[House Hearing, 114 Congress] [From the U.S. Government Publishing Office] THE FDIC'S TARGETING OF REFUND ANTICIPATION LOANS ======================================================================= HEARING BEFORE THE SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED FOURTEENTH CONGRESS SECOND SESSION __________ MARCH 16, 2016 __________ Printed for the use of the Committee on Financial Services Serial No. 114-79 [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] U.S. GOVERNMENT PUBLISHING OFFICE 23-887 PDF WASHINGTON : 2017 ---------------------------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Publishing Office, http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free). E-mail, [email protected]. HOUSE COMMITTEE ON FINANCIAL SERVICES JEB HENSARLING, Texas, Chairman PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking Vice Chairman Member PETER T. KING, New York CAROLYN B. MALONEY, New York EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas BILL POSEY, Florida WM. LACY CLAY, Missouri MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts Pennsylvania DAVID SCOTT, Georgia LYNN A. WESTMORELAND, Georgia AL GREEN, Texas BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota ROBERT HURT, Virginia ED PERLMUTTER, Colorado STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama MICK MULVANEY, South Carolina BILL FOSTER, Illinois RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan DENNIS A. ROSS, Florida PATRICK MURPHY, Florida ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona ANDY BARR, Kentucky JOYCE BEATTY, Ohio KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington LUKE MESSER, Indiana JUAN VARGAS, California DAVID SCHWEIKERT, Arizona FRANK GUINTA, New Hampshire SCOTT TIPTON, Colorado ROGER WILLIAMS, Texas BRUCE POLIQUIN, Maine MIA LOVE, Utah FRENCH HILL, Arkansas TOM EMMER, Minnesota Shannon McGahn, Staff Director James H. Clinger, Chief Counsel Subcommittee on Oversight and Investigations SEAN P. DUFFY, Wisconsin, Chairman MICHAEL G. FITZPATRICK, AL GREEN, Texas, Ranking Member Pennsylvania, Vice Chairman MICHAEL E. CAPUANO, Massachusetts PETER T. KING, New York EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina KEITH ELLISON, Minnesota ROBERT HURT, Virginia JOHN K. DELANEY, Maryland STEPHEN LEE FINCHER, Tennessee JOYCE BEATTY, Ohio MICK MULVANEY, South Carolina DENNY HECK, Washington RANDY HULTGREN, Illinois KYRSTEN SINEMA, Arizona ANN WAGNER, Missouri JUAN VARGAS, California SCOTT TIPTON, Colorado BRUCE POLIQUIN, Maine FRENCH HILL, Arkansas C O N T E N T S ---------- Page Hearing held on: March 16, 2016............................................... 1 Appendix: March 16, 2016............................................... 29 WITNESSES Wednesday, March 16, 2016 Gibson, Fred W., Jr., Acting Inspector General, Federal Deposit Insurance Corporation.......................................... 4 APPENDIX Prepared statements: Beatty, Hon. Joyce........................................... 30 Gibson, Fred W., Jr.......................................... 31 Additional Material Submitted for the Record Green, Hon. Al: FDIC Office of Inspector General Audit Report dated June 2006, ``Challenges and FDIC Efforts Related to Predatory Lending''.................................................. 48 Waters, Hon. Maxine: Written statement of the National Consumer Law Center........ 89 THE FDIC'S TARGETING OF REFUND ANTICIPATION LOANS ---------- Wednesday, March 16, 2016 U.S. House of Representatives, Subcommittee on Oversight and Investigations, Committee on Financial Services, Washington, D.C. The subcommittee met, pursuant to notice, at 2:03 p.m., in room 2128, Rayburn House Office Building, Hon. Sean P. Duffy [chairman of the subcommittee] presiding. Members present: Representatives Duffy, Hultgren, Tipton, Poliquin, Hill; Green, Cleaver, Ellison, and Sinema. Chairman Duffy. The Subcommittee on Oversight and Investigations will come to order. Today's hearing is entitled, ``The FDIC's Targeting of Refund Anticipation Loans.'' Without objection, the Chair is authorized to declare a recess of the subcommittee at any time. Also, without objection, members of the full Financial Services Committee who are not members of the subcommittee may participate in today's hearing for the purposes of making an opening statement and questioning our witness. The Chair now recognizes himself for 5 minutes for an opening statement. A year ago this month, the Oversight and Investigations Subcommittee heard testimony from the Chairman of the Federal Deposit Insurance Corporation on its role in Operation Choke Point, which was a law enforcement initiative launched by the Department of Justice to choke off legal businesses from the financial system in an effort, they say, to combat consumer fraud. Although the FDIC has repeatedly denied that it was involved in the DOJ-named Operation Choke Point, it is clear from the investigative work of this committee and other committees that the FDIC cooperated closely with the DOJ in identifying so-called high-risk merchants and severing their ties with the financial system through its supervisory authority. Payday lenders, gun dealers, and other perfectly legal industries were targeted by the FDIC based on the Corporation's own decision about which industries were favorable and which industries were unfavorable. Regrettably, we are here today to learn about a separate but no less egregious effort by the FDIC to target refund anticipation loans (RALs) which, simply put, are loans based on anticipated Federal tax refunds. A recent Inspector General report of inquiry into the FDIC's supervisory approach to refund anticipation loans reveals a troubling pattern by the FDIC officials of targeting legitimate and legal activities through abusive and unfair regulatory practices. The I.G. uncovered this targeting when performing its audit on the FDIC's involvement in the Operation Choke Point initiative, which was released in September of 2015. Though only an executive summary of this extensive 180-page report of inquiry is being made public, I am concerned because the full report details actions of several FDIC employees who were also involved in the Operation Choke Point initiative. According to the Inspector General, the FDIC ``set in motion a series of interrelated events affecting three institutions that involved aggressive and unprecedented efforts to use the FDIC's supervisory and enforcement powers, circumvention of certain controls surrounding the exercise of enforcement power, damage to the morale of certain field examination staff, and high cost to the three impacted institutions.'' In an effort to cause the three banks it supervised to exit the RAL business, the FDIC's Washington office also used ``strong moral suasion'' in late 2009 and early 2010. The FDIC also used its powers to inappropriately reject underwriting plans and pressure field staff to assign lower ratings in safety and soundness examinations for at least two of the institutions, and used unprecedented examination resources to conduct an intrusive horizontal review when one bank continued offering RALs. The Inspector General's report also found that the FDIC's legal division believed that to proceed with such enforcement remedies against the banks represented high litigation risk, but the agency proceeded anyway. All three banks ultimately, and no surprise, exited the RAL business by April of 2012. After FDIC Chair Sheila Bair asked management to look into a complaint made by one of these targeted institutions, FDIC management did not accurately and fully describe the abusive behavior to Chairman Bair. This kind of behavior cannot and will not be tolerated by Congress and the American people who expect much more from their government and their government bureaucrats. I am concerned that the FDIC has repeatedly demonstrated a disregard for the rule of law, for the limitations of its power, and for the financial institutions that it is supposed to serve. The work of this subcommittee is an important way to hold the Corporation accountable and to expose its behavior to ensure that it is kept in check. That concludes my remarks. I will now recognize the ranking member of the subcommittee, the gentleman from Texas, Mr. Green, for 5 minutes. Mr. Green. Thank you, Mr. Chairman. And I thank the witness for appearing today. I would like to note from the outset that this was not an Operation Choke Point activity. My belief is that the witness will validate this contention. While there were things that, in the opinion of the I.G., merited his attention, this was not a Choke Point activity. This is something that occurred 5 years ago. It has been resolved and disciplinary action has been taken. I do think that there is some currency, some merit, some value, if you will, in examining this question of safety and soundness. And I say this because this is one of the reasons why the FDIC was engaged in the process. We have loans that are anticipation loans, loans that are predicated upon a person receiving a certain amount of tax relief in terms of a refund. And unfortunately, for many of these persons, most of whom are low-income, earned-income-tax- credit folks--I will explain that at a later time if I need to--most of these loans did not materialize as expected. Perhaps ``most'' is too strong, ``a good many.'' How many is a good many? Too many did not materialize as expected, so the anticipated return was sometimes less than what was expected, which means then that the bank has an obligation that may or may not be fulfilled. An interesting thing about the loans has to do with how they were generated. This is not a circumstance where a person comes into the bank and talks to a loan officer in the bank to acquire a loan. These loans were generated away from the bank in the office of some third person, some third party, and they were generated by persons who were tax preparers, for the most part. These persons, in a de facto sense, became the loan officer, the loan originator, the underwriter. I am not sure it is a good practice for banks to have this kind of circumstance exist, but for our purposes today we won't go too deeply into it. It did exist. And under these circumstances, information was acquired, but that information didn't always prove to be true and there were occasions when the loans were not honored in the sense that they weren't repaid. So there are some safety and soundness questions here. Should banks be allowed to allow others--``others'' meaning persons outside of the bank--to underwrite loans that they anticipate will be covered by a tax refund when we know that not all tax refunds as they are anticipated are fulfilled? For example, you are scheduled to get a tax refund of X number of dollars but you have child support you haven't paid. You have other obligations that can encroach upon that refund. So you don't get the refund of X number of dollars. You get X minus some number of dollars. And as a result we have a bank now that has a client who is required to pay this money, but it was assumed from the outset that the money would be immediately available, almost guaranteed by way of the earned income tax credit refund that a certain person might get. So my point is this. I think that there is much to be said about the I.G's report, but there is a lot to be said also about the kind of business that was being regulated and whether the safety and soundness of the banks were in question as a result of the types of businesses with which these banks were associating themselves. With that, Mr. Chairman, I will yield back the 2 seconds that I have. Chairman Duffy. The gentleman yields back his 2 seconds. I now want to welcome our witness, Fred Gibson. Mr. Gibson is the FDIC's Acting Inspector General. Welcome. In his role, he is responsible for all facets of the Office of Inspector General's mission, which broadly is to prevent and detect waste, fraud, and abuse affecting the programs and operations of the FDIC, and to keep the Chairman of the FDIC and the Congress fully informed. We thank him for his work and for being with us here today. He will be recognized for 5 minutes to give an oral presentation of his testimony. And without objection, his written statement will be made a part of the record. Once the witness has finished presenting his testimony, each member of the subcommittee will have 5 minutes within which to ask questions of our witness. Mr. Gibson, on your table, and you are well aware of this, you have three lights: the green means go; the yellow means you have a minute left; and the red means your time is up. We will try to remain true to the lights and the time, but I have a limited panel here today so we might show some generosity with the gavel. The microphone is sensitive. Please make sure you are speaking directly into it. And so with that, Mr. Gibson, you are recognized for 5 minutes to give a presentation of your statement. STATEMENT OF FRED W. GIBSON, JR., ACTING INSPECTOR GENERAL, FEDERAL DEPOSIT INSURANCE CORPORATION Mr. Gibson. Chairman Duffy, Ranking Member Green, and members of the subcommittee, thank you for the invitation to speak with the Oversight and Investigations Subcommittee today regarding our report on the FDIC's supervisory treatment of refund anticipation loans or RALs. Our work on RALs is an outgrowth of work we performed in response to an October 2014 request from 35 Members of the Congress concerning the FDIC's participation in the Department of Justice's Operation Choke Point. During early stages of Operation Choke Point the Department of Justice attached a list of businesses, referred to as a high-risk list, to subpoena seeking information from a variety of organizations, including some financial institutions. The high-risk list, derived from an FDIC publication, was at the heart of the concern surrounding Operation Choke Point and was the starting point for our review. In our audit, we assessed the FDIC's supervisory approach to financial institutions that conducted business with merchants on the high-risk list. We concluded that the FDIC's supervisory approach was within the broad authorities that it is granted under the FDI Act. However, the manner in which the FDIC carried out its supervisory approach was not consistent, not always consistent with the FDIC's written policy and guidance. Payday lending in particular fell into this category. We also concluded that the FDIC's participation, direct participation in Operation Choke Point was limited to a few communications from FDIC staff to DOJ employees at the time the DOJ's initiative was implemented. During the course of that audit, we began to learn of the FDIC's supervisory approach to institutions offering RALs. Broadly speaking, refund anticipation loans are products offered to individuals through tax preparers that enable individuals filing returns to obtain a portion of their refund immediately. RALs can be legally offered in most locations. Because they are short-term, high-rate loans, the FDIC considered them to have similarities to payday loans. RALs were not on the high- risk list and were not associated with DOJ's Operation Choke Point. However, we noted that the FDIC's approach to institutions offering this product appeared to be similar to those prompting the original congressional request regarding Operation Choke Point. As a result, we decided to perform additional work regarding RALs which led to the report that we are discussing today. This report contains information relating to open banks, supervisory matters, and information that is protected under the Privacy Act, which under the law cannot be publicly disclosed at this time. I have provided as my written statement the executive summary of the report accompanied by the executive summary of the FDIC's response in a separate letter from the Board of the FDIC. I respectfully request that that written statement be included in the record. Thank you, Mr. Chairman, for indicating you would do so. In summary, our review of the FDIC's supervisory approach to RALs strongly reinforced the concerns raised in our September 2015 audit. While the number of institutions offering RALs was limited, RALs were a nationwide product and the FDIC's supervisory approach affected both the product and all of the FDIC-regulated institutions offering it. With this report, we concluded that the FDIC's decision- making process and supervisory expectations need to be more transparent. We found that the goal to eliminate RALs as a product line and the FDIC's approach in reaching that goal was not in keeping with that transparency. Taking our two reports together we believe: that the FDIC needs to examine how the actions described in the report unfolded as they did; that they should establish more meaningful controls over the exercise of certain supervisory tools; and lastly that the FDIC should create meaningful appeal and oversight mechanisms with remedies for institutions should they be subject to abusive treatment. The FDIC should also consider how its culture played into the events which our report details. On March 11th, I received a memo signed by each of the Directors committing to review and consider the key issues raised in our report and to provide a status update on their efforts by June 30th. Thank you for the opportunity to present our work. I am happy to answer your questions. [The prepared statement of Mr. Gibson can be found on page 31 of the appendix.] Chairman Duffy. Thank you, Mr. Gibson. I now recognize myself for 5 minutes for questions. I just want to be clear. In regard to the refund anticipation loans and the three institutions that were subject to pressure by the FDIC, were those institutions facing safety and soundness issues based on their participation in refund anticipation loans? Was it a safety and soundness issue for those banks? Mr. Gibson. The FDIC would argue that there were safety and soundness issues associated with refund anticipation loans, so from that perspective, I think the answer is yes. Chairman Duffy. And what was their argument? Mr. Gibson. I'm sorry? Chairman Duffy. What was their argument? Mr. Gibson. The argument shifted over the course of time depending upon the time that we are talking about. There were questions that the-- Chairman Duffy. Questions that either it was a work-in- progress, an argument-in-progress, depending on-- Mr. Gibson. I think it was. The argument shifted from various issues surrounding safety and soundness of the product, the manner in which the product was underwritten. The last issue that was raised, for example, was the loss of something called the debt indicator, an IRS tool that would enable institutions to have certain information about the borrowers. Chairman Duffy. Were they finding a high default rate with these loans? Mr. Gibson. No. Chairman Duffy. So to the banks' safety and soundness, do they see a real threat to the safety of the bank? Mr. Gibson. I think there is an argument to be made that numbers don't lie. The fact is is that the institutions never experienced a loss rate on these loans that exceeded 2 percent. In fact, in most years the loss rate on the loan was at the loans was significantly less than that. And that is true. We looked from 2007 forward to 2011, and during that period the loss rates were all less than 2 percent. Chairman Duffy. So the FDIC might try to make the argument of safety and soundness, but the facts showed something quite different. Is that fair to say? Mr. Gibson. The performance of the loans would suggest that there wasn't that much risk. Chairman Duffy. And you didn't see deceitful behavior, fraudulent behavior from these banks with the clients that they served or customers that they served at a high rate did you? Mr. Gibson. We didn't go and really examine the individual programs of the banks to make a call on something like that. But in the course of our work, we didn't become familiar with any such problem, no. Chairman Duffy. Did the FDIC make that argument to you that there is fraud and deceit being used by the financial institutions with their customers? Mr. Gibson. They never argued that there was fraud or deceit being used, to my knowledge. Chairman Duffy. One of my concerns is you have a product that doesn't affect the safety and soundness of the bank arguably, and it appears that the customers who are using the products know what they are getting and understand the terms of what they are getting. And here we have the FDIC stepping in using their judgment for the free will of the American people, which gives a lot of us concern, not just in this program but also with Operation Choke Point. The Congress uses its moral judgment as Representatives of the people. We didn't give that authority to the FDIC. In your report, Anthony Lowe, the Regional Director of the FDIC Chicago office, and Mark Pearce, the Director of Consumer Protection, were mentioned, I think in our search, 300 times in a 180-page report. Obviously if you reviewed, and you did, the Choke Point reports by Congress, and you were involved in that as well, these are two common names that came up in Choke Point as well. Can you describe Mr. Lowe's and Mr. Pearce's roles in the refund anticipation loan investigation that you did? Mr. Gibson. I am reluctant to discuss too many details for privacy concerns, but let me think about what I can say. Mr. Lowe is the Regional Director of the FDIC in the Chicago region. All three of the institutions offering refund anticipation loans were in the Chicago region and accordingly were supervised by an examination staff that Mr. Lowe supervises. Mr. Lowe directs that examination staff and is responsible for it. Mr. Pearce was the head of the Division of Consumer Protection at the time of these events, and as such was responsible for oversight of the consumer protection side, the compliance side, as it were, of the examination function. Both played roles in the course of this: Mr. Lowe from the standpoint of the implementation of directions that were received from headquarters in Washington; and Mr. Pearce at a higher level with respect to the policy of the FDIC concerning refund anticipation loans, as well as its implementation. Chairman Duffy. I am almost done here, but in the refund anticipation loans we saw with Mr. Lowe's and Mr. Pearce's involvement with the prior investigations with Choke Point, we had a chance to review the e-mail correspondence when they were targeting short-term lenders. Have these two been reprimanded? Do they still work for the FDIC? Have they been fired? What do you know about their employment status? Mr. Gibson. Both are still employed by the FDIC. And I cannot speak to any personnel action that may have been taken. I wouldn't know about that. Chairman Duffy. And we are not surprised by that. My time has expired. The Chair now recognizes the gentleman from Missouri, Mr. Cleaver, for 5 minutes. Mr. Cleaver. Thank you, Mr. Chairman. Mr. Gibson, thank you for being here. These RALs are products that have been around now for a while, and my first question is, do you see anything inherently evil with RALs, particularly those which are issued from reputable companies? Mr. Gibson. I don't really know that I have a position on RALs, per se. They seem to me to be a loan product that is being offered to people and that is really what they boil down to. Mr. Cleaver. I am thinking about that, yes, that there are some benefits. One, of course, is that the recipient of the loan which is based on anticipated refunds is able to get that refund not only more quickly, but it would allow them to speed up some delayed attention towards financial challenges. And so, I guess I don't see them as being evil. And my other concern and that made more impact, the FDIC, than you as the Inspector General, but that every entity providing RALs is not designed to rip them off. And so I think we may be doing a disservice if we have a conversation that would suggest that everybody who is doing it is a rip-off agent. Now, at the same time, I do agree with your recommendations that you made, that the I.G. made. I think those are right on target. And I don't think a reputable entity would back away from that. I would think that all of the reputable institutions doing RALs would probably jump right on it and say that they can do this: better communications internally and externally; improved guidance to supervised institutions; and an enhanced appeals process, which is what you have recommended. If that is cleaned up, and I don't know if this ends up in your purview, if those recommendations are taken do you see that as the most significant step that could be taken in terms of allowing this to be something that we live with? I don't particularly like high interest rates, even though it is a high interest rate for a short period of time. The truth of the matter is some people do in fact need that. Mr. Gibson. Sir, I think with respect to the recommendations that we made, the FDIC's Board indicated that they would provide us with a status update by June 30th. They indicated they would take the key issues under consideration and advise us about exactly what they were going to do in response to that. At that point in time, we will take a look at them. And I hope that they will be responsive to the issues that we have raised and we can address it at that point in time. Mr. Cleaver. Do you have any idea about--my concern is ``Uncle Willie's tax preparation company.'' Uncle Willie is an automobile body shop owner when he is not in tax season and he is a good human being, but I am just wondering how many of those kinds of things were involved in offering the RALs on behalf of, let us say, small banks, community banks? Mr. Gibson. The three banks that offered the RALs had different programs under which they would take a look at the folks who were offering these things. And one of the risks associated with offering these sorts of products is the risk that the person offering the product to the public isn't going to follow the law. The banks all had mitigation programs. One bank had a fairly extensive audit program that went out and looked at a very large number of the people who were offering these in order to assure that they were complying with the law. They made suggestions directly to the board of directors of that institution. And the board of directors, as I understand it, took action in order to remediate any of the issues that came up. So there was attention that was being paid by certainly that institution, to what was going on with the individual RAL offerors, the people who were offering the loans. Mr. Cleaver. Yes, but there are some of the lenders who are also banks themselves, who have a subsidiary that are actually banks, but I think those are all at another level. I am sorry I have run over, Mr. Chairman. Chairman Duffy. The gentleman yields back. The Chair now recognizes the gentleman from Arkansas, Mr. Hill, for 5 minutes. Mr. Hill. Thanks, Mr. Chairman. I thank you and the ranking member for this interesting hearing. Mr. Gibson, thank you for being with us today. Do you know off the top of your head when reputation risk was added into the CAMELS rating process? My guess is sometime around the mid- 2000s or so, but I just--if you might know? Mr. Gibson. Sir, I do not know. I don't know that CAMELS particular, that reputation risk is necessarily--it is not an individual component of CAMELS. I am not too sure if that-- Mr. Hill. No, but it was added in the exam manual sometime in 2000 that everything had reputation risk, and that boards needed to review that, particularly in new product development areas. But you agree that banks are responsible for their own product development consistent with the laws and regulations? Mr. Gibson. Yes, sir, I do. Mr. Hill. And I think banks are supposed to offer products based on consumer needs, which we see in CRA. You get extra credit in community reinvestment exams if you show survey results of your consumer base, your neighborhoods. And so from surveys or word of mouth that banks get credit for doing product innovation and trying to meet consumer needs, you have seen that, I'm sure, in your work? Mr. Gibson. Yes, we have. Mr. Hill. And banks have obligations for consumer compliance and for fair dealing under a number of statutes. So it always concerns me when I hear these stories of a regional office or a particular examiner kind of going rogue on taking the place of the microprudential manager of the bank about what he or she should not do in the product development arena. And that was kind of the whole point that we were frustrated about with Operation Choke Point, because I had a lot of customers who had legitimate reasons for refund anticipation loans, such as paying off a credit card after Christmas, car downpayments, home improvement, or tuition payments for a semester. And so when we had these sorts of activities by our regulators we are actually contradicting. We are hypocritical. We are saying that consumers want these products like overdraft protection or prepaid cards or refund anticipation loans and then we don't facilitate banks offering them. In fact, we, through moral suasion and other ways, defeat that causing these consumers who want the product to migrate out to the unbanked, unregulated or under-regulated segments. So again, that is one of my biggest frustrations in this process. Do you think it is fair to say that if banks do product innovation, and their board of directors reviews that product, and that they offer it and they accept the reputational risk and the financial risk with it, that generally a bank should be able to innovate, based on your work at the FDIC? Mr. Gibson. Sir, I think as a general proposition that it is up to the bank to mitigate the risks that are associated with the product that it offers. As you pointed out, we create laws that establish requirements that banks are obligated to follow. And we supervise for the purpose of ensuring that they are doing so in a safe and sound manner, but ultimately, risk is the bank's job. Mr. Hill. Right. So from your review of Mr. Lowe's work, is it fair to say that the Chicago regional office was off the reservation on pursuing this compared to the national policy directives from Washington? Mr. Gibson. Sir, I think with respect to the RALs, what our work shows is that the national policy informed what Mr. Lowe did. I think that the national policy directed how the RALs should be supervised. The banks offering RALs should be supervised ultimately. Mr. Hill. But what is setting that apart from any other consumer loan product? I don't understand. If it is that we have measured loss ratio, if we are in compliance with all the lending consumer disclosure laws, and we are operating in a fair dealing manner, why is this loan or why is this product being separated out from any other consumer credit decision to finance a car or finance a new air conditioning system for a home? Why is this being singled out? It is because of somebody's idea that it is bad. Isn't that right? Instead of a financial-- Mr. Gibson. I really can't answer the question. And I am sorry to say that I can't because I can't point to something specific that says, this is why we are doing this with respect to RALs. The FDIC chose not to issue any guidance or policies with respect to that particular product. Now, there is general guidance associated with kind of the type of lending here and third-party risk concerns, but there is no specific guidance on this particular product which we can turn to that answers that question. Mr. Hill. Thank you. Thank you, Mr. Chairman. Chairman Duffy. The gentleman yields back. The Chair now recognizes the ranking member, Mr. Green, for 5 minutes. Mr. Green. Thank you, Mr. Chairman. Thank you, thank you. Sir, I believe you will agree that the FDIC has a mandate when it comes to safety and soundness. Is this correct? Mr. Gibson. Absolutely. Mr. Green. And I believe that their opinion is of great value when it comes to safety and soundness? Mr. Gibson. As do I. Mr. Green. And you would probably also concur and agree that while you can give opinions about the process, the ultimate judge of safety and soundness is the FDIC. Mr. Gibson. I'm sorry, sir; I am having difficulty hearing you. Mr. Green. Okay. While you may give an opinion about a process, the ultimate judge of safety and soundness is the FDIC. Mr. Gibson. Oh, absolutely. Yes, sir. Mr. Green. So any opinion that you give today, and you are a wonderful person. I love you. I know your mother does. But my mother loves me, but that is just your opinion. You don't have the mandate that the FDIC has. And by the way, you have not gone so far as to say that there was not a safety and soundness issue. That is a fair statement, isn't it? Mr. Gibson. Sir, I didn't say that there wasn't a safety and soundness issue, but what I would point out-- Mr. Green. Let me just do this. I will let somebody--my time is limited and perhaps someone else-- Mr. Gibson. That is fine. Mr. Green. --will work with you. Let us talk about the quality of these loans. You did not give an opinion about the quality of the loans. I think you sort of indicated that you had no position on the quality, the quality in terms of whether or not these are good products or bad products in the main? Mr. Gibson. That is correct. Mr. Green. So with the banks having the duty to effectively manage safety and soundness, they have to determine something with reference to quality because the banks also have one other mandate. I think you will agree that the banks have a duty to also have a consumer protection component. Let me strike that and make it that the FDIC has this duty. The FDIC has a certain consumer protection component associated with it. Is this true? Mr. Gibson. That is true. Mr. Green. Okay. So you have the FDIC with a consumer protection component. They have the safety and soundness component. They have a real concern, especially given how certain underwriting standards in 2008 created a crisis that had a domino impact across the globe. Now, this is not of that magnitude, obviously, but they still have that safety and soundness concern, and they still have to deal with consumer protection issues, which is why we have to now examine the product itself because the FDIC has to give some value judgment about these products. And clearly, some of these RALs had annual percentage rates of as much as 500 percent, some, not all, just some. Look, I agree that if you need money you have to be able to go in and get it if you need it. But I also think that we have to have some protections for consumers, especially low-income people. It is a balancing test that we have to engage in. So with the 500 percent, with the underwriting being performed off campus away from the bank, and you couple that with the opportunity for fraud, you indicated there were some systems in place, but you did not go out and evaluate each individual underwriter, did you? Mr. Gibson. Of course not. Mr. Green. Okay. So you really don't know. You really don't know what those individual underwriters were doing, do you? You don't know. Come on-- Mr. Gibson. Do I personally know? No, of course not. Mr. Green. Of course you don't. You are the I.G., and you didn't go out and examine them, so you don't know. I think that is a fair statement, isn't it? Mr. Gibson. It is a statement. Mr. Green. Okay. Well, it is a fair statement. You weren't there. You don't know. You didn't examine them. If you want to find a clever way to say I know, tell me what that clever way is? Mr. Gibson. I wouldn't say that it is a clever way, but what I would point out is this. One of the institutions was to receive, based on the examination of the bank, an overall rating of two. That is a pretty good CAMELS rating, particularly if I-- Mr. Green. Can you do this a little bit faster because I have another question for you? Mr. Gibson. That is fine. I will be as quick as I can. Mr. Green. Okay. Mr. Gibson. The point I would make is that the DCP examiners, the consumer protection examiners of the FDIC reviewed that rating for that institution that was offering RALs, and they concurred in it. Mr. Green. Okay. Let us do this. Mr. Gibson. They didn't have a problem with giving that rating. Mr. Green. I appreciate your commentary. Let us do this. Do you agree that there was not a culture at the FDIC with reference to this type of product--there was not a culture at the FDIC? There was not a culture as it relates to what they were doing in auditing these products? There was not a culture there? Do you agree with that? Mr. Gibson. I am not sure what you mean, sir. I'm sorry. Mr. Green. Do you agree that this was not widespread, that all of the employees were involved in some sort of conspiracy to go out and put an end to these products? Do you agree with that? Mr. Gibson. Sir, I think that this involved a decision that was made at a headquarters level and was passed down to the field to execute. And I don't think anybody else was involved in it. Mr. Green. So there is not a culture at the FDIC. And do you also agree that you have been working with the FDIC and they are going to give you some indications as to the corrective actions that have been taken? Mr. Gibson. Yes, they will. Mr. Green. Okay. Mr. Gibson. I believe they will. Mr. Green. And finally, and I thank you for allowing me to go over, Mr. Chairman, do you also agree that this was not, ``N-O-T'', not a part of Operation Choke Point? Mr. Gibson. Sir, Operation Choke Point was a DOJ program. Mr. Green. I am going to-- Mr. Gibson. And this wasn't part of a DOJ program, correct. Mr. Green. Okay. All right. So then that is another way of saying it was N-O-T a part of Operation Choke Point, right? Mr. Gibson. Yes. Mr. Green. Okay. Thank you. Chairman Duffy. The gentleman yields back the time he doesn't have. Mr. Green. It is done. Chairman Duffy. The Chair now recognizes Mr. Poliquin, from Maine, for 5 minutes. Mr. Poliquin. Thank you, Mr. Chairman. I appreciate it very much. Mr. Gibson, thank you very much for being here. I appreciate it. I am a business owner, and before I became State Treasurer of Maine a few years ago, and before serving in Congress, I was in the private sector my entire life. And do you know one of the things that absolutely gives me fits is that this big, strong arm of the Federal Government, and I could extend that and say State and local government also, that continues to put pressure on our employers. One of the things that we parents all want are better opportunities for our kids. More jobs, we want to make sure they are healthy and safe and they get a good education. The Competitive Enterprise Institute computes that a couple of years ago, and presumably in 2015 also, the total cost to our employers in this country for Federal regulations only, Mr. Gibson, not State, just Federal regulations is $1.9 trillion-- $1.9 trillion on our businesses in this country. Now our businesses, of course, pass along these costs to the folks who buy their products or their services. So we end up paying for all this overregulation. Now, overregulation is bad enough, and I bet I spend 25 percent of my time, Mr. Chairman, 25 percent of my time here in Congress, being here for a year, listening to business owners or folks who represent business owners with one simple request: ``Get the government off my back. I know how to make money. I am an entrepreneur. I know how to take risk, invest my own savings, grow the economy. In doing that, I will hire more people and I will pay you more.'' That is what we want. So now comes this Operation Choke Point or something similar to it. This is alarming. And Mr. Gibson, I am guessing as an I.G. you are also alarmed or you wouldn't be here. Now, we are in a free enterprise economy where if you have a legal business, you should be able to conduct that operation, that business legally and lawfully in this country. But all of a sudden we see, Mr. Chairman, a few months ago we had a hearing on this that--there is a list of companies that the Justice Department didn't like, when you sell firearms legally or fireworks legally or tobacco legally or alcohol legally. Let us go put pressure on the FDIC. Let us put pressure on the regulators to stop these businesses by choking off their credit. And now, we have a situation that I think is very concerning. It takes it to another level. Unless I am mistaken, Mr. Gibson, and maybe you can shed light on this, and I quote from the Deputy Director of Policy at the FDIC, ``Marty Gruenberg who runs the FDIC thought it was a strong document,'' referring to a document that was written a few years before, which is a guideline in dealing with these issues, ``I thought it was a strong document.'' But he stated that, ``his instinct was to wait to issue a document like this until after we--i.e., the FDIC--had taken strong specific action with one or more of our RAL lenders.'' He said he believes these lenders are recalcitrant and would ignore the directive. So in other words, these are the cops showing up at your door, arresting you, and then after they do that saying now we will issue a guideline on what the heck the law is. Am I getting this wrong? What am I missing here? Can you imagine the behavior of the Federal Government that is supposed to help our citizens in this country, help our businesses, help our families live better lives with more opportunity and more freedom? And now these regulators are saying we don't like your business, or worse, we will put pressure on you now and we will write the regulation after. What am I missing here, Mr. Gibson? Mr. Gibson. Sir, I believe that one of the issues that is raised by the facts that are contained in this report does relate to the transparency of the decisions that are being made by the government. I believe that the government should be able and should be willing to explain to people why it is it is doing what it is doing. And that in this particular case, the FDIC didn't achieve that end. Mr. Poliquin. Let us drill down there a minute, Mr. Gibson, if you don't mind, in my remaining time. We both agree, and by the way I salute you for your work, keep digging. Absolutely keep digging. And you operate independently within FDIC and I know you have that authority and that power. Do you think, and I think you just said you didn't, that they have not explained why they conducted themselves the way they did? Is that what I am hearing? Mr. Gibson. Sir, I think at the time there was no transparency really associated with the FDIC's reasons for taking the actions that it took. Mr. Poliquin. And why do you think today-- Mr. Gibson. That is what I am saying. Mr. Poliquin. --they have taken those actions, sir? Mr. Gibson. Pardon me? Mr. Poliquin. And why do you think today, they took those actions when they did? Do you have an opinion now? Mr. Gibson. The FDIC says that they believe that these products represented safety and soundness issues and consumer protection issues-- Mr. Poliquin. But does that just-- Mr. Gibson. --and were not appropriate for that. Mr. Poliquin. But does that justify putting pressure by regulators on a bank to shut this down and then afterwards issuing guidelines? Mr. Gibson. In my view, they should have explained why it was they felt that way. Mr. Poliquin. What is next? Do you see anything coming down the road? What is next? Buying a new pair of tennis shoes even if you don't like the color? What is next? Thank you, Mr. Chairman. I yield back my time. Chairman Duffy. The gentleman's time has expired. We are now going to go into a second round so that the gentleman from Maine will have another chance to continue his questioning or comments. And with that, the Chair recognizes himself for 5 minutes. I want to follow up, Mr. Gibson, on the points that were just made by Mr. Poliquin. This is stunning to me, the fact that this individual by the name of Marty Gruenberg, in essence in an e-mail, was saying that, let us go through enforcement first and we will talk about guidance in our financial institution letter later. This individual, Marty Gruenberg, is he a low-level individual at the FDIC? Mr. Gibson. No, sir. Chairman Duffy. Who is he? Mr. Gibson. Mr. Gruenberg currently is the Chairman of the FDIC. Chairman Duffy. The Chairman of the FDIC, a-ha. The Chairman is the one who is saying let us go through an enforcement measure and let us look at guidance at a later date. Did the guidance in the form of a financial institution letter, a field letter, ever come from the FDIC? Mr. Gibson. Specifically with respect to this product, no, sir. Chairman Duffy. And so, it is no wonder that the individuals involved in this report, Anthony Lowe and Mark Pearce, are still working for the FDIC. Frankly, they are following the directive of the Chairman of the FDIC. Their boss is in up to his armpits in the report that you provided to this committee. Yes? Is Mr. Gruenberg part of this? Did Mr. Gruenberg know what was going on? Mr. Gibson. Sir, that e-mail wasn't written by Mr. Gruenberg. It represents what someone believe that he said. Chairman Duffy. Right, but it represented a comment that Mr. Gruenberg made-- Mr. Gibson. Yes. Chairman Duffy. --about holding off. And Mr. Gruenberg, as the Chair, said, let us enforce first, in essence, and we will give guidance later, right? Mr. Gibson. Sir, that is what he reportedly said. Chairman Duffy. And did they do enforcement first? Mr. Gibson. Yes. Chairman Duffy. Yes, and frankly the guidance never came, correct, because everybody got out of the business? Mr. Gibson. That is correct. Chairman Duffy. No wonder changes haven't been made at the FDIC and Mr. Gruenberg was a part of Operation Choke Point. And as Mr. Poliquin indicates, we are in a situation where we have a nanny state. Mother government will tell us what products are good and bad for us. I think, as Mr. Cleaver indicated, we have people who find themselves in hard times, who might need to get a little money early from their tax return. They might have to get a short- term loan because their car broke down. Or the family pet got hit by a car and has to go to the vet, and they need to get short-term money. And we are turning everyone away from an opportunity to access cash in the short term because we think we know best or they think they know best in Washington. And if you can't turn to a bank or a short-term lender, where do you turn? You are going to turn to Uncle Vinny, not uncle, Mr. Vinny down the street. And he is not too kind when you don't repay. And this is concerning stuff. Let me ask you this. In regard to the banks that were involved in your investigation, was any pressure put on the banks with any downgrade of their CAMELS rating that you found? Mr. Gibson. Yes, sir, there was. Chairman Duffy. Could you explain that? Mr. Gibson. A downgrade of the CAMELS rating results in increased assessments. It can result in limitations on the bank's ability to engage in certain activities. In this case, the downgrade of an institution from a two to a three basically reinforced a prohibition on that institution participating in the purchase of assets of failed institutions, which was part of their business strategy. So, changes in CAMELS ratings cause significant effects on financial institutions. Chairman Duffy. I think I read somewhere in your report that the FDIC was concerned there might be a high litigation cost to going after these three banks that are referenced in the report. Is that correct? Mr. Gibson. They did. Chairman Duffy. And it is fair to say that when your CAMELS rating is reduced, due pressure is applied, and people get out of the business instead of litigating it? Is that fair to say? Mr. Gibson. Sir, I don't know what the reasons were that people got out of the business. We didn't speak with them. But it is possible. Chairman Duffy. It is possible. I would just note that you look at what is taking place and the fact that last year alone 80,000 pages of new rules and regulations have come from the Federal Government. It is hard enough to comply with the rules that are put out that people can try to read and try to comply with, but it is even harder when you have a regulatory body of our financial industry that tries to enforce first and give guidance later. We should know what the rules are. The rules of the game should be clear. We should all be able to understand them and we should all be able to follow them. This is frightening that we have another Act by the FDIC that goes through enforcement first and guidance, if we are lucky, second. I want to thank you again, Mr. Gibson, you and your team for the hard work they have put into this investigation, and I appreciate your willingness to testify before this committee. Mr. Gibson. Thank you, sir. Chairman Duffy. My time has expired. And I now yield to the gentleman from Missouri, Mr. Cleaver, for 5 minutes. Mr. Cleaver. Thank you, Mr. Chairman. I think I sufficiently raised the issues that I needed to raise. I would like to yield the balance of my time to the ranking member. Mr. Green. Thank you, Mr. Cleaver. I greatly appreciate your sharing your time with me. Sir, with reference to the chairperson of the FDIC, is it true that the statements that were called to your attention, and we want to make sure that this is clear on the record, were statements that we would probably call hearsay in some circumstances? Is that a fair statement? Mr. Gibson. Sir, that is fair. Mr. Green. I'm sorry. Say that again? Mr. Gibson. That is fair. Mr. Green. Yes, hearsay. Somebody heard it or they say that they heard it and they then repeat it. That is not the most reliable evidence. In fact, it would take some sort of exception to the hearsay rule for it to be admitted in court. Of course, we bend the rules around here, so that just about anything that we want to say gets heard. But I want to kind of defend his reputation because I believe him to be an honorable man. And I don't think that he had a circumstance wherein he had an outcome that he desired and hence any means necessary to get to the outcome was the methodology employed. I just don't see the evidence of that as it relates to him. Now, let us go to what I have here as intelligence. I have here an indication that in 2006, there was a report by the FDIC's Office of Inspector General. Are you associated with that office, sir? Mr. Gibson. Yes, I was. Mr. Green. You were? All right. And how long were you there? Mr. Gibson. I have been there for a long time. I have been with the FDIC Office of Inspector General since the sunset of the RTC, which was 1995 or-- Mr. Green. So it is fair to say that you would be familiar with this report? Mr. Gibson. I don't know if I would be familiar with a report from-- Mr. Green. Okay. The style of the report is, ``The Challenges and FDIC Efforts Related to Predatory Lending.'' Mr. Gibson. I am sorry, sir. I am not specifically familiar with the report at this time. Mr. Green. Not specific. I don't want you to have read it in its entirety, but have you heard of such a report existing? Mr. Gibson. It doesn't surprise me that we did one at all. Mr. Green. Okay. And would it surprise you to know that the report indicates that borrowers lose more than $25 billion annually due to predatory mortgages, payday loans, lending abuses involving overdraft loans, excessive credit card debt, and tax fund loans. Would it surprise you to know that is in the report? Mr. Gibson. No. Mr. Green. And if this is the case, we would then focus on the refund loans and someone would conclude that predatory lending, not being a good thing, that we ought to regulate these tax refund loans. I am not saying eliminate, but I am saying that the FDIC ought to regulate them to the extent that they don't create a part of this $25 billion in predatory mortgages and other loans as well. But that shouldn't be a part of that. Don't you agree? Mr. Gibson. Sir, I don't know if I can comment on that. Mr. Green. All right, I will accept that. Sir, I think that was a fair comment. I will accept that you won't comment on that. I will give my editorial, my commentary, and I think that we clearly expect the FDIC to deal with predatory lending. And we ought to make sure that we deal with these refund loans. Let me give you a case in point, what we will call a case in point. A person goes in to the tax preparer. The tax preparer says, okay, I can get you this refund and I will charge you a certain amount of money because I am going to help you get a refund. The tax preparer makes a mistake or two, not intentionally, and the person does not get the amount of loan refund, well, doesn't get the amount of refund that the loan is for. And as a result, these persons who make these loans, they sign agreements. And when they sign these agreements, there is language contained therein requiring them to have to pay for the amount that the loan was for even if the refund is a lot less. You agree with this, don't you? Mr. Gibson. I think so. Mr. Green. Okay. I think you are thinking right. And so given that they have to pay for that loan, and given that you have a person who is getting this loan with an earned income tax credit, needed the money right away, now we have a person who doesn't have the loan. He spent that money already. And then, they have this obligation that was not expected. That happened in these circumstances such that poor people, people who needed the money found themselves having to repay loans that they didn't expect to have to pay because of mistakes that were made in tax preparation. I yield back. Chairman Duffy. The gentleman yields back. The Chair recognizes the gentleman from Arkansas, Mr. Hill, for 5 minutes. Mr. Hill. Thank you, Mr. Chairman. Again just, I think, to the ranking member, the FDIC exam manuals and exam process cover all consumer lending. All consumer loans have to be in compliance with the statutes and regulations. There is just nothing per se that distinguished these loans from another kind of consumer loan in the exam process. So that is why I have been searching for the point of why they have been singled out and why this kind of a project or the Choke Point project is so off the norm from the FDIC or the DOJ's process. With that, Mr. Chairman, I yield the balance of my time to you, sir. Chairman Duffy. Thank you, Mr. Hill. I just want to be clear that, again, Mr. Gibson, the allegation wasn't being made on predatory lending, was it, in regard to your investigation? Mr. Gibson. Not that I am aware of. Chairman Duffy. And to Mr. Green's point, this was not about the FDIC regulating these loans. They were there to eliminate these loans. Is that what you found? Mr. Gibson. Sir, what our report found was that there was a decision that was reached that FDIC's supervised institutions should not be offering refund anticipation loans. So the goal was to get them out of refund anticipation loans. So that is the goal. Chairman Duffy. So you would agree that is not regulating, that is eliminating, correct? Mr. Gibson. It is not regulating. Chairman Duffy. Did you have a chance to talk to Chairman Gruenberg about this? Mr. Gibson. Sir, we have talked about it, yes. Chairman Duffy. Did he know that this elimination was taking place in regard to-- Mr. Gibson. Sir, I did not speak with him personally or directly about that. I really don't know. Chairman Duffy. Did someone on your team? Did someone on your team speak with Mr. Gruenberg? Mr. Gibson. Mr. Gruenberg really had little recollection of these events, sir. Chairman Duffy. And it is my understanding that the quote that was given by the Deputy Director of Policy from the FDIC, which stated that Mr. Gruenberg thought it was a strong document, meaning to fill, but stated that his instinct was to ``wait to issue a document like this until we had a strong, specific action with one or more of our RAL lenders,'' meaning he wanted to go through enforcement before regulation. Did you ask Mr. Gruenberg or did your team ask Mr. Gruenberg about that e-mail? Mr. Gibson. Yes, sir, and he didn't recall it. Chairman Duffy. So he didn't deny it, per your recollection? Mr. Gibson. He didn't recall. Chairman Duffy. So he didn't deny it? Mr. Gibson. Not that I know of. Chairman Duffy. Okay. And it is also fair to say that Mr. Pearce in an e-mail said, ``I want to see if we can achieve a resolution with Bank A,'' that was redacted, ``in the next month or two then follow up with something like this in the May timeframe before institutions get going on next year's product.'' Then you are following up with a fill. Is that correct? That is the-- Mr. Gibson. Sir, if it is quoted and I don't remember the specific language of the e-mail, but if it is in our report then that is exactly what the e-mail said. Chairman Duffy. And how many people did you interview in regard to your investigation? Mr. Gibson. We interviewed 25 or 26 people with respect to this and well over 100 in connection with the original audit we did in the Choke Point era. Chairman Duffy. So how high does this go? Who is making the decisions? Mr. Hill is a former banker who is obviously outraged by the actions of the FDIC. Who is in control of the FDIC? Does it go to the top or is there someone below Mr. Gruenberg who is making these decisions, whether it is in regard to Choke Point or it is in regard to the current topic refund anticipation loans? Mr. Gibson. I think with respect to refund anticipation loans, the only answer that I can give you is that the decision was made by no one, but it was made by everyone. I can't point to a specific decision-maker because I can't find anything that identifies somebody. The origin of the discussion in recent times, in 2008, was an e-mail from Chairman Bair or a question that Chairman Bair asked about why FDIC banks should be offering these products. It seems to have just moved forward from there. Chairman Duffy. But it is obvious that Mr. Gruenberg knew about the program, at least by way of some of the e-mails that you discovered. So my question is, is Mr. Gruenberg a negligent leader at the FDIC or is he complicit in all the bad behavior at the FDIC? Because it has to be one or the other. Either he is involved and complicit or he doesn't know what is going on, and someone else is running the FDIC and he has checked out. Mr. Gibson. Sir, I believe that Mr. Gruenberg was generally at least aware of what was going on with respect to RALs. What I can tell you is that members of the board did most of these briefings and received information from management and in a variety of different ways each of the inside members of the board was engaged in these activities. Chairman Duffy. My time from Mr. Hill has expired. The Chair now recognizes the gentleman from Minnesota, Mr. Ellison, for 5 minutes. Mr. Ellison. Right next door to you. Chairman Duffy. I know. You are my neighbor. Mr. Ellison. That is right. Well, anyway, thank you Mr. Chairman, and Mr. Ranking Member. I have long been critical of refund anticipation loans, RAL loans. These short-term high- cost bank loans secured by the taxpayers' expected tax refund are often predatory and expensive. I would say always, but there might be some that aren't and I just don't know about them. But all the ones I have ever seen have been bad. I believe in many cases they violate the Equal Credit Opportunity Act (ECOA). A RAL preparer will typically charge tax preparation fees, loan administration fees, and bank fees in addition to other fees that a borrower can avoid by filing directly with the IRS. And I know your report starts in 2003 when refund anticipation loans or RALs were turning into a huge wealth-stripping problem. Professional tax preparers, as well as thousands of small independent preparers, were brokering these deals on behalf of insured financial institutions. These 7- to 14-day loans were paid by the actual IRS refund. The RAL preparers were often able to offer these loans because they partnered with banks. Numerous consumer groups decried this practice and urged regulators to stop the practice. And according to your report, most large banks stopped being involved with RALs. JPMorgan Chase, HSBC, and Santa Barbara Bank and Trust all stopped financing RALs. So I guess my question is, is that right? The most well- known RAL preparers, H&R Block and Jackson-Hewitt, stopped offering RALs? Would you agree? Mr. Gibson. Sir, I don't really know. I am not here to talk about whether RALs are good or bad products, frankly. It is the FDIC's supervisory approach to those three institutions-- Mr. Ellison. Okay. So did the IRS make an effort to stop RALs too by not allowing tax preparers to use its so-called debt indicator? Mr. Gibson. Yes. I believe they did. Mr. Ellison. Okay. And is it possible that the FDIC could have had a legitimate supervisory concern for the safety and soundness of institutions engaged in RALs? Mr. Gibson. The FDIC did have supervisory concerns with respect to the institutions offering RALs. In fact, the debt indicator or the loss of the debt indicator is something that the FDIC mentions as a reason for that concern. What I would point out in that particular regard is that the debt indicator was one of 80 to 120 factors that were used by institutions in evaluating the loan that they were making. Mr. Ellison. Thank you. In looking at your report, is it true that the FDIC staff identified compliance deficiencies at the three small financial institutions that were offering RALs? Mr. Gibson. I'm sorry. Could you repeat that, sir? Mr. Ellison. So in looking at your report, is it true that FDIC staff identified compliance deficiencies at the three small financial institutions that were offering RALs? Mr. Gibson. I believe there were some compliance deficiencies that were identified, yes. Mr. Ellison. Okay. So I am looking at perhaps weak electronic return origination training, a lack of RAL program audit coverage, and even substantive violation of the ECOA? Does that ring a bell for you? Mr. Gibson. Sir, that could be. Yes. Mr. Ellison. Okay. So if the FDIC had already identified previous violations with these three institutions on notice that the agency was concerned about their performance in RALs? Mr. Gibson. Well, sir, all I can say on that regard, again, with respect to one institution, that institution received a CAMELS rating of two from the safety and soundness examiner during that same period of time. The compliance examiners reviewed that examination, weighed in on it, and they concurred in a rating of two for that institution. The conclusion I would draw from that is that they weren't overly concerned about the extent of those compliance violations. Mr. Ellison. Okay. Thank you, and that is all I have for you today. Chairman Duffy. The gentleman yields back. The Chair recognizes the gentleman from Illinois, Mr. Hultgren, for 5 minutes. Mr. Hultgren. Thank you, Mr. Chairman. Mr. Gibson, thank you so much for being here. I appreciate you being here to testify, and I also appreciate your office looking into what appears to look very similar to the abuse of power that was uncovered by the Operation Choke Point. I respect that the names of some of the affected institutions will and need to remain anonymous for the purposes of your report and for this investigation, but I also understand that they may have been in my district or at least in Illinois given the role of the FDIC's Chicago Regional Director. In late 2009, the FDIC contended that Bank A had expanded its RAL program while operating under a 2009 cease-and-desist order. This perceived expansion prompted M. Anthony Lowe, the FDIC Chicago Regional Director since 1985, to send a letter to the institution's board of directors dated September 30, 2009, expressing concern about the bank's RAL products and requesting a plan for discontinuing this type of lending. In separate letters, both dated February 3, 2010, Mr. Lowe notified the boards of the two remaining institutions that RALs were unacceptable for the banks and that plans should be developed for the expeditious exit of those lines of business. The FDIC OIG determined that the FDIC's letter to all three institutions were coordinated through the Washington office, including the then Division of Supervision and Consumer Protection and the legal division. And there was discussion of a global approach at the FDIC to deal with the RAL products as well. Notably the OIG found that, ``The verbiage included text from letters that had been sent to banks engaged in payday lending'' as covered in the OIG September 2015 audit on Operation Choke Point. The specific language is as follows, ``We find that RALs are costly and offer limited utility for consumers as compared to traditional loan products. They also carry a high degree of risk to an institution, including third-party reputational compliance and legal exposures. These risks may expose the bank to individual and class actions by borrowers and local regulatory authorities. Consequently, we find RALs unacceptable for the bank.'' All three banks considered in this report of inquiry are located in the Chicago region. Is that correct? Mr. Gibson. They were located in the region--yes. They were located in the region, sir. Mr. Hultgren. And the Chicago Regional Director supervising these banks is Anthony Lowe. Is that correct? Mr. Gibson. Yes, sir, it is. Mr. Hultgren. This is the same Anthony Lowe who was mentioned in your September 2015 Operation Choke Point audit, is that right? Mr. Gibson. Yes, sir, it is. Mr. Hultgren. And Mr. Lowe was responsible for sending several letters to banks asking them to stop their payday lending businesses. Isn't that correct? Mr. Gibson. Mr. Lowe sent some letters, sir. Mr. Hultgren. Actually, in an informal interview with the committee staff on June 2, 2015, Mr. Lowe indicated that there may even be a letter template floating around the FDIC's Washington office for such letters. Would that surprise you? Mr. Gibson. Sir, I don't know whether there was or there wasn't. I don't remember seeing a template, per se. Mr. Hultgren. Okay. Let me move on. On December 17, 2014 FDIC Chairman Martin Gruenberg requested that the FDIC OIG ``conduct a fact-finding review of the actions of FDIC staff.'' That is ``in regards to the Operation Choke Point initiative.'' His request was prompted by concerns raised by Congressman Luetkemeyer in a December 10, 2014, letter which asks that the role of the five FDIC officials and others as appropriate be examined. The FDIC OIG addressed the roles of the five individuals in its audit report Number AUID15-008, dated September 2015, entitled, and I quote--``The FDIC's Role in Operation Choke Point and Supervisory Approach to Institutions That Conducted Business With Merchants Associated With High Risk Activities.'' In that audit, the FDIC OIG committed to conduct additional work on the role of the FDIC staff with respect to the agency's supervisory approach to financial institutions that offered RALs. The FDIC's OIG's more recent report of inquiry reveals that two of the five officials referenced by the Congressman--Mark Pearce, Director, Division of Depositor and Consumer Protection; and M. Anthony Lowe, Chicago Regional Director--as well as others at the agency played key roles in forcing banks to exit the RALs business. What was the impetus from the OIG's report of inquiry into refund anticipation loans? Mr. Gibson. Sir, as we were doing the work with respect to Operation Choke Point, we became aware of the FDIC's approach to refund anticipation loans. There were some similarities in that approach and it struck us that there were concerns that were similar to the concerns that were raised in the letter from 35 Members of Congress that triggered our original work. So we elected to continue to conduct work with respect to RALs even though they were a product that wasn't really directly involved in the DOJ's Operation Choke Point. Mr. Hultgren. Okay. Did the OIG determine any overlap in the FDIC officials involved in targeting refund anticipation loans and working with DOJ in carrying out Operation Choke Point? Mr. Gibson. No, sir. I don't believe so. Mr. Hultgren. Okay. I see my time has expired. I yield back the balance of my time. Thank you, Mr. Chairman. Chairman Duffy. The gentleman yields back. The Chair now recognizes the ranking member, Mr. Green, for 5 minutes. Mr. Green. Thank you, Mr. Chairman. Let us talk some more about Mr. Gruenberg. These activities that occurred, did they occur prior to 2011? Mr. Gibson. Yes, some of them did. Mr. Green. Okay. And is it true that Mr. Gruenberg became Chair in 2011, if you know? Mr. Gibson. Yes, it is. Mr. Green. And as a result, it would be inappropriate and misleading to imply that Mr. Gruenberg was Chair when these activities took place? Mr. Gibson. Mr. Gruenberg was the Vice Chairman. That is correct. Mr. Green. He was not the Chair? Mr. Gibson. No, he was not. Mr. Green. He was not the Chair. He was there, but he was not the Chair? Mr. Gibson. No, he was not. Mr. Green. And it seems as though we were trying to imply that as Chairman, he had knowledge of these things. He was a Vice Chair. He was there, but he was not the Chair. As a matter of fact, there was another person who was Chair, who, of course is obviously no longer there, Ms. Bair. Is that a fair statement? Mr. Gibson. That is correct. Mr. Green. And is it also true that Mr. Gruenberg was the person who asked for the investigation? Mr. Gibson. Yes, sir, Mr. Gruenberg had asked us to conduct investigative work. That is true. Mr. Green. Yes. Mr. Gibson. Yes, sir. Mr. Green. Yes, it is true. It is true. It is okay to just say it is true because it is. He is the person who caused you to come over to perform the investigation because he requested it. True? Mr. Gibson. He requested the investigation. Mr. Green. So that is true? Do you have a problem saying it is true, sir? Mr. Gibson. I don't have a problem with saying-- Mr. Green. Okay. Is it true that he is the person who asked for the investigation? Mr. Gibson. Sir, I don't know that I accept the premise of all of your questions. Mr. Green. Okay. Mr. Gibson. That is why-- Mr. Green. Did he ask for an investigation-- Mr. Gibson. --on that project. Mr. Green. Pardon me? Did he ask for an investigation? Mr. Gibson. He did. Mr. Green. And did he ask for the investigation as it related to Operation Choke Point? Mr. Gibson. He did. Mr. Green. And is it true that when you got there, you decided that you were going to expand the investigation into this other area, but he was the reason that you arrived because he asked for the investigation into Operation Choke Point? Mr. Gibson. Yes. Mr. Green. Okay. And by the way, you did not do an audit. You did a review. Mr. Gibson. That is correct, sir. Mr. Green. Okay. Now, let us go to something else with reference to elimination versus regulation. The product still exists, doesn't it? RALs? Mr. Gibson. As far as I know, it does. Insofar as I know, it does. FDIC-supervised institutions don't offer it. Mr. Green. Yes. And they were in the business of protecting banks, but they don't have jurisdiction over many other institutions that have the opportunity to present this product to the public. Is that a fair statement? Other institutions do this now. There are other institutions that are doing it. Banks don't. Mr. Gibson. I assume that there are, yes, but-- Mr. Green. Okay. The FDIC-- Mr. Gibson. --I am not aware of the industry-- Mr. Green. And well, you are not aware, but let us do it this way since I have to get this answer on the record for my own purposes. You agree that this product still exists but not with FDIC institutions, right? Mr. Gibson. I believe that is true. Yes. Mr. Green. Okay. So the FDIC, while it did, as my colleagues have indicated, deal with the product as it related to them, the FDIC could not eliminate this product so there are others that are doing it. It is just the FDIC, the entity in charge of safety and soundness, has a duty to protect consumers. This entity decided that it wasn't in the best interests of the banks to do this, and it moved to eliminate this as a product within these three institutions. Is that a fair statement? Mr. Gibson. Apparently so. Mr. Green. Okay. Now, final comment to you, sir, is this. Look, I appreciate your testimony here today. I really do. And after we finish, I am going to come down and shake your hand and offer you lunch. But I do want you to know that Mr. Gruenberg is not the source of this, and I don't want you to get caught up in some sort of implication that Mr. Gruenberg was the genesis of this and that this, all of this was emanating from him. He was a really bad manager, because that is just not the case. He did what he could when he found out about things, the Choke Point circumstance he called to your attention, and also he has taken a corrective action once you have called it to his attention. He is going to be reporting to you again in June. So I am just a person who wants to see people treated fairly, and I think Mr. Gruenberg has not been treated fairly today. And I am going to stand up for him. I yield back. Chairman Duffy. The gentleman yields back. Hopefully, he is paying for lunch when he offers that to you, Mr. Gibson. [laughter] Chairman Duffy. The Chair now recognizes the gentleman from Maine, Mr. Poliquin, for 5 minutes. Mr. Poliquin. Thank you, Mr. Chairman. And thank you, Mr. Gibson, for continuing to be here. I appreciate it very much. We all know in any organization that the bad behavior of that organization starts at the top if there is bad behavior. How long has Mr. Gruenberg been at the FDIC, sir? Mr. Gibson. Sir, he was appointed as Vice Chairman of the Board of Directors. I am not sure what year that was honestly. It was a number of years before he became the Chairman of the FDIC. Mr. Poliquin. And how do you become a chairman of a major regulator like this in Washington? How did he become the Chairman? Mr. Gibson. Sir, you are appointed by the President and-- Mr. Poliquin. And how long is Mr. Gruenberg's term appointed by the President? Mr. Gibson. Pardon me? Mr. Poliquin. How long does Mr. Gruenberg's term last? Mr. Gibson. Sir, I may have to get back to you on that, but I believe it is 5 years. I could be wrong, but-- Mr. Poliquin. Okay. And how long have you been the I.G. at the FDIC? Mr. Gibson. Sir, I have been the acting I.G. at the FDIC for almost 3 years now. Mr. Poliquin. Okay. So your time has overlapped with that of Mr. Gruenberg's. Is that correct? Mr. Gibson. Yes, it is. Mr. Poliquin. Okay, fine. If I am not mistaken, Mr. Gruenberg was in a position of extreme authority at the FDIC during Operation Choke Point, is that correct? Mr. Gibson. Sir, he was either the Vice Chairman or the Chairman, but I am not sure-- Mr. Poliquin. Okay. How many Chairmen-- Mr. Gibson. --what the timeframe of Operation-- Mr. Poliquin. How many Chairmen do you have at the FDIC? Mr. Gibson. We have one. Mr. Poliquin. And how many Vice Chairmen do you have? Mr. Gibson. We have one. Mr. Poliquin. Okay. So he was either the top banana or the number two guy, right? Mr. Gibson. That is correct. Mr. Poliquin. Okay, fine. You must associate with Mr. Gruenberg professionally and maybe otherwise with other I.G.s in this town embedded in other major regulators like the FDIC. Do you know who your counterparts are? Mr. Gibson. I know who my counterparts are, yes, sir. Mr. Poliquin. Okay. Do you think that the behavior of Operation Choke Point where Mr. Gruenberg was there and was in a position of authority and did nothing to stop it when it was exposed in their coordinated work with Justice? Do you find this unusual for other government agencies here in Washington? Mr. Gibson. Sir, what I would point out is that our audit found that the FDIC had minimal direct involvement with Operation Choke Point. And in fact, the FDIC's communications with DOJ at the time Operation Choke Point initiated ceased because Chairman or Vice Chairman Gruenberg--I believe he may have been the Chairman at the time--basically indicated that the FDIC shouldn't participate in those. Now, I can't really speak to the rest of your question. I am not sure that I can associate that with the heads of other agencies. Mr. Poliquin. Do you recall the genesis of Operation Choke Point, Mr. Gibson? Mr. Gibson. Yes, sir. I think I do. Mr. Poliquin. Could you tell us a little bit about it? Mr. Gibson. Operation Choke Point was a program that was initiated by the Department of Justice. Mr. Poliquin. Who was the head banana at the Department of Justice at that time? Mr. Gibson. Sir, I believe Eric Holder was the Attorney General at the time. Mr. Poliquin. Mr. Holder was the Attorney General at the time? And how long was Mr. Holder's term? Mr. Gibson. Sir, I don't know that he had a term. Mr. Poliquin. Okay, but he was appointed by whom? Mr. Gibson. He was appointed by President Obama. Mr. Poliquin. Okay, so what you are telling me is in some shape or form it is the Administration that is responsible for appointing all of these regulators, either top people-- Mr. Gibson. Yes, sir. Mr. Poliquin. --or those who eventually become the top people. This behavior with respect to Choke Point using Federal regulators to force banking regulators to choke off credit to legally operating businesses has been conducted recently over the last 7 years. Is that correct? Mr. Gibson. Sir, I believe Operation Choke Point was conducted during that timeframe. Mr. Poliquin. Okay, fine. And how long have you been in this town, Mr. Gibson? Mr. Gibson. Longer than I care to admit. [laughter] Mr. Poliquin. Okay. That is a fair statement. Do you find that this sort of behavior has happened throughout different parts of this Federal Government for the last 7 years? Is it unique to this period of time? Mr. Gibson. Sir, I am genuinely not sure how to answer that question. I don't know that I would accept the premise that things are necessarily different now than they were prior to that period of time. Mr. Poliquin. And do you find in the last 7 years, Mr. Gibson, that there has been an unusual amount of activity by the Federal Government to put burdensome regulations on legally run businesses-- Mr. Gibson. Sir-- Mr. Poliquin. --that we haven't seen in the past? Mr. Gibson. I honestly don't have an empirical basis on which I can make an assessment about that. Mr. Poliquin. How can we find out that information? Mr. Gibson. That is a good question. Mr. Poliquin. And to whom do we go? Mr. Gibson. Sir, I am sure there are studies that are done which address that. Mr. Poliquin. Another study. We don't--okay. Mr. Gibson. I-- Mr. Poliquin. Can you cite any of those studies? Mr. Gibson. I'm sorry? Mr. Poliquin. Could you cite any of those studies for our committee now? Mr. Gibson. No, I am afraid I can't. I am only-- Mr. Poliquin. And where we might go to find out-- Mr. Gibson. In terms of burdensome regulation, none. I am not an expert on that subject. Mr. Poliquin. Where might we go to find out if such studies existed? Mr. Gibson. Sir, I think the Congressional Research Service would be a place to start. Mr. Poliquin. Okay. Thank you very much. Thank you, Mr. Chairman. I yield back my time. Chairman Duffy. The gentleman's time has expired. The Chair now recognizes the gentleman from Texas for 5 seconds. Mr. Green. Thank you, Mr. Chairman. I referenced earlier an I.G. report, and at this time I would like to place that report in the record if there are no objections. It is styled, ``Challenges and FDIC Efforts Related to Predatory Lending.'' Chairman Duffy. Without objection, it is so ordered, and your 5 seconds has expired as well. I want to thank Mr. Gibson, you and your team, for your work and your testimony today. We are grateful for that. The Chair notes that some Members may have additional questions for this witness, which they may wish to submit in writing. Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to this witness and to place his responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. And with that, I note without further objection, this hearing is adjourned. Mr. Gibson. Thank you, sir. Chairman Duffy. Thank you. [Whereupon, at 3:30 p.m., the hearing was adjourned.] A P P E N D I X March 16, 2016 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] [all]