[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
__________
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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
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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
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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.
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\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.
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\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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