[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]


                    SETTLING THE QUESTION: DID BANK
                     SETTLEMENT AGREEMENTS SUBVERT
                  CONGRESSIONAL APPROPRIATIONS POWERS?

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

                                 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

                               __________

                              MAY 19, 2016

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-90
                           
                           
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                 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:
    May 19, 2016.................................................     1
Appendix:
    May 19, 2016.................................................    29

                               WITNESSES
                         Thursday, May 19, 2016

Gray, Ambassador C. Boyden, Partner, Boyden Gray & Associates....     5
Larkin, Paul J., Jr., Senior Legal Research Fellow, the Heritage 
  Foundation.....................................................     8
Min, David K., Assistant Professor of Law, the University of 
  California Irvine School of Law................................     9
Rosenkranz, Nicholas Quinn, Professor of Law, the Georgetown 
  University Law Center..........................................     6

                                APPENDIX

Prepared statements:
    Gray, Ambassador C. Boyden...................................    30
    Larkin, Paul J., Jr..........................................    53
    Min, David K.................................................    72
    Rosenkranz, Nicholas Quinn...................................    83

              Additional Material Submitted for the Record

Hensarling, Hon. Jeb:
    Letter from Richard A. Epstein, dated May 21, 2016...........    90

 
                    SETTLING THE QUESTION: DID BANK
                     SETTLEMENT AGREEMENTS SUBVERT
                  CONGRESSIONAL APPROPRIATIONS POWERS?

                              ----------                              


                         Thursday, May 19, 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 9:16 a.m., in 
room 2128, Rayburn House Office Building, Hon. Sean P. Duffy 
[chairman of the subcommittee] presiding.
    Members present: Representatives Duffy, Fitzpatrick, 
Mulvaney, Hultgren, Tipton, Hill; Green, Cleaver, Ellison, 
Beatty, and Sinema.
    Ex officio present: Representatives Hensarling and Waters.
    Chairman Duffy. The Subcommittee on Oversight and 
Investigations will come to order. 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 the witnesses.
    Today's hearing is entitled, ``Settling the Question: Did 
Bank Settlement Agreements Subvert Congressional Appropriations 
Powers?''
    The Chair now recognizes himself for 5 minutes for an 
opening statement.
    Since last year, this committee has been investigating the 
Obama Administration's use of bank settlement agreements as a 
slush fund to support liberal activists' groups. Today's 
hearing examines this practice and its impact on Congress' 
constitutional power of the purse.
    In the wake of the 2008 financial crisis, the Department of 
Justice was charged with investigating the pulling and sale of 
residential mortgage-backed securities which played a leading 
role in the housing meltdown and contributed to a global 
recession. Millions of Americans' mortgages went underwater and 
countless families faced foreclosure.
    In 2013, the DOJ announced a record breaking $13 billion 
settlement with JPMorgan Chase which included $4 billion in 
consumer relief to come largely in the form of loan 
modifications. Importantly, although it contained a provision 
giving credit for donations to certain community redevelopment 
organizations, it did not make any donation mandatory and 
offered only dollar-for-dollar credit to the bank to fulfill 
them.
    Several other high-profile settlements with other large 
financial institutions followed. In July 2014, DOJ announced a 
$7 billion mortgage lending settlement with Citigroup that 
included $2.5 billion in consumer relief.
    DOJ, which touted these consumer relief provisions as 
innovative, required a minimum $10 million in donations to HUD-
approved housing counseling agencies including, for example, 
the National Council of La Raza and NeighborWorks.
    For every dollar donated, Citigroup could earn $2 worth of 
credit against its $2.5 billion consumer relief commitment. In 
effect, the Bank was actually incented to donate to these 
third-party groups. By contrast, for direct forms of consumer 
relief like principal forgiveness for homeowners in the 
hardest-hit areas, the base credit is merely dollar-for-dollar.
    One month later, DOJ reached a settlement with Bank of 
America providing for $7 billion in consumer relief which 
included nearly identical terms.
    Earlier this year DOJ entered into settlements with Morgan 
Stanley and Goldman Sachs, settling for amounts of $2.6 billion 
and $5 billion respectively, allowing for much more than 
dollar-for-dollar credit.
    These terms appeared unprecedented, and as a result liberal 
activist groups have or are scheduled to receive over half a 
billion dollars outside of the normal appropriations process, 
setting up-front, mandatory, minimum donations to non-victim 
third parties, and in some instances, liberal activists' 
groups.
    It marks a substantial and disturbing departure from past 
practices. This subcommittee has two questions before it today. 
First, is what the Obama Administration did consistent with the 
law, and more importantly, Congress' Article 1 appropriations 
powers?
    And second, should we continue to allow the Executive 
Branch, regardless of party, Republican or Democrat, to 
structure settlements in such a way as to allow third parties, 
who are not harmed, to get funding otherwise owed to victims or 
to the government and taxpayers. To answer the first question, 
we have invited four legal scholars.
    At the very least, I would hope that we can agree that 
these settlements subverted or undermined Congress' 
appropriations power. And if not a clear violation of the 
Constitution, these settlements may very well have violated the 
Miscellaneous Receipts Act, which directs that money received 
by the government from any source must be deposited in the 
Treasury.
    Furthermore, the Department of Justice's own U.S. 
attorney's manual says this practice is restricted because it 
can create actual or perceived conflicts of interest and/or 
other ethical issues. As a policymaker, the answer to the 
second question is abundantly clear to me.
    Regardless of who is in power at the Department of Justice 
or any other agency with a role in structuring settlements on 
behalf of the U.S. Government, no settlement should compensate 
anyone other than a victim. Period.
    Based on everything the committee has learned it is clear 
that, in fact, these settlements created the very conflicts of 
interest that the U.S. attorney's manual warned against, with 
certain conservative groups being deliberately excluded from 
receiving settlement funds. This kind of practice should not 
take place under a Democrat or Republican Administration.
    The Department of Justice, and indeed the justice system 
itself, is supposed to be blind to this kind of behavior. It 
will not be tolerated. For the millions of Americans affected 
by the housing crisis, many may not be aware that their bank 
had a choice to provide them with direct relief or funnel money 
to a liberal activists' group.
    I think it is important for our committee to try to 
determine why, which is the reason I intend for this 
subcommittee to continue to investigate the agencies involved 
and prohibit this from happening in the future.
    I now recognize the ranking member of the subcommittee, the 
gentleman from Texas, Mr. Green, for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. I thank you for the 
time. I do not agree with the hearing. I do not agree with the 
hearing because I think that there are a good many other things 
that we could be doing today that the American people expect us 
to do.
    The American people are pretty fed up with what we have 
been doing. Not one person lately, and very few at all, have 
gone to jail as a result of this crisis that was created in 
2008. A good many people are still concerned about our having 
hearings that will prevent people from acquiring the necessary 
aid that they need to prevent foreclosures while not having 
hearings that would help us bring to closure some of the 
atrocities that have occurred.
    Now some would say that is what the Justice Department 
ought to do. We can have hearings to find out what happened and 
encourage the Justice Department to go after people. Some would 
say, well, this is within the purview of what we are doing. 
Yes, it is. But this bill that is going to be mentioned is one 
that emanates from the Judiciary Committee.
    And if we can take up issues emanating from the Judiciary 
Committee with reference to legislation, we can take up these 
issues that relate to people going to jail. This is why people 
are so upset with us. That is why you see this election going 
in all directions. People are fed up.
    So let us just talk about what we have here today. I think 
a more appropriate title for this hearing would be, ``No Good 
Deed Goes Unpunished.'' The Justice Department lawfully settled 
these cases and the amounts that have been called to our 
attention. I would think that these banks would be a little bit 
concerned about the way their names are going to be thrown 
around today because they settled these cases for good reason.
    They took advantage of consumers, and now they are having 
to pay. And if there is something unlawful about this, these 
banks have batteries of lawyers who are capable, competent, 
qualified, and prepared to take these issues before the 
judiciary in this country. Judges that we put in place.
    So, it is not some alien country that is going to have to 
deal with these issues. If there are unlawful acts going on, 
they would take them to court. No court has declared any of 
these settlements unconstitutional.
    We are doing what is within the law, and the Justice 
Department really ought to be commended for the outstanding job 
that it has done. I would also add this, at the very heart of 
this is the question, are we going to allow monies from 
settlements, less than 1 percent by some accounts by the way, 
less than 1 percent of the money from these settlements is what 
we are talking about today.
    Are we going to allow the money from settlements to go to 
organizations and entities that can help people stay in their 
homes? That is what this is about. Are we going to allow money 
to go to counselors who can help people stay out of 
foreclosure? Go to lawyers who can help them?
    And all of these entities and organizations that people are 
all upset about have been vetted by HUD. They are on an 
approved HUD list. You can't get on the list without being 
vetted.
    Do some get through that we might not want? Or someone 
might not want? Possibly, but they have still been vetted. And 
by the way, if the money could go to just any organization, the 
complaint would be, you are letting the money just go to 
anybody.
    None of these people are vetted. So, either way there is 
going to be a complaint. I don't approve of this hearing. I 
think this hearing should be called the means by which we will 
continue a crisis that started in 2008 with the debacle 
associated with banks that took advantage of people.
    Yes, JPMorgan Chase has a $13 billion settlement. Yes, Bank 
of America has a $7 billion settlement. And then, of course, 
there is Goldman Sachs at $5 billion.
    I would think that they would get sick of their names being 
drawn through the records of Congress and all of these things 
being mentioned about them. At some point they ought to say, 
look guys we have had enough, we settled that. We are not 
complaining. Or maybe they are complaining but they are not 
bringing it to our attention.
    I don't see one banker here today complaining about what is 
going on. If I am wrong someone will tell me. But it seems to 
me that if you are a banker, or a surrogate of a banker, you 
ought to speak up. The point I would like to make, finally, is 
this: At some point, we have to get about the business the 
American people expect us to take care of.
    They are sick of conservatives and liberals doing nothing. 
They want to see us deal with this crisis the way they would be 
dealt with if they were the culprits. Somebody ought to go to 
jail. We ought to be having hearings to determine who is going 
to jail. I yield back.
    Chairman Duffy. The gentleman yields back. We now recognize 
and welcome our witnesses here today.
    First, we have Ambassador Boyden Gray. Ambassador Gray is 
the founding partner of Boyden Gray and Associates, a law and 
strategy firm in Washington which is focused on constitutional 
and regulatory issues.
    Second, we have Professor Nicholas Rosenkranz who teaches 
constitutional law and Federal jurisdiction at Georgetown 
University Law School.
    Third, Mr. Paul Larkin is a senior legal research fellow at 
the Heritage Foundation where he directs the Foundation's 
project to counter abuse of criminal law.
    And finally, Professor Min is an assistant professor of law 
at the University of California Irvine School of Law. Welcome, 
all of you. The witnesses, in a moment, will be recognized for 
5 minutes to give an oral presentation of their testimony.
    And without objection, the witnesses' written statements 
will be made a part of the record. Once the witnesses have 
finished presenting their testimony, each member of the 
subcommittee will have 5 minutes within which to ask each of 
you questions.
    On your table, there are three lights: green means go; 
yellow means you have 1 minute left; and red means your time is 
up.
    And with that, Ambassador Gray, you are recognized for 5 
minutes.

STATEMENT OF AMBASSADOR C. BOYDEN GRAY, PARTNER, BOYDEN GRAY & 
                           ASSOCIATES

    Mr. Gray. Thank you very much, Chairman Duffy and Ranking 
Member Green, for inviting me to speak here about the 
importance of congressional control over the Nation's purse and 
how that control has eroded over the past several years. This 
erosion threatens the separation of powers that lies at the 
core of our constitutional structure.
    An Executive with access to the Treasury could very well 
free itself from popular oversight putting the entire idea of 
representative self-government at risk. I have been involved 
with this set of issues for a long time. I was counselor to the 
President and you can well imagine how often this issue came up 
in deliberations in the White House, especially in the 
Antideficiency Act, which I will mention in a minute.
    And later, in private practice, I was deeply involved 
representing Congressman Bliley and Senator Hatch in the 
American trucking case which addressed questions about the 
extent of Congress' ability to delegate authority to the 
Executive Branch.
    Today, I am challenging the constitutionality of the 
Consumer Financial Protection Bureau (CFPB), which is familiar, 
I think, to all of you on grounds, among others, of the power 
of the purse and on delegation.
    As my prepared text makes clear, the Appropriations Clause 
is a bulwark of the Constitution's separation of powers and it 
goes way back into English history, which is the background for 
our constitutional set up. In the end every constitutional 
power runs into the appropriations power.
    All exercises of constitutional power are limited by the 
congressional control over funds in the Treasury. In fact, the 
command of the purse is what gives effect to Congress with the 
authority to prescribe the rules by which the duties and rights 
of every citizen are to be regulated.
    Historically, Congress has protected its powers of the 
purse. The Miscellaneous Receipts Act, which is the principal 
topic of today's hearing, is very relevant and central. It ties 
the Executive Branch to Congress by requiring appropriations 
for any money received for the Government is spent.
    And we will go into this in a little more detail in the 
time I have. But let me first say, to put it all in context, 
there are three general categories of Appropriations Clause 
violations.
    The first is establishment of agencies that don't have 
congressional funding, it is self-fund, and thus escapes 
oversight by you, and one example is the CFTB, with which I 
think this subcommittee is familiar.
    The second is violations of the Antideficiency Act, which 
prohibits the Executive from committing funds not, spending 
funds not appropriated by Congress. ObamaCare is an example of 
that.
    And then there is the Miscellaneous Receipts Act, which 
prohibits the kind of discretionary control over funds 
received; and enforcement cases, the ones you are concerned 
about, give the banking settlements involved extraordinary sums 
of money which escape congressional oversight of the purse.
    This committee is familiar with the CFPB, which has no 
obligation to answer or respond to anything you do. So, when 
asked by a member of this committee who is in charge of the 
lavish renovation expenditures of CFPB, which cost more than 
the building of the Bellagio Hotel in Las Vegas, the Director 
of the CFPB answered, ``Why does that matter to you?'' That is 
an insolent response which stuns me, and I would think you 
would want to clasp him in handcuffs for saying something like 
that.
    The Affordable Care Act, sort of second bucket, involves 
the Antideficiency Act, and there are various payments which 
Congress has appropriated and various payments which Congress 
has authorized but not appropriated.
    So-called cost-sharing reduction payments have never been 
appropriated by Congress. The President requested $5.4 billion. 
He got $4 billion. When the answer was no, he took the $4 
billion anyway. So I think that it is important to watch that 
very, very carefully.
    You have covered, Mr. Chairman, the sins of the bank 
settlements. I don't know that there is much I can really add, 
except to say that the amounts are extraordinary in comparison 
to the other disbursements.
    The CFPB, for example, at $600 million a year, which pales 
in comparison to the billions that have been dispensed under 
the bank settlement.
    So, I commend you for this hearing, and I hope you have 
more success with it and stop this practice. And as far as what 
the ranking member said, as a Republican I am quite sympathetic 
to almost everything you touched on. Thank you.
    [The prepared statement of Ambassador Gray can be found on 
page 30 of the appendix.]
    Chairman Duffy. Thank you, Ambassador Gray.
    Professor Rosenkranz, you are now recognized for 5 minutes.

 STATEMENT OF NICHOLAS QUINN ROSENKRANZ, PROFESSOR OF LAW, THE 
                GEORGETOWN UNIVERSITY LAW CENTER

    Mr. Rosenkranz. Thank you, Chairman Duffy, Ranking Member 
Green, and members of the subcommittee. Thank you for the 
opportunity to express my views on this important topic.
    The Constitution provides: ``No money shall be drawn from 
the Treasury, but in Consequence of Appropriations made by 
Law.'' This is not a mere technical provision. This is a 
fundamental element of constitutional structure.
    It sounds, first, in democracy, reflecting this deep 
constitutional principle that the power of the purse should be 
vested in the most representative branch. Every dollar 
appropriated from the Treasury may represent a dollar in taxes, 
so this principle applies equally to taxes and spending. Taxing 
and spending are the twin powers of the purse, and the 
legislature commands the purse.
    Moreover, the House of Representatives is vested with a 
special role over revenues, as you know: ``All bills for 
raising revenue shall originate in the House.'' The reason is 
clear: House Members are more immediately representatives of 
the people.
    But this structural role of the Appropriations Clause 
sounds not only in democracy but also in separation of powers. 
Short of impeachment, the power of the purse is Congress' most 
potent check on Executive overreach.
    If the President can draw money from the Treasury without 
an appropriation or otherwise evade the Appropriations Clause, 
power would shift decisively from Congress to the Executive.
    It is in this context that this Appropriations Clause 
question arises. A willful President can evade many of the 
constitutional checks on his power, but Congress' 
appropriations power is the ultimate backstop. Everything the 
Government does costs money, so the power of the purse should 
successfully constrain the Executive Branch if all else fails.
    Moreover, all negotiations between the President and 
Congress, even those that have nothing to do with 
appropriations, happen in the shadow of this fundamental power. 
Alas, though, a determined President may flout this provision 
too.
    Just last week, District Judge Rosemary Collyer of the U.S. 
District Court for the District of Columbia found that the 
Administration has paid billions of dollars to insurance 
companies under ObamaCare without an appropriation from 
Congress.
    She held, in no uncertain terms, that making these payments 
``without an appropriation...violates the Constitution.'' Under 
these circumstances, then, it is fair to view these provisions, 
these bank settlements, with a skeptical eye.
    The provisions provide for payments from the banks to these 
third-party organizations that are neither parties nor victims 
of the alleged wrongdoing. It is certainly fair to say that 
these payments circumvent the clause at issue.
    If the banks had paid this money to the United States--
which, after all, was the plaintiff in the case--then the money 
would have gone into the Treasury. And if, subsequently, the 
President or the Attorney General favored using this money to 
subsidize various community development organizations or what 
have you, they would have had to request an appropriation from 
Congress.
    By providing for direct payment from the banks to the 
organizations, these settlements evade the Appropriations 
Clause and cut Congress out of the loop.
    Another way to put the point is that these settlement 
provisions embody two implicit decisions. The first is the 
value of the Government's claims--that is, what we would have 
predicted it would have won from a jury, discounted by the odds 
of a successful trial. And that is within the core competence 
of the Department of Justice. That is what they are supposed to 
be doing.
    But the second decision is the best possible use of these 
funds--whether to subsidize insurance companies under 
ObamaCare, or subsidize various community development 
organizations, or pay down the $19 trillion national debt, or 
do any number of other things. This second decision is 
paradigmatically legislative. It is exactly the sort of 
decision the Appropriations Clause was designed to reserve to 
Congress.
    If these funds were first paid into the Treasury and then 
appropriated out again, these two decisions would be distinct. 
The Attorney General would make the first. Congress would make 
the second. But by providing for direct payment, the 
Administration effectively arrogates both these decisions to 
himself.
    Finally, I will just note that at least one of these 
provisions is problematic in another way. One of them is 
contingent, actually, on the extension of the Mortgage 
Forgiveness Debt Relief Act of 2007. This is doubly problematic 
because it is contingent on a future act of Congress. Quite 
apart from the evasion of the Appropriations Clause, it is 
arguably a violation of separation of powers for the Executive 
Branch to attach either a tax or a bonus to a legislative act 
in this way. To see the point, imagine a settlement provision 
that required the Bank of America to pay an additional $100 
million if the Senate fails to confirm Merrick Garland to the 
Supreme Court. Surely, the Executive Branch can't add a tax to 
a Senate prerogative in that way.
    In short, these clauses clearly circumvent the text and 
subvert the function of the Appropriations Clause, and I 
applaud you for holding this hearing. I would certainly support 
legislation along the lines that have been proposed.
    [The prepared statement of Professor Rosenkranz can be 
found on page 83 of the appendix.]
    Chairman Duffy. Thank you, Professor.
    Dr. Larkin, you are now recognized for 5 minutes.

STATEMENT OF PAUL J. LARKIN, JR., SENIOR LEGAL RESEARCH FELLOW, 
                    THE HERITAGE FOUNDATION

    Mr. Larkin. Thank you, Chairman Duffy, Ranking Member 
Green, and members of the subcommittee. I appreciate the 
opportunity to come and help you address this problem. The 
views I state will be my own and not those of the Heritage 
Foundation.
    And today, I would like to make just two brief points. 
First, no private lawyer in settling a case, could enter into 
an agreement that has these conditions. No private lawyer could 
tell opposing counsel, I know you are willing to pay my client 
$100 to settle this case, but he doesn't need it all. Give some 
of that money to whomever you want. Pick a charity and hand it 
out.
    Any lawyer who did that would be disbarred for engaging in 
unethical conduct. Now, granted, government lawyers have some 
different responsibilities than private lawyers. But the McDade 
Amendment subjects government lawyers to the same ethical rules 
that apply to lawyers in whatever State where that government 
lawyer appears.
    The result is the Justice Department cannot escape the 
ethical responsibilities imposed on any individual lawyer by 
pointing to the fact that they are settling government cases, 
rather than private contract cases.
    Second, not only do you have the problem here that the 
Executive is acting improperly, but you have a practice that 
denies voters information they are entitled to receive in 
deciding whether to re-elect you and re-elect Senators to 
Congress.
    What happens when Congress lets the Executive Branch take 
over the appropriations process is it delegates that authority 
beyond what any reasonable person would think Congress should 
do.
    What you have, in essence, is the government deciding how 
money should come in to the Federal Treasury and by whom it 
should be received. That clearly is the sort of sham 
transaction that the Justice Department would prosecute as 
fraud, if private parties engaged in this. But it does create 
other problems.
    I agree with the ranking member that there should have been 
more investigations into the question of whether there was 
fraud on Wall Street. But third-party conditions like this take 
money that could be used to hire more FBI agents, and to hire 
more SEC investigators to look into that problem, and instead 
gives it out in a way that doesn't guarantee that victims will 
get it, and doesn't guarantee that the funds will be used only 
for lawful reasons.
    What you have then is essentially handing out money without 
any audit after the fact. And you have the additional problem 
that the public is generally unaware of what is happening and, 
particularly, who gets this money, and therefore, is deprived 
of information that it needs when deciding whether to reelect 
the members who voted for any such program, or to throw the 
bums out, as they used to say in Brooklyn.
    For those reasons, I think these practices that the 
government has engaged into, violate the Appropriations Clause 
as well as the Miscellaneous Receipts and Antideficiency Acts 
and that Congress should recognize that this is a terrible 
public policy.
    I yield back the rest of my time.
    [The prepared statement of Dr. Larkin can be found on page 
53 of the appendix.]
    Chairman Duffy. Thank you, Dr. Larkin. Professor Min, you 
are now recognized for 5 minutes.

  STATEMENT OF DAVID K. MIN, ASSISTANT PROFESSOR OF LAW, THE 
         UNIVERSITY OF CALIFORNIA IRVINE SCHOOL OF LAW

    Mr. Min. Chairman Duffy, Ranking Member Green, and 
distinguished members of the subcommittee, thank you for 
inviting me here to testify on the topic of the RMBS 
settlements negotiated by the DOJ.
    Today's hearing focuses specifically on provisions 
contained in three of the five RMBS settlements, which allowed 
the settling bank to fulfill some of its obligations by 
donating money to third-party charitable efforts, such as 
foreclosure prevention, and neighborhood anti-blight 
provisions. And it asks whether government settlements 
containing these types of charitable payment provisions 
subverted Congress' appropriations power.
    The legal answer to this question is fairly easy to answer. 
Under established law, the answer is no. This is, in fact, a 
quite common and ubiquitous practice. While some observers, 
including several of my fellow witnesses, have claimed that 
these charitable payment provisions violate Federal law by 
circumventing Congress' exclusive authority over 
appropriations, this claim is not well-grounded in current law.
    The Miscellaneous Receipts Act was passed by Congress in 
1849 to set the parameters of what was acceptable versus 
unacceptable encroachment by the Executive Branch over 
Congress' appropriation authority.
    Prior to the Miscellaneous Receipts Act, an official or 
agent of the government receiving money for the government 
shall deposit the money in the Treasury. The key point to note 
here is that the government must receive that money before it 
is required to send it to Treasury.
    The receipt of the money may not be actual receipt but can 
be construed as constructive receipt of that money by the 
courts. Thus, the long-standing legal standard for whether the 
government had received this money in legal settlements has 
revolved around two factors.
    First, is their admission of finding, for finding of 
liability. Second, does the government retain post-settlement 
control over the disposition or management of funds or projects 
carried out under the settlement?
    If the answer to both of these questions is no, then the 
government relationship with the money in question is said to 
be so attenuated that it could not possibly be construed as 
having received it and thus, the settlement funds would not be 
subject to the appropriations process.
    Importantly, the Comptroller General, which represents 
Congress, has endorsed this general legal framework, as have 
several courts. Based on this legal framework, and on the 
Attorney General's broad authorities to litigate and settle 
claims involving government, the Federal Government has crafted 
a wide variety of settlements with terms providing for payments 
to private charitable groups.
    It is fair to say that these types of provisions contained 
in the RMBS settlements are ubiquitous and certainly not 
unprecedented as several of you have said today. Indeed, the 
House Judiciary Committee, which is chaired by Congressman 
Goodlatte, one of the more outspoken critics of these types of 
provisions, has basically conceded this point by passing H.R 
5063 out of committee.
    H.R. 5063 would prohibit the DOJ from negotiating 
settlements with these types of charitable payment clauses. 
Obviously, the Goodlatte bill would not be necessary if 
charitable payment terms were already impermissible under 
existing law.
    The RMBS settlement at issue should clearly fall within the 
criteria fall that I described. They do not include a finding 
of liability on the part of banks, and the Federal Government 
does not maintain post-settlement control over them.
    Indeed, the banks themselves maintain full control over how 
they can disburse the funds under the Consumer Relief 
Provisions, and there is no requirement that they don't donate 
any funds to any particular third parties under the terms of 
these agreements. Thus, they are plainly permissible under the 
law.
    Having dispensed with this first question, let us move onto 
the second question, which is implied by today's hearing. 
Should Congress take action to prohibit these types of 
settlement provisions?
    I think the answer here is clearly no. It is undeniable 
that these types of provisions can serve a valuable purpose. 
Indeed, even Dr. Larkin, whom I would describe as the leading 
critic of these types of provisions, has acknowledged this 
point.
    As Dr. Larkin has noted, these provisions can be mutually 
beneficial for both government and the private defendant. From 
the government's perspective, they can effectively increase the 
total amount of the settlement, sometimes by a large amount. 
And they can also benefit third-parties. From a defendant's 
perspective, charitable payment provisions can provide 
significant public relations and community outreach benefits.
    Moreover, to the extent that the Federal Government may, 
but is not required to negotiate these types of provisions as 
part of its settlement, this provides it with additional 
flexibility to help negotiate as one of our current 
Presidential candidates likes to say, the best deal.
    For example, DOJ has negotiated only three of these 
settlements, RMBS settlements, with these types of provisions, 
but did not include them in settlements with Goldman Sachs and 
Morgan Stanley.
    Presumably, DOJ made the determination that, due to the 
specific facts and negotiating posture on that settlement, it 
was in the best interests of the Federal Government to seek 
these charitable payment provisions in some, but not all of its 
settlements.
    So, why would anyone oppose these types of provisions from 
a policy perspective? One objection that you have just heard 
from Dr. Larkin is that they redirect money away from the 
Treasury. But, in fact, I would point out that that is not 
entirely true.
    Dr. Larkin gives the example of a private attorney settling 
a $100 claim and giving that $100 to charitable interests 
instead. But, in fact, the Federal Government is often limited 
by statutory limitations on the amount of civil penalties that 
they can seek.
    Thus, it is incorrect to assume that each dollar of 
charitable payment secured in a settlement, is a dollar that 
otherwise would have been part of the civil settlement. In 
fact, the RMBS settlements provide a good example of this very 
point.
    The DOJ's primary Federal claims in each of these 
settlements were claims based on FIRREA violations. Penalties 
for FIRREA violations are capped at $1 million. Thus, it is not 
clear that DOJ could have put much more, if any, instilled 
penalties than it already did, even if it had litigated these 
cases and won them.
    Thus, the charitable payment provisions adhere to allowed 
DOJ to procure much more than it would have been able to get if 
it had been limited to civil penalties. And this, I argue in my 
written testimony, serves both a deterrent purpose, as well as 
a general compensation purpose, which is, in fact, motivating 
principles behind civil penalties as it has been addressed by 
many legal scholars.
    With that, I see my time has ended, so I thank you for your 
time.
    [The prepared statement of Professor Min can be found on 
page 72 of the appendix.]
    Chairman Duffy. Thank you, Professor Min.
    The Chair now recognizes himself for 5 minutes.
    Looking at the 2008 financial crisis, the panel, I think, 
would agree that there were a lot of families who were hurt, a 
lot of families who lost their homes. I don't think anyone 
disagrees with that on the panel, correct?
    And to the panel, was every family who was hurt in the 2008 
crisis made whole?
    Did everyone get reimbursed for their losses in the 2008 
crisis, Professor Min?
    Mr. Min. The answer is no, but I would argue--
    Chairman Duffy. No, you are right. Good answer. They were 
not made whole.
    And so, is it fair to say that instead of directing 
settlement money to victims of the 2009 crisis, the DOJ decided 
to take it away from victims and send it to third-party non-
victim groups.
    Do you agree with that, Professor Min?
    Mr. Min. No, I do not.
    Chairman Duffy. So, the money that went to third-party non-
victim groups wasn't taken away from victims?
    Mr. Min. I am not sure how you would craft a settlement 
that helps out the aggrieved homeowners other than through 
community groups that directly interface with them.
    Chairman Duffy. There are people who have lost homes; they 
have been foreclosed upon. I hear the ranking member talk about 
that all the time.
    Mr. Min. Sure.
    Chairman Duffy. We know who they are in our communities. 
Why couldn't that money be directed to actual victims of the 
2008 crisis?
    Mr. Min. Sure. And I believe that's what the money is 
intended to do.
    Chairman Duffy. No, it is not. It is going to third-party 
groups.
    Mr. Min. For foreclosure preventions.
    Chairman Duffy. Let me ask you this: Do you think it is 
appropriate, as you craft this settlement, that you craft it 
behind closed doors in a way to make sure that the money goes 
to left-leaning community activist groups instead of 
conservative groups?
    Do you think that would be a good public policy?
    Mr. Min. I think that is actually a flawed premise because 
there were a number of different groups that were allowed to be 
given money under this.
    Chairman Duffy. Would that be a good public policy?
    Mr. Min. No, but there were conservative groups--
    Chairman Duffy. Okay.
    Mr. Min. --that were part of that list as well.
    Chairman Duffy. So would you be surprised that if later on 
you learned that there were emails from HUD and the DOJ that 
actually lay out the fact that they were structuring this deal 
to make sure that liberals got the money and not conservatives?
    And if you heard that, you would be offended, wouldn't you?
    Mr. Min. I would be. I don't think that is what happened.
    Chairman Duffy. And so, if there is a deal that is 
structured like this, do you think there should be transparency 
to the panel? Do we think that the American people should be 
able to see the correspondence between the DOJ and HUD and how 
they determine what third-party activist group got the money?
    Should that be disclosed to the American people, Professor 
Rosenkranz?
    Mr. Rosenkranz. Yes, Mr. Chairman.
    Chairman Duffy. Dr. Larkin, do you think that the American 
people should be able to see through their Congress the 
documents surrounding this settlement?
    Mr. Larkin. Yes.
    Chairman Duffy. Mr. Gray?
    Mr. Gray. Yes, and how the money is to be ultimately 
dispersed is really up to you, not to a prosecutor.
    Chairman Duffy. We are going to come back to that in a 
second. I agree with you.
    Professor Min, do you think that we should be able to see 
that?
    Mr. Min. Of course. And I think--
    Chairman Duffy. Okay. So would the--
    Mr. Min. --the fact that we are discussing this means that 
it was released.
    Chairman Duffy. Yes. Would the panel, by chance, be 
surprised that we have actually asked on this committee and 
this subcommittee, for the documents from the Department of 
Justice and HUD? And do you think that they have actually 
provided those documents to Congress? Take a guess.
    Mr. Larkin. I would not be surprised by the fact that they 
refused to turn them over.
    Chairman Duffy. They refused to turn them over. So, not 
only do you have a settlement that was done behind closed 
doors, that sends money instead of to victims and/or the 
Treasury, sends it to third-party activist groups, and Congress 
can't see the documentation surrounding that settlement.
    Does that offend anybody's sensibilities on the panel?
    Mr. Gray. It offends mine, but I think it--more importantly 
than what I think, the Comptroller General is taking the view 
that all settlements must relate to the underlying violation, 
which principle was totally ignored in this series of 
settlements.
    Chairman Duffy. Professor Rosenkranz, I think you heard 
Professor Min's commentary and legal analysis on the DOJ 
settlements. Do you agree with his analysis?
    Mr. Rosenkranz. I don't agree with his analysis. I would 
just make one point. He points out that arguably both sides 
win. The banks are happy and the Department of Justice is 
happy, but that's not the separation of powers standard.
    That is often true in separation of powers problems. It is 
really Congress--and thus the American people--who are the 
aggrieved party. The fact that the bank is not here complaining 
doesn't actually prove the point.
    Chairman Duffy. They pay one way or the other, right? And 
so, instead of appropriating money-making decisions to the 
Congress, we have the Department of Justice, lawyers, and HUD. 
And I would just make one note.
    My time is almost up, but one of the organizations that 
received money was NeighborWorks. Board member Helen Kanovsky 
is General Counsel of the U.S. Department of Housing and Urban 
Development. So, she is a board member of NeighborWorks but 
also General Counsel at HUD, and they got money. Does that 
offend your sensibilities, Professor Min?
    Mr. Min. I am not sure what the question is, what the 
offending sensibility point is.
    Chairman Duffy. My time has expired. The Chair now 
recognizes the gentlelady from Ohio, Mrs. Beatty, for 5 
minutes.
    Mrs. Beatty. Thank you, Chairman Duffy, Ranking Member 
Green, and the witnesses.
    First, I thought I was in the Judiciary Committee when I 
walked in because it seems like recently, they had some of the 
same witnesses, on the same topic, and for the record, that 
seemed very appropriate to me where this would be.
    I was also surprised when I reviewed the hearing memo 
circulated by the Majority because it stated that this hearing 
would examine whether the Obama Administration encroached on 
Congress' appropriation powers, and if it overstepped his legal 
authority when crafting the settlement.
    But what surprised me most about the statement was the 
first part is a constitutional question, which, I assume, falls 
under the Judiciary Committee's jurisdiction, and the second 
part focuses on oversight of the Department of Justice, which 
is also the Judiciary Committee.
    Mr. Larkin, can you tell me, did you testify in the 
Judiciary Committee?
    Mr. Larkin. Yes. I testified at a subcommittee of the whole 
committee.
    Mrs. Beatty. Thank you. Okay. Just like this is a 
subcommittee.
    Mr. Larkin. That is right.
    Mrs. Beatty. And did you think it was appropriate for you 
to be there?
    Mr. Larkin. I was--
    Mrs. Beatty. Did you think this topic was appropriate in 
that committee, that it was the best place for it to be?
    Mr. Larkin. I think it was appropriate for that committee 
to look into it, but whether it was the best place is a matter 
for you all to decide.
    Mrs. Beatty. But you thought that this is where this issue 
belonged?
    Mr. Larkin. I thought that they had jurisdiction over it, 
no question, because it involved constitutional issues. But 
that doesn't mean they have exclusive jurisdiction--
    Mrs. Beatty. I didn't ask you that. I simply asked you the 
question, did you think it was the appropriate place for you to 
go and testify. That is a yes or no.
    Mr. Larkin. Oh yes, no, no, I said yes to that and I, that 
is, that was an appropriate place.
    Mrs. Beatty. Okay. So clearly, a renowned witness with all 
the things I have read about, Mr. Chairman, agrees with me, 
that Judiciary would be an appropriate place for it to be.
    Thank you for that, Mr. Larkin.
    I also find this to be ironic, this whole issue of us 
having this hearing here. It makes no sense to me. I think that 
Judiciary is where it belongs, and I have listened to the 
arguments by my colleagues on the other side of the aisle, how 
oftentimes it has been said by them that President Obama 
oversteps his authority as President.
    He encroaches on congressional powers. And this hearing 
seems to be the exact same thing that we have accused him of 
doing, that we are having congressional overreach by bringing 
this here.
    Mr. Chairman and Mr. Ranking Member, let me just say for 
the record that I take great offense to the claims that the 
Department of Justice is somehow diverting funds to radical, 
liberal, non-profit and affordable housing groups and I say 
that, because the National Urban League was one of those 
groups.
    And I was so proud yesterday to get the National I am 
Empowered Award from them for housing, named after Shirley 
Chisholm, and this morning, late to this committee because I 
was with the Vice President of these United States at their 
conference
    The National Urban League has probably done more than any 
of the other groups as it relates to housing, and minorities, 
and non-minorities and so for legislation by one of my 
Republican colleagues to claim that it is some radical, and I 
think La Raza was also named in that, so I just wanted to say 
that this morning, clearly to the witnesses, you can see that 
this is something that is important to me.
    Mr. Min, do you believe that any part of these bank 
settlements agreements were politically motivated?
    Mr. Min. I don't have any basis to make that assessment. I 
will say that as far as the left versus right groups, the banks 
that agreed to this settlement provision were given a list of 
hundreds of different nonprofits they could donate to.
    They were able to control which ones they gave to and in 
what amounts. And so, there were some conservative groups, as I 
mentioned to Chairman Duffy earlier that were part of this list 
as well.
    I don't see an ideological bent here just by the virtue of 
having La Raza and the National Urban League and NeighborWorks 
and other groups like that involved.
    Those were the groups that you would need to get involved 
to try to reach out to the homeowners who were most distressed 
by the housing crisis, that is, low and moderate income and 
often unrepresented minority households, and so I don't know 
how you would craft a settlement that tries to reach those bars 
with involving those.
    Mrs. Beatty. And lastly, do you believe these settlements 
were constitutional?
    Mr. Min. Oh absolutely, under current constitutional 
understanding, absolutely, as I made clear in my written 
statement.
    Mrs. Beatty. Thank you very much. Thank you, Mr. Min.
    Chairman Duffy. The gentlelady yields back. Congratulations 
on your National Urban League award, Mrs. Beatty. I wasn't 
aware that you had received that.
    The Chair recognizes the gentleman from Arkansas, Mr. Hill, 
for 5 minutes.
    Mr. Hill. Mr. Chairman, thanks for this hearing.
    This separation of powers and the power of the purse has 
been such a recurring issue for the Congress, and while I think 
that I understand the distinguished gentlelady's comments about 
the Judiciary Committee, I think that since these are so 
pervasively used in the financial services industry, I am glad 
to see that this hearing is being held in this committee too, 
just to expose the members of the Financial Services Committee 
to this level of detail.
    The first thing that I want to ask Ambassador Gray is, does 
the worthiness of an organization receiving a mandatory 
donation cure the underlying problem of whether the 
congressional appropriations process has been circumvented? 
Because of this good that Professor Min talks about, is that a 
legitimate reason?
    Mr. Gray. If I understand your question, it doesn't matter 
to the principle involved and the application of the 
Miscellaneous Receipts Act, whether any money actually touched 
the hands of any man or woman in the Justice Department.
    It is money due and owing the United States and should be 
deposited in the Treasury, and there is no excuse that the 
money went to worthy causes. Whether the causes are worthy is 
for you to decide, not for the Department to decide, and the 
money belongs to Congress, once it has been agreed to by the 
defendant in the case.
    Mr. Hill. Thank you, Ambassador.
    Dr. Larkin, isn't it true that some of these activist 
groups that we have referred to this morning, like ACORN and La 
Raza, pressured banks in the past to make certain kinds of 
loans and that even possibly contributed to the crisis, if you 
look back over the past 15 years or so?
    Mr. Larkin. I don't have any personal knowledge to that 
effect. I know there have been claims to that effect that have 
been reported in the media, and you would have to ask those 
journalists. But I couldn't give you any details about any such 
claims, because I just don't have personal knowledge in that 
regard. Oh, can I just follow up on the first question you 
asked?
    Mr. Hill. Yes. Sure.
    Mr. Larkin. Giving money to Guide Dogs for the Blind is 
also going to wind up tremendously benefiting a lot of people 
but if Congress hasn't authorized that money to be paid out, 
you can't cure the antecedent illegality by virtue of the fact 
that the recipient is going to make good use of it. Because you 
also are going to have instances where there will be misuses of 
it.
    Mr. Hill. I yield back the balance of my time, Mr. 
Chairman.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Cleaver, for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman, and Mr. Ranking 
Member for--well, I am not thankful that you are holding this 
hearing, but nevertheless, it is good to be here. Thank you for 
being here.
    I did the commencement on Saturday for the University of 
Missouri Law School, so I am very qualified to talk about legal 
matters, even though my degree is in theology. And I am always 
frustrated when we travel in parallel universes on this field. 
I don't know what is going on.
    Some of us were here and so we can speak experientially 
about what is going on. First of all, I don't know how in the 
world ACORN got into this conversation. I just think that is 
one of the most amazing things that happened, but that is just 
a weird on my part, I guess
    Let me ask Professor Min, are any of you attorneys like me?
    Okay. Dr. Larkin, isn't it true that all of these legal 
settlements were subject to a court review? Dr. Larkin, is 
that--
    Mr. Larkin. If there were--
    Mr. Cleaver. Go ahead. I'm sorry.
    Mr. Larkin. If there was a claim filed in court to start 
with, then yes. But, the review is very limited, but I don't 
think there were all these types of settlements. There is 
always a claim first filed in court. Oftentimes, you see 
agreements between the government and private parties to 
dispose of a matter without anything being filed.
    Mr. Cleaver. Yes, yes, sir. But I am talking about these 
settlements.
    Mr. Larkin. No, no, and I am trying to remember if they 
first filed anything in this case, and I can't remember if 
there was a complaint filed or if they settled without filing a 
complaint.
    Mr. Cleaver. Yes.
    Mr. Larkin. It was?
    Mr. Cleaver. There were three of them--
    Mr. Larkin. Okay. My colleagues said there was and so I 
will take that, yes. But the analysis is the same either way.
    Mr. Cleaver. It is?
    Mr. Larkin. Yes. The reason is, when it is filed in front 
of a District Court Judge, essentially the only thing a 
District Court Judge can do in approving a settlement is to 
look to see, for example, whether or not it was agreed to for 
an impermissible purpose.
    For example, in a plea agreement, the District Court is 
entitled to review the plea agreement to make sure that it 
wasn't, for example, a product of a bribe. And I am not saying 
anyone was bribed here. But I am just saying the review is very 
limited.
    Mr. Cleaver. Yes.
    Professor Min?
    Mr. Min. I would argue that the court review is implicitly 
endorse the idea that these types of provisions are in fact 
constitutional, and permissible under the Miscellaneous 
Receipts Act. A number of my colleagues have given maybe 
persuasive theoretical constitutional arguments as to why these 
types of provisions might not be constitutional.
    But the fact is that as a matter of settled law, these 
types of provisions have been found to be permissible under 
current law.
    Mr. Cleaver. Some of us were here during all of this, from 
day one until today, and so we went through it, experientially, 
and so we know that there was a judicial involvement, and there 
are settlements with the Federal Government, through the 
Justice Department, no matter who is in the White House, almost 
every day.
    Isn't that right Ambassador Gray?
    Mr. Gray. If I understand, the--if you back up a little 
bit, the question of what is current practice, seems to revolve 
around the fact that the Miscellaneous Receipts Act was enacted 
a century ago, whatever, but there have been recent Office of 
Legal Counsel Opinions coming out of the Department of Justice 
which are very, very clear, about what can and what cannot 
happen with these settlements.
    And the fact that there is a court approval does not, I 
think, when no one is there arguing either side of it, which is 
not going to happen when you have two parties who are settling 
a case, there is never going to be any defense of your 
authority and your constitutional obligation to oversee how 
these funds are spent and decide how these funds are spent.
    Mr. Cleaver. So, a judge is just going to ignore anything 
going on around a particular case and just deal with the 
settlement? Just forget everything else surrounding that 
particular case?
    Mr. Gray. There is no one arguing and the issues aren't 
raised in the settlement. The settlement agreements are usually 
reached in private and presented to the judge of the consent 
decree and the judge, as my colleague here has said, is not 
being asked to rule on the validity of the settlement under 
Miscellaneous Receipts Act, the Antideficiency Act or the 
Appropriations Clause of the Constitution.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the gentleman from Colorado, Mr. 
Tipton, for 5 minutes.
    Mr. Tipton. Thank you, Mr. Chairman. I do appreciate your 
holding this hearing today. It is interesting to be able to 
hear it.
    I would like to start with Professor Min. Do you believe, 
in your estimation, that people, through some of the alleged 
actions of the banks, did suffer personal damage?
    Mr. Min. If you are talking about homeowners and average 
Americans, sure. Absolutely.
    Mr. Tipton. They did. So, we have had abundant testimony 
across a variety of our whole committee, subcommittees, going 
through that the important thing is standing up for the 
individuals to make sure that they have their concerns 
addressed, that they are going to actually be helped.
    So, if we are taking money to rebuild a bridge, maybe to be 
able to rebuild an equestrian center to go through, is that 
going to be helping people in those personal instances?
    Mr. Min. I think that, as Ambassador Gray said, there is a 
requirement that there is a nexus between the proposed 
settlement terms and the alleged misconduct. So, that is one 
answer.
    I think also that I would point out that private parties 
are a little different than the government. The Federal 
Government is not suing on behalf of individuals. We have 
private causes of action for that.
    The Federal Government's duty is to try to maintain civil 
penalties on behalf of the Federal Government as a whole, and 
the country as a whole and that includes, primarily, the 
deterrence affects and general compensation for Americans, 
rather than to any particular interdictums.
    Mr. Tipton. And general compensation for Americans needs to 
be focused actually on what the injury was.
    Mr. Min. With a nexus, exactly.
    Mr. Tipton. Right. So, it probably disturbs you that there 
was a report in The Wall Street Journal in terms of 
disbursement of those funds where they were being directed for 
just exactly what I spoke to.
    New York Governor Cuomo was rebuilding an equestrian 
center, and rebuilding a bridge. How is that beneficial to 
people in that general class to be able to redress those 
grievances?
    Mr. Min. Right. So I think Governor Cuomo was probably 
using New York funds, rather than the provisions, the 
charitable payment provisions that issued here.
    Mr. Tipton. According to The Wall Street Journal, these 
were resources that were coming in off of the--
    Mr. Min. Bank settlements.
    Mr. Tipton. They were coming in.
    Mr. Min. Right, but they would have come in from, a portion 
allotted specifically to the State of New York, right?
    Mr. Tipton. So, effectively, with fungibility of money, 
this--
    Mr. Min. I am not an expert in New York law, so I don't 
know what New York law allows or does not allow Governor Cuomo 
to do. I do find that problematic but I think it is outside the 
scope of the particular provisions of that issue.
    Mr. Tipton. Dr. Larkin, would you like to maybe comment on 
this?
    Mr. Larkin. Yes, money is fungible. So, when you give money 
to a particular organization, what you are doing is freeing up 
other funds for other purposes. So, even if you give somebody 
$10 and they use it for the purpose that you have specified, 
that means they can use dollars they get from elsewhere for a 
different purpose.
    And that is why Congress needs to examine critically who 
gets money, because it is fungible. The Justice Department 
would take the position, under Title VI and Title IX, that if 
you get any money, you are now governed entirely by what Title 
VI and Title IX provide, because they know that money is 
fungible.
    And if money is fungible, then you have to be concerned 
about supplementing the income of people who may use it in ways 
that are improper. You can give money to the Red Cross, but 
that frees up money they could otherwise spend. If they use it 
for an improper purpose, in essence you have enabled them to do 
that.
    That is why Congress needs to look into this matter, decide 
who gets money, and then have audits done after the fact.
    Mr. Tipton. Would you tend to share the opinion, I think 
there are a number of us who want to be able to reinforce 
Article I, to make sure that Congress is actually controlling 
those purse strings, no matter where those resources come from, 
be it a fine, a fee coming in, the only reason any of these 
entities exist is because of an act of Congress. So, it is very 
appropriate for Congress to be able to direct how every one of 
those dollars is spent. Would you agree with that?
    Mr. Larkin. Absolutely, and one of the ways it can be spent 
is to recompense the people who are actually hurt. In criminal 
law, there are several acts that are designed to address the 
needs of victims of crime. You could do the same thing here, 
whether it is a housing matter or generally for a non-criminal 
injury, but that is a program Congress can design.
    But that is a program Congress can manage and that is a 
program that will have to have some oversight by an Inspector 
General or someone else to make sure the funds are properly 
used.
    Yes, you can get money to victims. And yes, they should get 
money, but it should be done in the proper manner to make sure 
that the taxpayers' dollars are being wisely used.
    Mr. Tipton. Great. Thank you. Mr. Chairman, my time has 
about expired.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the ranking member of the full 
Financial Services Committee, Ms. Waters, for 5 minutes.
    Ms. Waters. Thank you very much.
    Professor Min, the Republicans have claimed that they don't 
oppose the settlements. Instead, they claim that they merely 
want the relief to go directly to homeowners. However, in 
February of this year the Republicans brought to the Floor H.R. 
766 which would gut the Financial Institutions Reform, 
Recovery, and Enforcement Act, commonly referred to as FIRREA, 
a savings and loan error law that gave law enforcement the 
power to prosecute financial crime. As you know, the RMBS 
settlements were brought by the Department of Justice under 
FIRREA. H.R. 766 would change the Act to say that only crimes 
perpetrated against banks could be prosecuted under FIRREA, not 
crimes perpetrated by a bank.
    The bill likewise severely limits the discovery power under 
FIRREA requiring the attorney general or the deputy attorney 
general to directly sign off on subpoenas. This eliminates 98 
percent of the individuals in law enforcement who currently 
have subpoena power.
    What does that suggest to you, Mr. Min, about this claim 
that they want the money to go directly to victims?
    Mr. Min. I think that if you were to eliminate the 
penalties in FIRREA against banks that were--that had engaged 
in wrongful conduct coupled with the Goodlatte amendment or 
bill you would end up with a situation in which no victims 
could be compensated. And that seems very problematic.
    Ms. Waters. Thank you.
    Does anyone on the panel today believe that there was fraud 
committed by financial institutions? I can't see your hands. 
Does anyone on the panel believe that predatory lending by 
financial institutions caused people to lose their homes and 
diminish their quality of life?
    Does anybody on the panel believe that they should be 
prosecuted or taken to task, or made to settle in some way for 
the acts they committed that caused that subprime meltdown in 
2008?
    And does anyone believe that the groups that are organized 
and have the reputation for, and do the daily work of helping 
people to have a better quality of life because they are 
advocating for changes, they are advocating for justice, they 
are working on housing opportunities, they are working on 
making sure that they make government work for everybody? Do 
you believe that these people have any credibility at all? Any 
credibility?
    Mr. Gray. If I could respond, just make a--everything you 
say has merit. That is about the relevance of these potential 
recipients of the money. But that is a choice you should be 
making, not the prosecutor.
    And I just would add that, although it is not part of your 
jurisdiction, the Environmental Protection Agency, which 
everyone knows, I think, is no shrinking violet and makes 
active use of third-party settlements, does not include cash in 
any kind of third-party settlement because, and this is their 
words, use of cash could easily be construed as a diversion 
from the Treasury of penalties due and owing the government.
    What you say, they may very well be a better way. There is 
a better way to compensate victims of the original crisis, but 
that is not what happened. And that is for you--
    Ms. Waters. Well, let me--
    Mr. Gray. --to say.
    Ms. Waters. If I may--
    Mr. Gray. That is for you to decide.
    Ms. Waters. Reclaiming my time. Let me just say this. I 
would believe some of my colleagues on the opposite side of the 
aisle if they have not demonstrated such a dislike for activist 
groups. They don't like these grassroots groups that tend to 
speak for and act on behalf of poor people, and people who 
don't have the resources to go to court.
    This is consistent. And, yes, ACORN was mentioned because 
they set ACORN up, the same people who say, ACORN came to my 
office and tried to set me up. And these are the people that 
they like because they want to prove in some--they want to put 
them out of business. That is what they want.
    But I want to tell you something. Some of us who have been 
advocating for poor people and for the least of these all of 
our lives because we see every day what happens to poor people 
without resources.
    We see every day how people are taken advantage of, whether 
it is the payday lenders or whether it is financial 
institutions with exotic products that literally encourage 
people to sign on the dotted line, knowing that they cannot 
afford the mortgage that they are getting them to sign.
    These were the people who didn't vet. These were the people 
who had no documentation loans, on, and on, and on. And they 
should be compensated. And we trust the attorney general to do 
this work. And if the courts have to sign off on it, fine. Sign 
off on it. That is what they did.
    And the system is working. And just because you don't like 
the activist groups does not mean that you come in here and 
talk about somehow we should change the system, and people who 
don't like these activist groups should be responsible for 
deciding what happens to the victims.
    Thank you.
    Chairman Duffy. Does the gentlelady--
    Ms. Waters. I yield back the balance of my time if there is 
any left.
    Chairman Duffy. There is no time left to the ranking 
member. I trust you more than the DOJ, Ms. Waters.
    The Chair now recognizes the gentleman from Illinois, Mr. 
Hultgren, for 5 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman.
    And thank you all for being here.
    I want to address my first questions to Dr. Larkin, if I 
could. In general, if the congressional appropriations process 
is being subverted, which I believe flies in the face of 
Article I of the Constitution, does it matter what groups the 
RMBS settlement money is going to? Isn't this a slippery slope?
    Mr. Larkin. None whatsoever. It is as big a problem whether 
the money goes out to a conservative or a liberal group, and 
whether the disbursement is made by a Republican or a 
Democratic appointee. It doesn't matter. The process is one 
that is being corrupted.
    Mr. Hultgren. I think that is the point that the previous 
questioner just completely missed, is it doesn't matter the 
groups that it is going to; this is a process that is broken 
and a violation really of responsibility.
    Ambassador Gray, I think you said it so well. This should 
be us. It is our responsibility to do this. And why are we 
abdicating our responsibility, giving it over, and whoever the 
group is, furthering really, I would say, a dis-justice and a 
failure to do our work.
    Following up, Dr. Larkin, do you have any concerns with 
political appointees at DOJ or HUD being the ones determining 
which groups should get the money? And I guess, following up, I 
assume I know the answer. But with what Ambassador Gray said, 
don't you think Congress should be the one that makes these 
decisions?
    Mr. Larkin. Absolutely. The Appropriations Clause is quite 
clear. And the Supreme Court has said that on several 
occasions. It is your responsibility. It is not the Justice 
Department's responsibility.
    Mr. Hultgren. Yes. And it doesn't matter, I would assume 
you would agree with this, that if this happened under a 
Republican Administration, you would still say the same thing, 
that if it is still a misuse of authority that should be 
Congress' authority. We are giving it to somebody else.
    Would you agree with that? It doesn't matter what the 
Administration is, it doesn't matter what the group is, this is 
a broken process.
    Mr. Larkin. Absolutely, and on either the last or the 
penultimate page of my written statement, I criticized a 
Republican U.S. attorney, the current Governor of New Jersey, 
for doing exactly that.
    Mr. Hultgren. Thank you. And I appreciate that fairness, 
and recognition that this is bigger than a couple of groups or 
one Administration.
    Ambassador Gray, if I could maybe address a couple of 
questions to you. First, thank you for your service. Thank you 
for being here. But I wonder, are the RMBS settlements 
structured to do the most benefit to victims of the alleged 
misconduct, do you believe?
    Mr. Gray. I do not believe that they are directed at the 
people who suffered the most, no.
    Mr. Hultgren. What provisions in the settlements detract 
from benefiting the victims, do you think?
    Mr. Gray. I haven't read every single word of every single 
settlement agreement, but I think they basically ignore the 
victims of this. I would agree with the terminology, 
``predatory lending.'' There was a lot of predatory lending.
    Unfortunately, I think a lot of it was, or much of it was 
initiated by the government itself, not by the banks, but 
however you look at the cause, the victims have not been really 
attended to.
    Mr. Hultgren. Let me ask your opinion on this, Ambassador. 
Why do you think DOJ structured the settlements in a way that 
does not provide the most benefit for those who are harmed, in 
your opinion?
    Mr. Gray. I think--I don't know how politically incorrect 
to be in this, but it was easier that way. The government got 
multibillion dollar numbers in the front pages of the papers, 
or at least the business section. And so, it looked very good 
for the prosecution, but I don't think it looked very good for 
the process for two reasons.
    One, the victims aren't themselves really targeted for 
relief, and number two, and this goes back to the S&L crises of 
Bush 41, I would like to have seen, I mean, he insisted as a 
condition of any bailout that there be prosecutions that 
actually resulted in jail sentences for people who had really 
violated the criminal law.
    And we don't really see that now. And that is, I think, a 
failing. Although, I don't want to see anyone go to jail, I do 
think prosecutions were appropriate.
    Mr. Hultgren. Yes. Thanks, Ambassador.
    I just have a few seconds left. Professor Rosenkranz, are 
there provisions in these settlements that you would describe 
as unprecedented?
    Mr. Rosenkranz. Certainly, the scale of these third-party 
payments is unprecedented. There are scattered historical 
examples, but the sheer number of dollars is kind of startling 
in these cases.
    Mr. Hultgren. As far as you are concerned, that had never 
happened before?
    Mr. Rosenkranz. Certainly at this scale, I don't think so.
    Mr. Hultgren. Okay. Quickly, also Professor Rosenkranz, 
what should Congress do in response to the Administration 
usurping our appropriating authority?
    Mr. Rosenkranz. That is a great question. The President has 
always been tempted to try to evade the Appropriations Clause, 
and Congress has often had to defend its appropriations 
prerogative.
    So, these landmark statutes like the Antideficiency Act and 
the Miscellaneous Receipts Act are hugely important and 
appropriate. And if the Executive Branch finds a new novel way 
to evade this constitutional provision, you should certainly 
consider responding with another act of Congress to forbid this 
practice.
    Mr. Hultgren. Thank you all.
    My time has expired. I yield back.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the gentleman from Minnesota, Mr. 
Ellison, for 5 minutes.
    Mr. Ellison. Mr. Gray, could you define the term ``slush 
fund?''
    Mr. Gray. You are asking me to define the term--
    Mr. Ellison. The term slush fund.
    Mr. Gray. Slush fund. I don't think I use that term.
    Mr. Ellison. I just want to know if you can define that 
term.
    Mr. Gray. It is a fund that the dispensers of the money 
have complete discretion over how it is spent, under no 
controls or guidance from any other authority.
    Mr. Ellison. Is my bank account a slush fund to me?
    Mr. Gray. Excuse me?
    Mr. Ellison. Is my bank account a slush fund to me?
    Mr. Gray. No.
    Mr. Ellison. Because I have--
    Mr. Gray. You own--
    Mr. Ellison. --complete discretion over how it is spent.
    Mr. Gray. You own the money.
    Mr. Ellison. Right.
    Mr. Gray. But the trouble is these settlements--
    Mr. Ellison. Well, let me tell you--
    Mr. Gray. --who also own the money--
    Mr. Ellison. I reclaim my time. A slush fund is defined as 
something used for illicit or corrupt political purposes.
    And I would just like to know, Professor Min, under the 
definition of the fund being used for illicit or corrupt 
purposes, I would just like somebody to help me understand how 
the funds in this case could be described as illicit or corrupt 
when the money is allocated to housing counseling groups like 
Catholic Charities USA, the United Way, the National Council of 
La Raza, and the Urban League, to help homeowners who were 
harmed during the financial crisis.
    How could that be a slush fund?
    Mr. Min. I have not heard any persuasive evidence that 
there is any illicit affect to this. In fact, I would argue 
that these particular settlements were crafted the opposite 
way.
    When we look at actual evidence as opposed to opinion or 
hyperbole what we see is that housing counseling, foreclosure 
prevention efforts of the types that these consumer provisions 
were designed to do, are the most effective way to help 
aggrieved and struggling homeowners. That is a fact, not an 
opinion.
    Mr. Ellison. And going back to you, Mr. Gray, I could have 
sworn I heard you say that predatory lending did occur, but it 
was done by the government, not the banks. I am not aware of 
the government engaging in retail mortgage lending. Are you?
    Mr. Gray. Maybe I don't understand anything, but I think 
Fannie Mae and Freddie Mac were at the forefront of making--
    Mr. Ellison. Freddie Mac and Fannie Mae do not go to home 
mortgage buyers, and offer terms like, I don't know, you know, 
prepay penalty, 228, 327 balloon mortgages, yield spread 
premium. These are the hallmarks of a predatory loan.
    Professor Min, are you aware--
    Mr. Gray. Can I--
    Mr. Ellison. No. Excuse me. I reclaim my time. I gave you a 
chance to answer.
    But, Professor Min, are you aware of the government 
engaging in retail mortgage lending in the way that a 
commercial bank, or nonbank lender?
    Mr. Min. Absolutely not. In fact, that is, again, a myth, 
an opinion versus facts. The facts are the Fannie and Freddie 
did not originate, or seek to have originated any of those 
types of loans. Those are originated for Wall Street 
securitization, which is why all of these particular fraudulent 
aspects were attributable to Wall Street RMBS, and these 
settlements with private institutions.
    Mr. Ellison. Okay.
    I have another question, Mr. Gray. Could you explain to me, 
sir, now you just said that there were victims of predatory 
lending, I believe that was your testimony today, and if there 
were settlements why did the banks settle if they had done 
nothing wrong, or if all the predatory lending was by the 
government?
    Why did they settle? They have lawyers. They have a lot of 
lawyers. They have well-paid lawyers. Why did they settle at 
all? Why didn't they just say, we are going to court, and fight 
it out, and we are not paying a thing? Why did they settle?
    I don't know. Mr. Min, Professor Min, do you have an 
opinion? Because it seems like Mr. Gray doesn't have an 
opinion.
    Mr. Min. Clearly, I think they were misrepresentations and 
warranties that were not satisfied with the products that they 
sold and marketed.
    Mr. Ellison. So, they settled a case because they had 
liability exposure?
    Mr. Min. Almost certainly.
    Mr. Ellison. Yes. That is why people settle. In 16 years of 
me practicing law, I don't know people who settle cases if they 
don't think they are going to lose at trial, or at least there 
is some chance of it.
    So let me just ask you this. Could you talk, Professor Min, 
about how housing counseling is actually something that helps 
consumers, and that the settlements that help fund this 
activity actually makes for clearer better markets and restores 
some honesty to this mortgage market?
    Mr. Min. Right. When you think about the abundance of 
information out there, the average homeowner, particularly the 
one who is struggling, doesn't necessarily have a good idea of 
their options, how to navigate through the foreclosure 
prevention process, how to get a loan refinanced, maybe how to 
get a principal reduction, or a qualification for one of the 
government programs or other programs available to them.
    All of these factors can help them along with some legal 
guidance navigate that very, very complex, difficult process. I 
am sure those of us who have bought homes know how complex that 
mortgage agreement is, how that home purchase agreement, title 
insurance, all of that is very, very complex.
    And you can imagine that for folks who are really 
struggling with a lot of things that is a very, very difficult 
terrain to navigate.
    Mr. Ellison. I am out of time. Thank you.
    I yield back, and I thank all the witnesses today.
    Chairman Duffy. The gentleman yields back.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentleman from Texas, Mr. Green, for 5 
minutes.
    Mr. Green. Thank you, Mr. Chairman.
    Let me start with where Mr. Ellison somewhat left off. I 
want to just highlight, emphasize, underline the notion that 
JPMorgan Chase settled for $13 billion, $13 billion. JPMorgan 
Chase has a battery of lawyers. If there were questions with 
reference to constitutionality, JPMorgan Chase has lawyers who 
can litigate those questions.
    They were not litigated. And no court has concluded that 
any one of these settlements is invalid, unconstitutional, 
illegal, unethical, not one court. Bank of America, $17 
billion. Citigroup, $7 billion. Goldman Sachs, $5 billion.
    You would think that at some point, these business folks 
would say, hey, guys, quit dragging us into this. Don't keep 
bringing our names before the American public with reference to 
these things.
    You would think that at some point they would want to see 
this behind them, unless they are behind this. Who knows?
    Let us go now to a claim that was made with reference to 
some of this being unethical. All lawyers are aware that if 
there is a grievance with reference to ethics, you can take it 
to an ethics commission.
    They are across the length and breadth of this country. 
Every State has an ethics commission. If there were unethical 
questions, they could be addressed to an ethics commission, but 
we now bring them to Congress. We are going to litigate the 
ethics of it when there are commissions established to 
investigate, acquire evidence, and make decisions.
    Next point. Homeowners need help. That is what these 
settlements do. They accord homeowners help. And they need 
help. If you have never dealt with one of these circumstances, 
you don't understand that a homeowner walks in with just a box 
of paperwork. They don't know what they have in the box. All 
they know is that they need help.
    And when they go into these legal aid societies, to these 
NGOs, they have to sort through and sift through. The homeowner 
doesn't know that there is a HAMP program, a HARP program. They 
don't understand that there is a deed in lieu that they might 
engage with and acquire.
    They don't understand that there are short sales. They 
don't understand these things. That is why these programs are 
so beneficial to prevent foreclosure. So the money is going to 
help homeowners, to help them keep their homes, and stay in 
their homes.
    This really is an effort, it seems to me, to legitimize a 
process that would prevent homeowners from getting the 
opportunity to stay in their homes. And I regret that.
    Now, finally, on a couple more points quickly, I am 
concerned about the notion that the banks aren't here. If we 
really want records from the banks, why don't we call the banks 
in? Let them testify. Maybe the banks are here and I don't know 
it.
    Is anybody here representing a bank today? If so, raise 
your hand.
    You are? Which bank are you representing, sir?
    Mr. Gray. I think you are familiar with it. It is a 
gigantic bank of $270 million in Big Springs, Texas.
    Mr. Green. Okay. Well, kindly give us the name today if you 
would.
    Mr. Gray. Give--
    Mr. Green. The name of the bank.
    Mr. Gray. The National Bank of Big Springs, Texas.
    Mr. Green. The National Bank of Big Springs, Texas.
    Mr. Gray. Jim Purcell, I think we met when he testified--
    Mr. Green. Okay.
    Mr. Gray. --before this committee--
    Mr. Green. All right.
    Mr. Gray. --a year or 2 ago.
    Mr. Green. Well, your honor, I appreciate you sharing that 
with me.
    But we have the opportunity to require JPMorgan Chase, Bank 
of America, Citigroup, and Goldman Sachs to come before the 
committee and bring the records related to the settlement. You 
don't have to require the Justice Department to do it. If you 
say they won't do it, then I believe they have given you what 
they can. But you can bring the banks in.
    Why are we harping on the Justice Department when the banks 
are available to be brought in and they can give it to us? Why 
not? There is something about this that the American public 
doesn't like. And I am telling you right now, the American 
public is fed up with this.
    They want to see people prosecuted. Here we are finding 
clever ways to keep homeowners from staying in their homes when 
we ought to be finding ways to put people in jail who 
participated in this fraud, that have never been properly 
addressed, and, yes, we could appropriate money to do it if we 
wanted to, and we could investigate it if we wanted to.
    It is time to satiate the desires of the American public.
    I yield back.
    Chairman Duffy. The gentleman yields back.
    I want to thank our witnesses for their testimony today and 
a great conversation about what the appropriate role is through 
Congress or through bank settlements, where we get information 
whether it is from banks or from the government itself.
    As the panel might realize, the voting bells have just 
rung. We have 10 minutes to get to votes. I was hoping to go to 
a second round with the panel, but you can see the room has 
cleared because everyone has gone to the Floor to vote.
    The Chair notes that some Members may have additional 
questions for this panel, 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 these witnesses and to place their 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.
    I ask the witnesses to please respond as promptly as 
possible. I, again, want to thank you for your insight and 
testimony today. And with that, this hearing is now adjourned. 
Thank you.
    [Whereupon, at 10:39 a.m., the hearing was adjourned.]

                            A P P E N D I X


                              May 19, 2016

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