[Senate Hearing 112-265]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-265

 
   ENHANCED CONSUMER FINANCIAL PROTECTION AFTER THE FINANCIAL CRISIS

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   ON

 EXAMINING THE IMPACT OF THE FINANCIAL CRISIS ON CONSUMERS AND HOW THE 
DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT OF 2010 WILL 
                 ENHANCE CONSUMER FINANCIAL PROTECTION

                               __________

                             JULY 19, 2011

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     Dwight Fettig, Staff Director

              William D. Duhnke, Republican Staff Director

                       Charles Yi, Chief Counsel

                   Catherine Galicia, Senior Counsel

                     Laura Swanson, Policy Director

                 William Fields, Legislative Assistant

                 Andrew Olmem, Republican Chief Counsel

                 Beth Zorc, Republican Special Counsel

            Chad Davis, Republican Professional Staff Member

                       Dawn Ratliff, Chief Clerk

                     Levon Bagramian, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, JULY 19, 2011

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     2
    Senator Moran................................................     3

                               WITNESSES

Michael D. Calhoun, President, Center for Responsible Lending....     4
    Prepared statement...........................................    38
    Response to written question of:
        Senator Reed.............................................
Marcus Schaefer, President and Chief Executive Officer, Truliant 
  Federal Credit Union...........................................     6
    Prepared statement...........................................    61
Albert C. Kelly, Jr., Chairman and Chief Executive Officer, 
  SpiritBank, on behalf of the American Bankers Association......     8
    Prepared statement...........................................    62
Lynn Drysdale, Managing Attorney, Consumer Unit, Jacksonville 
  Area Legal Aid, Inc............................................     9
    Prepared statement...........................................    67
Andrew J. Pincus, on behalf of the U.S. Chamber of Commerce......    11
    Prepared statement...........................................    73
Adam J. Levitin, Professor of Law, Georgetown University Law 
  Center.........................................................    13
    Prepared statement...........................................   102

              Additional Material Supplied for the Record

AARP statement for the record....................................   120
.................................................................


   ENHANCED CONSUMER FINANCIAL PROTECTION AFTER THE FINANCIAL CRISIS

                              ----------                              


                         TUESDAY, JULY 19, 2011

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:03 a.m. in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. Good morning. I would like to call this 
hearing to order. Today the Committee will examine enhanced 
consumer financial protection after the Financial crisis.
    As we approach the 1-year anniversary of the Wall Street 
Reform and Consumer Protection Act, we should all be reminded 
of a basic lesson we learned from the Great Recession: failing 
to protect consumers has consequences not only for individuals 
and families, but also for the health of America's economy.
    The failure by regulators to hold Wall Street banks and 
unscrupulous mortgage lenders accountable for complying with 
consumer protection laws was detrimental to American families 
and brought the global financial system to near collapse.
    The cost of that failed oversight and accountability has 
been the loss of millions of American jobs, millions of homes, 
and trillions of dollars in retirement, college, and other 
savings.
    In numerous hearings in recent years, the Committee 
documented these failures by big banks and predatory subprime 
lenders to comply with consumer protection laws and the failure 
of banking regulators to hold them accountable.
    Passed in the wake of that thorough review with a 
bipartisan vote, the Wall Street Reform and Consumer Protection 
Act created a robust, independent consumer financial protection 
regulator.
    Congress established the Consumer Financial Protection 
Bureau to be the first financial regulator solely focused on 
consumer protection, but with more checks on its authority than 
the regulatory agencies that fell asleep at the switch.
    It is important to remember that most of the checks and 
balances imposed on this new regulator come from bipartisan 
ideas that were incorporated into the reform law during the 
months it was considered, and that the CFPB is modeled on the 
structure of existing financial services regulators.
    Putting partisanship aside, all of us here have a deep 
concern for American consumers, and we all believe that the 
small-community institutions that had no hand in the abusive 
practices that led to our financial crisis should not pay a 
price for being honest brokers.
    The CFPB will help by promoting an equitable and 
transparent marketplace and leveling the playing field between 
those responsible actors and the unregulated companies that 
preyed unchecked on consumers.
    That is why undermining this cornerstone of the Wall Street 
Reform law would be irresponsible. It would also ignore our 
responsibility to America's consumers and risk taking us back 
to the same unstable financial system that ushered in the Great 
Recession.
    Thank you, and I look forward to working with all of you on 
these important issues.
    Now I turn to Ranking Member Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman.
    Today's hearing provides the Committee a timely opportunity 
to examine one of the most serious flaws in the Dodd-Frank Act, 
namely, the governance structure of the new Bureau of Consumer 
Financial Protection. The issue is whether the Bureau is 
sufficiently accountable to the American people. I and 43 of my 
colleagues believe that it is not.
    There is a broad, bipartisan support for improving consumer 
protection. There has never been any disagreement on that point 
that I know of. There is a disagreement, however, over the 
appropriate means by which we should make those improvements.
    The approach taken by the Dodd-Frank Act was to create a 
huge new and entirely unaccountable bureaucracy. This is a 
typical response by Washington to any crisis. What is new, 
however, is the unprecedented amount of autonomy the 
bureaucracy will have. We will hear testimony today on what can 
only be described as the unfettered power of the Director. 
Unlike every other financial regulator, the Director of the 
Bureau essentially answers to no one. This concentration of 
power violates our Nation's basic democratic principles.
    Our National Government was carefully crafted to defuse 
authority and prevent one person from exercising power 
arbitrarily. In contrast, the Dodd-Frank Act builds a wall 
around the Bureau with the express purpose of eliminating any 
real checks on the Director's authority.
    Supporters of Dodd-Frank said that they wanted to make the 
Bureau independent. What they did was make the Bureau 
unaccountable. They argued that the Bureau needed to be 
protected from political pressures, yet by making the Bureau 
completely autonomous, they removed any avenues for meaning 
congressional oversight.
    What makes the lack of accountability of the Bureau so 
troubling is that Congress, for all intents and purposes, 
delegated its own legislative power by giving the Bureau an 
enormous amount of policymaking and rule-writing authority. At 
the same time it also insulated it from the very body that 
created it and gave it its mandate. This was a mistake, I 
believe, and it needs to be corrected.
    After nearly 1 year, the President has finally nominated 
someone to be the Director of the new bureaucracy. The Chairman 
has announced his intent to move quickly on this nomination. 
But given the fundamental flaws with the existing structure of 
the Bureau, the Senate, I believe, should not confirm any 
person to lead the Bureau until some responsible reforms are 
adopted.
    Those who are advocating for more accountability have been 
accused of trying to gut, cripple, or de-fang the Bureau. I 
believe it is important to note, however, that we have not and 
are not proposing--this is very important--not proposing any 
changes to the Bureau's authority. We are proposing changes to 
the Bureau's structure so that it will be more accountable to 
the American people.
    The creation of the Bureau was largely a partisan effort. 
We now have an opportunity to make some changes with strong 
bipartisan support. We all agree that consumer protection, as 
the Chairman mentioned, needs to be improved. We should also be 
able to agree that the structure of our financial regulators 
should comport with our democratic values.
    I see no reason why we cannot work together to make the 
Bureau a strong consumer advocate as well as a fully 
accountable governmental agency itself.
    Thank you, Mr. Chairman.
    Chairman Johnson. Are there any other Members who would 
like to give opening statements? Senator Moran.

                STATEMENT OF SENATOR JERRY MORAN

    Senator Moran. Mr. Chairman, thank you very much.
    Almost a year to the day after the President signed the 
Dodd-Frank bill into law, the President has finally nominated 
an individual, Richard Cordray, to head the Consumer Financial 
Protection Bureau. It is unclear to me why the centerpiece of 
the President's financial reform package has taken so long to 
materialize, but what is clear is that the nomination is dead 
on arrival because it does nothing to increase accountability 
or shed light on the operations of the CFPB.
    Two months ago, as Senator Shelby indicated, I, along with 
43 of my Senate colleagues, called for the Bureau's leadership 
structure to be strengthened prior to consideration of any 
nominee. We asked for three specific changes in our May 5th 
letter to the President: a board or commission to replace the 
single director, the Bureau to be funded through the 
appropriations process, and additional input by prudential 
regulators into the rulemaking and operation of the CFPB.
    I have introduced legislation to implement these three 
reforms. President Obama himself agreed with each of these 
three principles when he sent his original proposal to Congress 
back in 2009. Yet our request to return to these same 
principles is now being categorized as an attempt to kill the 
Bureau in its infancy.
    The rhetoric may grab headlines, but it ignores the basic 
fact. What we are asking for is not radical. Transparency and 
accountability are our goals--goals that should be shared by 
every policymaker interested in protecting consumers from 
abuses of the past. Ask Chairman Schapiro of the SEC if a 
Commission has weakened her agency, or ask Chairman Gensler of 
the CFTC the same question. While seeking consensus among 
fellow regulators may not always be easy, that consensus will 
lead to a better public policy.
    Even with these basic reforms to the structure of the 
agency, the CFPB will remain an incredibly powerful Government 
bureaucracy. Nothing I have proposed would undermine those 
authorities or responsibilities. But without additional 
accountability, the result of a poorly drafted rule could lead 
to less credit and less opportunity for consumers and small 
business alike.
    I look forward today to answers from these witnesses about 
how consumer protection and small business access to credit 
will intersect, and I welcome the testimony of our witnesses 
here today. And thank you, Mr. Chairman.
    Chairman Johnson. Before we begin, I would like to briefly 
introduce the witnesses that are here with us today.
    Our first witness is Mr. Michael Calhoun. Mr. Calhoun is 
President of the Center for Responsible Lending, a nonprofit, 
nonpartisan consumer research and product organization.
    Mr. Marcus Schaefer is the President and CEO of Truliant 
Federal Credit Union, a $1.1 billion credit union located in 
North Carolina, with the mission of improving the financial 
lives of its members.
    Mr. Albert C. Kelly, Jr., is the Chairman and CEO of 
SpiritBank based out of Oklahoma. Mr. Kelly is also the 
chairman-elect of the American Bankers Association.
    Ms. Lynn Drysdale is an attorney with Jacksonville Area 
Legal Aid in Florida, representing consumers, including 
servicemembers who have been harmed by financial institutions.
    Mr. Andrew Pincus is a partner at the law firm of Mayer 
Brown LLP in Washington, D.C., representing the U.S. Chamber of 
Commerce.
    And Professor Adam Levitin is from the Georgetown 
University Law Center. Professor Levitin specializes in 
bankruptcy, commercial law, and financial regulation.
    We welcome all of you here today and thank you for your 
time. Mr. Calhoun, you may proceed.

    STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, CENTER FOR 
                      RESPONSIBLE LENDING

    Mr. Calhoun. Thank you, Chairman Johnson, Ranking Member 
Shelby, and Members of the Committee.
    The Center for Responsible Lending works to help families 
achieve and maintain financial success. We are an affiliate of 
Self-Help, the Nation's largest community development lender, 
which has provided home financing to more than 64,000 families 
along with charter school financing, small business loans, and 
other community development financing.
    As we approach this anniversary of the Wall Street Reform 
Act, it is important to remember how we came to this point. 
Borrowers were placed in loans they had no reasonable chance to 
repay. One of those borrowers came to us, a retiree on Social 
Security benefits. He was placed in a loan with a deep teaser 
rate. After the loan readjusted, the required payments exceeded 
his entire take-home income. Notably, the mortgage broker and 
the lender received large bonuses for originating this loan. 
Unfortunately, that loan was all too typical.
    Wall Street in turn stoked the demand for these loans and 
created so much demand for the loans that they had to create 
synthetic securities because there were not enough loans to 
satisfy the demand for securities backed directly by these 
loans. This further leveraging of the loans plunged the country 
into crisis when the securities collapsed due to the weakness 
of the underlying loans.
    Importantly, when you compare the experience of the U.S. to 
other countries, no other country had such poor-quality 
mortgages. Other countries experienced similar reductions in 
home values, but because their loans were more sustainable, 
they incurred much less harm than the U.S. economy.
    Another lesson from the crisis was that a single company or 
group of companies cannot stop predatory practices. Indeed, 
some tried in the mortgage boom by not offering unsustainable 
products and by refusing to pay these bonuses that brokers were 
demanding for putting people into these risky loans. The result 
was those companies found their market share quickly 
evaporated, as the loans were steered to other companies who 
played by different rules. Ultimately, most of the companies 
joined in these unsustainable practices.
    The need for the Consumer Bureau remains critical as we 
approach the transfer date. Mortgage-servicing abuses have been 
permitted to become epidemic as financial regulators failed to 
exercise the necessary oversight. In addition, CRL is releasing 
a study this week showing that banking consultants have been 
peddling 350 percent interest loans for programs to be offered 
out of our biggest banks out of their own offices. The 
regulators, instead of keeping our flagship institutions out of 
this modern-day loan sharking, have let it spread to some of 
the largest national banks in our country, leaving struggling 
families trapped in a cycle of high-cost debt.
    There are proposals to restructure the CFPB before it opens 
its doors. As set out in detail in our testimony, there are 
many safeguards already in place. Certainly there must be care, 
certainly with small businesses and small financial 
institutions to consider the impact and burdens on those 
companies. However, already hard-wired into existing law is the 
requirement that the CFPB consult with and give notice to small 
companies before they can even issue a proposed rule, a 
requirement unique among financial regulators.
    Finally, the American people know how badly the CFPB is 
needed. CRL, along with AARP and Americans for Financial 
Reform, commissioned a poll this month asking about opinions 
regarding the consumer agency. The poll showed that members of 
all parties overwhelmingly support a strong consumer agency and 
oppose efforts to repeal it. They also reject the argument that 
fair lending is bad for the economy.
    In summary, America is still recovering from the 
devastation caused by the flood of unsustainable lending. Yet, 
to date, basic financial transactions for the average family 
remain unfathomable. Anyone who tries to read a mortgage loan 
agreement or even a credit card agreement has had that 
experience. And there is an absence of basic ground rules. 
Those deficiencies hamper the operation of our free markets and 
put our economy at risk. The CFPB is needed now to both help 
American families individually achieve and maintain financial 
stability, but also to restore our overall economic health. It 
should be allowed to begin this overdue work.
    Thank you, and I look forward to answering your questions.
    Chairman Johnson. Thank you, Mr. Calhoun.
    Mr. Schaefer, you may proceed.

  STATEMENT OF MARCUS SCHAEFER, PRESIDENT AND CHIEF EXECUTIVE 
             OFFICER, TRULIANT FEDERAL CREDIT UNION

    Mr. Schaefer. Truliant Federal Credit Union appreciates the 
opportunity to provide input into the public policy dialog 
regarding the enhancement of consumer protection. We would like 
to thank Chairman Johnson, Ranking Member Shelby, Senator 
Hagan, and Members of the Committee for having us here today.
    Our mission is to enhance the quality of life of our 
members and to become their preferred financial institution. 
Truliant offers a full range of financial services, including 
savings, checking, certificates, money markets, IRAs, and 
rainy-day savings. Loan services include first mortgage and 
home equity, new and used auto, personal lines, and Visa credit 
cards. We offer small business services including member 
business and SBA loans. We provide state-of-the-art home 
banking and electronic bill payment programs, mobile access, 
and remote deposit capture. Through our Credit Union Service 
Organization, we offer financial planning and a very popular 
auto-buying service.
    As a member-owned financial institution, we can offer lower 
loan rates, higher savings rates, low (and often no) fees as we 
help members execute financial plans for their future. Central 
to all our services is our emphasis on financial literacy 
education and counseling to our members and for our 
communities. Over 55 percent of our member households earn less 
than $45,000 per annum. Affordable, well-informed financial 
service access and delivery is key to our mission.
    Truliant maintains an overarching commitment to improve our 
members' lives by understanding and meeting their financial 
needs. This focus translates into our TruService culture. Our 
staff engages our members to bring about real change and help 
them meet their long-term objectives rather than the 
traditional product-pushing sales approach so prevalent in 
modern banking. For example, a benefit of low interest rates 
has allowed us to reposition hundreds of members into lower-
cost mortgages and car loans.
    Our operating principle is, ``Consumer, Be Aware,'' not 
``Consumer Beware.'' Well before the financial crisis, we 
instituted our Points of Differentiation that embody the spirit 
and practice of improving member financial lives. We have not 
sold our credit card accounts to the large credit card issuers. 
We never offered an opt-out courtesy pay overdraft protection 
program. We do not advertise a car loan rate to members unless 
the majority has the credit quality to qualify. We do not allow 
indirect auto loan car dealers to mark up our rate. We help our 
member-owners become debt free on their primary home by the 
time of retirement. We support public policy that informs and 
educates the consumer on financial decisions while improving 
personal balance sheets.
    Our experience is that consumers have been needlessly 
financially disadvantaged by a history of questionable 
practices and procedures by both mainstream and non-bank 
providers. Examples include opt-out overdraft protection, the 
sequence of clearing checking debits, extending credit to 
borrowers with terms they could not reasonably meet, overly 
complex disclosure materials, and punitive credit card 
practices.
    These seem to be acceptable ``gotchas'' rather than 
consumer-focused services and argue for some balance toward 
better information sharing. Congress has addressed some of 
these more egregious practices, and heightened consumer 
awareness post-financial crisis may have driven providers to 
become more consumer-friendly in the near term.
    Even with reforms like the CARD Act, Regulation E rule 
changes, and the consumer protection initiatives of individual 
regulators, it make sense to have a regulator focused on 
consumer protection.
    Clearly, controlling practices of non-bank providers, such 
as unregulated mortgage brokers, who in some cases were able to 
lure our members into products that did not improve their 
financial lives, is needed. We noted 13 finance companies 
operating in the small manufacturing town of Asheboro, North 
Carolina, leading to our extending services there.
    As we offered volunteer income tax assistance this spring, 
I observed that many national tax preparers continued to offer 
high-priced, tax-refund anticipation loans. A consumer 
protection regulator could address these practices directly or 
through a national initiative to improve financial literacy for 
consumers of varying degrees of education and experience. We 
all want our children to make better decisions for themselves.
    Even for traditional financial service providers, we 
support clear language and visual presentations like the 
``Federal box'' required of credit card disclosures. However, 
regulators should be mindful of the impact of mass 
implementation of regulation on smaller financial institutions, 
particularly credit unions, where the cooperative structure has 
historically resulted in pro-consumer practices.
    Seemingly small regulatory dictates can have a large impact 
on these institutions and ignore their ``local knowledge'' of 
how to best communicate with members. Larger institutions will 
benefit from economies of scale on a per account cost basis, 
further tipping the scale toward too-big-to-fail institutions.
    There may be unintended consequences to consumer-friendly 
financial institutions as the bad actors are reined in by one-
size-fits-all regulations. Implementation of the CARD Act 
requiring that specific credit card statement language for late 
payments be used resulted in hundreds of panicked calls by 
Truliant members who were not delinquent. The staff time 
required to explain the language mandated by the Fed could have 
gone to advising our members on how to better build their 
financial foundation.
    We support streamlining and simplifying existing 
overlapping regulation to improve consumer understanding while 
reducing cost to the financial institution that can be passed 
on to the member-owner. We welcome combining TILA and RESPA to 
improve usability by the consumer and financial institutions. 
Streamlining ECOA and the Fair Credit Reporting Act could have 
similar benefits. We support regulation that allows and 
promotes innovation in financial services that is also helpful 
to the consumer. The consumer protection regulator will need to 
carefully balance these two deliverables. Consumer protection 
is not a one-time fix, but an ongoing effort that will span 
different political landscapes. We support a balanced 
governance structure that would not make the regulator 
ineffectual nor one that allows for public policy to become 
overly politicized.
    Thank you again for the invitation to speak on behalf of 
Truliant, and I welcome your questions and discussion on this 
matter.
    Chairman Johnson. Thank you, Mr. Schaefer.
    Mr. Kelly, you may proceed.

STATEMENT OF ALBERT C. KELLY, JR., CHAIRMAN AND CHIEF EXECUTIVE 
    OFFICER, SPIRITBANK, ON BEHALF OF THE AMERICAN BANKERS 
                          ASSOCIATION

    Mr. Kelly. Thank you, Chairman Johnson, Ranking Member 
Shelby, and Members of the Committee, for the opportunity to 
testify today on ways to improve the accountability of the new 
Bureau of Consumer Financial Protection. My name is Albert 
Kelly. I am from SpiritBank in northeastern Oklahoma, and we 
run a bank that has offices in 10 cities and towns in the 
northeast part of the State.
    The banking industry fully supports effective consumer 
protection. At SpiritBank we are proud of our 95 years of 
service to our customers built on fair treatment of those 
customers. No bank can be successful without a long-term 
perspective like ours and without treating customers fairly.
    The new Bureau will certainly impose new obligations on 
banks large and small that had nothing to do with the financial 
crisis and already have a long history of serving consumers 
fairly in a competitive environment. Therefore, there are 
several features of the Bureau that make improved 
accountability imperative. These include the problems brought 
about by: the extensive new powers of the agency, the 
unfettered authority of the Director to impose new rules, the 
separation of consumer protection from bank safety and 
soundness, the gaps in regulating non-banks, and the expanded 
and unaccountable enforcement authority of prudential 
regulators and State Attorneys General.
    For all these reasons, and others, it is ABA's first 
priority to improve the accountability of the Bureau. 
Establishing accountability supersedes other important 
priorities regarding the Bureau, including ensuring appropriate 
bank-like supervision of non-banks for consumer protection.
    ABA supports the creation of a board or commission that 
would be responsible for the Bureau's actions rather than 
giving the head of the Bureau sole authority to make decisions 
that could fundamentally alter the financial choices available 
for customers. It also provides the needed balance and 
appropriate checks in the exercise of the Bureau's significant 
authority. We urge the Congress to pass statutory provisions 
that ensure such accountability before the Bureau is 
established with a single Director.
    The Dodd-Frank Act also gives license to pile on additional 
State law requirements and enables State Attorneys General and 
prudential regulators to second-guess Bureau standards as they 
see fit. If we are to hold the Bureau accountable, we must also 
hold accountable all those who derive authority from its 
existence.
    ABA also supports a simple majority vote of the Financial 
Stability Oversight Council to set aside a Bureau rule instead 
of the two-thirds vote. If a majority of the Nation's top 
regulators believe a Bureau rule will have an adverse impact on 
the banking system, the rule should not go forward.
    Moreover, ABA also believes that a finding of systemic risk 
is too narrow a review standard. The review standard should be 
recalibrated to account for adverse consequences of Bureau 
actions that do not rise to the level of systemic risk. For 
example, Bureau actions that end up driving some community 
banks out of business would not rise to the level of systemic 
risk but have enormous implications for the communities they 
serve.
    Once the goal of accountability is achieved, we believe the 
Bureau should direct its resources to the gap in regulatory 
oversight: a failure to supervise and impose enforcement 
actions on non-bank lenders committing consumer protection 
violations. We welcome current efforts to define the Bureau's 
non-bank supervisory scope as it prepares for the future 
exercise of that supervisory authority.
    As we have since our beginnings, banks across the country 
will continue to do whatever we can to make sure our customers 
understand the terms of the loans they are taking on. Our task 
is made more difficult by the many new hurdles that we have to 
jump over to serve our customers' most basic needs. Already, 
there are 2,700 pages of proposed regulations, and this is 
before the Bureau undertakes any new changes or rulemakings. 
All these changes have consequences for our communities: high 
costs, restrictions on sources of income, limits on new sources 
of capital, and excessive regulatory pressure. All make it 
harder to meet the needs of our communities. These impediments 
inevitably reduce the credit that can be provided and the cost 
of credit that is supplied. Fewer loans mean fewer jobs. Since 
banks and communities grow together, the restrictions that 
limit one necessarily limit the other. It is critically 
important that Congress establish accountability of the Bureau 
and ensure that the rules from the Bureau do not restrict 
access to financial products by responsible American families.
    Thank you.
    Chairman Johnson. Thank you, Mr. Kelly.
    Ms. Drysdale, you may proceed.

 STATEMENT OF LYNN DRYSDALE, MANAGING ATTORNEY, CONSUMER UNIT, 
               JACKSONVILLE AREA LEGAL AID, INC.

    Ms. Drysdale. Chairman Johnson, Ranking Member Shelby and 
Members of the Committee, I appreciate the opportunity to speak 
today. I have been a legal services attorney representing low-
income consumers for the last 23 years in Jacksonville, 
Florida. As some of you may know, we are proud to be the home 
of two major military bases, so I have had the honor of serving 
military clients in my tenure there.
    The group of low-income individuals has grown exponentially 
during the financial crisis. As this demographic grows, so also 
has grown the amount of aggressive and harmful lending which is 
going unregulated, or at least underregulated, throughout the 
United States.
    One of the most vulnerable populations are the 
servicemembers who are serving our country. Many years ago, 
Congress passed the Military Lending Act. This Committee also 
was in favor of that Act. This Act was meant to curb illegal 
and harmful products that were hijacking servicemembers' bank 
accounts and taking their automobiles while they were serving 
our country overseas, leaving them with low morale, harming 
military readiness, and certainly harming their families at 
home.
    Despite the passage of the Military Lending Act, which, 
among other things, reduced the interest rates which could be 
charged for military members and their families, and also 
prohibits mandatory unilateral arbitration, one of the 
individuals I spoke of when I spoke at the hearing in 2006 was 
an air traffic controller. He was having to monitor the airways 
at the same time he was being called and being threatened with 
court-martial and imprisonment for not paying back payday loans 
even though he had already paid back $10,000. Despite the 
protections of the Military Lending Act and despite the 
prohibitions of the Federal Fair Debt Collection Practices Act, 
he was still getting these threats. He was in danger of losing 
his security clearance as well as his job.
    The Military Lending Act capped interest rates and 
prohibited unlawful terms, but we are still seeing these loans 
with triple- or four-digit interest rates being provided to 
servicemembers as well as many American citizens. This is 
happening because these lenders are operating under the guise 
of the Internet. They are able to charge interest rates that 
are in excess of those allowed by the Military Lending Act and 
State laws and engage in other illegal practices such as 
requiring the assignment of wages as a condition of obtaining 
the loan. This is also in violation of Federal Trade Commission 
regulations.
    One may wonder why someone would take out a loan with 
triple-digit or four-digit interest rates. Well, that is 
because these loan products are packaged in a manner that is 
deceptive. The interest rates are not provided up front or 
either they are understated. For example, another client of 
mine took out a $2,200 automobile title loan secured by his 
free and clear title to his automobile. He also was required to 
pay $900 to purchase insurance which was required and provided 
no benefit to him and went straight to the pocket of the 
lender. The stated interest rate was 24 percent, which sounded 
high but reasonable to him, but the real interest rate was well 
above triple digits. He ended up losing his car.
    Another very disturbing trend in providing unregulated 
loans are loans provided to military veterans who are not 
covered by the Military Lending Act. These veterans are being 
enticed with ads with flags flying, with military names in the 
name of the loan company, and they are led to believe that 
these companies are sanctioned by the military, when instead 
they are taking their pensions with loans of interest rates of 
triple digits. These types of loans are completely unregulated.
    Just as I have--I know you have heard many hours of 
testimony relating to the problems with the mortgage industry, 
but I did want to bring up just a couple of instances where I 
have had clients who were fighting insurgents in Afghanistan at 
the same time they were fighting Wells Fargo on the mainland 
because Wells Fargo would refuse to accept their allotment 
payments even though they were current. I have received email 
messages from near Singapore from a gentleman with top secret 
clearance who was current in his mortgage and who was still 
being turned over to an attorney to proceed with mortgage 
foreclosure proceedings. This gentleman eventually was going to 
lose his home because he could not handle the stress of being 
on the job near Singapore as well as having his home lost for 
his family and his children. This automatically is going to 
affect the morale of military servicemembers. The Military 
Lending Act does not at all protect our veterans, and it also 
does not protect other citizens who should be protected by 
these unregulated or underregulated, aggressively marketed, 
high-interest loan products.
    Thank you.
    Chairman Johnson. Thank you, Ms. Drysdale.
    Mr. Pincus, you may proceed.

STATEMENT OF ANDREW J. PINCUS, ON BEHALF OF THE U.S. CHAMBER OF 
                            COMMERCE

    Mr. Pincus. Thank you, Mr. Chairman, Ranking Member Shelby, 
and Members of the Committee. It is an honor to testify before 
the Committee today on behalf of the U.S. Chamber of Commerce 
and the hundreds of thousands of businesses that the Chamber 
represents.
    The Chamber strongly supports sound consumer protection 
regulation that deters and punishes financial fraud and 
predation and requires that consumers receive clear, concise, 
and accurate disclosures about financial products. Businesses 
as well as consumers benefit from a marketplace free of fraud 
and other deceptive and exploitative practices.
    At the same time, consumer protection regulation must 
further these goals while avoiding duplicative and unjustified 
regulatory burdens. Those burdens harm all Americans by 
diverting resources essential to fueling economic growth and by 
preventing small businesses from obtaining the credit they need 
to expand and create the new jobs that our economy so 
desperately needs.
    The ability of a regulatory agency to carry out its mission 
successfully is influenced by its regulatory structure. The 
Bureau's unique and unprecedented structure deviates radically 
from the fundamental principles of accountability and checks 
and balances that have been a basic feature of our Federal 
Government for the past 224 years.
    The Bureau's current structure confers on its Director 
unprecedented unchecked power of extraordinary breadth, far 
beyond that wielded by any other Federal regulator of 
individuals and businesses. Indeed, the Bureau lacks each of 
the ordinary checks designed to ensure accountability that are 
present in these other agencies. All other agencies are subject 
to at least one of these checks, but there are none here.
    First of all, in contrast to the very familiar commission 
structure that is the norm for the FTC, the SEC, and other 
agencies, the Director exercises sole decisionmaking authority 
with respect to rulemaking, enforcement, and supervision 
actions, and every other matter.
    Number two, most Government officials, of course, serve at 
the pleasure of the President. The Director has policy 
independence from the President such that he or she may be 
removed from office only for, and I am quoting the statute, 
``inefficiency, neglect of duty, or malfeasance in office.''
    Number three, in other agencies the power to appoint 
deputies and other officials is reserved to officials subject 
either to the President or to officials subject to the 
President's authority. Here the Director has plenary power to 
appoint every one of the agency's employees.
    And, number four, of course, appropriation of funds by 
Congress is the norm for virtually every Government entity. 
Here the Director has the ability to spend more than half a 
billion dollars without congressional approval. There is no 
other regulation of private sector activities that enjoys both 
sole authority over an agency and tenure protection. Here the 
Director's additional authority to appoint all subordinates and 
freedom from the congressional appropriations process renders 
the position even more anomalous.
    I know that there have been analogies attempted to the 
Comptroller, and I think it is important to say at the outset 
that the Comptroller is subject to the President's plenary 
power of removal and that the Secretary of the Treasury has 
oversight authority, general oversight authority, over the OCC 
as well as the power to appoint the Comptroller's deputy. So 
this is a very, very different situation.
    Some cite other constraints that are claimed to substitute 
for the ones that are present in every other agency and not 
present here. But, again, those contentions are just wrong.
    A budget cap, while it is true there is a budget cap in 
that Dodd-Frank sets a cap of $550 billion, escalating in the 
future, here every agency has a budget cap set by its 
authorization legislation and its appropriations legislation. 
So that is no difference.
    The fact that there is a GAO audit, every agency is subject 
to an audit either by the GAO or by its Inspector General. 
Again, no difference.
    The fact that there is a review by the Financial Stability 
Oversight Council, again, if the Bureau were a private entity 
and it cited FSOC review as a check on its power, that 
statement could well be the subject of an enforcement action 
for a deceptive practice. First of all, FSOC review applies 
only to rules. Second of all, the process itself is illusory 
and seems to have been designed never to be triggered. It has a 
high standard. There has to be a threat to the entire U.S. 
financial system, not just a part of it. And then seven of nine 
votes have to be in favor of overturning the rule, and even if 
every prudential regulator opposes the rule, it still cannot be 
overturned.
    Finally, also false is the contention that a multi-member 
commission would somehow impose radical constraints on consumer 
protection. The Commission model, as I said, is the norm for a 
Federal agency, and I do not think anyone would say that the 
Federal Trade Commission is not a vigorous regulator.
    In addition, the commission model was proposed by the 
President for this very agency and approved by the House of 
Representatives for this very agency in the course of its 
consideration of Dodd-Frank. Again, I do not think anyone would 
say that either the President or the House of Representatives 
in the last Congress was somehow interested in gutting the 
power of consumer protection.
    The Chamber believes strongly that unless the Bureau's 
flaws are remedied now, problems in execution that are already 
being shown will worsen and spread, harming consumers, 
legitimate businesses, and our entire economy.
    Thank you again and I look forward to answering your 
questions.
    Chairman Johnson. Thank you, Mr. Pincus.
    Professor Levitin, you may proceed.

  STATEMENT OF ADAM J. LEVITIN, PROFESSOR OF LAW, GEORGETOWN 
                     UNIVERSITY LAW CENTER

    Mr. Levitin. Good morning, Chairman Johnson, Ranking Member 
Shelby, and Members of the Committee. My name is Adam Levitin. 
I am a Professor of Law at the Georgetown University where my 
research focuses on consumer finance and financial regulation.
    Three bills have been proposed in the Senate and the House 
to reform the structure of the CFPB. Let us be clear about what 
these bills are about. They are not about reforming the CFPB. 
They are simply attempts to hobble the agency under the banner 
of accountability and oversight. It is, frankly, puzzling that 
there are concerns about CFPB oversight before the CFPB is even 
operational. Nothing the CFPB transition team has done has 
raised any concerns about the existing oversight structure. 
Instead, it has only received accolades from financial 
institutions and consumer advocates.
    I would suggest that concerns about oversight would be 
better directed at other bank regulators, like the OCC and the 
Federal Reserve, which failed epochally in their safety and 
soundness and systemic stability missions preceding the 
financial crisis. Curiously, those who demand better oversight 
of the CFPB have shown no interest in also pursuing better 
oversight of the agencies on whose watch the financial crisis 
occurred.
    Looking at the design of the CFPB, it is apparent that the 
CFPB is, contrary to what Mr. Pincus claims, actually more 
accountable than any other Federal financial regulator. On page 
6 of my testimony, you can see a chart comparing the CFPB's 
oversight with other Federal agencies.
    As you might notice, it does differ somewhat from Mr. 
Pincus' chart, especially in its characterization of OCC and 
OTS oversight. In particular, I would note that it is not clear 
whether the President has the ability to remove the Comptroller 
at will or if it is only for cause. Mr. Pincus cites an OTS 
general counsel memorandum on post-employment retirement as his 
authority on this. As far as I know, that is not the law. That 
is simply the opinion of the general counsel in one part of the 
Treasury Department. It is not the United States Code.
    I think that when you look at the chart as a whole, it 
shows that there is extensive and unprecedented oversight for 
the CFPB. This accountability does sometimes differ from that 
of other Federal bank regulators, but given these other bank 
regulators' abysmal performance in allowing the financial 
crisis, it is not clear why we would want to replicate them. 
Their oversight structures have not worked.
    So to review the key CFPB oversight provisions, the CFPB is 
subject to the Administrative Procedures Act notice and 
comment, rulemaking, and hearing and adjudication provisions. 
The CFPB is one of only three Federal agencies that is subject 
to OIRA's Small Business Flexibility Review. No other Federal 
bank regulator is subject to that kind of review.
    The CFPB has numerous statutory limitations on its 
rulemaking powers. For example, the CFPB must make detailed 
findings if it wishes to exercise its power to declare certain 
acts or practices unfair, deceptive, or abusive. And it is 
prohibited from imposing usury caps or from regulating non-
financial businesses.
    The CFPB is also the only Federal bank regulator subject to 
a budgetary cap. While some think that this cap is too high 
because it will enable the CFPB to be too effective, I have 
never heard similar complaints about the lack of budgetary 
controls on the Fed, the OCC, the OTS, or the FDIC. There seems 
to be concern about budgetary independence only when it 
involves an agency tasked with prioritizing American families, 
not banks.
    The CFPB is the only Federal bank regulator whose actions 
are subject to a veto by the Financial Stability Oversight 
Council. I have not heard many calls to subject the Fed or the 
OCC to similar vetoes.
    The CFPB is, of course, subject to moral suasion by the 
Administration and, perhaps most crucially, the CFPB is subject 
to oversight by Congress. There have been no less than six 
hearings on the CFPB in the last 4 months, and the CFPB is not 
even open for business. I think that is impressive oversight. 
There is no escaping the fact that no other Federal regulator 
is subject to comparable oversight and limitations on its 
actions.
    Turning to the specific bills, one would subject the CFPB 
to the appropriations process. Doing so would be a serious 
mistake. The financial crisis should have taught us that 
consumer financial protection is too important systemically to 
politicize it through the appropriations process. Do we want 
the level of consumer protection that we get in a given year to 
be the results of political horse trades? If it is a tight year 
in the budget, are we going to say exploding ARMs are OK this 
year? That would be the result. No other Federal bank regulator 
is subject to this appropriations process, and there is no 
reason the CFPB should be.
    OFHEO, the former regulator of Fannie Mae and Freddie Mac, 
was subject to appropriations, and it was an impotent regulator 
as a result. Whenever OFHEO showed some teeth, the GSEs' allies 
in Congress yanked on its funding leash. Congress recognized 
this problem when it freed OFHEO's successor, FIFA, from the 
appropriations process. The only reason to subject the CFPB to 
the appropriations process is to create the possibility of de-
funding the agency and rendering it ineffective.
    Other provisions in the reform bills would replace the 
single Director with a five-member commission. Put differently, 
this proposes paying five people to do one person's job. This 
is classic Big Government bloat and waste, and it is going to 
diminish accountability. Instead of having the buck stopping 
with one person, authority will be diffused over five people. 
If a single Director is good enough for the OCC, it should be 
good enough for the CFPB.
    Finally, the reform bills would lower the threshold for the 
Financial Stability Oversight Council to veto CFPB rulemakings. 
They would require a veto if the rulemaking were inconsistent 
with bank safety and soundness. Now, ``bank safety and 
soundness'' is a technical term. It means profitability. It is 
axiomatic that a bank can only be safe and sound if it is 
profitable. But consumer protection is sometimes at loggerheads 
with bank profits. The only reason to engage in predatory 
lending, for example, is because it is profitable. It is not 
done out of spite. What this means is that any CFPB rulemaking 
that affected bank profitability would, therefore, be 
inconsistent with safety and soundness and be subject to a veto 
under this reform bill standard. Accordingly, the Credit Card 
Act of 2009 and Title 14 of the Dodd-Frank Act, which reforms 
the mortgage lending industry, could not be implemented because 
they would affect bank profitability and, thus, be inconsistent 
with safety and soundness.
    Congress established the CFPB to protect American families, 
not maximize bank profits. Let us let the CFPB have a chance to 
do its job.
    Thank you.
    Chairman Johnson. Thank you, Professor, and thank you all 
for your testimony.
    We will now begin asking questions of our witnesses. Will 
the clerk please set 5 minutes on the clock for each Member for 
their questions?
    Ms. Drysdale, in your testimony you talk about the scams 
servicemembers and their families are tricked into. As you 
know, the CFPB has an office headed by Holly Petraeus dedicated 
to servicemembers and designed to help them. What are the 
benefits your clients will get from Mrs. Petraeus' office?
    Ms. Drysdale. I think her office will be extremely 
effective in providing servicemembers with an avenue of redress 
when they have a problem. Now they are not sure where to go. It 
will be one agency that will be tasked with taking on consumer 
complaints, with trying to address consumer complaints, and by 
recognizing systemic problems that need to be addressed.
    I think one of the clear examples of her effectiveness that 
has already taken place was her actions in ensuring that three 
of the main mortgage servicers were providing the foreclosure 
notice required to be given to active-duty military. Active-
duty military individuals were losing their homes without 
proper notice and without the protections of the Servicemembers 
Civil Relief Act. She took notice of this. There were hearings 
and enforcement actions have been taken against three of the 
servicers that were the most at fault in the failure to provide 
notice. I am sure there are others out there who also need to 
be addressed, and I feel comfortable that the Office of Service 
Member Affairs will be the most effective vehicle to do this.
    Chairman Johnson. Mr. Schaefer, without a Director in 
place, the CFPB will not be able to exercise its examination 
and enforcement powers over non-bank financial institutions 
such as payday lenders. Do you agree that this authority is 
essential to level the playing field between responsible small 
community banks and credit unions that will not be examined by 
the CFPB and their non-bank competitors that will?
    Mr. Schaefer. Senator, we agree that the sooner the CFPB 
can get to the task of monitoring and regulating the non-bank 
participants, the better. We recognize that it is a somewhat 
arduous and political process now. We would love to see a CFPB 
that is not subject to political whipsaw in terms of not 
knowing--like any business, we like it to be predictable what 
we are going to be subject to, but certainly the sooner the 
better in terms of being able to regulate payday lenders, the 
folks that do tax anticipation refund loans. We would like to 
see some leveling of the playing field, so the sooner the 
better.
    Chairman Johnson. Professor Levitin, there seems to be much 
misinformation about the accountability of the CFPB and the 
checks and balances imposed on that new agency. Professor 
Levitin, would you please set the record straight about this 
issue?
    Mr. Levitin. The CFPB has a unique set of oversight and 
accountability provisions. It does not look like any other 
Federal bank regulator in this regard, and I think that is 
actually a very good thing because we have seen that the 
oversight has not worked well for the other Federal bank 
regulators.
    The CFPB has not opened its doors yet. The other Federal 
bank regulators allowed the financial crisis to occur.
    If you look at the oversight provisions, I think they can 
be fairly characterized as much more exacting. The CFPB is 
subject to a budget cap. No other Federal bank regulator is 
subject to that budget cap. The CFPB is subject to a veto. 
There is no other Federal bank regulator that can be vetoed by 
the other regulators. Only the CFPB is subject to that veto.
    The CFPB also is subject to a very standard set of 
oversight provisions in addition. It is subject to the 
Administrative Procedures Act which governs rulemaking and 
enforcement actions and adjudication. The CFPB is subject to 
the Small Business Review by OIRA within the Office of 
Management and Budget. No other Federal bank regulator is 
subject to that.
    There is a mandatory GAO audit of the CFPB annually. That 
does not occur for any other Federal bank regulator. The 
Federal Reserve received a one-time partial audit as part of 
the Dodd-Frank Act, and that occurred only over the Fed's 
kicking and screaming. Mr. Pincus' characterization that GAO 
audits of financial regulators are routine is not correct.
    And, last, it is important to note that as part of the 
Federal Reserve, the CFPB is subject to the Federal Reserve's 
Inspector General, that there may not be a dedicated CFPB 
Inspector General, but the Federal Reserve does have a very 
capable IG's office, and its mission includes the CFPB.
    Chairman Johnson. Professor Levitin, would you please 
explain all of the ways that the actions of the CFPB will be 
tempered by the prudential regulators and their safety and 
soundness mission?
    Mr. Levitin. Well, most importantly, we have the Financial 
Stability Oversight Council. The Financial Stability Oversight 
Council has the ability to veto CFPB rulemakings if they 
endanger the systemic stability of the U.S. economy. That is a 
critical oversight, and it is unique. If the OCC were to take 
an action that endangered systemic stability, no other 
regulator would have a say on that.
    The CFPB is also instructed to coordinate with the 
prudential regulators regarding rulemakings, and the CFPB has 
already shown an extreme willingness to listen to other 
regulators, to listen to consumer advocates, and to listen to 
financial institutions. This is not an agency that is looking 
to be one-sided only for consumers. It is an agency that has 
really shown already that it is trying to find the right 
balance between consumer protection and ensuring that we do not 
have too many restrictions on business.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    Mr. Kelly, Professor Levitin notes that if the Bureau opens 
without a Director, the Bureau will not have all of its powers, 
including the authority to regulate non-banks. Some have said 
that the Director should be installed immediately in order to 
ensure that banks and non-banks are regulated similarly.
    What is the American Bankers Association's position on the 
need to immediately confirm a Director?
    Mr. Kelly. Thank you, Senator. The American Bankers 
Association's position has been consistent since the beginning 
of Dodd-Frank and the introduction of the CFPB, and that is, it 
is a matter of governance. Just as I report to a board and most 
other businesses do, we believe that this should have an 
oversight board or a commission that allows that Director to 
report to it. That has been our position. We believe that is a 
sound way to roll this out. No one ever will stand in favor of 
having any consumer damage or having the egregious nature that 
certainly Ms. Drysdale discussed. We believe this needs to be 
gotten right the first time. We have done without this 
particular position for 150 years in the banking industry, and 
we ought to get it right this time if we are going to do it.
    So it is not a matter of the ABA not saying go ahead. It is 
a matter of the ABA saying from the beginning, which we said, 
we believe this structure is the proper structure for this 
agency.
    Senator Shelby. And it is all about accountability, is it 
not?
    Mr. Kelly. Yes, it is.
    Senator Shelby. Mr. Pincus, in your testimony you state, 
and I will quote, that ``The Bureau's unique and unprecedented 
structure''--unique and unprecedented--``deviates radically 
from the fundamental principles of accountability and checks 
and balances that have been a basic feature of our Federal 
Government for the past 224 years.''
    In the testimony by Professor Levitin, he states that the 
Bureau ``is more accountable than any other Federal financial 
regulator.''
    On what specific points do you disagree with Professor 
Levitin's analysis here?
    Mr. Pincus. I think I disagree on all of them, Senator, and 
I think what is critical in looking at accountability before we 
get into the specifics is what is the purpose of these checks 
and balances.
    Senator Shelby. That is right.
    Mr. Pincus. And I think the critical thing about the four 
checks and balances that I mentioned and that have been 
present, at least one of them, in every other agency that has 
been created--a commission structure, plenary removal authority 
in the President, subject to the appropriations process, 
Presidential power, either oversight or appointment of 
subordinates--is that they ensure oversight and some control by 
the political branches, because what is critical here is not 
just checks and balances for the sense of checks and balances. 
It is checks and balances so that this exercise of Government 
power by this entity in the end answers to the elected 
officials who are elected by the people. And I think the 
absence of any of those means that there is a critical defect 
here, that the Director has power but really is not in any way 
checked by a representative of the people because it lacks each 
of those four things. And I think turning to the things that 
the professor mentioned, they are either common to all 
agencies, or they do not really tie back to the people's 
elected representatives.
    For example, it is true that like every other agency of the 
Federal Government the Bureau's regulations will be subject to 
the Administrative Procedures Act, but that Act merely codifies 
probably much of what the Constitution's Due Process Clause 
requires. So, again, it ties back to some important guarantees, 
but it does not tie back to the people's elected 
representatives.
    He mentioned the FSOC review. As I said, I think it is the 
most illusory system ever constructed. First of all, it does 
not even apply to enforcement actions. The Director has total 
authority over enforcement actions. And the people setting up 
the Bureau have already said that they plan to proceed 
principally through enforcement actions rather than 
regulations, as the SEC and FTC have. But even if there were a 
regulation, the standard, as Mr. Kelly mentioned, threatening 
the stability of the entire financial system is a standard that 
cannot be met, shouldn't we be concerned about a regulation 
that would threaten the stability of a sector of the financial 
system? And the voting is such that there will never be an 
instance--this is a review system set up never to be used.
    Congressional oversight, it is true there can be hearings, 
although I think it is interesting to take a look at the report 
of a House Appropriations Committee on the financial services 
budget, which talks about the problems that that Committee has 
had getting information about how the Bureau intends to spend 
the money that it has under this line of credit from the Fed.
    The SBREFA, the Small Business Review Authority, it is true 
it is in the statute, but, A, it again only applies to 
rulemaking, not to enforcement or supervision; and, B, it is 
advisory. You have to go through the process, but at the end of 
the day, there is no check on the Director's decision. The 
Director gets to decide and reject whatever the SBREFA panel 
has decided. That is very different from the Office of 
Management and Budget OIRA review process where OMB, 
representing the President, can instruct agencies to change 
their views because what they plan to do does not comport with 
what the President believes is what is proper in his role as 
the people's representative.
    Senator Shelby. Thank you.
    Mr. Kelly. Senator, may I add a comment to that?
    Senator Shelby. Sure, go ahead.
    Mr. Kelly. I just want to say that, as well as what Mr. 
Pincus says, when we talk about the FSOC review, I guess the 
reality is when these rules were promulgated and put forth, we 
have 7,500-plus, 7,750-plus community banks out there scattered 
on Main Street across this country. And sometimes I think when 
we testify and when we are up here, we talk about things that--
what is this review standard and what is that review standard. 
None of those banks are ever going to rise to systemic risk. As 
a matter of fact, the collection of those banks is not going to 
rise to systemic risk. Those banks get up every day--they are 
in your communities and mine, and they get up every day with 
the intent of trying to serve their customers, support their 
schools, and do the things that they have done for years and 
years. And all we are saying is this needs to have a board 
because it can become very unwieldy. Today the only growth 
areas of most of these small banks is compliance, and it is 
very, very difficult for them to take on the burdens of Dodd-
Frank and CFPB in the manner that it is going to be promulgated 
just because of the massive amount of regulations. We will 
comply. We will do that, and we as always will welcome that to 
the extent that it is required. But the fact of the matter is 
if we look at this review as being a systemic risk review, it 
is far too broad.
    Senator Shelby. Do you believe that Dodd-Frank is going to 
help us create jobs in this country?
    Mr. Kelly. Senator, I would say that from a standpoint of 
the banking industry, it is doing quite the opposite.
    Senator Shelby. Thank you.
    Mr. Kelly. I can cite example after example. I was sitting 
literally thinking the other day that today I can think of a 
thousand jobs that we have funded that are working today, that 
if that loan came in I promise you we would not even take it 
down the road to the committee, because it requires there to be 
imagination and creativity and hope, that you think about that, 
think about that community, the jobs that that will create, and 
what it is going to build in the economy. And today, quite 
frankly, most community banks are running their banks in order 
to comply with regulation, which they always have, but not to 
really develop business or to try and create jobs for the 
economy because they are absolutely overwhelmed by the 
regulations they are getting.
    Senator Shelby. Thank you.
    Thank you, Mr. Chairman.
    Mr. Levitin. Senator, may I add a word to that, please?
    Senator Shelby. Sure, go ahead.
    Mr. Levitin. I cannot say whether the Dodd-Frank Act is 
going to create jobs or not, but I think it is important that 
we all remember that hundreds of thousands of jobs were lost in 
this economy before Dodd-Frank, that were lost before we had 
this regulatory scheme in place, and, arguably, because we did 
not have it in place.
    Chairman Johnson. Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman.
    Mr. Levitin, as I understand it--and you could elucidate 
for me--the agency becomes effective in a few days. It has the 
authority to promulgate regulations. Those regulations will be 
enforced by the existing regulatory entities. Is that accurate?
    Mr. Levitin. No, not quite. On July 21st, the CFPB stands 
up, it becomes effective. At that point, unless there is a 
Director that has been appointed by the President and who has 
either been a recess appointment or confirmed by the Senate, 
the Treasury Secretary becomes the Acting Director. The 
Treasury Secretary, however, will have limited powers as Acting 
Director. The Treasury Secretary will only be able to exercise 
the powers given the Bureau by subtitle (f) of Title X. Those 
powers include enforcing existing Federal consumer protection 
laws, but they do not include the power to create--to do new 
rulemakings other than under those laws, and it does not 
include the ability to examine non-banks.
    Senator Reed. Thank you very much, because I think that is 
an important clarification of what happens, effectively, on the 
day that the agency stands up.
    One of the consistent themes here is that we should be 
applying these standard provisions to all financial agencies. 
Mr. Pincus, would you and the Chamber support subjecting the 
Federal Reserve's budget to the congressional appropriations 
process.
    Mr. Pincus. I think the Chamber's position, Senator, is 
that at least one of these checks needs to apply.
    Senator Reed. So which check----
    Mr. Pincus. Well, the Federal Reserve has one check 
already, which is that it is a multi-member commission. It is 
not a single person who exercises the power, and, of course, 
Congress did that because the power that the Fed has is vast, 
and it did not want to put that into the hands of one person.
    Senator Reed. So the Fed is a multi-member commission, but 
what is your position with respect to the budget as well as the 
FDIC budget? Should it be subject to Congress?
    Mr. Pincus. No.
    Senator Reed. No?
    Mr. Pincus. No, we think that history has shown that that 
check has proved effective with respect to the Federal Reserve. 
Of course, that is not a check that is present with respect to 
the Bureau.
    Senator Reed. Well, how effective has it been since I 
believe Congress in the 1990s--in 1993, 1994--passed HOEPA, 
which was designed to address the issue of predatory lending? 
The Federal Reserve refused to enforce the regulation despite 
their commission status. In fact, it was not until, I believe, 
March of 2009 that they did enforce some regulations with 
respect to predatory lending, but not under HOEPA, under the 
Truth in Lending Act, which they had authority for a long time 
before HOEPA. So as far as consumers are concerned, do you feel 
that commission structure was effective?
    Mr. Pincus. I think there certainly--and the Chamber said 
this during the Dodd-Frank debate, that there were failures 
with respect to the entities that had consumer protection 
authority, and the Chamber supported congressional action to 
remedy those failures. So the Chamber certainly recognized that 
during the run-up to the financial crisis, there were failures 
of enforcement, there were failures of regulators to exercise 
their existing regulatory authority. One question was what was 
the best way to remedy that. Congress decided the best way to 
do that was to consolidate that authority in a new regulator. 
But the problem is that it is a new regulator that is not--
really has none of the checks and balances designed to ensure 
accountability, first of all, that the President proposed when 
he first proposed the agency, but that are the features 
generally of our Government structure.
    Senator Reed. How about the commission structure of the SEC 
with respect to the regulation of Lehman Brothers, Bear 
Stearns, and others? Was that an effective--and, by the way, 
their budget is subject to congressional authorization also. Do 
you think they were effective regulators with that structure in 
place, two of the elements?
    Mr. Pincus. I think the SEC has had some regulatory 
failures, and in fact, the Chamber issued a report before the 
financial crisis saying that changes were needed. On the other 
hand, I think if you look at the Federal Trade Commission, many 
people would say that the Federal Trade Commission has, A, been 
an extremely successful and effective consumer regulator, and 
also if you compare the Federal Trade Commission to the 
Antitrust Division, I think a lot of people would say that it 
has been a more effective antitrust regulator than the 
Antitrust Division has been.
    Mr. Calhoun. Senator, may I add a comment?
    Senator Reed. I would like to go to Mr. Levitin and then, 
if I may, get a comment.
    Mr. Calhoun. Thank you.
    Senator Reed. Mr. Levitin, you have heard this dialog. What 
is your impression?
    Mr. Levitin. I think that Mr. Pincus is being rather kind 
in his characterization of the FTC as a consumer protection 
agency. The FTC has tried at times, but it has been held on a 
very tight leash by Congress, not least through the 
appropriations process. And if you think back a ways to 1980, 
the FTC tried to ban certain advertising targeting children as 
unfair. And what happened? Congress stepped in and choked off 
the FTC's budget. Then a few years later, we see Congress 
itself acting on cigarette advertising targeting children. I do 
not know that that is the way we really want to do our 
regulation, having a whipsaw effect.
    I think maybe the most instructive comparison is with the 
Office of the Comptroller of the Currency. No commission 
structure, single Comptroller. The U.S. Code expressly 
prohibits the Treasury Secretary from delaying or preventing 
the Comptroller from undertaking rulemakings, so, you know, 
really a very independent regulator with an independent budget, 
and that is really the analog for the CFPB. The Comptroller has 
been an incredibly effective advocate on behalf of banks. And 
part of creating the CFPB is to create a counterweight to that, 
recognizing that consumer protection and safety and soundness 
need to be balanced, that it cannot simply be one subordinated 
to the other but they need to be balanced with parallel 
agencies.
    Senator Reed. A quick comment, Mr. Calhoun.
    Mr. Calhoun. Yes. I think in this discussion, following up 
on Professor Levitin's comments, we have overlooked the most 
fundamental checks and balances there, and that is the 
constitutional authority of the Congress through the normal 
legislative process. There have been repeated instances where 
agencies have taken actions that the Congress thought were 
inappropriate, and Congress has then through the normal 
legislative process revised the structure or rules and 
authority of that agency.
    What concerns us so much about doing this in advance, by 
changing the structure of the agency, is the history that we 
have had. In one of the most recent ones, when the Federal 
Reserve proposed modest credit card reforms, far less 
comprehensive than what the Senate and the Congress enacted, 
the OCC declared those mild reforms as a threat to the safety 
and soundness of the banking system. And it is that viewpoint 
that it affected short-term profits, we are going to oppose it, 
that makes us concerned about putting it in a place where it 
can veto readily the actions of the Consumer Bureau.
    Senator Reed. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman, and I thank all of 
you for your testimony. I know that my friend from Rhode Island 
was not suggesting that because people have failed--and many 
have--that we should not have any checks and balances in any of 
these organizations. I know that could not be possible. But let 
me go to you, Mr. Calhoun.
    I know that you know that a lot of us tried to figure out a 
way to cause this thing to have some checks and balances, and I 
guess I ask this question: I do not understand why--I mean, 
there has been a major victory in having a consumer protection 
organization. It is obviously going to be well funded. I do not 
understand why people have tried to press into sort of an 
ideological divide to say that this one entity is one that 
should have absolutely no checks and balances. I mean, I would 
not confirm me as head of this agency, OK, because it is just 
not an appropriate thing. And I guess I would just ask you: Why 
is it that we have taken this one issue? There have been some 
modest requests. I know you have been very involved in the 
creation of this. There have been some modest requests 
regarding checks and balances.
    One of the things you all are forgetting is, you know, 
there is going to be a Democratic appointee to this. There 
could be some ideological Republican appointed at some point on 
the opposite side that just repeals everything. I mean, I do 
not understand why you all have done this and why you have not 
been willing--I know that your input has had a big effect on 
this--why you all have not been willing to just sit down and 
say, OK, you know, they are right, maybe we ought to have just 
a few appropriate checks and balances where everybody will be 
united behind this instead of this continuing to be a political 
football as it has been because of the lack of any kind of 
checks and balances?
    Mr. Calhoun. Well, first of all, Senator, thank you and all 
the Members of this Committee for your work on this. This 
really is where the rubber meets the road of how do we avoid 
another financial crisis. I think our perspective and 
experience, again, has been that you have had--and we think the 
checks and balances are appropriate, that you have an OCC that 
is set up whose primary responsibility is safety and 
soundness----
    Senator Corker. Let me just make one point----
    Mr. Calhoun.----parallel structure for the Consumer Bureau, 
and that has been the guiding philosophy, again, based on the 
experience we have had.
    Senator Corker. You know, the one thing about the OCC that 
you all continue to leave out, though, is that the OCC, the way 
it is set up, a banking institution can choose not to be 
regulated by the OCC. So that is really not appropriate. I 
mean, you can end up being a State-chartered entity and not 
deal with the OCC. So that is not apples to apples.
    Mr. Calhoun. We think, though, that that cuts the other way 
because the history has clearly shown that because of that 
feature that the banks can choose their charter, that has 
tilted the OCC's perspective to be even more pro-bank and, 
quite frankly, anti-consumer. We saw that. Countrywide objected 
to very mild restrictions put on it by the OCC and they 
flipped----
    Senator Corker. So why are you using the OCC as an example?
    Mr. Calhoun. And they flipped to the OTS.
    Senator Corker. So that is my point. So why are you using 
the OCC as an example? It is not a good example.
    Mr. Calhoun. But it will be the continuing regulator, 
primary regulator of the national banks in this country, which 
control a huge share of consumer financial transactions, and 
the Consumer Protection Bureau and its Director need to be on 
par so that you do have the two of these working together with 
comparable structures, comparable powers to move us--and we 
agree, in a very balanced way--forward. But I would tell you 
again, everyone in the agencies, and in particular the Consumer 
Bureau, is very aware that at the end of the day for them to be 
sustainable they have to stay in line with where the Congress, 
where the Administration, and where the political process is, 
because we saw that with the FTC in the 1970s. It stepped 
further than the Administration or the Congress thought it 
should, and they promptly came in and revised and substantially 
cut back its authority.
    Senator Corker. I think you all have needlessly created an 
issue that actually created a divide over financial regulation 
in general, which then meant that the only way it could pass is 
with all Democrats, which then meant that the bill ended up 
being lopsided in a way, which then meant that we ended up with 
a tremendous lack of clarity now and will have for several 
years. And I just want to say to you, I think this was a gross 
misstep. I think you had the opportunity at one point to 
actually--Senator Shelby worked on it. We have all worked on 
it. You had a point in time when you could have created just 
some checks and balances and brought people together, and we 
have ended up with a financial reform bill that is not what it 
could have been really over this issue. And to me, this is a 
great example of people taking an ideological viewpoint and 
causing really, really bad legislation--not just on this issue, 
but really bad legislation on numbers of fronts to come forth.
    Let me ask a final question, and I will stop. If you knew 
that the person appointed to this position was going to use 
this position to then run for Statewide public office in a few 
years and had told people that, would you believe that would be 
the right person for this job? Do you think it ought to be a 
politicized job?
    Mr. Calhoun. I think that the person should have 
qualifications, and you look at the qualifications, and, again, 
you would look at the accountability that the person has to do 
a good job.
    Senator Corker. There is no accountability. There is no 
accountability. So I just want to ask you this question. If 
someone stated that they wanted to run for Governor of a State 
in 2014 but they were going to do this in the interim--and I 
would assume make a name for themself--would you consider them 
to be an appropriate nominee for this position?
    Mr. Calhoun. I do not think that that has disqualified 
people from other positions, that there are a lot of folks who 
have been in administrations and then moved to electorate 
offices, including recent history.
    Senator Corker. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Akaka.
    Senator Akaka. Thank you very much, Mr. Chairman, for this 
hearing. I want to welcome the witnesses and say, Mr. Chairman, 
that history has shown that our country has been great because 
whenever we have been challenged, we have been able to come 
forth with legislation that has turned our country around. And 
I think the Dodd-Frank bill has done that because of a crisis 
that we faced. We can talk about many of the failures that have 
happened already, and as we know, it has been documented there 
has been failure of the Federal banking regulators to address 
consumer protection issues. And for me this is what it is all 
about, and here is one.
    Ms. Drysdale, a 2006 DOD report found that payday lending 
had a negative effect on military readiness and our troop 
morale, as you did mention. The report was further evidence 
that junior enlisted servicemembers are particularly vulnerable 
to predatory lending practices.
    Do you see any existing gaps in consumer protection for 
members of the Armed Forces to ensure that our servicemembers 
maintain a high level of readiness in the defense of our 
Nation? What role can the CFPB and its Office of Service Member 
Affairs play in addressing these gaps?
    Mr. Drysdale. I see very large gaps, and I think my 
testimony--in my testimony I attempted to highlight the 
loopholes that have been created by the Federal regulations 
adopted after the Military Lending Act was enacted, which 
allows payday lenders, title lenders, refund anticipation 
lenders to create products that put themselves outside of the 
coverage of the Military Lending Act, so that takes them 
outside the 36 percent interest rate cap. It allows them to 
include mandatory unilateral arbitration in their contracts 
which prohibit military members from being able to have access 
to courts if they do have problems with these very aggressively 
and deceptively marketed products.
    I think that the loopholes that have been created have 
watered down the Military Lending Act to make it almost 
ineffectual to protect the younger servicemembers.
    Also, one of the big gaps in the Military Lending Act is it 
does not apply to automobile financing, and I think one of the 
first things that many of the young enlisted do when they get 
their first paycheck, one of the first things they are going to 
do is try to purchase an automobile.
    I think also the protections provided by the Military 
Lending Act should be expanded. Veterans are not covered by the 
Military Lending Act, as watered down as it is. Older Americans 
are not covered by the protections of the Military Lending Act. 
And talking about checks and balances, we have businesses that 
are putting mandatory unilateral arbitration clauses in their 
contracts which provide consumers no redress if they are harmed 
by these very high cost, unfair products that are bleeding them 
of their bank accounts, robbing them of their vehicles, and, 
more importantly, I think, taking their homes away, leaving 
them and their families without a place to live.
    Senator Akaka. Mr. Levitin, Professor, in your testimony 
you identified a tradeoff that sometimes arises between 
consumer protection and bank profitability. Can you talk more 
about that tradeoff and what implications it should have on the 
focus of the CFPB?
    Mr. Levitin. Of course. There is a balance that the 
regulatory structure is trying to strike between bank safety 
and soundness and consumer protection. Bank safety and 
soundness sounds like it is a very technical term, but it 
simply means bank profitability. A bank that not profitable is 
not safe and sound. You do not want to put your money in a bank 
that is losing money. And, unfortunately, the way the 
regulatory architecture worked prior to the creation of the 
CFPB was that consumer protection and safety and soundness were 
entrusted to the same agencies, and those agencies consistently 
put bank safety and soundness--that is, bank profitability--
ahead of consumer protection.
    By creating the CFPB and not giving it safety and soundness 
responsibility, this now means that consumer protection has a 
fighting chance against concerns over bank profitability. We 
need to have profitable banks in our country, but I do not 
think that we have any public policy concern over the exact 
level of bank profits. As long as they are profitable, there is 
no public interest in whether they are probably making X number 
of billion dollars or 2X. It is simply that they be profitable. 
And the banks, though, as self-interested actors, want to 
increase their profits, and they are very concerned that the 
CFPB will reduce their profitability. As long as the CFPB does 
not create a systemic risk by rendering banks insolvent, I do 
not think there is really any concern there. There is no reason 
that Congress should be concerned about the exact level of bank 
profitability, simply that banks are profitable. And that is 
what the FSOC veto does. It ensures that the CFPB does not 
create a systemic risk, and instead it allows the CFPB to find 
the right level of consumer protection.
    Senator Akaka. Thank you very much.
    Mr. Kelly. Senator, may I comment on that?
    Chairman Johnson. Yes.
    Mr. Kelly. Well, just very briefly, I think that with 
respect to the professor, I can assure you that the regulators 
that come into our bank and banks like us look very closely at 
compliance with every consumer law and are severe beyond all 
means if you are not in compliance. We spend an enormous amount 
of money trying to comply every day, and I think it is wrong to 
suggest that any of us would rise to the level of a systemic 
risk under any system. So anything that is done or imposed on 
us would never be something that would rise to that level. So I 
just take respectful exception to that.
    Chairman Johnson. Thank you.
    Senator Merkley.
    Senator Merkley. Thank you, Mr. Chair.
    Mr. Calhoun, we have heard about the Federal Trade 
Commission being a very effective regulator. It is my 
impression that they are a regulator of mortgage brokers, and 
we had a period in which brokers engaged in both receiving 
steering payments or bonuses for steering families into 
predatory loans when they qualified for prime loans. The liar 
loans developed in which the loans were not underwritten and 
the numbers were often fictionalized. We had the teaser rates 
with families being locked in by the prepayment penalties. So 
where was the FTC through all this? Why didn't the FTC end 
these practices?
    Mr. Calhoun. I think you saw a variety of influences, and 
they are ones that have been proposed today for the CFPB that, 
in fact, handcuff the FTC and would in turn handcuff the 
Consumer Bureau. For one, there was repeated deadlock on the 
Commission, on the FTC Commission. As has been, I think, widely 
acknowledged, there has been a general challenge with the 
confirmation process, not just of the CFPB but across the 
board, and this body has been looking at ways to improve that. 
But that raises concerns with five members. But the CFPB had 
authority but was unable to use it because of that deadlock. 
They also----
    Senator Merkley. The Trade Commission?
    Mr. Calhoun. The Trade Commission, excuse me. And, in fact, 
we saw this appropriations process again, and this is a concern 
we have. HUD also had authority over mortgage brokers and in 
the 1990s moved to try to limit these kickbacks that brokers 
got for putting people in the 2/28 loans that blew up the 
economy. There were appropriation riders put on HUD's budget to 
dissuade them from moving in that direction, and they backed 
off, and that was a direct contributing cause to our ultimate 
crisis.
    So those are the concerns we have. Those agencies were not 
effective. You look at--the absence of rulemaking or 
enforcement actions are really stark at the FTC and with HUD 
during the crisis as well.
    Senator Merkley. Thank you, Mr. Calhoun.
    Mr. Levitin, we heard that the OCC objected to the Fed's 
mild credit card reforms. You might recall that we had issues 
like companies creating remote post offices so that payments 
were late, changing the number of days each month so that the 
consumer, when they did their regular payment, it turned out 
that they were late--a whole series of clever actions designed 
to run up fees.
    Why did the OCC object to such mild considerations?
    Mr. Levitin. Because the OCC was concerned that it would 
affect the short-term profitability of banks.
    Senator Merkley. So here is kind of an interesting puzzle, 
and that is, it appears that under the argument to protect 
short-term profitability, long-term structural problems were 
allowed to emerge and that families' personal finances were 
undermined, making them weaker, and ultimately we ended up with 
mortgage practices that were turning to securities that carried 
the flaws of the mortgages into the securities and blew up our 
entire system. Why was the short-term profitability put over 
the long-term soundness of our system under the argument of 
soundness?
    Mr. Levitin. I think a lot of that has to do with the 
competition for charters among bank regulators, that banks can 
shop for the regulator and that has some real serious 
consequences. Mr. Calhoun spoke about it earlier in his dialog 
with, I think, Senator Corker about how the ability to shop for 
charters has created a race to the bottom in bank regulation, 
and that the OCC, for example, gets its budget from 
appropriations--not from the appropriations process but, 
rather, from fees that it charges to the banks that it 
charters. And if it wants to have a larger budget, it has to 
charter more banks. And how is it going to get more banks? 
Well, it is going to offer more favorable regulation--not 
necessarily better regulation, just regulation that the banks 
like more. That means less regulation.
    Senator Merkley. Thank you very much.
    Ms. Drysdale, you mentioned the Military Lending Act and 
the fact that there are loopholes in it or that a lot of the 
pieces are not being effectively regulated. Who is the 
regulator for that? And how do we fix these loopholes? Is it a 
regulator issue?
    Ms. Drysdale. It is a regulator issue, I believe. Thank 
you. I believe it is a regulator issue, and the regulations 
that were provided narrowed the products that were covered and 
the businesses that were covered so greatly that there are 
very, very few products that are actually covered, and it is 
very easy for any type of lender, institutional or otherwise, 
to create a loan product that is 92 days as opposed to 90 days 
to completely allow it to avoid regulation altogether.
    The Department of Defense is the actual entity that 
regulates the Military Lending Act, and as you can well 
imagine, the Department of Defense has an awful lot of other 
matters on its mind rather than regulating financial 
industries.
    Senator Merkley. Thank you. My time has expired, Mr. Chair, 
but I just want to note that as we look into the details, we 
find that HUD's efforts were stymied, the FTC efforts were 
stymied, the Fed's efforts never materialized because of their 
pursuit of the safety and soundness side, DOD is limited in 
their enforcement. So many of these issues that started with 
fairness to consumers ended up to be huge systemic risks, and I 
think it helps us to understand why the CFPB is such an 
important institution.
    Thank you.
    Chairman Johnson. Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman, and I thank the 
witnesses and you, Senator Shelby.
    First, I want to echo the comments from Senator Reed and 
many other of my colleagues about the need to preserve 
independent funding for the CFPB. As one of the original 
sponsors of the bill, before we put it into Dodd-Frank, I 
believe in it strongly.
    We have seen in debates over funding for the SEC and CFTC 
some Members of Congress use the power of the purse, not just 
to hold agencies accountable--that is a good thing--but to 
undermine their mission and achieve deregulation through the 
back door. That is a bad thing.
    Now, we know most Republicans oppose the creation of the 
CFPB and that fights about funding and accountability are just 
efforts to take away the Bureau's teeth before it is up and 
running.
    I should also point out the Bureau is not funded by 
taxpayer dollars, and it is an irony that many of the same 
Members of Congress who express so much concern over the debt 
and deficit now want to add the CFPB to the taxpayers' tab.
    Look, I went through this. For 10 years I tried to get the 
Fed to do a ``Schumer Box,'' credit card disclosure. It took 10 
years because that was not the Fed's mission. Their mission was 
safety and soundness. And even when they looked at this issue, 
they looked through the lens of safety and soundness, not 
through protecting consumers. And that is why we need an 
independent board.
    My question is related to that. As you know, a recent study 
by the Pew Charitable Trust found nearly half of all checking 
account disclosure statements provided to new customers from 
the 10 largest banks run over 111 pages. The report found that 
half of all banks have more than 49 different hidden fees in 
these disclosure statements, and Americans are expected to pay, 
for instance, $38 billion in overdraft fees in 2011 alone.
    Following this study, I proposed an easy-to-read checking 
fee disclosure statement on all checking account applications 
similar to the ``Schumer Box'' disclosure that I championed 
when I was a Congressman in the House and is still found on 
credit card applications, and it has been very successful. 
Remember, we are not talking Government regulation. We are 
talking Adam Smith here. Disclosure is how the economy is 
supposed to work.
    The new box would show in an easy-to-read chart the key 
terms of any checking account, including minimum deposit, 
interest rate, amount of ATM fees, account closing fees, and 
other important fees like the terms of overdraft fees, et 
cetera.
    So I want to ask each of the witnesses: Would you support a 
new ``Schumer Box'' disclosure requirement for checking 
accounts? Mr. Calhoun.
    Mr. Calhoun. Yes. The box that was used with credit cards 
was an important advance in consumer protection for credit 
cards. This would also be so for checking accounts and is 
particularly needed right now as many banks are adjusting the 
fees that they are charging on checking accounts, and they 
change them frequently, and it is very hard for consumers to 
move their accounts from one bank to another, and so they 
really need to know what they are getting into.
    Senator Schumer. Before they get into it.
    Mr. Calhoun. Yes.
    Senator Schumer. That is correct.
    How about you, Mr. Schaefer?
    Mr. Schaefer. Enthusiastically.
    Senator Schumer. Great. How about you, Mr. Kelly?
    Mr. Kelly. Senator, we support simplification and 
disclosure so that the customer understands it clearly. The 
simpler that could be, if that is what the ``Schumer Box'' 
would be on a checking account, that is fine as long as it does 
not violate the other things that we are mandated to do. I 
think the same should be true on mortgages and other things.
    Senator Schumer. Good. So you are basically supportive of 
the concept of a simplified----
    Mr. Kelly. I am not speaking on behalf of the ABA because I 
have not talked with them about it, but I am saying from my 
standpoint, the simpler that we could do it, the much better.
    Senator Schumer. And 111 pages is not very simple. I 
understand you need legal requirements and all that, but it is 
not----
    Mr. Kelly. Well, Senator, we do not have 111 pages, and I 
respect the Pew report, but ours is not 111 pages, but it still 
could be simplified.
    Senator Schumer. Great.
    Mr. Kelly. I will tell you that I believe that the 
mortgage--all of the mortgages--and we do quite a few of them. 
I think that there is too much paperwork that is mandated by 
the various laws, regulations, and this sort of the thing, and 
the simplification of that as well would be very, very welcome.
    Senator Schumer. Great. I like simplification myself, and 
thank you for being supportive, and I would ask you to go back 
and bring your views to the ABA.
    Ms. Drysdale?
    Ms. Drysdale. Yes, sir, we would be supportive because a 
lot of the problems caused by products today are because they 
are being crafted as non-loan products, and the Truth in 
Lending disclosures are not being provided at all.
    Senator Schumer. Thank you.
    Mr. Pincus?
    Mr. Pincus. Senator, I do not know the Chamber's views on 
your legislation, but I do know we are very supportive of 
simplification, shorter, clearer disclosures. For example, the 
process underway now in the mortgage disclosure process, the 
Chamber is very supportive of that process and certainly would 
be supportive of a similar simplification process with respect 
to accounts.
    Senator Schumer. Good. If you could show my proposal to the 
Chamber, I would be interested in a written answer from the 
Chamber and the ABA on whether they support it or not, and I 
hope they would.
    Mr. Levitin?
    Mr. Levitin. Yes, I think standardized disclosures are a 
very important step for checking accounts. It would allow 
consumers to do an apples-to-apples comparison between 
accounts, and that would enable consumers to get the best 
deals.
    Senator Schumer. Thank you. I would say to all the 
witnesses that when the ``Schumer Box'' actually went into 
effect, it did bring credit card interest rates down because 
there was real competition. And many people propose a cap on 
credit card interest rates. I am sure Mr. Kelly and Mr. Pincus 
would not be for it. The ideal way to go is have disclosure, 
and if it can work in a simplified good form, that is the best 
way to go, and that is what we are trying to do here. So I 
thank all the witnesses for their virtually unanimous support 
of this proposal, and we will try to move it forward.
    Chairman Johnson. Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman. Thanks for holding 
this hearing. And I do want to take one quick opportunity to 
welcome two of our panelists from North Carolina, Mike Calhoun 
and Mark Schaefer.
    Mike Calhoun is the President of the Center for Responsible 
Lending, which has its roots in Durham, and your organization 
has truly been a forceful advocate for consumer protections in 
my State and at the national level.
    Then I have had many dealings with Mr. Schaefer as the 
President and CEO of Truliant, which has 22-member financial 
centers and approximately $1.4 billion in assets.
    Both of these individuals are exceptionally knowledgeable 
voices on consumer protection issues and were deeply engaged on 
these issues during the Dodd-Frank Act. So I do want to thank 
you both for being here.
    Mr. Calhoun, I wanted to ask you one question having to do 
with for-profit education. Title X of the Dodd-Frank Act 
requires the study and monitoring of the private education 
student loan market, and it is my understanding from hearings 
in the Health, Education, Labor, and Pensions Committee that it 
is common for the for-profit educational institutions to make 
student loans directly to their students as a way to fill the 
gap between Federal loans and the price of tuition.
    Do you know if these loans would be covered by the Bureau's 
new authorities under Dodd-Frank Act? And if not, do you 
believe they should be?
    Mr. Calhoun. They are covered, and they should be because 
this is, if you will, a mini version of some of the subprime 
lending and other mortgage problems that we saw, because these 
loans are provided to people who are trying to do the right 
thing--get an education, advance themselves, which helps the 
economy. Importantly, many of these loans are Government 
guaranteed, and so ultimately taxpayers are at risk on these 
loans.
    Also, for the consumers they are typically non-
dischargeable in bankruptcy except in the most extraordinary 
circumstances, so that student debt follows them essentially to 
the grave. And there have been repeated studies showing 
overreaching with these loans, providing loans that people 
really do not have the ability to repay. The loans are made, 
the for-profit educator gets paid, taxpayers are then left with 
the bill, along with the family. So it is a very serious 
problem, and it is one example where there has been a 
regulatory gap that needs to be carefully looked at.
    Senator Hagan. Thank you.
    Mr. Schaefer, I understand from your testimony that 
Truliant has been particularly forward-thinking in its approach 
to handling overdraft fees. In April of this year, the Pew 
released a study titled ``The Case for Safe and Transparent 
Checking Accounts'' that highlighted several of the overdraft 
procedures that may be harmful to customers.
    Can you tell me just a little bit about the overdraft 
policies that Truliant has implemented and what the results 
have been for your institution and your customers?
    Mr. Schaefer. Well, as you know, with the Reg. E reform, 
the bad practice, in our opinion, of opt-out overdraft 
protection was eliminated. Truliant never had opt-out. We 
always had opt-in, so our members were always aware of their 
options other than paying a high overdraft fee, such as 
advancing a line of credit or taking a draft from savings.
    I think relative to the CFPB, you know, they have indicated 
a willingness to allow innovation, and I think in the area of 
overdraft protection, there is lots of room for innovation. I 
hate to kind of give a feather to my own competitors, but 
Coastal Credit Union in North Carolina and the State Employees 
Credit Union both have an early warning notification on NSF 
charges. I have been trying to get my staff to implement it for 
a couple years now. We intend to implement it as well. You 
would get a notice, obviously, on your PDA, and you would have 
until 10 o'clock in the morning to cure it.
    So that type of innovation, we just want to make sure the 
CFPB--and I know they backed away from plain vanilla. I think 
that is good that they backed away from that because innovation 
comes from the shops that are actually trying to help their 
members, and so I think we will have some ways to redress what 
we consider overpayment of overdraft fees.
    Senator Hagan. Thank you.
    Mr. Calhoun, as you know, when I was in the State Senate in 
North Carolina, I worked aggressively to oppose the payday 
lenders that preyed on the families throughout the State, and 
we were successful in effectively ending that practice in North 
Carolina. Under Dodd-Frank it granted the CFPB certain 
supervisory and enforcement authorities over the payday 
lenders.
    Do you feel that these authorities are sufficient to 
curtail the practice? And what might be the hurdles that the 
CFPB is facing or may face in the future as it attempts to 
regulate these predatory practices?
    Mr. Calhoun. Well, first, it does have explicit authority 
there, and it is badly needed. We urge the CFPB--and I think it 
is moving forward carefully with a lot of research, looking at 
the markets, understanding them, reaching out to businesses. 
There is, as I indicated in my testimony, an immediate crisis, 
though, in that the national banking regulators are allowing 
our biggest banks to come in and offer payday loans out of the 
national banks, even in States that expressly prohibit those 
loans. And we just think that is the wrong direction for 
lending in general, but particularly for flagship institutions.
    Senator Hagan. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. I thank all the 
witnesses.
    You know, I would like to ask Professor Levitin, have you 
seen the CFPB's ``Know Before You Owe'' effort? Have you had a 
chance to look at that?
    Mr. Levitin. I have read about it. I have not actually seen 
it.
    Senator Menendez. Mr. Calhoun, have you seen that at all?
    Mr. Calhoun. Yes, I have.
    Senator Menendez. You know, my understanding is it is an 
effort to simplify the mortgage disclosure form. As someone who 
practiced quite a bit at one time in that field, I am happy to 
see the mortgage disclosure forms simplified.
    In your view, is the new form being proposed by the CFPB 
and going through consumer testing right now better than the 
two existing forms under RESPA and TILA?
    Mr. Calhoun. Yes, and my understanding is it has received 
accolades from both consumer advocates as well as mortgage 
lenders, and we look at it through the lens of both, being 
affiliated with a substantial mortgage lender. And it is a 
place where, again, consolidating the authority is--what you 
had for literally more than a decade you had HUD and the 
Federal Reserve with both having authority in that area and 
being unable to agree on even a simple disclosure form. And it 
is a place where I think we see the value of the Consumer 
Bureau being demonstrated. And, also, we see the care with 
which the Consumer Bureau has moved forward with that proposal.
    Senator Menendez. You mean this horrible agency has 
actually done something that, prior to its existence, no one 
could create, so to simplify and yet create a clear opportunity 
for the consumer to understand what they are entering into, and 
to get the mortgage lenders and the private sector to actually 
have a simpler, more modified, more efficient process? Is that 
actually what happened here?
    Mr. Calhoun. That is what is happening certainly in the 
context of this form.
    Senator Menendez. Well, that is interesting.
    Ms. Drysdale, what do you think about the Bureau's new 
consumer complaint process that routes complaints to financial 
service providers for resolution and gathers information about 
those complaints?
    Ms. Drysdale. I think that that is going to be a very 
effective mechanism. Now consumers do not know who to turn to, 
and often when they turn to Federal regulatory agencies, they 
do not receive relief from those agencies. Also, many of the 
products I have talked about, the State regulatory agencies 
just do not have any control over. Either they are acting under 
the auspices of a national bank, or they are importing interest 
rates from other States, or, quite frankly, the State 
regulatory authorities just do not have the funding to address 
some of the significant needs of consumers.
    One of the other things that I wanted to mention that has 
not been mentioned yet was the Office of Financial Literacy. I 
think this is a very important aspect of the Consumer Financial 
Protection Bureau because I think consumers should be learning 
about consumer finance even before they become consumers.
    Senator Menendez. You know, Mr. Chairman, I want to read 
some quotes that existed from the Chamber of Commerce and the 
American Bankers Association. All of these are quotes that 
created concerns about bills that created a new Federal 
financial regulatory bureau, and I think observers will be able 
to tell which one I am talking about:

        There is no important aspect of the economic life of this 
        country, whether it be agriculture or industry, banking or 
        commerce, which will not be adversely affected by this bill.
                                 ______
                                 
        Nobody with any practical acquaintance with business process 
        could look at these regulations and arrive at any verdict other 
        than that they will cripple and retard business rather than 
        help revive it. The fact is even so clear that it is hard to 
        keep from wondering if such a result were not actually 
        intended.
                                 ______
                                 
        This bill, if passed by Congress, will not only destroy our 
        security markets but also a necessary consequence interrupt the 
        flow of credit and capital into business.
                                 ______
                                 
        The bill is so unsound that it will ultimately force its own 
        repeal.

Now, not one of these quotes, Mr. Chairman, is about the CFPB. 
Each quote is about the creation of the FDIC and the Securities 
and Exchange Commission from the 1930s when they were initially 
created in response to the Great Depression. Each quote sounds 
like what we are currently hearing about the CFPB and was 
created as a response to the financial catastrophe of 2008. And 
I just for the life of me cannot understand why it is that we 
have such an aversion--this would be the equivalent of saying, 
well, we do not like what the EPA does so we will not let it 
have a head; we do not believe in Medicare the way it is so we 
will not let it have a head of the agency. So we are destined 
at the end of the day not to have a well-performing agency, 
certainly as well as it could perform, without having 
leadership at the end of the day that can make sure that it is 
responsive to the Congress and the original intentions that we 
had for this Consumer Financial Protection Bureau.
    And the same types of, I think, shrill and overblown 
rhetoric that has marked the current debate is what I see in 
the speeches that took place in the releases that were issued 
as it related to the FDIC and the SEC, two entities that we 
nowadays think, notwithstanding some of their shortfalls here 
and there, have acted in the interests of the marketplace, have 
acted in the interests of investors, have acted in the 
interests of depositors, have acted in the interests of 
consumers. I think that is really the case here as well.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Shelby has a few more questions.
    Senator Shelby. Thank you, Mr. Chairman, for your 
indulgence.
    Professor Levitin, in your testimony today you have clearly 
expressed, I believe, your belief that the OCC, the Office of 
the Comptroller of the Currency, and other financial regulators 
have not done a good job of overseeing our financial system. I 
think that is a given. Accordingly, do you support reforming 
the OCC and other regulators to make them more accountable?
    Mr. Levitin. Yes.
    Senator Shelby. Thank you.
    Mr. Calhoun, in your testimony you severely criticized the 
Office of the Comptroller of the Currency's actions in the 
lead-up to the financial crisis, noting several areas where the 
OCC acted irresponsibly and where its actions had adverse 
consequences. It is worth noting that other than the Bureau 
that we are talking about here, the Comptroller is probably the 
least accountable of our financial regulators. At least a lot 
of people believe that.
    Do you believe, sir, that the OCC should be held 
accountable for its actions? Do you?
    Mr. Calhoun. I believe that it should, but I think 
primarily by----
    Senator Shelby. OK. You do believe it should be as a 
regulator, should be held accountable for its actions, don't 
you?
    Mr. Calhoun. I think it has accountability in many respects 
now.
    Senator Shelby. I did not ask you that. I asked you----
    Mr. Calhoun. Yes. I think everyone thinks----
    Senator Shelby. OK. If so, would you support an effort to 
make them more accountable to Congress? Would you support an 
effort to make the OCC and other regulators more accountable to 
Congress?
    Mr. Calhoun. We would support an effort to make the OCC 
comparable with the CFPB because they are the two pillars of 
financial oversight--consumer protection and safety and 
soundness--and we think that they should be comparable because 
they do represent the two interests that need to be at the 
table and balanced.
    Senator Shelby. But would you support--again, let me be 
clear. My question is this: Would you support efforts in the 
Congress to make the OCC and other financial regulators more 
accountable to the Congress? Either yes or no.
    Mr. Calhoun. I do have concerns about interference there, 
and there were protections put in that----
    Senator Shelby. So you would not support it then? You are 
modifying your position?
    Mr. Calhoun. No. I think the specifics matter. For example, 
in the savings and loan crisis, we saw intervention that 
prevented the regulators from stepping in and preventing 
greater collapse in that industry. And so it is a difficult 
balancing, but there are reasons to have protections and 
independence with the financial regulators because those short-
term interventions are the tyranny of small decisions that 
create huge consequences. And, again, I would not want, for 
example, the OCC to be subject to intervention every time they 
tried to close down a bank.
    Senator Shelby. Neither would we.
    Mr. Calhoun. And that is what happened in the past.
    Senator Shelby. They have got to have the ability to do 
their job, the power to do their job. But my question to you, 
again: Would you support efforts to make them more accountable? 
If they fail the American people, which most people believe 
that the financial regulators failed the American people--the 
Federal Reserve, the FDIC, the Comptroller of the Currency, and 
so forth, I believe from this point here on the Committee, 
failed the American people leading up to the financial crisis. 
My question again: Would you support efforts to make them more 
accountable?
    Mr. Calhoun. I do not think the problem is their lack of 
accountability. I think the problem has been----
    Senator Shelby. Oh, you do not? You do not believe that?
    Mr. Calhoun. No. I think the problem has been the lack of--
--
    Senator Shelby. Have you followed this--have you followed 
the hearings on what led up to the crisis? I think you need to 
go back and look at them if you do not believe it is lack of 
accountability. Everybody says, just about that I know, before 
this Committee and anywhere else that kept up with it, that it 
is a problem of accountability.
    Mr. Calhoun. That surprises me somewhat because I have not 
seen the proposals to change----
    Senator Shelby. I would suggest----
    Mr. Calhoun.----the structure.
    Senator Shelby. I hope you will go back and look at this 
because I think you are standing alone here.
    Professor?
    Mr. Levitin. Senator, I think that there is an important 
point that Mr. Calhoun is trying to make here, which is that 
accountability is important. No one debates that.
    Senator Shelby. Absolutely.
    Mr. Levitin. And I would hope everyone on this panel would 
agree that we should seek more accountability for the Federal 
bank regulators.
    Senator Shelby. Absolutely.
    Mr. Levitin. The question, though, is: How do we do that? 
And not every form of accountability is equally effective or 
equally appropriate.
    Senator Shelby. That is right, but accountability is 
important, isn't it?
    Mr. Levitin. Without a doubt.
    Senator Shelby. Mr. Pincus.
    Mr. Pincus. Senator, I just wanted to make two points, if I 
may, in response to your question. I think first of all, there 
is sort of a fundamental question of Government here----
    Senator Shelby. Absolutely.
    Mr. Pincus.----about who ultimately everybody is 
accountable to, which is the people, and I do think accountable 
to elected officials. Although we might not all like everything 
that Congress and the President do every time, ultimately they 
are the people in whom the people have reposed their trust, and 
it seems to me that is a pretty fundamental part of our 
Government. And, therefore, when somebody says, for example, it 
is an interference because in an appropriations bill there is a 
provision that says to a regulator you may or may not do 
something, that is something that both Houses of Congress 
approved and the President signed, and it seems to me maybe it 
is bad, but it is what the people's representatives decided.
    And I wanted to make one point about the OCC because I 
think it ties into your question, which is: I think several 
people on the panel have said we want to make the Bureau's 
Director on a par with the Comptroller, and so I think it is 
very important to note that the statutory language is very 
different. The Comptroller statute does not have the limitation 
on the President's removal power that I read before that the 
Bureau provision does, and that is the reason why--and I just 
want to correct Professor Levitin's statement. It was the 
Office of Legal Counsel at the Department of Justice that 
issued that opinion on behalf of the Attorney General saying 
that the Comptroller serves at the pleasure of the President, 
and the reason why is because that statutory language is 
different. Another difference in the statutory language is the 
language in the Comptroller statute that talks about the 
Treasury Secretary's ability to exercise general direction over 
the Comptroller--again, not present at all in the CFPB statute.
    So if the goal was to put them both on the same par, that 
has not been reached.
    Senator Shelby. To create a bureaucracy, a powerful 
bureaucracy that is not accountable to the Congress for its 
funds or really real oversight there, isn't that a big mistake?
    Mr. Pincus. I think it is, Senator. I think it really goes 
against, as I said, 224 years----
    Senator Shelby. That is right.
    Mr. Pincus. And, also, I think it is important to go back 
to the--in the face of statements that this would be some 
shocking hobbling of the Bureau, this is what the President 
originally proposed. It is not as if this is something--and 
what the House of Representatives passed, albeit in a staged 
process. This is not something that, you know, has been thought 
up by people and has not been advocated by people who are very 
strong advocates of consumer protection. And as you said in 
your opening statement, no one is asking to change the Bureau's 
substantive powers a bit. It is just to create----
    Senator Shelby. Or its mission.
    Mr. Pincus. Or its mission. It is just to create the kinds 
of responsiveness that really the Constitution mandates.
    Mr. Levitin. Senator, if I may.
    Senator Shelby. Go ahead.
    Mr. Levitin. The CFPB is subject to oversight by Congress. 
That oversight is not through the appropriations process, but 
that is actually, I think, quite right. I should not be one to 
speak to you about how the appropriations process worked, but 
appropriations bills involve lots of horse trading, and they 
are not policy bills. Overall they are compromises, and they do 
not focus on the specific policy issues at hand. We should want 
that kind of--that is the kind of oversight that Congress 
currently has now, that if the CFPB does something that 
Congress does not like, Congress can act and tell the CFPB, 
``Don't do that.'' And that is a much better form of oversight 
than oversight through appropriations. The appropriations 
process is meant to be a funding process, not an oversight 
process.
    Senator Shelby. Well, we all know that the Pentagon, our 
defense, very important, the FBI, all of our law enforcement 
people, are subject to appropriations. They are subject to the 
oversight of the Appropriations Committee because they are 
subject to the annual appropriations.
    I have another question for Mr. Schaefer. The new Bureau 
will have the power, as I understand it, to write rules 
prohibiting products that are ``abusive.'' If the Bureau deems 
one of your products to be abusive and you believe that the 
product provides value to your members, what recourse do you 
have to have the Bureau's decision reviewed or perhaps 
overturned?
    Mr. Schaefer. Senator, I would hope that there would be 
some type of appeal process. We are very interested in the--
there is supposed to be an Office of Regulatory Burden 
Monitoring within the CFPB. They are----
    Senator Shelby. You hope. You are using the word ``hope.'' 
We all hope so, but go ahead.
    Mr. Schaefer. It is my understanding there is a chance of 
that happening. But, you know, it would be very unlikely in a 
credit union environment where we would create a product that 
was so offensive that the CFPB would not approve of it.
    There is also a small financial institution department that 
I believe Elizabeth Vale runs that takes a close look at how 
the regulations impact smaller financial institutions. But to 
address your question directly, I believe that the CFPB should 
have some type of appeal process whereby all financial 
institutions could redress concerns that they might have with 
their products.
    Senator Shelby. Mr. Schaefer, my last question. In your 
testimony you state that, and I will quote you, ``Regulators 
should be mindful of the impact of mass implementation of 
regulation on smaller financial institutions''--which we all 
are concerned about. You also state that, ``Larger institutions 
will benefit from economies of scale on a per account cost 
basis, further tipping the scale toward [too big to fail] 
institutions.''
    Do you believe, sir, that the Bureau is immune from this 
same concern? Have you thought about it?
    Mr. Schaefer. Well, they do seem to have a predilection 
toward considering the concerns of smaller financial 
institutions. Actually, Mr. Kelly and I, even though usually 
banks and credit unions are on the other side, we have a common 
interest, as I do with many of my banker friends in North 
Carolina, in ensuring that the impact of the regulation does 
not unduly harm small financial institutions. The cost of 
regulation is higher per account for us than it is for Bank of 
America, and so we ask that they take that into account.
    Are they immune from it? No. But do we think that they will 
reasonably take that into account? Yes. We believe that they 
have shown an interest in doing that.
    Senator Shelby. You would hope so, anyway.
    Mr. Schaefer. I would hope so, sir.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Johnson. Thank you again to all of our witnesses 
for your testimony and for being here with us today. We look 
forward to the CFPB beginning its important work.
    The hearing record will remain open for 7 days for 
additional statements and questions.
    This hearing is adjourned.
    [Whereupon, at 12:04 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]

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                                 ______
                                 
                 PREPARED STATEMENT OF MARCUS SCHAEFER
            President and CEO, Truliant Federal Credit Union
                             July 19, 2011

Introduction
    Truliant Federal Credit Union appreciates the opportunity to 
provide input into the public policy dialog regarding the enhancement 
of consumer protection. We would like to thank Chairman Johnson, 
Ranking Member Shelby, Senator Hagan, and Members of the Committee for 
having us here today.
    Our mission is to ``Enhance the quality of life of our members and 
to become their preferred financial institution''. Headquartered in 
Winston-Salem, NC, Truliant is a full service, not-for-profit financial 
cooperative with assets totaling approximately $1.5 billion. We serve 
over 180,000 member-owners and their families who work for over 900 
Select Employer Groups, including Cook Medical, TIMCO Aviation 
Services, Klaussner Furniture, or who reside, work, or worship in our 
communities with a concentration in the Piedmont Triad area and in 
Charlotte, NC.
    Truliant offers a full range of financial services including 
savings, checking, certificates, money market, IRAs, and Rainy Day 
Savings. Loan services include first mortgage and home equity, new and 
used auto, personal lines, and VISA credit cards. We offer small 
business services including member business and SBA loans. We provide 
state-of-the-art home banking and electronic bill payment programs, 
mobile access, and remote deposit capture. Through our Credit Union 
Service Organization, we offer financial planning and a very popular 
auto buying service.
    As a member-owned financial institution, we can offer lower loan 
rates, higher savings rates, low (and often no) fees as we help member-
owners execute sound financial plans for their future. Central to all 
our services is our emphasis on financial literacy education and 
counseling to our member-owners and for our communities. Over 55 
percent of our member-owner households earn less than $45,000 per 
annum. Affordable, well-informed financial service access and delivery 
is key to our mission.
    Truliant maintains an overarching commitment to improve our member-
owners' lives by understanding and meeting their financial needs. This 
focus translates into our TruService culture. Our staff engages our 
member-owners to bring about real change and help them meet their long-
term objectives--rather than the traditional product-pushing sales 
approach so prevalent in modern banking. For example, a benefit of low 
interest rates has allowed us to reposition hundreds of member-owners 
into lower cost mortgages and car loans.
    Our operating principle is ``Consumer BE Aware''; NOT Consumer 
Beware. Well before the financial crisis we instituted our Points of 
Differentiation that embody the spirit and practice of improving 
member-owner financial lives. For example:

    We have not sold our credit card accounts to the large 
        credit card issuers.

    We never offered an opt-out courtesy pay overdraft 
        protection program.

    We don't advertise a car loan rate to member-owners unless 
        the majority has the credit standing to qualify.

    We don't allow indirect auto loan car dealers to mark-up 
        our rate.

    We help our member-owners become debt free on their primary 
        residence by retirement.

    We support public policy that informs and educates the 
        consumer on financial decisions while improving personal 
        balance sheets.

    Our experience at Truliant is that consumers have been needlessly 
financially disadvantaged by a history of questionable practices and 
procedures by both mainstream and non-bank providers. Examples include 
opt-out overdraft protection, the sequence of clearing checking debits, 
extending credit to borrowers with terms they could not reasonably meet 
in ordinary circumstances, overly complex disclosure materials, and 
punitive credit card practices. These practices, which seem to be 
acceptable ``gotchas'' rather than consumer-focused services, argue for 
some balance toward better information sharing. Congress has addressed 
some of the more egregious practices, and heightened consumer awareness 
post-financial crisis may have driven providers to become more 
consumer-friendly in the near term.
    Even with reforms including the Card Act, Regulation E rule 
changes, and the consumer protection initiatives of individual 
regulators, including the National Credit Union Administration, it make 
sense to have a regulator focused on consumer protection.
    Clearly, controlling practices of non-bank providers, such as 
unregulated mortgage brokers, who in some cases were able to lure our 
member-owners into products that did not improve their financial lives, 
is needed. We noted 13 finance companies operating in the small 
manufacturing town of Asheboro, North Carolina, which lead to our 
extending services there. As we offered Volunteer Income Tax Assistance 
at Truliant this spring, I observed that many of the national tax 
preparers continued to offer high-priced, tax-refund anticipation 
loans. A consumer protection regulator could address these practices 
either directly or through a national initiative to improve financial 
literacy for consumers of varying degrees of education and experience. 
We all want our children to make better decisions for themselves.
    Even for traditional financial service providers, we support clear 
language and visual presentations like the ``Federal box'' required of 
credit card disclosures. Warnings should be issued for overly complex 
consumer products that ``trick'' the consumer into overpaying for 
services or making decisions not generally in their long-term best 
interests (e.g., variable rate mortgage that reset with payments beyond 
the likely ability to repay).
    However, regulators should be mindful of the impact of mass-
implementation of regulation on smaller financial institutions, 
particularly credit unions, where the cooperative structure has 
historically resulted in pro-consumer practices.
    Seemingly small regulatory dictates can have a large impact on 
these institutions and ignore their ``local knowledge'' of how to best 
communicate with members. Larger institutions will benefit from 
economies of scale on a per account cost basis, further tipping the 
scale toward TBTF institutions.
    There may be unintended consequences to consumer-friendly financial 
institutions as the ``bad actors'' are reined in by ``one-size-fits-
all'' regulations. Implementation of the Card Act requiring that 
specific credit card statement language regarding late payments be used 
resulted in hundreds of panicked calls by Truliant member-owners who 
were not delinquent. The staff time required to explain the language 
mandated by the Federal Reserve could have gone to advising our member-
owners on how to better build their financial foundation.

Conclusion
    Truliant supports streamlining and simplifying existing overlapping 
regulation to improve consumer understanding while reducing cost to the 
financial institution that can be passed on to the member-owner. We 
welcome combining TILA and RESPA to improve usability by the consumer 
and financial institutions. Streamlining ECOA and FCRA could have 
similar benefits.
    Truliant supports regulation that allows and promotes innovation in 
financial services that is also helpful to the consumer. The consumer 
protection regulator will need to carefully balance these two 
deliverables. Consumer protection is not a one-time fix, but an ongoing 
effort that will span different political landscapes. We support a 
balanced governance structure that would not make the regulator 
ineffectual or one that allows for public policy to become overly 
politicized. Thank you again for the invitation to speak on behalf of 
Truliant. I welcome your questions and discussion on this matter.
                                 ______
                                 
               PREPARED STATEMENT OF ALBERT C. KELLY, JR.
           Chairman and Chief Executive Officer, SpiritBank,
             on behalf of the American Bankers Association
                             July 19, 2011

    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee, my name is Albert C. Kelly, Jr., Chairman and Chief 
Executive Officer, SpiritBank, a $1.3 billion bank headquartered in 
Bristow, Oklahoma. I am also the chairman-elect of the American Bankers 
Association. I appreciate the opportunity to present the views of the 
ABA on the new Bureau of Consumer Financial Protection (Bureau). The 
ABA represents banks of all sizes and charters and is the voice of the 
nation's $13 trillion banking industry and its two million employees. 
ABA is uniquely qualified to comment on the issues related to the 
Bureau. Not only will the agency's rulemaking impact every bank--large 
and small--but ABA's membership represents the full range of banks over 
$10 billion that will be under direct supervision by this new agency.
    SpiritBank has survived many economic ups and downs for 95 years. 
Our long tradition of service is not unique among banks. In fact, there 
are 2,735 banks--35 percent of the banking industry--that have been in 
business for more than a century; 4,937 banks--64 percent--have served 
their local communities for more than half a century. These numbers 
tell a dramatic story about the staying power of banks and their 
commitment to the communities they serve. It is a testament to the 
close attention to customer service.
    My bank's focus, and those of my fellow bankers throughout the 
country, is on developing and maintaining long-term relationships with 
our customers. We cannot be successful without such a long-term 
philosophy and without treating our customers fairly.
    We are very proud of our relationship with the people and small 
businesses we serve. They are, after all, our friends and neighbors. 
The success of SpiritBank is inextricably linked to the success of our 
customers and our community. Let me give you just a glimpse of 
SpiritBank's close ties with our community:

    We held $847 million in small business loans within our 
        communities at year-end 2010. The new rigors of regulation and 
        capital requirements have meant that we cannot continue to lend 
        at this level.

    We funded 25,960 mortgage loans for families in 10 States 
        last year, none sub-prime, for a total of $3.8 billion.

    We contributed over $550,000 dollars last year and our 330 
        employees have logged thousands of hours of service to schools, 
        charitable organizations, and civic and community organizations 
        throughout our area--in a year in which our investors saw no 
        return to them. We far exceeded this amount in years when the 
        economy has been good.

    We started an Entrepreneurial Spirit Award in one of our 
        large communities, launching 20 to 30 companies each year at an 
        annual cost to us of $100,000 each year.

    The banking industry fully supports effective consumer protection. 
We believe that Americans are best served by a financially sound 
banking industry that safeguards customer deposits, lends those 
deposits responsibly, and processes payments efficiently. My bank's 
philosophy--shared by banks everywhere--has always been to treat our 
customers right and do whatever we can to make sure that they 
understand the terms of the loans they are taking on and their 
obligations to us. Traditional FDIC-insured banks--more than any other 
financial institution class--are dedicated to delivering consumer 
financial services right the first time. Not only do we have the 
compliance programs and top-down culture to prove it, we are required 
to have the financial wherewithal--in terms of capital, liquidity and 
asset quality--to be there when our customers need us.
    Fair service to our banking customers is inseparable from sound 
management of our banking business. Yet despite this axiom, the Dodd-
Frank Act erected a Bureau that divides consumer protection regulation 
from safety and soundness supervision. Therefore, it is critical that 
improvements be made to assure this new Bureau is accountable to the 
fundamentals of safe and sound operation, to the gaps in regulating 
non-banks that motivated financial reform, and to the principles of 
consistent regulatory standards consistently applied.
    There are several features of the Bureau that make improved 
accountability imperative. In addition to the weakening of any 
connection between the Bureau's mission and safety and soundness 
concerns, Dodd-Frank gave the Bureau expansive new quasi-legislative 
powers and discretion to re-write the rules of the consumer financial 
services industry based on its own initiative and conclusions about the 
needs of consumers. The prerogative of Congress to decide the direction 
and parameters of the consumer financial product market has essentially 
been delegated to the Bureau. The resulting practically boundless grant 
of agency discretion is exacerbated by giving the head of the Bureau 
sole authority to make decisions that could fundamentally alter the 
financial choices available to customers.
    Furthermore, the proliferation and fragmentation of enforcement 
authority that Dodd-Frank has distributed among the Attorneys General 
in every State and the prudential regulators unleashes countless 
competing interpretations and second-guessing of the supposed baseline 
``rules of the market.'' This will result in complicating and 
conflicting standards.
    At risk is the entire body of rules that has governed the 
development, design, sales, marketing, and disclosure of all financial 
products; they are subject to change under the Bureau, and could change 
dramatically in many instances. When developing and offering products, 
firms rely on the basic rules of the road, knowing that they are 
subject to careful changes from time-to-time. This uncertainty can 
cause firms to pull back from developing new products and new delivery 
systems. It also makes banks think twice about various types of lending 
if they are uncertain what the rules will be when they try to collect 
the loan a few years out. This problem should not be underestimated.
    For all these reasons and others, it is ABA's first priority to 
improve the accountability of the Bureau. Establishing accountability 
supersedes other important priorities regarding the Bureau, including 
ensuring appropriate bank-like supervision of non-banks for consumer 
protection. During consideration of the legislative proposals that 
became the Dodd-Frank Act in the last Congress, ABA recommended 
provisions designed to increase the accountability of the CFBP because 
we were greatly concerned about the concentration of authority in a 
single director of this agency. Our concern was focused on the fact 
that the Bureau has authority over already supervised insured 
depositories as well as unsupervised or lightly supervised non-banks. 
Our concern remains the same. We urge the Congress to pass statutory 
provisions that ensure such accountability before the Bureau is 
established with a single director.
    To restore the necessary accountability of the Bureau, ABA offers 
several recommendations:

    Strengthen accountability by making meaningful structural 
        changes;

    Reinforce the focus of the Bureau's authority on the 
        regulatory gaps; and

    Improve consistency in the application of consumer 
        protection standards.

    I will address each of these broad suggestions in turn and propose 
specific steps that Congress should consider to address the concerns 
about the Bureau's accountability. Before that, though, I think it is 
very important to dispel a myth that continues to color the debate on 
the Bureau: that community banks like mine are exempt from the new 
Bureau. Community banks are not exempt. All banks--large and small--
will be required to comply with rules and regulations set by the 
Bureau, including rules that identify what the Bureau considers to be 
``unfair, deceptive, or abusive.'' Moreover, the Bureau can require 
community banks to submit whatever information it decides it ``needs.''
    The Bureau will have direct supervisory authority for consumer 
compliance of larger banks (with assets greater than $10 billion)--
which adds another layer of regulation and supervision--and can join 
the prudential regulator by doubling up during any small-bank exam at 
the Bureau's sole discretion. It is also true that bank regulators will 
examine smaller banks for compliance at least as aggressively as the 
Bureau would do independently. In fact, the FDIC has created a whole 
new division to implement the rules promulgated by the new Bureau, as 
well as its own prescriptive supervisory expectations for laws beyond 
FDIC's rulemaking powers. Thus, the new legislation will result in new 
compliance burdens for community banks and a new regulator looking over 
our shoulders.
    This is no small matter. The CFPB, while significant, is only one 
change among hundreds that will adversely affect the banking industry 
and the communities we serve. Already there are 2,762 pages of proposed 
regulations and 607 pages of final regulations--and this is before the 
CFBP undertakes any new changes or rulemakings. It is important to 
understand that our bank, indeed, any small business, can only bear so 
much. Most small banks do not have the resources to easily manage the 
flood of new rules.
    The totality of all the changes, brought about by Dodd-Frank, 
including those expected under the Bureau, and the excessive regulatory 
second-guessing by the regulators has consequences for our communities. 
Higher costs, restrictions on sources of income, limits on new sources 
of capital, and excessive regulatory pressure, all make it harder to 
meet the needs of our communities. Jobs and local economic growth will 
slow as these impediments inevitably reduce the credit that can be 
provided and the cost of credit that is supplied. Fewer loans means 
fewer jobs. Access to credit will be limited, leaving many promising 
ideas from entrepreneurs without funding. Capital moves to other 
industries, further limiting the ability of banks to grow. Since banks 
and communities grow together, the restrictions that limit one 
necessarily limit the other.
    Let me now turn to specific recommendations for improvements and 
ABA's thoughts on the several new legislative proposals that are under 
consideration.

I.  First Priority: Strengthen Accountability with Meaningful 
        Structural Changes
    ABA believes that a board or commission structure is appropriate to 
address the unfettered authority of the Bureau's director to impose new 
rules. Having only one Senate-confirmed director vests too much power 
in one person and lacks any effective checks and balances. A board or 
commission would help to provide accountability and balance. It would 
also broaden the perspective on any rulemaking and enforcement activity 
of the Bureau, and would provide needed balance and appropriate checks 
in the exercise of the Bureau's authority. It will facilitate 
continuity of the organization and enhance predictability about 
rulemaking over time.
    ABA believes that the board or commission should include members 
with consumer finance business experience and direct safety and 
soundness regulatory expertise. Such expertise provides an important 
and necessary perspective as standards are set and enforcement 
activities undertaken. Such an important feature will also improve 
accountability and help redress the separation between consumer 
protection and sound financial management.
    ABA also urges Congress to consider requiring one of the seats in 
the board or commission be filled with the recently created, 
statutorily mandated position of the Vice-Chairman for Supervision of 
the Federal Reserve Board. We believe that the inclusion of the Vice-
Chair for Supervision provides necessary and current safety and 
soundness experience that directly addresses a pivotal deficiency of 
the existing structure. The Vice-Chair for Supervision is a unique 
official who has oversight responsibility both for large financial 
holding companies (which include the nation's biggest banks and credit 
card issuers) and State-chartered community banks that are Federal 
Reserve members. This broad responsibility and expertise would be 
invaluable to achieving the missing accountability for safety and 
soundness that the current structure lacks.
    Another fundamental structural flaw of the Bureau's structure is 
that only the Director is appointed by the President and approved by 
the Senate. A board or commission structure corrects this shortcoming.
    ABA also supports changing the voting standard for the Financial 
Stability Oversight Council's (FSOC) review of Bureau rulemaking to a 
simple majority rather than a two-thirds vote. It should clearly be 
sufficient to set aside a Bureau rule if a simple majority of the 
nation's top regulators believes the Bureau has acted in a manner that 
adversely impacts the safety and soundness of the American banking or 
financial system. The stakes are too high to let one agency's rule 
create such significant risk. The very purpose of the FSOC was to avoid 
problems that could lead to risks that threaten the economy. To ignore 
the majority viewpoint of those with this responsibility is completely 
counter to the mission of this council. Congress should erase the 
super-majority requirement for FSOC authority set in Dodd-Frank and 
replace it with a simple majority requirement.
    In addition, ABA believes that the standard for the FSOC review of 
Bureau actions--systemic risk--is also flawed. Much harm can be 
inflicted that would impair whole subsets of legitimate market players 
without necessarily rising to the level of a banking, let alone a 
financial, system risk. For example, a Bureau rule that severely 
threatens the viability of community banks will not create a system 
risk. But each bank that disappears from the community makes that 
community poorer. Customers that have been served by local banks for 
decades may face fewer choices, less access to credit, and higher 
costs. Will the FSOC really conclude that the loss of large numbers of 
community banks rises to the level that demands a systemic risk ruling? 
ABA strongly urges Congress to re-calibrate the review standard by 
which the FSOC may act in setting aside a Bureau rule so that action 
may take place on less than system-wide impacts or risks.
    Furthermore, the FSOC review process for Bureau rules is 
administratively cumbersome and complicated, filled with timing 
pitfalls. For example, a petition must be filed that attests to 
objecting agency ``good faith'' within 10 days of rule publication; it 
must be transmitted ``contemporaneously'' to Congressional committees; 
a stay of 90 days duration may be applied for, but without a stay the 
petition will be deemed denied if the FSOC does not issue a decision in 
45 days. As constructed, this convoluted process represents precisely 
the kind of bureaucracy that gives government bureaus a bad name. ABA 
urges Congress to fix this review process so that there is at least 
some reasonable expectation that it can be successfully invoked.

II.  Reinforce the Focus of the Bureau's Authority on Regulatory Gaps
    Even the strongest proponents of the Bureau acknowledge the fact 
that traditional banks were not the cause of the financial crisis. 
Rather, unsupervised non-bank lenders and unregulated packagers of 
collateralized mortgage obligations (CMOs) were allowed to take 
excessive risks in spite of existing laws that could have stemmed the 
tide of corrosive market conduct by non-depositories. The system failed 
to enforce laws--already on the books--against predatory practices by 
many of those firms and it failed to bring market discipline to bear on 
underwriting standards against which bankers were hard pressed to 
compete. Yet here we are, the surviving bankers, facing a new 
bureaucracy charged with making sense of the often conflicting, never 
intuitive, and always burdensome compliance obligations.
    As we noted above, establishing accountability is the number one 
priority. Once that goal is achieved, the Bureau must be held 
accountable for directing its resources to the glaring gap in 
regulatory oversight--a failure to supervise and pursue available 
enforcement remedies against non-bank lenders committing predatory 
practices or other consumer protection violations. To this end, ABA 
sees value in Section 1016(c)(6) of the Dodd-Frank Act requiring the 
Bureau to report on actions taken ``with respect to covered persons 
which are not credit unions or depository institutions.'' In addition, 
we welcome current efforts to define the Bureau's non-bank supervisory 
scope as it prepares for the future exercise of that supervisory 
authority.
    ABA believes that the best way to keep the Bureau accountable to 
the Dodd-Frank objectives in section 1021(b) would have been to have 
the Bureau concentrate solely on rationalizing the laws and powers 
already on the books before passing any new authority. Unfortunately, 
in the process of transferring existing unfair and deceptive acts or 
practices authority, the unwarranted addition of ``abusive'' was 
inserted.
    This addition opens wide all manner of after-the-fact excuses for 
rewriting the conditions of transactions entered into by customers who 
had complete information and competitive alternatives. It is an end run 
around the well-established statutory criteria that Congress and the 
courts have defined for conduct that is either deceptive or unfair. ABA 
strongly urges the Congress to eliminate the term ``abusive'' from the 
Bureau's prohibitions. This is the most effective method of keeping the 
Bureau focused on and accountable to the task of reforming the more-
than-adequate authorities it has inherited from its predecessor 
regulators and shaping those into simpler, more effective, and less 
burdensome consumer protections.

III.  Improve Consistency in the Application of Consumer Protection 
        Standards
    As discussed above in detail, the Bureau represents an 
unaccountable regulatory entity. While this alone is bad enough and 
should be addressed, the problem is magnified by other authorities 
granted in Dodd-Frank. The Act gives license to pile on additional 
State law requirements and gives unfettered authority to State 
Attorneys General and prudential regulators--acting on their own 
initiative--to enforce Bureau statutory authorities and rules. Both of 
these expansive powers erode Bureau accountability for achieving 
uniform rules for all consumers to be protected by and all providers to 
abide by. Even if one can make the Bureau answerable for its market 
defining rules, neither Congress, nor bankers nor customers can rely on 
such rules remaining intact in the States where they all reside. This 
broad delegation of legislative license, interpretive power and 
prosecutorial discretion--without adequate check by either the Bureau 
or other Federal banking agencies--exposes all banks to uncertain 
market expectations, compounded compliance obligations, and potentially 
crippling litigation risk.
    Accordingly, ABA recommends that Congress consider three possible 
constraints on these threats to consistent consumer protection 
standards consistently applied:

    Adopt statutory language prohibiting States from imposing 
        additional consumer protection requirements without meeting the 
        same cost benefit, credit access and burden reduction 
        objectives that Dodd-Frank imposes on the Bureau (and 
        demonstrated with the same level of data analysis expected of 
        the Bureau).

    Adopt statutory language precluding prudential regulators 
        or enforcement authorities from establishing rules, guidance, 
        supervisory expectations or prosecutorial actions that extend 
        obligations with respect to consumer financial products or 
        services beyond requirements contained in rules of the Bureau.

    Adopt statutory language limiting State Attorneys General 
        from seeking remedies of any conduct by a covered person 
        occurring prior to the last exam report date of any exam by the 
        Bureau or a prudential regulator.

    The premise of the Bureau of Consumer Financial Protection was that 
it would result in a single set of rules of the road for consumers, 
industry and investors to abide by for the benefit of all. If we are to 
hold the Bureau accountable to this premise, we must hold accountable 
all those who derive authority from its existence to abide by the same 
rules of the road. To do otherwise--by allowing new rules to be written 
or applying new interpretations each time a State border is crossed--
would completely undermine the reliance of all citizens on the Bureau's 
rules.

Conclusion
    The banking industry fully supports effective consumer protection. 
Traditional FDIC-insured banks have a long history of delivering 
consumer financial services right the first time and banks have the 
compliance and top-down culture to prove it.
    It is an inescapable fact that fair service to our banking 
customers is inseparable from sound management of our banking business. 
Yet despite this axiom, the Dodd-Frank Act erected a Bureau that 
divides consumer protection regulation from safety and soundness 
supervision. It is for this reason that Congress should act to enhance 
the accountability of the Bureau by dealing with the problems brought 
about by the extensive new powers of the agency, the unfettered 
authority of the Director to impose new rules, the separation of 
consumer protection from financial institution safety and soundness, 
the gaps in regulating non-banks, and the expanded and unaccountable 
enforcement authority of prudential regulators and State attorneys 
general.
    My bank's philosophy--shared by banks all across this country--has 
always been to treat our customers right and do whatever we can to make 
sure that they understand the terms of the loans they are taking on and 
their obligations to us. We will continue to do this, but now there 
will be many new hurdles that we will have to jump to serve our 
customers' most basic needs that will inevitably add cost, time, and 
hassle for my customers.
    Banks are working hard every day to make credit and financial 
services available. Those efforts will be made more difficult by the 
hundreds of new regulations expected from the Dodd-Frank Act. I worry 
about how my bank will handle all the new compliance obligations; I 
cannot imagine how the median size bank with $156 million in assets and 
37 employees can handle this truckload of new compliance obligations. 
Even more troubling is what it means for my community. The more time 
bank personnel devotes to parsing regulatory requirements, the less 
time they can devote to the financial and credit needs of bank 
customers. Thus, it is critically important that
    Congress be vigilant in overseeing the regulatory actions of the 
Bureau and other rules stemming from the Dodd-Frank Act to assure they 
do not restrict access to responsive financial products by responsible 
American families.
                                 ______
                                 
                  PREPARED STATEMENT OF LYNN DRYSDALE
  Managing Attorney, Consumer Unit, Jacksonville Area Legal Aid, Inc.
                             July 19, 2011

Introduction
    Chairman Johnson, Ranking Member Shelby and Members of the 
Committee, thank you for the opportunity to bring the consumer 
perspective to the Enhanced Consumer Finance Protections: After the 
Financial Crisis. Specifically I hope to illustrate just a small part 
of the problems consumers face which renders the Consumer Finance 
Protection Bureau (``the CFPB'') an essential tool to level the playing 
field between consumers and businesses governed by the authority of the 
Bureau. My testimony represents a snapshot of the problematic 
experiences of consumers, particularly older Americans and members of 
the armed services I represent in Florida. I will share with you 
stories of individuals who have suffered because of our failed 
financial regulatory system. Their stories demonstrate a need for a 
strong independent Consumer Financial Protection Bureau that has both 
rule writing and enforcement power over banks and non-banks that 
provide financial products.\1\ I have testified before the Federal 
Trade Commission, the Federal Reserve Board and before this Committee 
in 2006 when I spoke in support of the Department of Defense Report on 
Predatory Lending Practices Directed at Members of the Armed Forces and 
Their Dependents. The Senate passed the Talent-Nelson amendment to the 
John Warner Defense Authorization Act of 2007 in 2006 to prohibit 
predatory practices and rein in the fees charged in several types of 
consumer finance transactions.
---------------------------------------------------------------------------
    \1\ Since 1988, I have been a consumer protection attorney with 
Jacksonville Area Legal Aid, Inc. and represent low-income consumers in 
the greater Northeast Florida area. I am a co-chair of the Board of 
Directors of the National Association of Consumer Advocates, chair of 
the Florida Bar Association's Consumer Protection Law Committee, teach 
mortgage foreclosure, debt collection and motor vehicle sales and 
financing litigation to attorneys all over Florida and nationwide, 
including the Judge Advocates in Newport News, Rhode Island. I am also 
an adjunct Consumer Law professor at the University of Florida College 
of Law.
---------------------------------------------------------------------------
    Today I will use the stories of the consumers I work for who could 
be assisted by the Bureau and recommend the full support of this 
Committee for the CFPB.

Why the Consumer Finance Protection Bureau is Important
    Times are difficult for many consumers, including consumers who 
prior to the financial crisis never considered themselves vulnerable to 
illegal, deceptive or unfair practices of finance companies, lenders, 
debt collectors or credit reporting companies. This new class of 
targeted consumers is added to the older Americans and members of the 
armed services who have historically been targeted for abuse. Existing 
bank regulators have clearly failed to design and enforce fair rules of 
the road for credit, leaving these consumers exposed to tricks and 
traps on high cost loans and abusive mortgages that cost families their 
homes. With so many consumers being targeted and access to the courts 
being diminished it is important that a strong, unified Bureau focused 
on protecting consumers.
    The CFPB should have broad authority to write rules, supervise a 
wide variety of financial institutions, and enforce Federal consumer 
protection laws--all with the ultimate goal of ensuring a more fair and 
equitable financial playing field for consumers.
    As consumer advocates have previously shared with this Committee, 
the idea of a Federal consumer protection agency focused on credit and 
payment products has gained broad and high-profile support because it 
targets the most significant underlying causes of the massive 
regulatory failures that occurred in recent years. Federal agencies did 
not make protecting consumers their top priority; ignored many 
festering problems that grew worse over time; when acting to protect 
consumers (and they often did not), the process was cumbersome and 
time-consuming. In the end, agencies often did not become involved to 
stop some abusive lending practices until it was too late. Finally, 
regulators were not truly independent of the influence of the financial 
institutions they regulated.\2\
---------------------------------------------------------------------------
    \2\ For additional background on why there is a need for a strong 
Consumer Finance Protection see Testimony of Travis Plunkett, 
Legislative Director, Consumer Federation of America, before the Senate 
Committee on Banking, Housing and Urban Affairs, (July 14, 2009) 
available at: http://banking.senate.gov/public/
index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=9a
56da23-60cb-4fd0-ac04-f94ead7d1859&Witness_ID=18d80e15-8970-49d1-8867-
54b81d389272.
---------------------------------------------------------------------------
    In my testimony, I will highlight three main points:

  1.  The range of consumers being negatively affected by aggressive 
        lenders with a wide variety of high cost and risky consumer 
        financial products has grown exponentially during the financial 
        crisis.

  2.  Victimized consumers are not being protected by most States, 
        either because high cost lenders have crafted products which 
        ostensibly take them out of the regulatory power of the State 
        small loan laws and claim that State credit laws do not apply 
        to them. Also, lenders are moving to the Internet to provide 
        illegal products behind the veil of secrecy, putting them 
        beyond the grasp of many State regulators with diminishing 
        resources to pursue them. Many loan products on the market 
        today are grossly one-sided and include unilateral, mandatory 
        arbitration clauses utilized to deprive consumers of their day 
        in court and to limit their remedies.

  3.  Because of the restrictions on availability of new credit, 
        creditors and debt collectors are stepping up efforts to 
        collect debt through illegal, unfair or deceptive means in my 
        clients' stories.

Range of Consumers Hurt by Predatory Lending Increased During Financial 
        Crisis
    American consumers did not create the financial crisis with 
products such as no document mortgage loans, triple-digit interest rate 
loans secured by automatic access to a consumer's bank account or motor 
vehicle, and spurious open-ended credit. Nor did they profit from 
steering homeowners who qualified for safe, affordable mortgages into 
exploding adjustable rate loans. But consumers are paying the price of 
unfair and irresponsible financial products through record 
foreclosures, rising unemployment rates, abusive debt collection 
practices and a struggling economy. Even in good economic conditions, 
consumers are always under fire, whether it's from lending scams or 
deceptive marketing. The need for effective consumer protection 
regulation and enforcement is always there. However, the current 
financial crisis seems to emphasize this need even more as it has 
become a breeding ground for increased deceptive and abusive practices 
by lenders.

Recent Consumer Protection Laws, particularly those intended to protect 
        Active Duty Servicemembers and their Families are being ignored 
        or coverage is being evaded by carefully crafted loan products.
    Military servicemembers are particularly affected by these 
deceptive and abusive practices. After President Bush signed the 
Military Lending Act (MLA), implemented by rules adopted by the 
Department of Defense, many consumer advocates were encouraged that 
those fighting for our country would be protected from abusive lending 
and collection activities. Unfortunately, lenders tweaked their product 
designs to get around the DOD covered credit definitions or are 
ignoring the law and are still charging triple digit interest rates and 
calling with threats of court martial and imprisonment for failure to 
pay these exorbitant terms. For example, I mentioned a servicemember in 
my testimony 5 years ago who was being charged 1,000 percent interest 
rates. He spent 5 years faithfully attempting to pay off $10,000 worth 
of payday loan debt incurred as a result of his wife's illness and 
still owed $12,000. The lender kept the servicemember paying with 
threats of court martial and imprisonment. A year after the MLA became 
law reducing the interest rate caps to 36 percent for new loans he was 
still getting threats of court martial, loss of security clearance and/
or imprisonment despite the prohibitions in State and Federal consumer 
collection protection laws which have historically prohibited this 
conduct for all debt collectors.
    Even in connection with new loans to active duty servicemembers, 
these same lenders are still putting borrowers' bank accounts at risk 
and charging triple digit interest rates well in excess of the 36 
percent interest rate cap and are still threatening criminal 
prosecution. This and other lenders provide their loans through the 
Internet to avoid any type of State or Federal regulation. They are 
also taking borrowers' wages before they obtain judgments against the 
borrowers by requiring its borrowers to sign documents allowing an 
assignment of wages in violation of 16 C.F.R.  444.2(a)(3). This 
company and many others just like it avoid State credit protection 
laws, State and Federal debt collection laws and FTC regulations by 
operating on the Internet. These companies also avoid the consequences 
of their illegal behavior by including unilateral, mandatory 
arbitration clauses in their contract.
    Other payday lenders get around the ban on loans secured by checks 
or automatic access to a borrower's bank account as well as interest 
rate caps imposed by the MLA and State credit protection laws by 
crafting their loan products as open-ended transactions or by setting 
their loan terms at greater than 180 days. These lenders charge triple-
digit interest rates, require electronic access to borrowers' bank 
accounts as security for the loan, and claim they do not have to 
provide the cost of credit information required by the Federal Truth in 
Lending Act, 15 U.S.C. 1601, et seq. in payday loans by merely 
pretending the borrower has the right to use the loan like a line of 
credit when in fact no further sums will be provided or by setting the 
loan term for in excess of 181 days rendering the loan outside of the 
protections of the MLA.
    An example of a loan product targeted to servicemembers is an 
installment loan with a loan company with whom I've worked. It stated 
its interest rate was 32.77 percent which would appear to be within the 
MLA cap and many State small loan rate caps. However, the lender set 
the loan term to fall outside the MLA protections and is, therefore, 
ostensibly not covered by the MLA. The stated interest rate also did 
not include charges for a required insurance product which if included 
in the interest rate calculation would bring the rate to 66 percent 
rendering the loan criminally usurious in Florida where many borrowers 
are located. In addition to using the loan term to avoid the MLA 
interest rate cap, this particular lender claimed to be a subsidiary of 
a national bank.
    Under Dodd-Frank, this type of bank subsidiary would not be able to 
use the National Banking Act to evade State law consumer protection 
laws. Dodd-Frank ends preemption for bank operating subsidiaries by 
reversing Watters v. Wachovia Bank \3\ and the regulation Watters 
upheld. This ``anti-preemption'' provision of Dodd-Frank is important 
to all consumers, including those who are not covered by the MLA such 
as military veterans and older Americans.\4\ National Banks and their 
subsidiaries can no longer successfully claim to be exempt from 
application of State consumer protection laws by hiding behind the 
National Banking Act, 12 U.S.C.  85.
---------------------------------------------------------------------------
    \3\ 550 U.S. 1 (2007).
    \4\ Dodd-Frank  1044, 1046.
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    Automobile title loans were also one of the problematic products 
listed in the Department of Defense Report on Predatory Lending 
Practices Directed at Members of the Armed Forces and Their Dependents. 
Now even after the passage of the MLA and in violation of State law, 
lenders still provide triple-digit rate automobile title loans and 
secure loans with the title to the borrower's vehicle, a practice 
prohibited by the Military Lending Act. A family's vehicle is probably 
their most valuable asset and this type of loan puts the vehicle at 
serious and unnecessary risk of repossession for a loan a fraction of 
the value of the vehicle owned by the borrower.
    For example, Mr. B used the free and clear title to his truck as 
security for a $2,200 loan. The stated interest rate is 24 percent but 
he is charged $900.00, more than a third of the value of the loan for a 
``collateral damage waiver.'' This fee is kept by the lender, is 
required to get the loan and provides no benefit to the servicemember 
who is paying $4,712.88 for a $2,200.00 loan. When he missed a payment, 
the truck was repossessed meaning he lost his truck and the equity he 
had in the truck. The lender will only provide a loan in an amount 
equal to a third to a fourth of the value of the truck so the lender 
received months of payments plus the excess equity in the truck. The 
lender avoided the application of the MLA by extending the term of the 
loan and avoided State lender laws by illegally disguising interest as 
the fake insurance product.
    Another type of loan highlights the ineffectiveness of the present 
regulatory structure and the need to enforce Federal Truth in Lending 
and VA pay and pension laws intended to protect Veterans who have 
served our country. Companies have been stealing veterans' pensions 
through high cost loans branded as veterans' pensions loans. These like 
other loans targeted to servicemembers and veterans have names that 
make them appear to be affiliated or approved by the military and have 
flags and military symbols in their advertisements. A veteran is 
offered the right to ``sell'' his or her right to receive future 
benefits. These loans are structured as sales to avoid Truth in Lending 
and cost of credit laws and to hide the true costs of the loans which 
can run into the triple digits. Therefore, veterans lose the right to 
receive their pensions and pay exorbitant interest rates for the right.

The Bureau will Provide a Unified and Focused Entity To Address the 
        Many Facets of the Mortgage Foreclosure Crisis
     Much has been said about the mortgage foreclosure crisis. These 
issues have many layers. I've heard story after story of active duty 
servicemembers losing their homes while they are stationed overseas and 
State-side families who are struggling with the threat and reality of 
eminent foreclosure while their spouses are overseas. For example, we 
have received requests for assistance from military families who are 
being evicted from their homes by companies that have bought their home 
at foreclosure sales when the family did not even know their home was 
in foreclosure.
    I know Congress is attuned to these issues based upon a recent 
forum relating to illegal foreclosures against U.S. Servicemembers and 
their families held by the Senate Committee on Commerce, Science and 
Transportation and the House Committee on Oversight and Government 
Reform on July 12, 2011. It is not uncommon for our office to hear of 
stories like those of Army National Guard Warrant Officer Charles 
Pickett and Army Captain Kenneth Gonzales. Foreclosures are proceeding 
when borrowers are not in default and without their knowledge while 
they are deployed for service to our country. The Director of the 
Office of Servicemember Affairs, Hollister K. Petraeus spoke of the 
importance of the CFPB role in preventing these abuses. Our office sees 
real life examples of servicemembers fighting insurgents in Afghanistan 
and fighting Wells Fargo in an illegal foreclosure in the States or 
coming home to find their homes foreclosed upon and boarded up. Members 
of the military are supposed to receive special notice and delay of the 
foreclosure proceedings but many of them never receive this notice. It 
is not clear which agency if any is addressing these loan servicing 
issues harming our most deserving consumers.
    I have many veteran clients with FHA and VA loans who are entitled 
to specific pre-foreclosure default servicing before a mortgage 
foreclosure is filed. Borrowers who have paid a premium for an FHA loan 
or served our country in order to be eligible for a VA loan do not get 
the assistance required by Federal law and their mortgage loan 
contracts to help them avoid foreclosure. For example, I represent an 
older American widow with a VA loan she and her deceased Veteran 
husband obtained. Instead of working with her, the company servicing 
her loan sent a blizzard of form letters and either ignored her request 
for a loan modification or continuously lost her paperwork when she 
tried to follow the loss mitigation procedures. Her loan was sent to a 
law firm to foreclose. When the servicer did not have the assignments 
needed to foreclose, their attorney created and signed a fake 
assignment of mortgage to make it appear the company owned the loan 
when it did not. In fact the servicer did not own the loan until more 
than a year after the fake assignment was prepared and signed. This 
widow will lose her home as a result of the servicer's failure to 
comply with VA requirements contained in the note and mortgage and 
based upon fake documents. This also is the experience of a veteran who 
has been receiving the ``lost document'' run around for almost 2 years 
in an effort to utilize the VA protections to which he is entitled 
because of his service of our country.
    This failure to evaluate loan modification documents or to 
continuously lose the documents is one of the main reasons why the HAMP 
program has not had the intended effect of helping all consumers save 
their homes. The use of fake documents is also rampant. I have clients 
who are being sued by two different companies represented by two 
different law firms for the same loan. Both companies cannot own her 
loan but each continues to add foreclosure related fees to the amounts 
she owes. Servicers also have no incentive to modify loans because they 
are being paid in full by the loan guarantors Fannie Mae, Freddie Mac 
and Ginnie Mae. In other words our children, when they reach adulthood, 
will be paying off the debt created by the same entities that created 
the mortgage aspect of the financial crisis. These entities are being 
paid up front all the expense of all tax payers while homeowners are 
losing their homes, neighborhoods are deteriorating and homes sit 
vacant by the thousands further depressing the market.
    Because loan servicers are not complying with the loss mitigation 
requirements imposed by the Servicemember Civil Relief Act and with 
FHA, VA, Fannie Mae, Freddie Mac loans and loans held or serviced by 
entitles which received TARP funds, borrowers in trouble are turning to 
foreclosure assistance companies that offer to help keep consumers from 
losing their homes. These companies promise to stop foreclosures and 
collect hundreds if not thousands of dollars from homeowners already 
deep in debt. This money could be going toward the delinquency in the 
home payments but instead is taken by these foreclosure relief 
companies who pocket the money and move on to the next state of 
victims. The Federal Trade Commission has already said they will not be 
pursuing enforcement actions against these companies. Because of tight 
State budgets and the interstate nature of these companies, State 
regulators do not have the resources to address these companies preying 
on foreclosure victims.

The Bureau is Needed To Address Increased Illegal Debt Collection
        Activity
    I have also noticed an increase in aggressive debt collection 
tactics. I have several clients who are being sued by debt buyers for 
debt that has already been repaid, was forgiven through litigation or 
discharged in bankruptcy. Because credit is more difficult to obtain, 
debt collectors are being more aggressive in trying to collect old 
debt.
    The creation of false documents to support debt collection is not 
limited to mortgage foreclosure. It is also common, if not the norm, 
for debt buyers to create fake documents because they do not have the 
paperwork to prove they own the debt or the amounts owed. When they buy 
the debt, they only pay pennies on the dollar and they do not get the 
paperwork needed to back up their claims.

Not Only Are Our Homes Not Safe From Big Banks but Door-to-Door Sales 
        and Finance Companies Seek us out for Illegal Products
    Door-to-Door sales provides the delivery system for another form of 
false open-ended credit. The sales staff canvas neighborhoods including 
those whose demographics are primarily older American consumers, 
neighbors surrounding military bases and other vulnerable consumers to 
offer products such as water purifying equipment, solar panels and 
security systems. They offer on-the-spot financing. Sales staff use 
scripts and have a specialized routine most likely to trick homeowners 
into buying products financed by false open-ended credit. For example, 
I have represented over a dozen older American homeowners. Each time 
the story is the same, the salesman shows up at their house with a 
water testing kit, draws some tap water, places a tablet in the water 
and watches with the older American homeowner as their water clouds up. 
Then the salesman adds another tablet and the water magically clears. 
The salesman then explains the cloudiness means the homeowners' water 
is dangerous to their health and that they can save their health and 
save money with water conditioned with their system. They usually will 
not leave until the consumer signs on the bottom line, spending hours 
at a time at the consumer's home.
    The Truth in Lending cost of credit disclosures are not provided 
until after the equipment is installed. It is not until the disclosures 
are provided that the homeowner learns the payments are much more than 
they can afford. If there is a default on the loan, the lender sues the 
older American homeowner in a city which is a 4-hour drive from the 
consumer's home. They cannot afford to travel to court or to hire an 
attorney and a judgment is entered against them.
    These companies also target young military families like clients of 
mine with little children and tell them their water is dangerous and 
will cause cancer if not treated. Salesmen refuse to leave until the 
contract is signed, staying through the consumers' dinnertime while 
their children want dinner, install the equipment and then days later 
provide the financing contracts. The salesman promised the interest 
rate would be really low because of their good credit and when the 
contract is presented; after the equipment is installed the interest 
rate is 17 percent which was significantly higher than the low rate 
they were promised because of their good credit score. The airman has 
to pay because he knows if he does not he may lose his security 
clearance has to pay even though the equipment makes their water taste 
bad and leaves their clothes yellow.

Why We Need a Consumer Financial Protection Bureau
    Unfortunately, there are too many consumer victim stories to tell 
and this is why we need a strong Consumer Financial Protection Bureau 
(CFPB) with full authority to protect consumers, particularly our most 
vulnerable members of society. The CFPB will help protect consumers 
from many of the fraudulent, abusive, and deceptive practices I have 
shared with you this morning. Notably:

    The CFPB will put teeth into predatory lending laws:

      Predatory lenders often get away with their deceptive 
        practices because the Federal Trade Commission (FTC), which 
        regulates debt collectors and mortgage brokers, has very few 
        attorneys devoted to consumer protection and lacks basic tools 
        such as rulemaking and oversight/monitoring authority. In the 
        past 5 years, the FTC has filed only one case against a 
        mortgage broker. The CFPB will strengthen the enforcement and 
        regulation of laws such as the Truth in Lending Act.

      The Federal Deposit Insurance Corporation (FDIC) and 
        Federal Reserve Board regulate predatory lending practices, but 
        both are also charged with promoting the stability of the banks 
        that make loans. By avoiding this kind of conflict of interest, 
        the CFPB would increase the likelihood of fraudsters getting 
        caught.

    The CFPB will combat abusive debt collectors and debt 
        buyers:

      Debt collectors and buyers also ignore the law without 
        penalty. Despite nearly 500,000 complaints under the Fair Debt 
        Collection Practices Act (FDCPA) in the past 5 years, the FTC 
        has filed only 8 cases against debt collectors. The CFPB would 
        devote more resources and help strengthen enforcement, so that 
        debt collectors no longer think they can get away with shady 
        practices that they know are illegal.

      Currently, no Federal law or regulation requires debt 
        buyers to keep records of what they are buying or even to 
        possess original documentation. By consolidating and 
        streamlining rulemaking and enforcement of consumer protection 
        laws, the CFPB could identify this and similar loopholes in 
        consumer protections and promote new, necessary protections.

    The CFPB's launch is only a few days away; it vital that we provide 
them with the necessary support to be a successful consumer watchdog 
agency. Thank you for the opportunity to testify today. If you have any 
questions or comments regarding this testimony, please feel free to 
contact me.
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 RESPONSE TO WRITTEN QUESTION OF SENATOR REED FROM MICHAEL D. 
                            CALHOUN

Q.1. There are some who support loan modifications that are 
achieved through interest rate reductions, term extensions, or 
the forbearance of principal but oppose loan modifications that 
come in the form of principal reductions.

   LCan a loan modification that involves principal 
        reduction maximize value for the bank, investor and 
        homeowner? Could you explain how this might be the 
        case?

A.1. Principal reduction is an important tool for avoiding 
unnecessary foreclosures and improving our overall housing 
market. Studies, such as those by Amherst Securities, show that 
if homeowners are deep underwater on their loans, owing far 
more than their home is worth, the probability is high that the 
home will go into foreclosure. This is a loss for not only the 
homeowner, who is forced to leave the house, but also the 
investors who own the loan or mortgage security, as houses are 
selling for very low prices at foreclosure sales, and the 
investors receive far less than they would receive from a 
modified loan with a reduced principal. In addition, these 
avoidable foreclosures are adding to the oversupply of 
foreclosed houses that continue to drag down the housing market 
and the overall economy. Since both the homeowner and the 
investor benefit from a responsible loan modification, a number 
of servicers have begun programs that provide principal 
reduction as part of their loan modification procedures. One 
program, for example, offers the homeowner reduced principal in 
exchange for an agreement to share with the investor a portion 
of any home appreciation in the event the house value goes up 
and the house is sold. Several structural impediments 
associated with the securitization process discourage optimal 
use of principal reductions. These include the general 
misalignment of servicer incentives with the investors' 
interests, as well as conflicts of interest for servicers who 
also own second mortgages on the same property.

              Additional Material Supplied for the Record

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