by 
setting up a brand new agency, that everything is going to be 
resolved.
    In fact, in the testimony that took place by Mr. Calhoun 
earlier, he already said there are enough laws that are on the 
books and it is simply a matter of enforcement.
    So my question is, just because a so-called new agency 
would be independent, what makes people think that they would 
be any more prone to enforcing so-called consumer issues than, 
for example, the Fed, which had the power to outlaw 2/28 and 3/
27 mortgages and the power to require underwriting standards of 
having written confirmation of a person's income? Why would 
things change? Who would these new regulators be?
    Mr. Menzies, welcome back. I think this is the third time I 
have seen you here. And you have been an excellent witness on 
behalf of the Independent Community Bankers Association. Do you 
understand the tenor of my question?
    Mr. Menzies. I hope so, Congressman.
    Mr. Manzullo. Could you pull the microphone closer?
    Mr. Menzies. As you know, Congressman, I get married on 
Saturday. I am going to understand the meaning of living by new 
rules.
    But I would agree that the community banks of this Nation 
not only didn't create the train wreck, but if you had had the 
opportunity to sit through my safety and soundness exam 2 
months ago with 7 members of our board of directors and receive 
the FDIC's report on safety and soundness and compliance and 
CRA and everything else, you wouldn't think that they are 
passing us over, or cozy, or anything like that.
    Mr. Manzullo. That is precisely--
    Mr. Menzies. They have taken their responsibilities very, 
very seriously. And that is one of the reasons that the 
community banks are well-capitalized, well-managed, and well-
regulated. They are small enough for the regulators to get 
their arms around, to deal with them, and to effect the 1,700 
pages of legislation and the safety and soundness 
simultaneously.
    Mr. Manzullo. Mr. Himpler, would you like to comment on 
that?
    Mr. Himpler. Yes, Mr. Manzullo. I think it is worth noting 
for the committee members that apart from mortgage--and all the 
discussion has been on mortgage--according to Federal Reserve 
data, there is at any given time $2.5 trillion of outstanding 
consumer credit, that doesn't include payday. We are talking 
personal loans, student loans, small business loans, vehicle 
loans. Over half is generator-originated by nondepository 
lenders that put their own money at risk and are not a risk to 
the system.
    I think what concerns us is exactly how broad this is and 
the single focus. We all recognize on both panels a need for 
consumer protection. But if you went to the Department of 
Transportation and created this agency and said, we want you to 
protect drivers with a single focus, if I were that agent and I 
had no other responsibility, I would reduce the speed limit 
from coast to coast to 25 miles an hour. That is what we are 
afraid of.
    Mr. Manzullo. I agree with that. I guess the issue is the 
powers have already been out there to stop the subprime 
meltdown. But it is interesting that some of the people who 
complain now that those powers were not used, were the first in 
line to say, we have to have housing for everybody. Housing 
became a right, and then an entitlement, and then the meltdown 
started on it.
    Thank you.
    Mr. Green. [presiding] Mr. Driehaus of Ohio is recognized 
for 5 minutes.
    Mr. Driehaus. Thank you very much, Mr. Chairman. And thank 
you, gentlemen, for testifying today for the umpteenth time for 
some of you.
    I spent the better part of the last 8 years in the State 
legislature in Ohio. And I fully agree with you that the 
community banks and the small independent financial 
institutions were not part of the problem. But I think you 
would concede that you have not been part of the solution 
either.
    For years, we tried to pass predatory lending legislation 
in the State of Ohio, and were stopped. We were stopped in 
large part because so many financial institutions said, look, 
we are already the most regulated industry in the country, the 
last thing we need is more regulations. And the legislature too 
often bought into that.
    It wasn't until Governor Strickland was elected in 2006 
that we finally created a foreclosure task force in the State 
of Ohio, and finally started actually doing something. And even 
then, I served on the task force, the bankers were very 
reluctant to work on legislation that would have gotten at some 
of the predatory lending issues.
    Now, I grant you that the vast majority of the legislation 
should have been Federal in nature because the State-chartered 
institutions were few, and they weren't causing the problem. 
But I just have a problem with this revision as history.
    I agree, and I have been fighting for the community banks 
and this legislation. I was on the phone with the FDIC 
yesterday, talking about assessments and trying to protect 
community banks. But my problem is that in the last 8 years, we 
saw this thing run away; we saw predatory lending legislation 
introduced in this body in 2001 and every year since, and we 
did nothing about it.
    We saw the problem, but people were making money off the 
system when real estate was increasing. And until the bubble 
burst, that is when everybody said, okay, we need to do 
something about it.
    Well, we were paying the price in foreclosures in 
Cincinnati back in 2001 and in 2002 and 2003. I now live in a 
neighborhood that has hundreds of homes that have been 
foreclosed on because we failed to act back then, and the banks 
were part of that inertia.
    What I am trying to get at is I want to come up with a 
solution that works. I believe very strongly in consumer 
protection. I also believe you don't need another regulatory 
burden. Is there a way that we structure this that we are 
achieving the consumer protection--and maybe it is not by 
giving the CFPA examination authority, maybe it is by allowing 
them to create rules and regulations, and they then have 
enforcement authority but they don't have examination 
authority, because you don't need another examiner.
    I want to make this thing work because the consumers are 
demanding it, and the consumers deserve it. We in our 
neighborhoods are paying the price for it. It is not those 
folks who were foreclosed on, it is not the big banks that have 
the mortgage-backed securities, it is the neighborhoods who are 
paying the price. And we continue to pay the price.
    So I want you to help me make this work. And I think many 
of us are willing to work with you in trying to reduce the 
regulatory burden, but help us understand how we make that 
happen.
    Mr. Yingling?
    Mr. Yingling. Congressman, I just want to say I agree with 
you completely. I think that our industry--I will speak on 
behalf of the ABA--made a big mistake. We didn't look at this 
hard enough, we didn't look at it more globally. We looked at 
it previously on what does it mean for our regulatory burden on 
banks.
    And not to justify but to explain it, it is because we have 
such a heavy burden that we get paranoid about it, sometimes 
for good reason, but we should have been more aggressive in 
looking at this bad lending and looking at the trends and 
seeing what was happening in communities. And we should have 
worked with you at the State level; we should have worked with 
the Fed earlier on to say, look, something is wrong here and it 
is going to blow us up.
    One of the lessons for the future is we can't just look at 
what is going on in our narrow interest, but we have to look at 
what is going on in the economy and in neighborhoods like 
yours. So your criticism is justified.
    Going forward, we need to sit down and figure out how to 
make this work so we do have more focus on consumer protection, 
so we don't have the bubbles and bad actors that eventually 
gobble up all of us. And you have our pledge we are going to 
work with you to help solve this. We do have concerns about how 
it is done, but we need to make sure we have protections in 
place.
    Mr. Driehaus. And because I am running out of time, 
although I don't see any other folks here, so maybe the 
chairman will allow me a little more, do we get part of the way 
there by taking away examination authority of the CFPA, by 
allowing it to be a rulemaking body with enforcement power but 
not examination authority, do we get part of the way there?
    Mr. Menzies. Coordination is important on anything that can 
be done to produce greater coordination between the regulatory 
agencies and the CFPA will produce a positive benefit.
    But, Congressman, community banks and our customers were 
equally injured by predatory lending. And in our State, we have 
been aggressive about that, because predatory lending benefits 
no one.
    Mr. Green. Mr. Lee of New York is recognized for 5 minutes.
    Mr. Lee. Thank you. I was pleased to hear my friend from 
Ohio talk about the idea of what we can do to promote less 
bureaucracy and greater efficiency.
    If we are ever going to emerge from this economic downturn, 
it has to be through job creation in the private sector. Your 
industry has been one of those bright spots, especially 
community banks who have been good stewards, well-capitalized, 
and without them during this downturn, the situation could have 
been much worse.
    I am astonished because you look at Congress and it seems 
that Congress has a way of adding restrictions, regulatory 
burdens, more bureaucracy, frankly, in some cases to industries 
that have done well. My concern here is how we impact, again, 
the community banks in getting through this. I look at what the 
CFPA represents, and especially with the issue on preemption.
    I guess maybe I can start with, Mr. Yingling, your concern. 
What are the potential consequences, unintended or not, if this 
issue of no longer having Federal preemption takes place?
    Mr. Yingling. First, very briefly, there was some 
discussion in the last panel as though preemption were created 
4 or 5 years ago. I have behind my desk, and have had for 30 
years in my office, a copy, with Abraham Lincoln's signature, 
of the National Bank Act. The preemption goes back to that law 
signed by Abraham Lincoln.
    And we have always had preemption in the consumer area. 
What happened 5 years ago is all of a sudden there were cases 
all over the country. We had the City of Santa Monica, the City 
of San Francisco, passing ordinances that they basically--and 
the courts said it was the case--violated the National Bank 
Act. So the Comptroller came in with a rule that was designed 
to clarify to everybody, here is what is going on and, you, the 
City of Santa Monica, will violate this rule and you are going 
to lose in court. And that is in effect what happened.
    We have always had preemption. It became much more 
contentious in the last 10 years as States tried to do things 
and as attorneys general tried to do things.
    There has to be a happy medium somewhere. I don't know why 
we have to go to court all the time to settle this. There has 
to be some way to receive the input from the States, to let 
them deal with really egregious issues, while not having 50, 
and then add the locals, different rules.
    The visual I use is we all want to have a very simple 
credit card disclosure. Everybody talks about having one page. 
You are not going to have one page, because you are going to 
have one page, plus 40 or 50 or 60 disclaimers on it. I saw one 
the other day that said if you were married in one State it is 
this; if you are not married, it is that. So it is very hard to 
function; it would be very inefficient.
    And one key point: chilling new products. It is one thing 
to say I am going to offer and design a new product and figure 
out what law applies to it. It is another thing if you have to 
go through an analysis of 50 laws, 10 of which could change 
while you are doing the analysis.
    Mr. Lee. Is it fair to say if we don't get our arms around 
this, it will stifle the ability for these businesses to grow 
and add employment?
    Mr. Yingling. Right. And more than that, it is going to 
stifle the ability of consumers and small businesses to get 
credit products or other financial products.
    Mr. Lee. Thank you. With that I yield back.
    Mr. Green. Thank you. I thank all of the witness for 
appearing and especially thank one witness, Mr. Menzies, for 
appearing. This is 2 days before your wedding. I imagine there 
may be one or two things you could be doing elsewhere. So thank 
you for taking the time to come in. I also trust this will not 
be your last appearance with us, we will see you in the future.
    Mr. Yingling, I do take seriously your comments. You 
indicated a lack of focus was a part of the problem. Explain to 
me how we can--how you would have us cause the proper amount of 
focus to be generated such that these things that escaped us 
previously would not escape us going forward. How would you 
handle the focus question?
    Mr. Yingling. I am not sure I have the total answer. I 
think the hearing today brought out a lot of options that we 
can look at. I think part of it is making it more explicit in 
the statute that you should do this. I think part of it may be 
the structure of whatever we end up doing here, whether it be 
within something that looks like the existing framework or 
something new that builds in an explicit focus. Part of it 
could be in staff requirements. Frankly, a lot of it is in who 
is appointed.
    If you think through who was sitting on the Federal Reserve 
Board at this critical time or who has been in some of these 
seats, perhaps there could have been somebody on the Federal 
Reserve Board with more of a focus on it.
    But I don't think you can rely totally on people, that is a 
major part, but I think we have to in some way institutionalize 
in whatever we end up doing here, something that says there 
will be focus.
    One way to do it also that we have suggested is you have 
the regular Humphrey-Hawkins type hearings before this 
committee, that you have regular hearings on the consumer 
issues.
    The other thing is, this doesn't get down into the trees, 
but as you consider the creation of a systemic regulator, the 
systemic regulator should also have built in a consumer focus, 
because systemic problems are not just a huge institution, they 
are not just credit default swaps. The mortgage crisis was a 
systemic problem.
    Mr. Green. Continuing, so as not to confuse those looking 
in perhaps for the first time, do you all agree that there is a 
necessity for some sort of consumer protection--and without 
going farther and saying ``agency,'' just consumer protection? 
If there is someone who differs and you are of the opinion that 
we don't need some sort of consumer protection, will you kindly 
extend a hand in the air?
    Mr. Himpler. I would nuance it this way, Congressman. Yes, 
there is a need but it is AFSA's position that finance 
companies that are State-licensed and regulated face that 
consumer protection in a vigorous fashion at the State level.
    Mr. Green. Anyone else?
    In moving toward consumer protection, Mr. John, who was 
with us earlier, mentioned a council. Have you had an 
opportunity to review his concept of a council? I am just 
curious as to whether you support his council.
    Mr. Menzies, have you reviewed it?
    Mr. Menzies. No. It is logical that more minds collectively 
produce a better analysis of the situation, like our board of 
governors or our board of directors, but we haven't studied his 
proposal.
    Mr. Green. I see. Anyone? Mr. Himpler, you studied it?
    Mr. Himpler. I think Mr. Menzies testified to the 
importance of coordination. And AFSA finds Mr. Minnick's 
proposal very intriguing, and we are looking to explore it 
further with him because we think there is a very important 
role in terms of collaboration between the Feds and the States.
    Mr. Green. Mr. Yingling?
    Mr. Yingling. Well, I have not studied it in detail. The 
one advantage of that over, say, the Administration's proposal 
is that one of our big concerns has been this potential clash, 
and we are confident it would take place, between safety and 
soundness and consumer.
    To the degree that you can have the people who are in 
charge of both writing the rules, it would be very helpful. I 
would have one concern that if you have a group that is a 
council, of course, it can get very bureaucratic and very slow. 
I don't think that is what you want, Congressman. You want 
something that is designed--and maybe you can do it through 
this council in some way--but something that is designed that 
when they need to adopt a HOEPA regulation, it doesn't take 2 
years to do it. Anything like that would have to be designed in 
a way that is efficient.
    Mr. Green. I appreciate your indicating that I might not 
favor certain aspects of it. I also concern myself with the 
notion that ultimately if the council doesn't act, that it is 
brought back to Congress, and then you have 435 Members of the 
House and 100 Members of the Senate who will have to come to 
some accord before the action that the council has recommended 
will be acted upon. That, to me, puts us right back where we 
are.
    Mr. Yingling. I was anticipating you might have that 
concern.
    Mr. Green. Well, let me thank all of you for coming. I do 
it on behalf of the Chair, who had to step away.
    At this time, we would like to enter a statement from the 
Mortgage Bankers Association for the record. And without 
objection, it is so ordered.
    Also at this time, we are going to bring the hearing to 
closure. And in so doing, the Chair notes that members may have 
additional questions for this panel which they 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 the witnesses on the other panel as well, 
and to place their responses in the record.
    The hearing is now adjourned.
    [Whereupon, at 1:40 p.m., the hearing was adjourned.]






                            A P P E N D I X



                           September 30, 2009


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