[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]