[Senate Hearing 112-]
[From the U.S. Government Publishing Office]



 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2013

                              ----------                              


                       WEDNESDAY, MARCH 28, 2012

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 2:30 p.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Richard J. Durbin (chairman) 
presiding.
    Present: Senators Durbin, Lautenberg, and Moran.

                       DEPARTMENT OF THE TREASURY

                        Office of the Secretary

STATEMENT OF HON. TIMOTHY F. GEITHNER, SECRETARY

             OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

    Senator Durbin. Good afternoon. I am pleased to convene 
this hearing of the Appropriations Subcommittee on Financial 
Services and General Government. Senator Moran is at the 
Supreme Court--I do not know why--but will be back momentarily, 
and I will give him a chance if he would like an opening 
statement at that time.
    Welcome to Treasury Secretary Timothy F. Geithner. Glad to 
have you here. We are going to discuss your Department's 
critical work in support of economic recovery--particularly 
programs and policies dealing with the foreclosure crisis. And 
I am going to raise issues about what I consider to be a 
looming debt crisis involving student loans and where that will 
take us.
    The Department of the Treasury, as you know, plays a key 
role in promoting economic stability and prosperity, developing 
policies and strategies to promote not just recovery, but 
sustainable growth. Now, one of the largest barriers to 
economic recovery, we have discussed many times, is our 
struggling housing market. Under the Home Affordable 
Modification Program, the Treasury Department provides 
financial incentives for lenders to prevent foreclosures 
through principle reduction.
    Our economy, I am afraid, will not make a full recovery 
until we address the $700 billion worth of underwater mortgages 
held by more than 11 million homeowners. I believe that around 
20 percent of homeowners are affected. There are 3.3 million 
homeowners currently facing foreclosure.
    There are a number of approaches that can help families 
save homes, but many economists, banks, administration 
officials, and attorneys general from both political parties 
believe that principle reduction has to be one of the tools we 
use. Reducing principle often makes sense for both the 
homeowner and the lender, not to mention the communities which 
are being littered with foreclosed and abandoned property. That 
is why the recent bipartisan settlement between the five major 
lenders and a coalition of attorneys general of both parties 
includes $10 billion in principle reduction for underwater 
homeowners. I think we have to do everything we can to stop 
this foreclosure problem from getting worse as a means of 
simple justice, as well as making certain that economy recovery 
continues.
    Here is the issue I am going to raise with you. Of the 11 
million underwater mortgages, 3 million are being held by 
Fannie Mae and Freddie Mac. To date, the Department of the 
Treasury has provided $170 billion in taxpayers' dollars to 
keep Fannie Mae and Freddie Mac afloat. I want to explore today 
what more your Department can do to help these homeowners, 
especially through carefully tailored principle reduction.
    The second issue is the student loan crisis. And I had a 
hearing last week that really focused on what is happening. As 
you are undoubtedly aware, total outstanding student loan debt 
exceeded $1 trillion last year. There is now more student loan 
debt than credit card debt in America. The credit rating 
agency, Standard & Poor's, warned us that ``Student loan debt 
has ballooned and may turn into a bubble.''
    The hearing I held last week brought several things to 
light, including the impact of high-interest loans on young 
people, and many times on their parents. I want to discuss the 
impact of this growing student loan debt, the numbers that are 
associated with it, and what it means for our future.
    It was interesting to me that the 32-year-old woman who 
testified before us has started off with $79,000 in student 
loan debt 5 years ago. It is now up to $98,000. The private 
loan that she has incurred, which is in the range of $40,000, 
will ultimately cost her more than $111,000, if paid off over 
the term. And it has completely changed her life. She cannot 
borrow another penny to go to a real school. She wasted her 
money on a for-profit school. And she is about to lose her 
home.
    I think these things are connected unfortunately, and the 
student loan debt, if it does not cost young couples their 
homes, may impede them from ever having one. That will have a 
long-term impact on economic growth.
    Now, the money for your Department, which I am sure is 
first and foremost on your mind: the request from the 
administration is $14.072 billion for fiscal year 2013. It is a 
$909 billion or 6.9-percent increase more than current levels. 
And the majority is needed for the Internal Revenue Service, 
which constitutes more than one-half of the discretionary 
funding in our jurisdiction.
    I am pleased to see your budget request continue to 
prioritize the Community Development Financial Institution Fund 
(CDFI). And if you would like to say a word about that, we will 
give you a chance. Last year this subcommittee held an in-depth 
hearing on how CDFIs have leveraged small amounts of Federal 
funds to develop affordable housing, retail, small business 
lending, and the like. I have seen the impact on some 
neighborhoods in Illinois, and I would like to know if you 
share my positive impression. I hope you do.
    And I am going to give Senator Moran a chance to speak when 
he arrives, but at this time I would like to turn the floor 
over to a busy man, our Treasury Secretary Tim Geithner. 
Welcome.

                SUMMARY STATEMENT OF TIMOTHY F. GEITHNER

    Secretary Geithner. Mr. Chairman, nice to see you. Thanks 
for having me here, and thanks for all your support and your 
colleagues' support for Treasury over these years.

                           PREPARED STATEMENT

    You know, if you would like, since we are here alone, I 
would be happy to just leave my opening statement for the 
record and get to the conversation, whatever is best for you.
    Senator Durbin. Okay.
    [The statement follows:]

               Prepared Statement of Timothy F. Geithner

                              INTRODUCTION

    Let me start with the broader challenges facing the national 
economy.
    Our economy is gradually getting stronger. Over the last 2\1/2\ 
years, the economy has grown at an average annual rate of 2.5 percent. 
Businesses have added nearly 4 million jobs over the last 2 years, 
including 429,000 manufacturing jobs.
    While the economy is regaining strength, we still face significant 
economic challenges. Unemployment is still far too high, the housing 
market remains weak, and the overall effects of the financial crisis 
remain an obstacle to growth. The strength of our recovery will depend 
in part on events beyond our shores, as we saw last year when United 
States growth was buffeted by headwinds from Europe.
    The harm caused by the crisis came on top of a set of deep, pre-
existing economic challenges, including a long period of stagnation in 
the median wage, diminished confidence in the ability of children to 
exceed the economic achievements of their parents, a substantial 
ongoing shift in the risk and cost of healthcare and retirement 
security away from employers and onto workers, poverty rates much 
higher than in any economy with comparable wealth, and the dramatic 
erosion in our fiscal position between 2001 and 2008.
    The President has laid out a strategy to address these challenges. 
His strategy entails a carefully designed set of investments and 
reforms to improve opportunity for middle-class Americans and 
strengthen our capacity to grow by improving access to education and 
job training, promoting innovation in our manufacturing sector, and 
investing in infrastructure.
    These critical investments are combined with a balanced plan for 
restoring fiscal sustainability. The President's budget reduces 
projected deficits by a total of more than $4 trillion over the next 10 
years by adding more than $3 trillion in deficit reduction to the 
approximately $1 trillion in savings already enacted through the 
discretionary caps included in the Budget Control Act. These savings 
are sufficient to stabilize our debt as a share of the economy by 2015 
and begin placing our debt on a downward path as a share of Gross 
Domestic Product.
    Treasury plays a vital role in helping to shape and implement the 
President's economic policies, driving reform of the financial system, 
encouraging lending to small businesses, working to reform the tax 
system, promoting economic prosperity, and monitoring risk in the 
financial system.
    Treasury is working hard with the Department of Housing and Urban 
Development and with the Federal Housing Finance Agency to repair the 
housing market. We have active programs to modify mortgages for 
distressed homeowners so that people can stay in their homes, help 
States in the hardest hit areas provide both loan principal reduction 
and payment forbearance for the unemployed, transition vacant homes to 
the rental market and make it easier for homeowners who are underwater 
to refinance their loans.
    As the President has made clear, more can be done to help, and we 
urge the Congress to consider the President's plan to help homeowners 
refinance their mortgages to take advantage of lower rates.
    Treasury is also working with other agencies, in particular the 
Department of Education, on a range of ways to help make college more 
affordable, such as the President's proposal to make permanent the 
American Opportunity Tax Credit. The administration is also moving 
forward with its ``Pay As You Earn'' proposal to help reduce debt 
burdens, and the President has called on the Congress to stop the 
interest rate on Stafford loans from doubling in July.
    In addition to our core policy functions, the Congress has given 
Treasury a very broad mission, with responsibilities that touch many 
aspects of the lives of Americans.
    Treasury is responsible for raising the resources necessary to fund 
critical government functions, from national defense to protecting 
national parks. The Department disbursed more than $2.4 trillion in 
Social Security benefits, veteran's pensions, and other benefit 
payments to more than 100 million Americans last year. Treasury 
delivered tax credits to drive investment in clean-energy production 
and to help families finance college education. We design and enforce 
the financial sanctions necessary to prevent the spread of nuclear 
weapons and the financing of terrorism. Our Internal Revenue Service 
(IRS) collected the $2.4 trillion in taxes necessary to fund core 
Government operations. We run the factories that produce every American 
dollar and coin.
    Treasury's fiscal year 2013 budget proposal supports the 
President's strategy through key priorities that will strengthen 
economic growth and make the Government more efficient while delivering 
essential services at lower costs to the taxpayer. The proposal also 
reflects Treasury's contributions to protect our national security 
interests and prevent illicit use of the financial system.
    Unlike most Federal agencies, Treasury's annually appropriated 
budget is about people more than programs. Salaries and operating costs 
make up 96 percent of our budget, and most of the rest of our budget is 
for investments in technology they require to function.
improving efficiency, reducing taxpayer costs, and reforming government
    The Treasury budget request reflects our commitment to deliver core 
services more efficiently and at the lowest cost to the taxpayer. Our 
request includes efficiencies, program reductions, and other measures 
that will produce savings of $286 million in fiscal year 2013 and 
additional cost reductions in the years ahead.
    Key proposals include the consolidation of the Bureau of the Public 
Debt and the Financial Management Service. This consolidation will save 
$36 million over 5 years, starting with fiscal year 2014, through 
management, administrative, and support service efficiencies.
    As you know, these bureaus provide the financial infrastructure for 
the Federal Government. Both bureaus have successful track records 
working together on joint initiatives, including a recent information 
technology consolidation, which is projected to save $129 million over 
5 years. I am confident that they will build on this success by 
consolidating and improving the delivery of their core services.
    The budget also proposes legislation to provide Treasury with the 
ability to change the composition of coins to utilize more cost-
effective materials. Currently, the costs of making the penny and the 
nickel are more than twice the face value of each of those coins. In 
addition to this proposal, Treasury is implementing measures to improve 
the efficiency of coin and currency production, including improved 
manufacturing practices and administrative cost reductions, which will 
save more than $75 million in fiscal year 2013.
    These savings build on a number of steps that the Department has 
taken during the last 3 years to improve efficiency and reduce taxpayer 
costs.
    Last December, we announced that we were suspending the production 
of Presidential dollar coins for circulation. At that time, there were 
1.4 billion surplus $1 coins sitting unused in Federal Reserve vaults. 
These surplus coins will now be drawn down over time. Taking this 
simple step will save taxpayers $50 million per year in production and 
storage costs.
    We are also continuing to achieve results in our ongoing paperless 
initiative, which will yield more than $500 million in savings over 5 
years. These efforts not only improve our internal management but 
provide modernized services to meet the public demand for more 
electronic services. In response, we have changed the way we provide 
services and are achieving savings while providing taxpayers the 
services they deserve.
    To give you an example of this, 6 years ago, just more than one-
half of individual taxpayers filed their returns online. We have worked 
proactively to increase electronic filing, and today, 77 percent of 
taxpayers choose to file online. In 2013, it is our goal to get 80 
percent of taxpayers to file online, achieving an additional $8.1 
million in savings on top of the $63.9 million we have saved since 
2009.
    The fiscal year 2013 budget for Treasury's operating bureaus is 2.7 
percent below fiscal year 2012 and 6.8 percent below our fiscal year 
2010 enacted budget, excluding the IRS. The request for the IRS 
includes investments in enforcement activities that will contribute 
significantly to improving voluntary compliance with the tax code and 
closing the tax gap. For each additional $1 we propose to spend on 
compliance activities we bring in more than $4 in additional revenue. 
The enforcement investments in our request will bring in an additional 
$1.5 billion in annual revenue once fully implemented.

                    ECONOMIC GROWTH AND JOB CREATION

    We are also supporting small business growth through our Small 
Business Lending Fund (SBLF) and State Small Business Credit Initiative 
(SSBCI). Last year, we provided more than $4 billion to 332 community 
banks through the SBLF. Participating institutions estimate that they 
will increase their small business lending by $9 billion within 2 years 
of receiving the investments. By the end of this fiscal year, we will 
have provided approximately $1.5 billion to State programs that support 
small business lending and investment through SSBCI. States expect 
these investments to spur at least $15 billion in new small business 
financing.
    Our $221 million request for the Community Development Financial 
Institutions Fund (CDFI Fund) is focused on key community development 
priorities designed to improve services in underserved communities, 
including access to healthy food and financial services. Of the total 
request, up to $25 million is for the administration's Healthy Food 
Financing initiative, which will support increased availability of 
affordable, healthy food alternatives in these communities.
    The CDFI Fund's core program for financial and technical assistance 
provides monetary awards to CDFIs, which in turn provide loans, 
investments, financial services, and technical assistance to 
underserved populations and low-income communities. In 2010, CDFIs were 
awarded $105 million in grants under the CDFI program, which should 
contribute to $589 million in community development activity and the 
creation or preservation of approximately 10,000 jobs.
protect our national security interests and prevent illicit use of the 

                            FINANCIAL SYSTEM

    Finally, Treasury's financial intelligence and enforcement 
activities play a significant role in protecting our financial system 
from threats to our national security. Our funding request for the 
Office of Terrorism and Financial Intelligence is maintained at $100 
million and reflects our continued efforts to combat rogue nations, 
terrorist facilitators, money laundering, and other threats to our 
financial systems and our Nation's security.
    The work that this office conducts is far reaching and of critical 
importance to national security. The sanctions the administration 
imposed on Libya were a critical factor in removing the Gaddafi regime, 
and they continue to add pressure to the regimes in Iran, Syria, and 
North Korea.

                               CONCLUSION

    Treasury benefits from a talented and dedicated group of public 
servants. Their work affects the lives of all Americans. They have 
played a critical role in pulling our economy out of crisis and setting 
the Nation on a path to recovery.
    Our Treasury team helps to protect America's economic interests and 
national security--so seniors can get their Social Security benefits, 
families can borrow money to buy a home or send a child to college, and 
businesses can grow and create jobs. They have worked hard to continue 
to make Treasury a leaner, more efficient organization that effectively 
delivers essential services to the American people.
    I appreciate the support of this subcommittee over the past several 
years in helping to make sure we have the resources to carry out these 
important responsibilities.

  FEDERAL HOUSING FINANCE AGENCY'S LACK OF PRINCIPLE REDUCTION POLICY

    Senator Durbin. So, let us start talking about this 
situation involving Mr. DeMarco's Federal Housing Finance 
Agency (FHFA). Here is how I understand it, and I would like to 
hear your take on it. I have heard him defend his position 
against principle reduction saying, that is not my job. My job 
is to oversee Fannie Mae and Freddie Mac as to their solvency. 
And I am not promoting any type of housing project or any type 
of recovery project when it comes to mortgage foreclosure. I 
just look at the bottom line. How is it going to affect Fannie 
Mae and Freddie Mac? That is perhaps as brutally honest. I do 
not know if it is true, but that is how he sees it.
    You are in a position where you are providing $170 billion 
in assistance to the government-sponsored enterprises (GSEs) 
through preferred stock purchase agreements. The administration 
has made it clear that principle reduction is an important 
component in stopping foreclosures and economic recovery. Now, 
reconcile these things.
    Secretary Geithner. Excellent question, and I am glad you 
are drawing attention to it.
    The law the Congress passed that put the GSEs into 
conservatorship and gave the FHFA more authority, gave them in 
some ways two mandates. One was to promote policies that help 
the overall housing market, but as important as that, and this 
is the critical constraint, they need to make sure they are 
operating in the interest of the taxpayer, looking to working 
to minimize losses, maximize returns to the taxpayer as a 
whole. They are doing a lot of different things to help people 
to modify mortgages with payment reductions and to help 
homeowners refinance, even homeowners that are deeply under 
water.
    But in the area of principle reduction, as you have heard 
Mr. DeMarco testify, they adopt a program they call principle 
forbearance, and they have been very reluctant to reduce 
principle. There is a very strong economic case for investors, 
any investor, whether it is the Government, or a bank, or a 
private investor, to reduce principle in some circumstances 
because that might increase overall recovery to the investor 
and the taxpayers. And where that is true in the private 
market, it is equally true for Fannie Mae and Freddie Mac.
    And so, we have been encouraging Fannie Mae and Freddie Mac 
to take another look at the math, at the economics of it, the 
finance, because we think there is a strong case in some 
circumstances to add principle reduction as part of their 
strategies to help maximize return to the taxpayer.
    Now, what Mr. DeMarco has said is that they are taking 
another look at their numbers, looking at our economic case. We 
are in the process of working through that with him, and I hope 
he is going to be in a position to indicate what he plans to do 
in the next several weeks.
    But you are right to emphasize this as an important part of 
a credible national strategy, that they have been reluctant to 
move, even though they have done a lot of things that have been 
very, very helpful. The art in this to try to make the 
financial case that for homeowners that are deeply under water, 
and you and your spouse loses a job, there are some cases in 
which principle reduction is not just good for the homeowner 
and the community, but it is good for the taxpayer too.
    Senator Durbin. So, am I right to say that 30 percent of 
these mortgages, roughly, through Fannie Mae and Freddie Mac 
would be at least subject to this principle reduction?
    Secretary Geithner. I do not think it is that high, but I 
have to look at the numbers and see. You know, Fannie Mae and 
Freddie Mac, contrary to what is popular perception in some 
quarters in Washington, were actually more conservative than 
the private markets and their underwriting standards, and 
required larger down payments in areas. So, in fact, the 
overall quality of the loans they made and the record of 
delinquencies performance is better than the overall market. I 
do not know what the exact numbers are in terms of how many 
people are under water, worst case. But, again, the economic 
case is there. There is a set of homeowners who are deeply 
under water and experience a hardship where it is better for 
the taxpayers to reduce principle. And our job is to try to 
encourage them to recognize that.
    Senator Durbin. So, let me just pursue this along a similar 
question, a little different line. It is the stated policy of 
the administration that principle reduction is one of the key 
elements in reducing foreclosures, stabilizing the real estate 
market, and perhaps reaching a point where we know what the 
value of real estate is, which I think is one of the still 
largely unanswered and central questions to our economic 
situation. And now you have the power through the Treasury 
Department to fund the group that oversees Fannie Mae and 
Freddie Mac, which is basically saying we do not buy that. We 
do not buy principle reduction. Do you need to be told by me or 
the Congress to close the carrot drawer and open the stick 
drawer? How do we get Fannie Mae and Freddie Mac to run the 
same play as the rest of the economy?
    Secretary Geithner. I have asked that question of my staff 
many times and of my predecessor because the law that gave them 
this authority was passed in the fall 2008, before I took 
office as the Secretary. And the Congress, in considering how 
much authority to give the administrator at that point, decided 
to keep it completely independent of the Secretary of the 
Treasury and the administration. I have no power to compel, 
even though you are right to remind people that in a sense 
those institutions exist only because we are providing the kind 
of support in terms of capital they need to be able to borrow 
at affordable rates and to continue to play the role they are 
playing in the housing market.
    I wish it were different, but the Congress considered this 
and decided at that point to--and they did it--I understand why 
they did it, to leave that entity, which had been subject to a 
lot of political pressure and political influence in the past, 
to leave it completely independent of any influence by the 
administration.
    Senator Durbin. Do you have anything to say about what they 
do with the senior preferred stock purchase money that you send 
their way?
    Secretary Geithner. Well, let me say they were limited to 
the power of our persuasive abilities.
    Senator Durbin. Carrots.
    Secretary Geithner. Of course, if the Congress were to 
change it, change that balance of authority, I would welcome 
that. But I think that, again, we are working very closely 
together, and we think there is a very strong economic case in 
this context, and we think that should govern.
    Senator Durbin. You know more about this business than I 
will ever know. Give me the Fannie Mae and Freddie Mac argument 
from their point of view against principle reduction.
    Secretary Geithner. Well, I think Fannie Mae and Freddie 
Mac themselves are actually pretty supportive of this. FHFA has 
been a little more conservative over time because their 
argument would be this: they would say that, look, we have to 
make sure we are maximizing returns to the taxpayer. If there 
is a chance that over time if we forbear on principle but do 
not forgive it, we could get a higher return to the taxpayer, 
we are obligated to pursue that path. That is the argument they 
would make.
    But ours is a simple choice. We think there is a set of 
cases where it is clearly in the interest of the taxpayer for 
them to do principle reduction up front. It is not an 
overwhelming number, but where it makes sense to do it, we 
should do it. That is what we are trying to convince them.
    Senator Durbin. I am going to turn to my colleagues with 
one last question. Can you think of an example where 
foreclosure would be in the best interest of Fannie Mae and 
Freddie Mac?
    Secretary Geithner. Well, I hate to say it this way, 
because as you pointed out, and you have said this many times, 
across the country there are thousands and thousands and 
thousands of people who are completely innocent victims of the 
fact that they either lost their job or they saw their house 
price decline precipitously, or they face another hardship and 
could not afford to stay in their home. And in that context, 
the first best solution is for the bank or Fannie Mae and 
Freddie Mac to work with the homeowner to restructure their 
payment obligations so it is within the ability of the 
homeowner to pay so they are given a little more time to find 
another job to get back on their feet.
    But not everyone will be able to do that. So, there are 
some cases where the best case for the homeowner is for them to 
be able to leave their house and go and find some affordable 
option, even if they have to rent.
    But, again, the obligation of all of us should be to do 
everything we can to make sure where people have the chance to 
stay in their home, and when that is clearly better for the 
Government in some context, not just for the community, we want 
to give them that chance.
    But there is one dimension of this that I would like to 
come back to, if we can, after your colleagues have a chance to 
do a----
    Senator Durbin. Sure. Okay. I will let Senator Moran.
    Senator Moran. I would yield to Mr. Lautenberg.
    Senator Durbin. Senator Lautenberg, would you like to 
proceed?

                STATEMENT OF SENATOR FRANK R. LAUTENBERG

    Senator Lautenberg. I apologize for being late. And 
perhaps, Mr. Secretary, welcome you. And I do not want to be 
repetitive, but I may run into that as a consequence of not 
having heard your full presentation.

                           PREPARED STATEMENT

    One of the things that we see here, and especially in the 
private sector--I ask unanimous consent that my full statement 
be included in the record.
    Senator Durbin. Without objection.
    [The information follows:]

           Prepared Statement of Senator Frank R. Lautenberg

    Mr. Chairman, we have stepped safely back from the edge of 
financial crisis, and our economy is steadily recovering. But some 
effects of the crisis remain. More than 11 million homeowners owe more 
than their homes are worth. A path forward for these homeowners is 
essential for the health of our housing market and our economy. Unless 
there is some relief, 9 million homeowners could face foreclosure and 
eventual liquidation. While the impact on our economy would be severe, 
the human cost would be unthinkable. None of us can afford foreclosures 
at this scale--not homeowners, not investors, not taxpayers. The path 
forward is clear. Writing down some of the principal owed by underwater 
homeowners will help stem the tide of foreclosures and revive the 
housing sector, which has long been a drag on our national recovery. 
Principal forgiveness for responsible homeowners will give hope to 
those families, and reason for optimism for our economy as a whole.
    We must also be attentive to emerging risks to our financial 
system, and growing levels of student loan debt are raising alarms. I 
am concerned about reports that students are being swindled into 
borrowing more than they can afford. This sounds similar to the 
predatory mortgage lending practices that preceded the financial 
crisis. Like mortgages in the years before the crisis, student loans 
are difficult to understand and difficult to value. And Americans are 
taking out student loans--including private student loans--at a rapid 
pace. Many borrowers don't realize that private student loans lack the 
borrower protections of Federal student loans. Christopher Bryski--a 
constituent of mine who studied at Rutgers University--passed away in 
2006. His Federal student loans were discharged by law when he passed, 
but his private loans were not. Six years later, Christopher's dad is 
still sending monthly payments to his deceased son's bank. Student 
loans should be designed to protect borrowers, not just enrich banks. 
If we learned anything from the recent crisis, it's that financial 
products designed to generate profits for banks at the expense of 
consumers pose serious risk to the economy as a whole.
    I look forward to hearing from Secretary Geithner about what we can 
do to reduce risks and restore our economy back to full health.

                      MORTGAGE PRINCIPLE REDUCTION

    Senator Lautenberg. But I am concerned about the students, 
and I know that you have been discussing the homeowner 
foreclosures, and I have a question there about--and I think I 
heard you say it. A few of us or none of us can afford 
foreclosures at this scale, not homeowners, not investors, not 
taxpayers. And I will have an opportunity to ask you questions 
about that.
    But writing down some of the principle owed by underwater 
homeowners will help stem the tide of foreclosures, and revive 
the housing sector, which has long been drag on our national 
recovery. Principle forgiveness for responsible homeowners will 
give hope to these families and reason for optimism for our 
economy as a whole. And we have also got to be attentive to 
emerging risk to the financial system, growing levels of 
student loans.

                             STUDENT LOANS

    I want to look at that, please, for a moment. And I am 
concerned about reports that students are being swindled into 
borrowing more than they can afford. And it sounds similar to 
the predatory mortgage lending practices that preceded the 
financial crisis.
    Like mortgages in the years before the crisis, students are 
difficult to understand and difficult to value, and Americans 
taking out student loan, including private student loans, are 
running into difficulties at a rapid pace.
    Many borrowers do not realize that private student loans 
lack the borrower protections of Federal student loans. And a 
case of a young man named Christopher Bryski, a constituent of 
mine who was studying at Rutgers University, who passed away 
very young in 2006, his Federal student loans were discharged 
by law when he passed. But his private loans were not. Six 
years later, Christopher's dad is still sending monthly 
payments to his deceased son's bank. And student loans should 
not--should be designed to protect borrowers, not just in rich 
banks.
    So, if we learned anything from the recent crisis, it is 
that financial products designed to generate profits or banks 
at the expense of consumers pose serious risks to the economy 
as a whole.
    So, I want to talk about that, and if I can use the 
remainder of my moments, Mr. Chairman, I would appreciate it.

  FEDERAL HOUSING FINANCE AGENCY'S LACK OF PRINCIPLE REDUCTION POLICY

    Opponents of principle forgiveness for struggling 
homeowners have argued that lowering the amount owed on 
underwater mortgage costs would cost taxpayers too much. We 
already heard that. However, analysis by the FHFA suggests that 
forgiveness would save taxpayer money.
    And forgive me if this is repetitious, but what has your 
analysis of the Treasury's principle forgiveness program 
revealed about the benefits of principle forgiveness for 
taxpayers and homeowners?
    [The information follows:]
The Effect of the Principal Reduction Alternative on Redefault Rates in 
      the Home Affordable Modification Program: Early Results \1\
---------------------------------------------------------------------------
    \1\ The logistic regression described in this paper was performed 
by Fannie Mae in its role as program administrator under Treasury's 
Making Home Affordable Program. The data points, figures and tables 
reflected herein were sourced from Fannie Mae as program administrator.
---------------------------------------------------------------------------
                           EXECUTIVE SUMMARY

    Since the inception of the Making Home Affordable Program, more 
than 1 million homeowners have had their mortgages permanently modified 
through the Home Affordable Modification Program (HAMP). As of May 
2012, more than 63,000 homeowners have received permanent modifications 
with loan principal reduction under HAMP Principal Reduction 
Alternative (PRA).\2\ This document presents an analysis of the 
performance of HAMP modifications with and without PRA. To date, this 
analysis has shown the following results:
---------------------------------------------------------------------------
    \2\ Fannie Mae and Freddie Mac do not participate in the PRA 
program.
---------------------------------------------------------------------------
  --Payment reduction is an important driver of HAMP modification 
        performance.
  --HAMP modification redefault rates also fall as the loan's after 
        modification mark-to-market loan-to-value, or MTMLTV, ratio 
        decreases (i.e., as the size of the loan's current principal 
        balance relative to the home's value decreases).
  --HAMP PRA participating servicers tend to use the principal 
        reduction feature on loans that have relatively riskier credit 
        characteristics than the overall HAMP population--borrowers 
        with much lower credit scores and that are more seriously 
        delinquent at time of modification.
  --A logistic regression controls for these riskier characteristics. 
        The regression shows that for a given payment reduction, 
        homeowners who received a HAMP modification with principal 
        reduction perform better than homeowners who receive a HAMP 
        modification without principal reduction.

    EARLY EFFECTS OF HOME AFFORDABLE MODIFICATION PROGRAM PRINCIPAL 
                REDUCTION ALTERNATIVE ON REDEFAULT RATES

    In June 2010, the Department of the Treasury announced the HAMP 
Principal Reduction Alternative program. HAMP PRA provides financial 
incentives to investors for reducing principal owed by homeowners whose 
homes are worth significantly less than the remaining balance owed on 
the mortgage. As of May 2012, homeowners have been granted more than 
63,000 HAMP PRA permanent modifications.
    HAMP data show that the amount of the monthly payment reduction 
affects the performance of HAMP modifications. Twenty-four months after 
converting to a permanent modification, there is a 28-percentage-point 
difference in the redefault rate between loans that received a 20 
percent or less monthly payment reduction and loans that received more 
than a 50-percent monthly payment reduction. Figure 1 shows the 
redefault curves by the percent of monthly payment reduction.




        Figure 1. 60+ Day Delinquency Rate by Payment Reduction

    The redefault rate of HAMP modifications also decreases as the 
after-modification MTMLTV ratio decreases. At 24 months, loans with 
less than or equal to 80-percent MTMLTV redefault at a rate that is 12-
percentage points lower than loans with more than 170-percent MTMLTV. 
Figure 2 shows the redefault curves by MTMLTV. The gap in the redefault 
rate between loans with higher and lower postmodification MTMLTVs 
increases as the loans age. This gap is smaller for the redefault rate 
after 6 months than for the redefault rate after 24 months.




         Figure 2. 60+ Day Delinquency Rate by After Mod MTMLTV

    To date, participating servicers have selected loans with riskier 
credit characteristics to receive the principal reduction feature under 
HAMP PRA--loans that are more seriously delinquent at the time of 
modification and borrowers with lower overall credit scores than all 
HAMP modifications.
    If one were to look only at the early redefault performance of HAMP 
PRA versus all HAMP modifications without controlling for these riskier 
characteristics, it would appear that loans modified with the principal 
reduction feature under HAMP PRA are performing slightly worse than 
overall HAMP modifications, as shown in Table 2.

     TABLE 2.--HAMP MODIFICATION PERFORMANCE AFTER 6 MONTHS WITHOUT CONTROLLING FOR RISK CHARACTERISTICS \1\
----------------------------------------------------------------------------------------------------------------
                       All modifications                               Modifications with PRA forgiveness
----------------------------------------------------------------------------------------------------------------
                                        Percentage of 90+ days    Number of permanent     Percentage of 90+ days
  Number of permanent modifications     delinquent at 6 months       modifications        delinquent at 6 months
----------------------------------------------------------------------------------------------------------------
800,613..............................                     5.80                   30,345                     6.30
----------------------------------------------------------------------------------------------------------------
\1\ Sample shown includes all HAMP loans that were modified at least 6 months before March 2012.
Source.--Making Home Affordable Program System of Record--data through March 2012

    The standard approach in statistical analysis for disentangling the 
impacts of different factors influencing an outcome is called 
regression analysis. In this case, a logistic regression controls for 
risk characteristics, which allows a better comparison of the 
performance of HAMP modifications with and without the principal 
reduction feature. These loan characteristics include MTMLTV, 
origination loan-to-value ratio, percentage monthly payment change, 
credit score at modification, age of the loan, delinquency of the loan 
at time of modification, investor type, vintage of the modification, 
unpaid principal balance of the loan at time of modification (including 
all past due amounts), delinquency number of months in trial, whether 
the loan received principal reduction, whether the modification was 
done under the HAMP PRA program or received principal reduction under 
traditional HAMP, whether the loan received principal forbearance, 
geography, servicer, and home price forecast following the 
modification.
    This analysis indicates that for loans with similar 
characteristics, there is a measurable improvement in performance when 
the HAMP modification includes principal reduction.
    This result is consistent with an assumption of the HAMP net 
present value (NPV) default model that a homeowner who receives a 
modification with principal reduction will perform similarly to a 
homeowner at the same post-modification MTMLTV who receives a 
modification without principal reduction.
    Some have wondered if principal forbearance has a similar effect on 
modification performance as principal reduction. These results indicate 
that a homeowner receiving a HAMP modification with principal 
forbearance performs slightly better than a homeowner who receives a 
HAMP modification without forbearance as well as without principal 
reduction. This improvement, though, is smaller than the improvement 
seen for a HAMP modification with principal reduction.
    The regression analysis allows us to separate the impact of the 
principal reduction from other characteristics that influence default. 
For illustrative purposes, we constructed a hypothetical homeowner with 
a premodification MTMLTV of 165 percent and a 10-percent chance of 
redefault (90+ days delinquent) within 6 months without a payment 
reduction. We then consider the redefault rate after 6 months implied 
by the same regression model for three different modifications, each of 
which provides a 30-percent payment reduction. The three different 
modifications provide the 30-percent payment reduction in the following 
ways, via:
  --Rate reduction and term extension to achieve a 30-percent payment 
        reduction, an example of a standard HAMP modification: The 
        model shows that the homeowner would have a 4.6-percent chance 
        of redefault.
  --Forbearance (no rate or term adjustment) to achieve a 30-percent 
        payment reduction: The model shows that the homeowner would 
        have a 4.4-percent chance of redefault.
  --Principal reduction (no rate, term, or forbearance adjustments), to 
        achieve a 30-percent payment reduction and an after-
        modification MTMLTV of 115 percent: The model shows that the 
        homeowner would have a 3.5-percent chance of redefault.
    Table 3 illustrates these results for our hypothetical borrower 
with an MTMLTV of 165 percent.

   TABLE 3.--ESTIMATED DEFAULT OUTCOMES BY MODIFICATION STRUCTURE FOR
    HYPOTHETICAL BORROWER WITH 10 PERCENT INITIAL DEFAULT PROBABILITY
------------------------------------------------------------------------
                                                             Probability
                                                            of advancing
                                                              to 90-day
                  Modification structure                     delinquency
                                                              within 6
                                                               months
                                                            (percentage)
------------------------------------------------------------------------
No modification...........................................            10
Rate reduction and term extension to achieve a 30-percent            4.6
 payment reduction (no change in MTMLTV)..................
Forbearance to achieve a 30-percent payment reduction (no            4.4
 change in MTMLTV)........................................
Principal reduction to achieve a 30-percent payment                  3.5
 reduction and MTMLTV of 115 percent......................
------------------------------------------------------------------------
Note.--These early redefault rates are just a fraction of expected
  redefault probabilities over the loan's lifetime, and so the absolute
  differences in probabilities that we see here would be expected to
  increase over time.

                               CONCLUSION

    While it is still early, data show that there is a measurable 
improvement in borrower performance when the HAMP modification includes 
principal reduction. The outcome of the regression test is consistent 
with the assumption in the HAMP NPV default model that a homeowner who 
receives a modification with principal reduction to a certain MTMLTV 
will perform similarly to a homeowner getting a modification at that 
MTMLTV without principal reduction. In summary, the table above 
demonstrates that principal reduction leads to a 20-percent reduction 
in redefault probabilities as compared to a modification utilizing 
forbearance, and principal reduction leads to a 24-percent reduction in 
redefault probabilities as compared to a modification that receives 
payment reduction, but neither forgiveness nor forbearance.

    Secretary Geithner. Well, if you look at the economics of 
it and the finance, we believe that there is a very strong case 
for some homeowners who are deeply under water, experiencing 
hardship, there is a very strong case to provide principle 
reduction up front instead of other forms of payment reduction. 
And we are trying to make that case to FHFA.
    Now, you know, what you do with these cases, you look at a 
range of options, and you try to figure out what is the best 
option for both the borrower and the family and the home at the 
least cost to the taxpayer. And in some cases, it may be a 
payment reduction that substantially reduces the level of your 
monthly obligations for a long period of time. In some cases it 
may be principle reduction.
    What we are trying to do is to work through the case with 
FHFA and convince them that it is in the interest of the 
taxpayer and consistent with conservatorship for them to adopt 
the type of program we put in place for their book of 
mortgages. And they are working with us on this. They have been 
a little hesitant, a little more conservative so far. But they 
are reasonable people, and they are amenable to argument, and 
we think the facts are very compelling.
    Senator Lautenberg. You will be able to have another----
    Senator Durbin. Yes. We will have a second round for sure.
    Senator Moran.

                    STATEMENT OF SENATOR JERRY MORAN

    Senator Moran. Mr. Chairman, thank you. Mr. Secretary, 
thank you very much. Thank you for calling and giving me the 
opportunity to visit with you. I am sorry I was not able to do 
that.
    I continue to hear concerns about a lack of coordination 
among the Stability Council members on various Dodd-Frank Act 
rulemakings, especially those related to the derivative titles.

                       DERIVATIVE MARKET REFORMS

    As the chairperson of the Financial Stability Oversight 
Council, do you have confidence that you will be able to 
encourage the harmonization of derivative market reforms at a 
time at which it appears that you are unable to encourage or 
facilitate consensus between the Securities and Exchange 
Commission (SEC) and the Commodity Futures Trading Commission 
(CFTC)?
    Secretary Geithner. Well, you were right to point out that 
we have a very complicated system in the United States, and by 
preserving a lot of different people with authority over the 
pieces of the system, it makes it a little harder to 
coordinate, and frankly, makes the process more complex. The 
additional challenge is these are global markets.
    And so, it is very important to us that we get the world to 
move with us. What we do not want to do is raise the standards 
of the United States, have the world decide not to raise its 
standards and have markets just ship outside of the United 
States.
    So, we have got two dimensions of complexity. One is we 
want to get the U.S. agencies in the same place on the sensible 
terms, and we want to get the world in the same place.
    Now, the Congress in its wisdom did not give the Secretary 
of the Treasury the authority to write these rules, and I do 
not have the authority to force convergence on these agencies. 
But we are working very closely with them to try to make the 
case that we are not going to be able to get the world in a 
sensible place unless U.S. entities are aligned. And where the 
SEC and the CFTC, under their independent jurisdiction, have 
the discretion to be fully aligned, we think that makes a lot 
of sense.
    I am actually pretty confident that the broad framework of 
oversight and derivatives is going to get landed in a sensible 
place, both here and globally. I am much more confident than I 
was 1 year or 18 months ago. There are still a lot of concerns 
out there about some of the details, and you know in our system 
we go out for public comment on each of these rules, and 
everyone has a chance to assess the implications in their 
context. That gives the regulators a chance to adapt.
    So, we are on it. We are focused on it. We care a lot about 
making sure these rules land in a sensible place. And, you 
know, we have got some ways to go, but we are going to keep 
working on it.
    Senator Moran. Generically, Mr. Secretary, not necessarily 
your comments, but when a person says the Congress in its 
wisdom failed to do something, is that said just factually or 
with disrespect?
    Secretary Geithner. No, that was extraordinary deference 
and respect.
    Senator Moran. All right, thank you.
    Secretary Geithner. And to be fair, we did not seek 
authority to write the rules and derivatives. We thought they 
should be left with the SEC and the CFTC. And the SEC and the 
CFTC, not surprisingly, agreed.
    Senator Durbin. Let the record show that the witness is not 
under oath. Proceed.
    Senator Moran. He is not what?
    Senator Durbin. Under oath.

                     ENTREPRENEURSHIP OPPORTUNITIES

    Senator Moran. Under oath. Mr. Secretary, at the end of 
January, President Obama sent to the Congress his Startup 
American legislative agenda, and three items that are currently 
on the way to his desk, the so-called Jobs Act. And I am 
supportive of that development. In my view, there remains to be 
a lot of work done in regard to innovation and startups, 
creating an entrepreneurship environment. I got interested in 
this topic because, in my view, the Congress and the 
administration has failed to do much of anything about the 
deficits. And while I am not walking away from the spending and 
revenue sides of the deficit issue, another way--an additional 
way to deal with our growing deficit is to grow the economy.
    And so, I started looking at entrepreneurship 
opportunities, trying to create that circumstance in the United 
States in which somebody who has an idea and goes to work in 
their backyard, their garage, their basement, has a greater 
opportunity of succeeding than they otherwise would have.
    Senator Warner and I introduced legislation called the 
Startup Act that would make permanent zero capital gains for 
investments in small businesses. The President signed a 
temporary version of that provision that expires at the end of 
2010--it went into effect in 2010 and has since expired. And I 
am interested in knowing your view, your opinion, as to the 
impact of this exemption in 2011, what additional investment we 
might expect if it was reinstated as either suggested by the 
President or in our legislation.
    Secretary Geithner. Well, we are with you on this 
completely, and we think it should be extended and made 
permanent. And we think it would have a powerful incentive in 
encouraging investment in startups, and that is a good thing.
    I do not have with me today an estimate of the magnitude of 
the impact, but I would be happy to see if there is anything 
with enough integrity we could share with you. We would be 
happy to do that.
    Senator Moran. I would welcome your input. Thank you very 
much.
    Thank you, Mr. Chairman.
    [The information follows:]

    The administration supports a 100-percent exclusion from income for 
long-term capital gains on qualified small business stock from capital 
gains tax, and we proposed in our fiscal year 2013 budget to make this 
favorable tax treatment permanent. While we are not aware of any 
studies on the economic impact of this particular provision, largely 
due to the required 5-year holding period, it is no doubt an important 
incentive to encourage and reward investment in new and growing 
businesses, such as many startup companies.

    Secretary Geithner. Just because you raised it, I think 
that there are other things in the tax law, too, that would be 
helpful in this context. And just for you to consider as you 
think about this legislation going forward, we think there is a 
very strong case to reinstate expensing, full expensing, for a 
temporary period of time, too. That creates an incentive for 
people to invest, good for the economy, good to grow the 
economy now. We have also suggested various ways to encourage 
through the tax code small businesses to add to payroll, hire 
more people, add hours, when we are trying to get more people 
back to work. I think those things will work by incorporating a 
grain of permanent capital gains inclusion for investment in 
small businesses. There is a lot of merit to those things.

                        ACCELERATED DEPRECIATION

    Senator Moran. Mr. Secretary, I am glad you added those 
points, and I share that view. I would add that it would be 
helpful in regard to one of those particular accelerated 
depreciation issues is general aviation. And the President has 
a habit of talking about general aviation aircraft and 
corporate jets. And the provision that we are always talking 
about that is being criticized is accelerated depreciation. And 
it is certainly an important one to the manufacturing base in 
Kansas and across the country.
    But I know just as a rural member of, well, of the 
Congress, somebody who represents a very rural State, if we are 
going to have small businesses, manufacturers located in small 
towns, we ought to have a viable general aviation industry that 
encourages those businesses to be able to fly to places to 
connect with the rest of the world so that we are not all 
centered around airports. And I just would ask you to encourage 
the President to reduce the rhetoric about accelerated 
depreciation when it comes to general aviation aircraft.
    Secretary Geithner. I think our proposal, Senator, is to 
put them on the same footing, to level the playing field, with 
other people who make aircraft. But I get your point, and I 
understand your concern.
    Senator Moran. Thank you very much.

                          STUDENT LOAN CRISIS

    Senator Durbin. Mr. Secretary, I mentioned student loans 
earlier, and I want to draw some parallels. There are 
interesting parallels between mortgages and American student 
loan debt.
    There is $1.4 trillion in mortgage debt in this country 
held by about 52.5 million mortgage holders, and 11 million, or 
about 20 percent of them, are under water. We are talking about 
what we do for principal reduction, to deal with the reality of 
foreclosure, and the impact it has on their lives, and our 
communities, and the future of the housing market.
    Now, look at the parallel universe. Student loan debt 
totals $1 trillion--not $1.4 trillion, but $1 trillion. The 
number of students is 37 million; and 15 million, or 39 percent 
of them, are actually paying on their debt. That is 39 percent. 
The remainder, 61 percent, or 22 million, are not paying on 
their debt. Some are in school, but many of them are in a 
position where for a variety of reasons, they cannot pay on 
their debt.
    One of your charges is to look ahead at the impact of 
certain financial decisions that are being made on the future 
of our economy. And when I look at what the foreclosure side on 
the mortgage market is doing to our economy overall, I then try 
to jump ahead a few years and anticipate the impact of this 
student loan debt on our economy.
    Now, there is a significant difference. The most 
significant difference is that the mortgage debt is 
dischargeable in bankruptcy; the student loan debt is not. I 
ask people at the Federal agency, well, what do you think of 
this, that we have so much student debt out there owned by our 
Government, and so much it is not being paid, and defaults, and 
the like.
    And their answer was a little smug. They said, we will get 
our money. Someday we will get our money. It may be a Social 
Security check, but we will get it. That is a grim prospect for 
someone 22 years old, and their mom, and signing up for a 
student loan to think that is the outcome of this decision.
    Tell me what you think in terms of whether or not this 
should be a matter of concern. Are we dealing with a potential 
bubble as some analysts have said? And what do you think we 
should do about it?
    Secretary Geithner. A very important question, and my 
compliments to you for drawing attention to it.
    Let me just say a few general things, and we do share your 
concern, particularly about the unique challenges in the 
private student loan market.
    In the Government student loan market, as you know, there 
are a lot of various forms of flexibility to make sure you can 
adjust payment to income over time, many other ones, too, and 
that is very important. In the private market, those 
protections do not exist, and we would like to work with you on 
how best to think about solving that problem. I know Secretary 
Duncan is thinking a lot about this.
    As you know, the Consumer Financial Protection Bureau 
(CFPB), has responsibility and some authority to look at 
practices in these areas, and they are responsible now for 
taking a look at whether you are seeing behavior by lenders 
that would magnify the risks in this context. We think it is 
very important that--and the President has been very focused on 
this, to try to make sure we are holding all providers of 
postsecondary education--community, private, public--to higher 
standards for the quality of the education they provide to the 
country because, as you pointed out, many people are going to 
very expensive schools where they have not been able to earn a 
return that justifies the expense. And we are working very hard 
to make it more affordable for people to go to college with the 
Congress' support, a range of tax incentives, and other 
options.
    But even with what CFPB is doing, even with these efforts 
to deal with some of the special challenges posed by these 
private universities and for-profit universities across the 
country, and even with steps the Congress has supported to make 
it affordable to go to college, we have a problem we do not how 
to deal with yet in the private student loan business. So, we 
would like to work with you on your specific proposal. There is 
definitely some merit in it. We want to do it carefully, but 
for all the reasons you said.
    It is important to recognize that the average earnings for 
somebody who goes to college are much higher than somebody who 
just graduates with a high school diploma. There is a very good 
case for society as a whole and for the individuals to be able 
to borrow money, and afford, a community college or a 4-year 
college program. But you want to make sure you are doing that 
in the most financially sensible way for you, and with the 
protections you deserve in that basic context.
    A lot of those protections exist in the Federal student 
loan market, and we have got some work to do to bring those to 
the private market.
    Senator Durbin. Let me add one other element I should have 
added, and the difference if we contrast mortgage loans and 
student loans. The bubble in the mortgage market was brought on 
by overpricing real estate. And as a result of people losing 
their homes, being unable to pay, real estate prices came down 
dramatically. The President raised this point in his State of 
the Union Address about the cost of higher education. It seems 
like there is no ceiling. It is just on its way up forever. And 
I am not sure if the bubble bursts and more and more students 
cannot make their payments, whether the message will be driven 
home to a lot of these institutions.
    Some of the tuition charges at schools, including some I 
attended, I think have reached an outrageous level, and I do 
not think that they are sensible anymore in terms of the debt 
that a student has to incur. But they need to be. We have to 
create incentives for them to price a product that is worthy of 
the investment that many young students and their families are 
making.
    It turns out that when it comes to the private loan side of 
it, more and more of these schools, even with the fact that you 
cannot discharge the loan in bankruptcy, are insisting that the 
parents sign on, too. And many parents who thought they were 
headed for retirement with a college-educated child end up 
continuing to work because of student debt that cannot be paid 
at the end of the day.
    Secretary Geithner. It is also true that many people used 
to have the ability to borrow against their house to cover the 
cost of college for their kids, which was a very financially 
attractive way to pay for higher education. But, of course, 
that opportunity no longer exists for many people because of 
how much home prices have fallen.
    Senator Durbin. I am much larger than the average canary, 
but I hope that this testimony today will start some people 
thinking about what this student loan debt is going to mean to 
us in the longer term. And I am not sure which way to turn at 
this point.
    Senator Moran. Mr. Lautenberg is fine.
    Senator Durbin. Senator Lautenberg.
    Senator Lautenberg. Thanks very much. Unscrupulous mortgage 
brokers' practices have led Americans to buy homes that they 
clearly could not afford, and today we see some for-profit 
colleges are pushing students to run up debt they can never 
repay. What, if anything, can the administration do to make 
sure that for-profit colleges do not put our economy at risk 
like the mortgage brokers did?
    Secretary Geithner. Well, excellent question. The President 
and Secretary Arne Duncan have in place a range of policies 
designed to address just this question. So, in addition to what 
the CFPB, we hope, will do in improving the quality of 
disclosure and providing information about borrowing choices 
for its students, in addition to what we can do through the tax 
system and elsewhere to help make college more affordable, the 
President and the Secretary of Education are working hard to 
try to reduce the rate of growth and costs.
    You are both right to highlight this. You want individuals 
to know when they are thinking about how they pay for college 
or community college, about the difference between the 
protections you get with a Federal student loan and a private 
loan. So, you want them to go in eyes open. You do not want 
them to have unrealistic expectations about what they are going 
to be able to earn after college, not justified by the quality 
of the education they get. Those things are very important. 
And, again, you are right to bring attention to it.
    I spent some time talking to the President and Secretary 
Duncan before our hearings; I knew you were going to raise it. 
I know that they are very focused on your specific suggestions 
and would like to work with you on it.
    Senator Lautenberg. Well, is it possible that private 
student loans could have some of the same borrowing protections 
as Federal loans?
    Secretary Geithner. Well, that would really be a matter for 
consideration by the Congress and the CFPB. That is something 
we have to look at. I know the chairman has proposed or is 
considering some specific legislation that would allow private 
student loans to be discharged in bankruptcy with a full set of 
protections. That would be one approach, and we will look at 
all sensible ideas in this area.
    Senator Lautenberg. Right now, budget cuts would slash Pell 
Grants, 10 million students, by at least $1,000. What might be 
the impact of cutting Pell grants for student loans?
    Secretary Geithner. Well, again, if the U.S. Government 
were at this time, with all the concerns we have about the 
basic competitive position of the American economy, and the 
need to equip Americans with the skills they need to get jobs 
to significantly reduce the assistance it provides students 
going to college, that would be a bad thing for the country. 
And it is one reason why it is important for us to recognize 
that even though we recognize our deficits are unsustainable, 
and even though we recognize we are going to have to bring them 
down over time, to understand where we cut and how we do it is 
as important as doing it itself.
    And so, here we put in place tax reform and fiscal reforms 
to help reduce those deficits in the future, we have to be 
preserving room--and we can afford to do this as a country--
preserving room to make it easier, not harder, for kids to go 
to college.
    Senator Lautenberg. Going back some years, I was a 
beneficiary of the GI bill, and was able to get a pretty good 
education at Columbia Business School. And I helped co-found a 
company that now employs more than 40,000 people and presents 
the employee statistics every month, ADP. And we built the 
greatest generation, so called. I was one of the builders, but 
I do not know whether I carried my share of the 8 million 
people who got a GI bill education.
    And not to avail ourselves out of what can come out of a 
broad-scaled educational program that encourages people, does 
not discourage them, does not put them under unrealistic 
burdens, and put our society further in debt, understand that 
watering those flowers produce--it is not only a beautiful 
scent, but a beautiful view.
    Thanks very much.
    Secretary Geithner. I agree. Could I just say, Mr. 
Chairman, that I, too, borrowed to finance my college and 
graduate school education, and I was able to repay those loans 
on a civil service salary, which was a very fortunate thing for 
me. I think as a country, if anything, we are under investing 
in an investment that would have very high returns for the 
country as a whole, and the GI bill is the best example.
    Again, it's a good thing to remember as we think about how 
we find a bipartisan agreement on ways to reduce those long-
term deficits, because we need to be doing that in a way that 
preserves room for these kinds of investments.

                              VOLCKER RULE

    Senator Moran. Mr. Secretary, I am going to ask you to 
advise one of my bankers in their efforts to comply with the 
record keeping requirements of the Volcker Rule.
    The way I understand the situation is a bank without any 
proprietary trading ambitions, either before or after the 
financial crisis, would now have an affirmative obligation to 
prove the negative. In other words, although they never had a 
proprietary trading operation, the Dodd-Frank Act now forces 
them to develop an expensive compliance system to prove that 
fact to the Government.
    Has the Treasury Department made any efforts to quantify 
the costs of that compliance, and how would you suggest a 
banker do that?
    Secretary Geithner. I have heard that concern, and that is 
one of the many comments and concerns expressed by the private 
market in response to the rule proposed by the regulators. 
Again, this is a rule proposed by a group of independent 
regulators. I know they are taking a look at that concern among 
many.
    I think the question they face is, can they find a way--and 
I am very confident they can--can they find a way to achieve 
the objectives of the law, which is to limit proprietary 
trading by the largest banks in the country, but still preserve 
exceptions the Congress designed for market making and hedging, 
and make sure that complying with that does not put an undue 
burden on the rest of the system. I am very confident they can 
do that, but they have got some work to do. And it is important 
to me, not just to your banker, that they get this right.
    Senator Moran. Thank you. I appreciate that confidence that 
it can be accomplished. And it is that reminder that this 
premise about too big to fail, one of the things we have to be 
very cautious of is that because of regulatory burdens, we do 
not force financial institutions to become bigger and bigger to 
cover the costs of the regulatory burden created by the Dodd-
Frank Act and other legislative rulemaking.

                      SMALL BUSINESS LENDING FUND

    Let me ask another one dealing with a similar topic, your 
written testimony references support for community banks from 
the Small Business Lending Fund (SBLF). But I am concerned 
about a lack of an exit plan for those several hundred banks 
that received TARP money from the Capital Purchase Program, 
that were not eligible or were otherwise prevented from 
participating in the SBLF. Do you have a strategy to recover 
those taxpayer dollars and to allow community banks to exit the 
program?
    Secretary Geithner. Excellent question, and we are very 
focused on this. I should point out that we have already 
recovered more than $10 billion of the total amount invested by 
the Government in the banking system in the crisis. The 
expected return on those investments for banks is going to be 
north of $20 billion.
    But you are right, we still have a series of quite small 
investments left in a number of community banks across the 
country. And we are working with those institutions and their 
regulators to encourage them to repay and make it possible for 
them to repay. Not everybody is going to be able to do it. 
There will be some banks that cannot do it. But we are trying 
to figure out a way to encourage those firms to replace those 
investments by the taxpayer with private investments as quickly 
as possible. And they generally want to do it, too. They are 
very eager to return those investments.
    Senator Moran. Mr. Secretary, thank you. Mr. Chairman, 
thank you.

      FINANCIAL CRIMES ENFORCEMENT NETWORK INFORMATION TECHNOLOGY 
                             MODERNIZATION

    Senator Durbin. Mr. Secretary, in your Financial Crimes 
Enforcement Network (FinCEN), there has been a lot of work for 
a long time to upgrade the technology. Tell us where you are.
    Secretary Geithner. Well, we have got some work ahead of 
us. And, as you have said, this has been a challenge for many 
arms of government. We have a stronger management team in place 
in working how to design and execute this modernization. We 
have drawn on resources outside FinCEN to help reinforce it. I 
would be happy to give the subcommittee more details on how 
things are going. But I think they are doing okay.

    OFFICE OF FOREIGN ASSETS CONTROL SANCTIONS AGAINST IRAN, SUDAN, 
                           BELARUS, AND SYRIA

    Senator Durbin. There is another aspect of your agency. 
Most people might think about it instantly, the Office of 
Foreign Assets Control (OFAC), and it oversees economic 
sanctions against targeted foreign countries and regimes, 
terrorists, and other threats to America.
    So, I would like to ask you, is work being done relative to 
the situation in Sudan by your Department?
    Secretary Geithner. Absolutely, and I thank you for drawing 
attention to this part of the Treasury.
    This part of the Treasury is responsible for designing and 
executing these financial sanctions we have in place with many 
countries around the world. And in Sudan, we have in place the 
most powerful sanctions available to us. They are very 
comprehensive, and I think they have been a pretty powerful 
incentive to reinforce the broader objectives of the State 
Department and the President in Sudan.
    OFAC's work goes well beyond Sudan, and, of course, a big 
part of their work today surrounds Iran where we are making 
tremendous progress in bringing more pressure on Iran from 
countries around the world.
    Could I just take this moment to convey my best wishes to 
Senator Kirk, who I know has been such a champion of a tougher 
approach in Iran. I want him to know as he recovers that we are 
making extraordinary progress using the authority he has helped 
give us at the Treasury working with countries around the world 
to bring more pressure to bear on Iran. We are having, we 
think, a big impact economically on them.
    Senator Durbin. I will make sure he gets that message.
    One of the witnesses before the Foreign Relations Committee 
last, when we asked about Sudan and what we could do, said that 
there are at least three Sudanese leaders who have been found 
guilty of war crimes before the International Criminal Court: 
President Bashir, Defense Minister Hussein, and Government 
Minister Harun. And they asked whether we could and whether we 
are tracking their financial assets.
    Secretary Geithner. Well, I would be happy to take a look 
at that more specifically and talk to my colleagues about it. 
The sanctions we have in place cover the government as a whole, 
but, of course I welcome that suggestion and I'm happy to 
consult with my colleagues. We will get back to your staff on 
whether we think that makes sense.
    Senator Durbin. I would like to ask you at the same time to 
consider the situation in Belarus with Viktor Lukashenko, the 
last dictator in Europe, as well as the Syrian dictator, Bashar 
al-Assad. If you would like to say another word or two about 
the situation in Iran. The President has told us and others, 
Secretary Clinton and others, that the sanctions regime is 
making an impact. Can you give us any testimony today about 
what you think the impact has been on the Iranian economy?
    Secretary Geithner. Yes. All evidence suggests, and you can 
see it in what has happened to their exchange rate, the rate of 
inflation, and the difficulty they are having, frankly, trading 
with the rest of the world and selling their oil, that it is 
having very substantial economic effects.
    You have seen 10 countries in Europe and Japan announce 
that they are going to substantially reduce imports of oil from 
Iran. The Europeans are going to cut them off completely. 
Countries around the world are in the process of taking 
additional steps to reduce their imports of oil. But beyond 
that, these financial sanctions are making it very difficult 
for countries to do business with Iran, very difficult for Iran 
to get paid for the oil they do ship, and to get paid for other 
things. And that is absolutely having an effect on the economy 
as a whole.
    Now, we do not know, of course, what effect that is going 
to have on their nuclear ambitions. Of course, our ultimate 
objective is to convince Iran that they should join the 
consensus of the international community to renounce those 
ambitions. We think these sanctions are necessary, and we hope 
will be an effective path to achieve that.
    I want to say in the Belarus context--happy to report in 
more detail--but we have put sanctions in place in Belarus on a 
number of senior government officials, including Lukashenko and 
others.
    Senator Durbin. Thank you.
    Senator Moran.
    Senator Moran. Mr. Chairman, you started me down another 
line of questioning, and one of the areas--I think both of the 
areas we agree upon. I just would encourage the Treasury 
Department to fully implement, to enforce the sanctions as 
authorized by the Congress in regard to Iran, and I would 
encourage you to do that.

                   SALE OF AGRICULTURAL GOODS TO CUBA

    On the topic of Cuba, one that the chairman and I have 
dealt with in the past, the administration has made--the Obama 
administration has made changes in our relationship, bilateral 
relationship with Cuba in regard to travel and regard to money 
being sent to Cuba. But you have not done anything in regard to 
the sale of agriculture commodities, food, and medicine.
    And going back to the year 2001, the Congress passed 
legislation that authorized the sale for cash up front of those 
items. We had regulations developed by the Treasury Department 
that were in place for a number of years. The Bush 
administration Treasury Department changed those regulations, 
made it more difficult for those cash sales to occur in really 
two ways: third-party financing and the definition of when the 
shipment arrived or left the United States, the determining 
factor of when the cash had to be paid. Prior to those 
regulatory changes, it had to be paid when the ship landed in 
Havana. The Treasury Department changed the rules and said it 
had to be paid before the ship left the United States, making 
the United States' sales significantly less competitive.
    And other countries' exports to Cuba have increased, for 
example, to Brazil. Ours following those Treasury regulation 
changes were reduced, diminished. And as--this goes back to my 
days in the House of Representatives, Representative Peterson 
and I wrote the administration asking, if you are going to do 
those other two things, why do you refuse to take the steps 
necessary to deal with the agricultural sales--it is not even 
trade--agricultural sales for cash up front, and return us at 
least to the days that pre-existed the change by the previous 
Treasury administration.
    I would be happy to know your response, but mostly I want 
to ask you to encourage the administration to do that, and to 
work with us as we try to craft legislation if you will not.
    Secretary Geithner. I will be happy to work with you on it. 
And, as you know, there are Members of the Congress who have a 
somewhat different view than you on this, and they have 
occasionally tightened----
    Senator Moran. I have met them.
    Secretary Geithner [continuing]. The things you are trying 
to loosen. And we have to be guided by what they put into law.
    Senator Moran. But the same thing could be true--be said 
for the other two aspects of trade in regard to the money being 
sent and the opportunity to travel to Cuba. And it just seems 
odd this is the one that there seems to be--there is an 
unwillingness for the administration to make the changes.
    Secretary Geithner. Again, happy to listen to your concerns 
on this and to work with you on it. We try to hew closely to 
the line that Constitution draws, and when you change the law, 
then we move. But we are happy to talk to you.
    Senator Moran. I think we have had this conversation 
before. Your happiness to talk to me has been demonstrated 
previously, but the rules remain the same.

             TAXPAYER SUPPORT OF FREDDIE MAC AND FANNIE MAE

    The only--I think, Mr. Chairman, the only other question I 
would ask is, this is a question that Senator Kirk asked me to 
ask in regard to taxpayers being made whole in their 
investments and the rescue of Freddie Mac and Fannie Mae. And I 
think the point he wanted me to raise with you is that in the 
Senate Banking Committee, February of this year, Secretary 
Donovan estimated that the taxpayer exposure to the bad loans 
of Fannie Mae and Freddie Mac could exceed $1 trillion. Do you 
agree with that assessment?
    Secretary Geithner. No, and I do not think it is likely he 
said it that way. Let me tell you how we look at this.
    FHFA does a regular periodic assessment of what future 
losses might be even in the event we face another recession or 
another crisis, those are put in the public domain, and they 
periodically revisit those.
    But I will tell you what they show. What they show is that 
all the losses they face going forward now are really the 
legacy problem of the choices they made during the financial 
boom. And today, because of the changes put in place since the 
crisis under the legislation the Congress passed, they have 
much more conservative underwriting standards and much more 
conservative lending practices.
    Most independent economists assessing their book of 
business would say that the new business they are doing today, 
which is still very important--the housing market--is done on 
much more conservative financial terms and looks relatively 
profitable. And over time, those profits are helping reduce the 
losses we inherited.
    But what FHFA does, and which is appropriate, is to 
periodically publish estimates of what those losses might be in 
the future to the taxpayer under even a significantly worse 
economic scenario. But the estimates out there, including the 
ones made by CBO, are nothing close to $1 trillion.
    We will lose some money, but I think the current estimates 
are more in the range of $100 billion. And even those losses 
look like they are going to be largely offset by the 
Government's return on the range of other things that we did as 
part of the financial rescue done by the Federal Reserve and 
the Federal Deposit Insurance Corporation (FDIC) and the 
Treasury.

                     ADDITIONAL COMMITTEE QUESTIONS

    But, you know, we got some ways to go, and really at the 
very early stage of putting in place reforms that will make the 
housing finance system work better in the future. We are pretty 
far advanced on the broader financial reforms, but not very far 
along on the reforms to the housing finance system.
    Senator Moran. Mr. Secretary, thank you.
    Senator Durbin. Mr. Secretary, thank you for your time and 
your valuable testimony.
    Secretary Geithner. Thank you.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]

            Questions Submitted by Senator Richard J. Durbin

    Question. What is the Department of the Treasury doing in its role 
as manager of the Senior Preferred Stock Purchase Agreements--through 
which the Government-sponsored enterprises (GSEs) have received about 
$170 billion in taxpayer assistance--to ensure the GSEs are engaging in 
behavior such as principal reduction that, as Secretary Geithner has 
stated, when appropriately used would ``limit the futures losses of the 
GSEs''?
    Answer. The Federal Housing Finance Agency (FHFA), as Conservator 
of Fannie Mae and Freddie Mac, is responsible for the oversight and 
management of the activities at Fannie Mae and Freddie Mac.
    As part of the Senior Preferred Stock Purchase Agreements, Treasury 
has certain protections on its investment, which include approval 
rights over any asset sales not at fair value.
    Treasury assisted the FHFA in its analysis of the effects of 
principal reduction when made in connection with a Home Affordable 
Modification Program (HAMP) loan modification. In July 2012, after 
months of deliberation, FHFA announced it would not allow Fannie Mae 
and Freddie Mac to provide borrowers with principal reduction in 
connection with a modification. Treasury is ready to consult with the 
FHFA if they wish to continue a further analysis of principal 
reduction.

                       DOMESTIC FINANCE--HOUSING

    Question. Who at Treasury is in charge of managing and overseeing 
the Senior Preferred Stock Purchase Agreements?
    Answer. The Under Secretary of the Treasury for Domestic Finance is 
responsible for the management and oversight of the preferred stock 
investments under Senior Preferred Stock Purchase Agreements.
    Question. How many Treasury employees work on a daily basis to 
oversee the financial assistance provided to FHFA?
    Answer. Treasury takes very seriously its responsibility to oversee 
the financial support it provides under the Senior Preferred Stock 
Purchase Agreements. Employees of a number of Treasury offices, 
including the Office of Financial Markets, the Office of Financial 
Institutions, the Office of the Fiscal Assistant Secretary, and the 
Office of the General Counsel, provide support to the Under Secretary 
for Domestic Finance for the management and oversight of the financial 
support provided under the Senior Preferred Stock Purchase Agreements.
    Question. What information, if any, is Treasury receiving from the 
GSEs to ensure that the billions in financial assistance they have 
received under the Purchase Agreements isn't being misused?
    Answer. The respective management and Boards of Directors of Fannie 
Mae and Freddie Mac are responsible for the proper use of the financial 
support they each received under the Senior Preferred Stock Purchase 
Agreements. FHFA, as Conservator of Fannie Mae and Freddie Mac, is 
responsible for the oversight and management of the activities at 
Fannie Mae and Freddie Mac. Both Fannie Mae and Freddie Mac submit 
annual risk management plans to Treasury which provides information 
about the enterprise risk management at both firms.
    Question. What is Treasury doing to ensure FHFA completes its 
principal reduction analysis in a timely manner and that FHFA does not 
indefinitely delay its results?
    Answer. In 2012, Treasury assisted the FHFA in its analysis of the 
effects of targeted principal reduction on underwater mortgages owned 
or guaranteed by Fannie Mae and Freddie Mac in connection with payment-
reducing loan modifications under HAMP. Treasury believes that 
principal reduction should be assessed as part of a payment-reducing 
modification, and the overall economic result compared to a 
modification without principal reduction. This approach ensures that 
principal reduction is implemented where it produces the best result 
from an economic standpoint. FHFA, as Conservator of Fannie Mae and 
Freddie Mac, is responsible for the oversight and management of the 
activities at Fannie Mae and Freddie Mac. In July 2012, FHFA announced 
it had concluded its analysis and it would not allow Fannie Mae and 
Freddie Mac to provide borrowers with principal reduction in connection 
with a modification. Treasury is ready to consult with the FHFA if they 
wish to continue a further analysis of principal reduction.
    Question. Has Treasury done its own analysis about the benefits of 
the GSEs participating in principal reduction? Who at Treasury would be 
responsible for completing this analysis?
    Answer. Treasury assisted FHFA in its analysis of the effects of 
principal reduction when made in connection with a HAMP loan 
modification. The assistance was provided by Treasury staff within the 
Office of Domestic Finance and the Office of Economic Policy.
    Question. Does Treasury have access to the necessary information, 
including the books of the GSEs, to conduct its own analysis about the 
benefits of the GSEs participating in principal reduction?
    Answer. Treasury assisted the FHFA in its analysis of the effects 
of principal reduction when made in connection with a loan 
modification, however Treasury does not have access to the detailed 
data of the GSEs to conduct our own analysis. Treasury is ready to 
consult with the FHFA if they wish to continue a further analysis of 
principal reduction.
    Question. Isn't it true that the GSEs could target principal 
reduction to those homeowners for which it makes the most business 
sense, which would address most of the concerns critics and those with 
philosophical objections have with principal reduction?
    Answer. Treasury believes that principal reduction should be 
assessed as part of a payment-reducing modification, and used in those 
cases where it produces a better overall economic result when compared 
to a modification without principal reduction. This targeted approach 
ensures that principal reduction is implemented where it produces the 
best result from an economic standpoint. The application of principal 
reduction to an underwater loan can, in many cases, help reduce a 
struggling borrower's monthly payment to a level where the borrower can 
sustain this lower, modified monthly payment and is less likely to 
default going forward. Currently, of all of the eligible underwater 
non-GSE loans receiving a HAMP modification in December 2012, for 
example, Treasury has reported that 71 percent included some principal 
reduction.
    As noted, FHFA announced in July 2012 it had concluded its analysis 
and it would not allow the GSEs to provide borrowers with principal 
reduction in connection with a modification. Treasury is ready to 
consult with the FHFA if they wish to continue a further analysis of 
principal reduction.
    Question. How does Treasury interpret FHFA's conservatorship 
mandate?
    Answer. FHFA placed each of the GSEs into conservatorship on 
September 6, 2008. At that time, FHFA set out the purpose and goals of 
conservatorship as follows:

    ``The purpose of appointing the Conservator is to preserve and 
conserve the Company's assets and property and to put the Company in a 
sound and solvent condition. The goals of the conservatorship are to 
help restore confidence in the Company, enhance its capacity to fulfill 
its mission, and mitigate the systemic risk that has contributed 
directly to the instability in the current market.''

    Question. Does anything in FHFA's conservatorship mandate prohibit 
Acting Director DeMarco from allowing the GSEs to engage in activity 
such as principal reduction that even private investors are using to 
reduce losses?
    Answer. FHFA is an independent Federal regulator and as such, it 
would not be appropriate for Treasury to comment on FHFA's mandate.
    Question. Has FHFA shared their resource concerns with Treasury 
about implementing principal reduction as indicated in FHFA's January 
20 letter to Representative Cummings? Has Treasury offered to help 
address resource issues?
    Answer. In January 2012, Treasury announced that it was willing to 
pay principal reduction investor incentives to servicers participating 
in HAMP who were modifying underwater GSE loans, if the FHFA permitted 
the GSEs to participate in the HAMP Principal Reduction Alternative 
program (HAMP-PRA). After that announcement, Treasury engaged with FHFA 
regarding their concerns with resources needed to implement principal 
reduction and offered to pay additional administrative costs required 
to implement HAMP-PRA. As noted, FHFA decided in July 2012 not to allow 
GSEs to provide borrowers with principal reduction in connection with a 
modification. Treasury is ready to consult with the FHFA if they wish 
to continue a further analysis of principal reduction.
    Question. What is Treasury doing to ensure that the tax 
consequences of principal reduction do not outweigh the benefits of 
principal reductions?
    Answer. Treasury worked closely with Congress to ensure that the 
Mortgage Debt Relief Act of 2007 was extended through December 31, 
2013. The Mortgage Debt Relief Act of 2007 generally allows taxpayers 
to exclude income from the discharge of qualified mortgage debt on 
their principal residence. Principal residence mortgage debt reduced 
through mortgage restructuring, as well as mortgage debt forgiven in 
connection with a foreclosure, can qualify for the relief.
    In addition, Treasury worked closely with the Internal Revenue 
Service on recent IRS guidance (Revenue Procedure 2013-16) addressing 
principal reduction. Under this guidance issued on January 24, 2013, 
principal reduction is excluded from homeowners' income to the extent 
the holders of the loan receive Government-paid incentives. Homeowners 
may elect whether to treat any principal reduction from non-Government 
sources as income in the year of the permanent modification or as the 
principal is reduced on the loan. Additionally, the guidance permits 
homeowners to amend returns filed in previous years. As a result of 
this guidance, homeowners' compliance with their tax obligations should 
be improved and homeowners' access to existing exclusions from taxable 
income should be simplified.
   domestic finance--financial institutions/federal insurance office
    Question. Treasury's Federal Insurance Office (FIO) has a 
significant workload, particularly in international forums like the 
International Association of Insurance Supervisors (IAIS). FIO's work 
at the international level, in conjunction with state insurance 
supervisors, is important to the competitive standing of U.S. insurers 
and will help ensure that the United States gets the best outcome in 
reviews of international insurance standards. Please provide a progress 
report on the work that FIO is undertaking, including what the 
Department is doing to stand up and provide resources to this office 
and how many staff are expected to be in place by the end of each of 
fiscal year 2012 and fiscal year 2013.
    Answer. By virtue of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, the Department of the Treasury's FIO is authorized to 
coordinate and develop Federal policy on prudential aspects of 
international insurance matters, including representing the United 
States at the International Association of Insurance Supervisors 
(IAIS). FIO became a full member of the IAIS in October 2011. FIO 
became a member of the IAIS Executive Committee in February 2012, and 
the FIO Director was selected to chair the IAIS Technical Committee in 
October 2012. FIO also represents the United States on the IAIS 
Financial Stability Committee, the Macro-Prudential Surveillance 
Working Group, and numerous subcommittees.
    In January 2012, FIO initiated an insurance dialogue project 
(Project) with State regulators and European Union (EU) insurance 
officials in order to identify those subject regulatory matters 
appropriate for improved convergence and compatibility between the EU 
and the United States. The Project will conclude in 2018.
    FIO has participated in the Insurance and Private Pensions 
Committee of the Organization for Economic Cooperation and Development 
(OECD). In this capacity, FIO supports the leadership of the U.S. 
Department of Commerce.
    FIO has developed numerous bilateral relationships with insurance 
supervisors from around the world. For example, FIO participated in the 
U.S.-China Strategic and Economic Dialogue and the U.S.-China Joint 
Economic Committee. FIO also participated in the 2012 NAFTA Financial 
Regulatory Dialogue, and has initiated a joint semiannual insurance 
supervisory discussion with the lead insurance supervisors of Canada 
and Mexico, in addition to State regulators.
    In addition to its authorities relating to international insurance 
matters, the Director of FIO also serves on the Financial Stability 
Oversight Council. FIO has been actively engaged in the work of the 
Council, and expects to increase its engagement as staff resources 
increase. FIO has also been preparing a number of studies and reports 
that will be issued in 2013.
    As of February 20, 2013, FIO has 11 full-time employees and is 
building to a staff of 15 employees. The Treasury Department supports 
FIO with the additional support resources needed to fulfill its 
statutory authority.

  TERRORISM AND FINANCIAL INTELLIGENCE--FINANCIAL CRIMES ENFORCEMENT 
                                NETWORK

    Question. The Financial Crimes Enforcement Network (FinCEN) 
collects Suspicious Activity Reports from financial institutions. 
Patterns in the data allow FinCEN to identify criminal ``hot spots'' 
that can be addressed through enforcement and coordination among law 
enforcement entities. In fiscal year 2010, FinCEN began a second 
attempt to upgrade the IT system that hosts this data.
    When will the final product be available, and how will it improve 
financial intelligence efforts?
    Answer. The Bank Secrecy Act (BSA) Information Technology (IT) 
Modernization Program is a 4-year program, which began in fiscal year 
2010, that has delivered multiple products that fundamentally improve 
FinCEN's information technology infrastructure, applications, and 
ability to provide support to users from hundreds of Federal, State, 
and local law enforcement, regulatory, and intelligence agencies. The 
Program has continuously and successfully delivered products on time 
and within budget, meeting the rapid incremental milestones established 
by the Office of Management and Budget (OMB).
    Question. What improvements have FinCEN and the Department made to 
the planning and implementation process that will avoid problems that 
plagued the previous failed upgrade?
    Answer. The BSA IT Modernization Program has continuously and 
successfully delivered products on time and within budget, meeting the 
rapid incremental milestones established by OMB. Treasury's Office of 
the Inspector General (OIG) has produced two reports on the program and 
in the most recent of those, OIG had no recommendations.
    Question. How have FinCEN and Treasury involved the wide variety of 
stakeholders in the planning for this IT overhaul--including banks, 
Federal law enforcement, State and local law enforcement, and other 
Federal intelligence agencies?
    Answer. Throughout the modernization effort, FinCEN has consulted 
with a Data Management Council (DMC), which is comprised of 
representatives from more than a dozen Federal law enforcement and 
regulatory organizations. In addition, FinCEN collaborated with the 
Bank Secrecy Act Advisory Group, which includes both public and private 
sector participants, to obtain feedback on various aspects of the 
program.
                                 ______
                                 
            Questions Submitted by Senator Richard J. Durbin

    Question. What is the Department of the Treasury doing in its role 
as manager of the Senior Preferred Stock Purchase Agreements--through 
which the Government-sponsored enterprises (GSEs) have received about 
$170 billion in taxpayer assistance--to ensure the GSEs are engaging in 
behavior such as principal reduction that, as Secretary Geithner has 
stated, when appropriately used would ``limit the futures losses of the 
GSEs''?
    Answer. The Federal Housing Finance Agency (FHFA), as Conservator 
of Fannie Mae and Freddie Mac, is responsible for the oversight and 
management of the activities at Fannie Mae and Freddie Mac.
    As part of the Senior Preferred Stock Purchase Agreements, Treasury 
has certain protections on its investment, which include approval 
rights over any asset sales not at fair value.
    Treasury assisted the FHFA in its analysis of the effects of 
principal reduction when made in connection with a Home Affordable 
Modification Program (HAMP) loan modification. In July 2012, after 
months of deliberation, FHFA announced it would not allow Fannie Mae 
and Freddie Mac to provide borrowers with principal reduction in 
connection with a modification. Treasury is ready to consult with the 
FHFA if they wish to continue a further analysis of principal 
reduction.

                       DOMESTIC FINANCE--HOUSING

    Question. Who at Treasury is in charge of managing and overseeing 
the Senior Preferred Stock Purchase Agreements?
    Answer. The Under Secretary of the Treasury for Domestic Finance is 
responsible for the management and oversight of the preferred stock 
investments under Senior Preferred Stock Purchase Agreements.
    Question. How many Treasury employees work on a daily basis to 
oversee the financial assistance provided to FHFA?
    Answer. Treasury takes very seriously its responsibility to oversee 
the financial support it provides under the Senior Preferred Stock 
Purchase Agreements. Employees of a number of Treasury offices, 
including the Office of Financial Markets, the Office of Financial 
Institutions, the Office of the Fiscal Assistant Secretary, and the 
Office of the General Counsel, provide support to the Under Secretary 
for Domestic Finance for the management and oversight of the financial 
support provided under the Senior Preferred Stock Purchase Agreements.
    Question. What information, if any, is Treasury receiving from the 
GSEs to ensure that the billions in financial assistance they have 
received under the Purchase Agreements isn't being misused?
    Answer. The respective management and Boards of Directors of Fannie 
Mae and Freddie Mac are responsible for the proper use of the financial 
support they each received under the Senior Preferred Stock Purchase 
Agreements. FHFA, as Conservator of Fannie Mae and Freddie Mac, is 
responsible for the oversight and management of the activities at 
Fannie Mae and Freddie Mac. Both Fannie Mae and Freddie Mac submit 
annual risk management plans to Treasury which provides information 
about the enterprise risk management at both firms.
    Question. What is Treasury doing to ensure FHFA completes its 
principal reduction analysis in a timely manner and that FHFA does not 
indefinitely delay its results?
    Answer. In 2012, Treasury assisted the FHFA in its analysis of the 
effects of targeted principal reduction on underwater mortgages owned 
or guaranteed by Fannie Mae and Freddie Mac in connection with payment-
reducing loan modifications under HAMP. Treasury believes that 
principal reduction should be assessed as part of a payment-reducing 
modification, and the overall economic result compared to a 
modification without principal reduction. This approach ensures that 
principal reduction is implemented where it produces the best result 
from an economic standpoint. FHFA, as Conservator of Fannie Mae and 
Freddie Mac, is responsible for the oversight and management of the 
activities at Fannie Mae and Freddie Mac. In July 2012, FHFA announced 
it had concluded its analysis and it would not allow Fannie Mae and 
Freddie Mac to provide borrowers with principal reduction in connection 
with a modification. Treasury is ready to consult with the FHFA if they 
wish to continue a further analysis of principal reduction.
    Question. Has Treasury done its own analysis about the benefits of 
the GSEs participating in principal reduction? Who at Treasury would be 
responsible for completing this analysis?
    Answer. Treasury assisted FHFA in its analysis of the effects of 
principal reduction when made in connection with a HAMP loan 
modification. The assistance was provided by Treasury staff within the 
Office of Domestic Finance and the Office of Economic Policy.
    Question. Does Treasury have access to the necessary information, 
including the books of the GSEs, to conduct its own analysis about the 
benefits of the GSEs participating in principal reduction?
    Answer. Treasury assisted the FHFA in its analysis of the effects 
of principal reduction when made in connection with a loan 
modification, however Treasury does not have access to the detailed 
data of the GSEs to conduct our own analysis. Treasury is ready to 
consult with the FHFA if they wish to continue a further analysis of 
principal reduction.
    Question. Isn't it true that the GSEs could target principal 
reduction to those homeowners for which it makes the most business 
sense, which would address most of the concerns critics and those with 
philosophical objections have with principal reduction?
    Answer. Treasury believes that principal reduction should be 
assessed as part of a payment-reducing modification, and used in those 
cases where it produces a better overall economic result when compared 
to a modification without principal reduction. This targeted approach 
ensures that principal reduction is implemented where it produces the 
best result from an economic standpoint. The application of principal 
reduction to an underwater loan can, in many cases, help reduce a 
struggling borrower's monthly payment to a level where the borrower can 
sustain this lower, modified monthly payment and is less likely to 
default going forward. Currently, of all of the eligible underwater 
non-GSE loans receiving a HAMP modification in December 2012, for 
example, Treasury has reported that 71 percent included some principal 
reduction.
    As noted, FHFA announced in July 2012 it had concluded its analysis 
and it would not allow the GSEs to provide borrowers with principal 
reduction in connection with a modification. Treasury is ready to 
consult with the FHFA if they wish to continue a further analysis of 
principal reduction.
    Question. How does Treasury interpret FHFA's conservatorship 
mandate?
    Answer. FHFA placed each of the GSEs into conservatorship on 
September 6, 2008. At that time, FHFA set out the purpose and goals of 
conservatorship as follows:

    ``The purpose of appointing the Conservator is to preserve and 
conserve the Company's assets and property and to put the Company in a 
sound and solvent condition. The goals of the conservatorship are to 
help restore confidence in the Company, enhance its capacity to fulfill 
its mission, and mitigate the systemic risk that has contributed 
directly to the instability in the current market.''

    Question. Does anything in FHFA's conservatorship mandate prohibit 
Acting Director DeMarco from allowing the GSEs to engage in activity 
such as principal reduction that even private investors are using to 
reduce losses?
    Answer. FHFA is an independent Federal regulator and as such, it 
would not be appropriate for Treasury to comment on FHFA's mandate.
    Question. Has FHFA shared their resource concerns with Treasury 
about implementing principal reduction as indicated in FHFA's January 
20 letter to Representative Cummings? Has Treasury offered to help 
address resource issues?
    Answer. In January 2012, Treasury announced that it was willing to 
pay principal reduction investor incentives to servicers participating 
in HAMP who were modifying underwater GSE loans, if the FHFA permitted 
the GSEs to participate in the HAMP Principal Reduction Alternative 
program (HAMP-PRA). After that announcement, Treasury engaged with FHFA 
regarding their concerns with resources needed to implement principal 
reduction and offered to pay additional administrative costs required 
to implement HAMP-PRA. As noted, FHFA decided in July 2012 not to allow 
GSEs to provide borrowers with principal reduction in connection with a 
modification. Treasury is ready to consult with the FHFA if they wish 
to continue a further analysis of principal reduction.
    Question. What is Treasury doing to ensure that the tax 
consequences of principal reduction do not outweigh the benefits of 
principal reductions?
    Answer. Treasury worked closely with Congress to ensure that the 
Mortgage Debt Relief Act of 2007 was extended through December 31, 
2013. The Mortgage Debt Relief Act of 2007 generally allows taxpayers 
to exclude income from the discharge of qualified mortgage debt on 
their principal residence. Principal residence mortgage debt reduced 
through mortgage restructuring, as well as mortgage debt forgiven in 
connection with a foreclosure, can qualify for the relief.
    In addition, Treasury worked closely with the Internal Revenue 
Service on recent IRS guidance (Revenue Procedure 2013-16) addressing 
principal reduction. Under this guidance issued on January 24, 2013, 
principal reduction is excluded from homeowners' income to the extent 
the holders of the loan receive Government-paid incentives. Homeowners 
may elect whether to treat any principal reduction from non-Government 
sources as income in the year of the permanent modification or as the 
principal is reduced on the loan. Additionally, the guidance permits 
homeowners to amend returns filed in previous years. As a result of 
this guidance, homeowners' compliance with their tax obligations should 
be improved and homeowners' access to existing exclusions from taxable 
income should be simplified.
   domestic finance--financial institutions/federal insurance office
    Question. Treasury's Federal Insurance Office (FIO) has a 
significant workload, particularly in international forums like the 
International Association of Insurance Supervisors (IAIS). FIO's work 
at the international level, in conjunction with state insurance 
supervisors, is important to the competitive standing of U.S. insurers 
and will help ensure that the United States gets the best outcome in 
reviews of international insurance standards. Please provide a progress 
report on the work that FIO is undertaking, including what the 
Department is doing to stand up and provide resources to this office 
and how many staff are expected to be in place by the end of each of 
fiscal year 2012 and fiscal year 2013.
    Answer. By virtue of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, the Department of the Treasury's FIO is authorized to 
coordinate and develop Federal policy on prudential aspects of 
international insurance matters, including representing the United 
States at the International Association of Insurance Supervisors 
(IAIS). FIO became a full member of the IAIS in October 2011. FIO 
became a member of the IAIS Executive Committee in February 2012, and 
the FIO Director was selected to chair the IAIS Technical Committee in 
October 2012. FIO also represents the United States on the IAIS 
Financial Stability Committee, the Macro-Prudential Surveillance 
Working Group, and numerous subcommittees.
    In January 2012, FIO initiated an insurance dialogue project 
(Project) with State regulators and European Union (EU) insurance 
officials in order to identify those subject regulatory matters 
appropriate for improved convergence and compatibility between the EU 
and the United States. The Project will conclude in 2018.
    FIO has participated in the Insurance and Private Pensions 
Committee of the Organization for Economic Cooperation and Development 
(OECD). In this capacity, FIO supports the leadership of the U.S. 
Department of Commerce.
    FIO has developed numerous bilateral relationships with insurance 
supervisors from around the world. For example, FIO participated in the 
U.S.-China Strategic and Economic Dialogue and the U.S.-China Joint 
Economic Committee. FIO also participated in the 2012 NAFTA Financial 
Regulatory Dialogue, and has initiated a joint semiannual insurance 
supervisory discussion with the lead insurance supervisors of Canada 
and Mexico, in addition to State regulators.
    In addition to its authorities relating to international insurance 
matters, the Director of FIO also serves on the Financial Stability 
Oversight Council. FIO has been actively engaged in the work of the 
Council, and expects to increase its engagement as staff resources 
increase. FIO has also been preparing a number of studies and reports 
that will be issued in 2013.
    As of February 20, 2013, FIO has 11 full-time employees and is 
building to a staff of 15 employees. The Treasury Department supports 
FIO with the additional support resources needed to fulfill its 
statutory authority.

  TERRORISM AND FINANCIAL INTELLIGENCE--FINANCIAL CRIMES ENFORCEMENT 
                                NETWORK

    Question. The Financial Crimes Enforcement Network (FinCEN) 
collects Suspicious Activity Reports from financial institutions. 
Patterns in the data allow FinCEN to identify criminal ``hot spots'' 
that can be addressed through enforcement and coordination among law 
enforcement entities. In fiscal year 2010, FinCEN began a second 
attempt to upgrade the IT system that hosts this data.
    When will the final product be available, and how will it improve 
financial intelligence efforts?
    Answer. The Bank Secrecy Act (BSA) Information Technology (IT) 
Modernization Program is a 4-year program, which began in fiscal year 
2010, that has delivered multiple products that fundamentally improve 
FinCEN's information technology infrastructure, applications, and 
ability to provide support to users from hundreds of Federal, State, 
and local law enforcement, regulatory, and intelligence agencies. The 
Program has continuously and successfully delivered products on time 
and within budget, meeting the rapid incremental milestones established 
by the Office of Management and Budget (OMB).
    Question. What improvements have FinCEN and the Department made to 
the planning and implementation process that will avoid problems that 
plagued the previous failed upgrade?
    Answer. The BSA IT Modernization Program has continuously and 
successfully delivered products on time and within budget, meeting the 
rapid incremental milestones established by OMB. Treasury's Office of 
the Inspector General (OIG) has produced two reports on the program and 
in the most recent of those, OIG had no recommendations.
    Question. How have FinCEN and Treasury involved the wide variety of 
stakeholders in the planning for this IT overhaul--including banks, 
Federal law enforcement, State and local law enforcement, and other 
Federal intelligence agencies?
    Answer. Throughout the modernization effort, FinCEN has consulted 
with a Data Management Council (DMC), which is comprised of 
representatives from more than a dozen Federal law enforcement and 
regulatory organizations. In addition, FinCEN collaborated with the 
Bank Secrecy Act Advisory Group, which includes both public and private 
sector participants, to obtain feedback on various aspects of the 
program.
                                 ______
                                 
           Questions Submitted by Senator Frank R. Lautenberg

                       DOMESTIC FINANCE--HOUSING

    Question. Opponents of principal forgiveness for struggling 
homeowners have argued that lowering the amount owed on underwater 
mortgages would cost taxpayers too much.
    However, analysis by the Federal Housing Finance Agency suggests 
that forgiveness would save taxpayers money.\1\ What has your analysis 
of Treasury's principal forgiveness program revealed about the benefits 
of principal forgiveness for taxpayers and homeowners?
---------------------------------------------------------------------------
    \1\ See February 8, 2012 Letter from House Oversight Committee to 
FHFA Director DeMarco, which reads, in part, ``according to the latest 
report you provided from December 2011 . . . implementing principal 
reduction programs for borrowers who are Net Present Value (NPV) 
positive would reduce overall losses by $28.3 billion, while principal 
forbearance programs for these borrowers would reduce overall losses by 
$27.9 billion compared to the cost of taking no action.''
---------------------------------------------------------------------------
    Answer. Treasury supports using principal reduction on a targeted 
basis where it makes economic sense to do so. When used in combination 
with a payment-reducing loan modification such as a Home Affordable 
Modification Program (HAMP) modification, principal reduction can be an 
effective way to help underwater borrowers avoid foreclosure and help 
housing markets to recover. The application of principal reduction to 
an underwater loan can, in many cases, help reduce a struggling 
borrower's monthly payment to a level where the borrower can sustain 
this lower, modified monthly payment and is less likely to default 
going forward. Currently, of all of the eligible underwater non-
Government-sponsored enterprises (GSEs) loans receiving a HAMP 
modification in 2012, nearly three-quarters included some principal 
reduction.

                       DOMESTIC FINANCE--HOUSING

    Question. Some have suggested that principal forgiveness on Fannie 
Mae and Freddie Mac mortgages would enrich banks that hold second 
liens.\2\
    But principal forgiveness is essential for struggling homeowners 
and for restoring the health of our housing market. How can the 
Congress help homeowners while preventing a windfall for banks?
---------------------------------------------------------------------------
    \2\ See, for example, ``A Bailout by Another Name'', New York 
Times, March 24, 2012.
---------------------------------------------------------------------------
    The concern that principal reduction could offer a benefit to large 
financial institutions that hold subordinate second liens is addressed 
HAMP through the associated Second Lien Modification Program (2MP). 
Servicers participating in 2MP are contractually obligated to 
proportionately modify each eligible second lien that is matched to a 
first lien HAMP modification. In the case of any first lien that has 
principal reduced in connection with a HAMP modification, the 
participating servicer is required, at a minimum, to reduce a 
proportional amount of principal on the associated second lien. Most 
major servicers are participants in 2MP (including the five largest 
mortgage servicers), so instead of providing a windfall to the banks, 
if Fannie Mae and Freddie Mac's (the GSEs) allowed principal reduction 
in connection with HAMP modifications on GSEs loans, it would compel 
the largest banks to help homeowners even further by writing down more 
second liens through 2MP.
    Prior to the launch of 2MP, it was often difficult to even 
determine the owner of a second lien on a property subject to a first 
lien modification. Treasury facilitated the creation of a nationwide 
system to match first and second liens, thereby facilitating and 
ensuring that second liens are modified when there is a first lien 
modification, whether or not the modification involves principal 
reduction.

                            ECONOMIC POLICY

    Question. In 2006, Christopher Bryski, a constituent of mine, 
passed away after not regaining consciousness from an injury he 
suffered 2 years prior. His Federal student loans were discharged by 
law when he passed, but his private loans were not, so his father is 
still paying them off. Do you believe that private student loans should 
have the same borrower protections as Federal loans?
    Answer. Treasury defers to the Consumer Financial Protection Bureau 
(CFPB) on the issue of private student loans. CFPB issued a report in 
July 2012 that discussed borrower protections for private student 
loans.
                                 ______
                                 
                Questions Submitted by Senator Mark Kirk

                       DOMESTIC FINANCE--HOUSING

    Question. In your response to a question during the March 28 
hearing, you indicated that you were not familiar with the statements 
made by Department of Housing and Urban Development Secretary Shaun 
Donovan during a hearing before the Senate Banking Committee on 
February 28. Secretary Donovan replied to questions from Senator 
Johanns as follows:

    ``Senator Johanns. Let me ask you about that, because I think 
you're making my point. How much today would the taxpayers be on the 
hook for when it comes to Fannie and Freddie? Everything, right?
    ``Secretary Donovan. There--there is no question that taxpayers are 
at risk for those loans being made. What I would also say, though, is 
all the evidence that we have is that the new loans being made are 
safe, good loans; that the exposure that taxpayers have is to the 
legacy loans that were made before they went into conservatorship.
    ``Senator Johanns. How much----
    ``Secretary Donovan. This is where the confidence issue is 
important. The single-most important thing we can do to protect 
taxpayers is ensure that those old loans, which we can't make go away, 
perform in a way that improves their value, rather than continue as 
their value decline. In that sense, improving the housing market more 
broadly, keeping confidence in the securities that are issued by Fannie 
and Freddie, is critical going forward.
    ``Senator Johanns. How much are those legacy loans? If you're the 
average taxpayer out there, and you're tuned into this hearing, and you 
want to know how much you're on the hook for, how much is that?
    ``Secretary Donovan. I'm sorry, Senator. I don't have a number in 
front of me. Perhaps--I know that FHFA will be testifying on the next 
panel. I'm sure that they would have more specific details. But it's 
obviously substantial, in the over-trillion-dollar range.''

    Your specific response during the March 28 hearing was:

    ``The FHFA does a regular periodic assessment of what future losses 
might be, even in the event if we face another recession or another 
crisis. And those are put in the public domain and they periodically 
revisit those. But I'll tell you what they show. What they show is that 
all the losses they face going forward now are really the legacy 
problem of the choices they made during the financial boom. And today, 
because of the changes put in place since the crisis under the 
legislation Congress passed, they have much more conservative 
underwriting standards and much more conservative lending practices. 
And most independent economists assessing their book of business would 
say that the new businesses they're doing today, which is still 
important to the housing market, is done on much more conservative 
financial terms and looks relatively profitable. And over time, those 
profits are helping reduce the losses we inherited. But what FHFA 
does--and this is appropriate--is to periodically publish estimates of 
what those losses might be in the future to the taxpayer under even 
much--even, you know, a significantly worse economic scenario. And--but 
the estimates out there, including ones made by CBO are nothing close 
to $1 trillion.''

    To clarify the precise level of exposure, please provide Treasury's 
estimate of the value of outstanding mortgage loans that carry a direct 
or indirect Federal guarantee, broken down by ``legacy loans'' and 
``loans since 2010'', accompanied with an estimate of taxpayer exposure 
to loss. Also respond as to whether you view debt forgiveness as part 
of a plan to minimize the taxpayers' long-term loss exposure.
    Answer. The majority of losses at the GSEs stem from loans 
guaranteed prior to 2009. FHFA has conducted stress tests in order to 
project potential GSE losses and draws from Treasury over a 3-year 
forward-looking window. However, it is important to note that these are 
modeled projections and can change over time as inputs and assumptions 
change.
    In the ``Projections of the Enterprises Financial Performance'', 
FHFA reported on October 26, 2012, FHFA projected results for the 
period of 2013-2015. These results estimated that the cumulative amount 
of draws from Treasury less the dividends paid to Treasury for FHFA 
baseline scenario since conservatorship and through 2015 was $53 
billion for Fannie Mae and $23 billion for Freddie Mac. Under a stress 
scenario, FHFA projected these amounts to be $94 billion for Fannie Mae 
and $38 billion for Freddie Mac.
    The administration uses these projections as the starting point for 
its budget estimate of the cost of Treasury support for Fannie Mae and 
Freddie Mac and will provide updated estimates in the fiscal year 2014 
budget. In the administration's fiscal year 2013 mid session review, 
net payments of senior preferred liquidity payments minus dividends 
were projected to be $12 billion through the budget window of 2009-
2022. The lower figure reflects FHFA's projected stronger results and 
dividend payments to Treasury in the 2015-2022 period.
    Treasury supports using principal reduction on a targeted basis 
where it makes economic sense to do so. When principal reduction is 
used in combination with a payment-reducing loan modification such as a 
HAMP modification, it can be an effective way to help underwater 
borrowers avoid foreclosure and help housing markets to recover.
    Question. The debt limit increase approved as part of the Budget 
Control Act of 2011 is expected to accommodate the Treasury's borrowing 
needs until the end of this year. Following the Student Aid and Fiscal 
Responsibility Act of 2009, student debt issuances by the Federal 
Government have widely expanded to displace loans no longer made 
through the subsidized student loan market, adding new demands for 
Treasury funding.
    What is the numerical change in dollars to debt subject to the 
limit caused by this expansion in Government-issued student debt? How 
many days did student loan debt accelerate the need for a debt limit 
increase in 2011?
    Currently, the Government is recovering 85 percent of every student 
loan dollar that goes into default status.
    Are default rates greater than expected, and how is that affecting 
Treasury's ability to project its cash flow needs?
    Answer. Student loans are a critical part of the administration's 
goal to increase access to higher education. Treasury plays an 
important role in financing direct loans and supporting delinquent debt 
collection across the Government. Borrowing related to student loans 
and grants increased our overall borrowing needs in fiscal year 2011 by 
approximately $155 billion, which was one of the factors that 
contributed to the need for a debt limit increase in 2011. Treasury has 
been working with the Office of Management and Budget and the 
Department of Education to analyze the data relating to student lending 
in order to accurately ascertain the lending program's impact on cash 
flows. This is an important issue that Treasury will continue to 
analyze and monitor closely.

                         INTERNATIONAL AFFAIRS

    Question. A recent Federal Reserve paper concludes that Chinese 
foreign official flows into the United States and acquisition of United 
States Treasuries has had significant effects on Treasury yield, 
reducing interest rates.
    Should we be encouraging foreign holdings of Federal debt, rather 
than criticizing them?
    What are the risks related to foreign holdings of Federal debt that 
might offset our interest savings?
    Answer. The market for Treasury securities is the deepest and most 
liquid fixed income market in the world. As a result, Treasury 
securities have a diverse investor based--domestic and international, 
small and large. We view this as a source of confidence in our market 
and an indication of the status Treasury instruments occupy in global 
fixed income markets. More broadly, the United States has a 
longstanding open investment policy, which has been beneficial to our 
growth and employment.

TERRORISM AND FINANCIAL INTELLIGENCE--TERRORIST FINANCING AND FINANCIAL 
           CRIMES/OFFICE OF FOREIGN ASSETS CONTROL SANCTIONS

    Question. On February 27, 2012, the Treasury Department issued a 
fact sheet entitled ``Treasury Amends Iranian Financial Sanctions 
Regulations to Implement the National Defense Authorization Act'' in 
which you wrote, ``Beginning on February 29, 2012, privately-owned 
foreign financial institutions that knowingly conduct or facilitate any 
significant financial transaction with the CBI other than for the 
purchase of petroleum or petroleum products from Iran face U.S. 
sanctions, consistent with subsection 1245(d) of the NDAA.'' Nearly 1 
month later, no sanctions have been imposed pursuant to subsection 
1245(d) of the fiscal year 2012 National Defense Authorization Act 
(NDAA) (commonly known as the ``Menendez-Kirk'' amendment). As you 
know, unlike other sanctions law, the imposition of sanctions under 
``Menendez-Kirk'' is not contingent on a Presidential determination. 
Simply put, under U.S. law, sanctions must be imposed when sanctionable 
activity is found.
    Why is the administration not complying with the ``Menendez-Kirk'' 
amendment when it comes to the imposition of sanctions with regard to 
nonoil transactions conducted with the Central Bank of Iran?
    Answer. The Treasury Department is aggressively implementing the 
``Menendez-Kirk'' amendment, along with the full range of sanctions 
that we administer against Iran, to disrupt the Government of Iran's 
incoming revenue streams and its access to its existing revenues. As a 
key part of these efforts, we will continue to target both oil and 
nonoil dealings with the Central Bank of Iran under all appropriate 
authorities.
    Question. Are you willing to report to us in writing that since 
February 29, 2012, the Treasury Department has found no evidence of 
activity sanctionable under subsection 1245(d) of the fiscal year 2012 
NDAA?
    Answer. The Treasury Department is aggressively implementing the 
``Menendez-Kirk'' amendment, along with the full range of sanctions 
that we administer against Iran, to disrupt the Government of Iran's 
incoming revenue streams and its access to its existing revenues. As a 
key part of these efforts, we will continue to target both oil and 
nonoil dealings with the Central Bank of Iran under all appropriate 
authorities. Treasury will continue to work closely with the Congress 
as we implement the range of United States sanctions against Iran.
    Question. Are you willing to report to us in writing that since 
February 29, 2012, the Treasury Department has seen no intelligence 
indicating foreign financial institutions have conducted nonoil 
transactions with the Central Bank of Iran?
    Answer. Treasury is fully committed to targeting any foreign 
financial institutions engaged in sanctionable dealings with the 
Central Bank of Iran. However, it is longstanding Treasury policy not 
to comment on possible investigations.
    Question. My staff has repeatedly asked the Treasury Department to 
brief in classified session on current intelligence relating to these 
issues. Why is the Department unwilling to meet with members of the 
Senate or their staff to discuss the administration's failure to comply 
with subsection 1245(d) of the fiscal year 2012 NDAA?
    Answer. The Treasury Department is unaware of any outstanding 
briefing requests, but has been and remains willing to provide 
classified briefings as appropriate to the Congress.
    Question. Has the Treasury Department observed any financial 
transactions with Central Bank of Iran since February 29, 2012, or 
designated Iranian banks since July 1, 2010, that were deemed 
nonsignificant and for which sanctions under Comprehensive Iran 
Sanctions, Accountability, and Divestment Act of 2010 or the 
``Menendez-Kirk'' amendment were not imposed? If so, on what basis were 
the determinations made that the transactions were not significant? 
What foreign financial institutions were responsible for processing 
these transactions?
    Answer. Treasury is fully committed to a robust implementation of 
the range of Iran sanctions that we administer to maximize their impact 
on the Government of Iran. However, it is longstanding Treasury policy 
not to comment on possible investigations.

                          SUBCOMMITTEE RECESS

    Senator Durbin. The subcommittee will stand recessed.
    [Whereupon, at 3:23 p.m., March 28, the hearing was 
concluded, and the subcommittee recessed, to reconvene subject 
to the call of the Chair.]
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