[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
THE DODD-FRANK ACT FIVE YEARS
LATER: ARE WE MORE FREE?
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 17, 2015
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-50
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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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
C O N T E N T S
----------
Page
Hearing held on:
September 17, 2015........................................... 1
Appendix:
September 17, 2015........................................... 57
WITNESSES
Thursday, September 17, 2015
Gray, Hon. C. Boyden, Founding Partner, Boyden Gray & Associates. 7
Gupta, Deepak, Founding Principal, Gupta Wessler PLLC............ 9
Skeel, David A., Jr., S. Samuel Arsht Professor of Corporate Law,
University of Pennsylvania Law School.......................... 8
Spalding, Matthew, Associate Vice President and Dean of
Educational Programs, Hillsdale College........................ 5
Zywicki, Todd J., Foundation Professor of Law and Executive
Director of the Law and Economics Center, George Mason
University School of Law....................................... 11
APPENDIX
Prepared statements:
Hinojosa, Hon. Ruben......................................... 58
Gray, Hon. C. Boyden......................................... 60
Gupta, Deepak................................................ 66
Skeel, David A., Jr.......................................... 97
Spalding, Matthew............................................ 112
Zywicki, Todd J.............................................. 124
Additional Material Submitted for the Record
Zywicki, Todd J.:
Written responses to questions for the record submitted by
Representative Hultgren.................................... 137
Written responses to questions for the record submitted by
Representative Murphy...................................... 139
Gray, Hon. C. Boyden:
Written responses to questions for the record submitted by
Representative Murphy...................................... 141
THE DODD-FRANK ACT FIVE YEARS
LATER: ARE WE MORE FREE?
----------
Thursday, September 17, 2015
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
[chairman of the committee] presiding.
Members present: Representatives Hensarling, Royce, Lucas,
Garrett, Neugebauer, Pearce, Posey, Fitzpatrick, Luetkemeyer,
Huizenga, Duffy, Hurt, Stivers, Stutzman, Mulvaney, Ross,
Pittenger, Barr, Rothfus, Messer, Schweikert, Guinta, Williams,
Poliquin, Love, Hill, Emmer; Waters, Maloney, Velazquez,
Sherman, Hinojosa, Lynch, Scott, Green, Cleaver, Himes, Kildee,
Delaney, Sinema, and Vargas.
Chairman Hensarling. The Financial Services Committee will
come to order. Without objection, the Chair is authorized to
declare a recess of the committee at any time.
Today's hearing is entitled, ``The Dodd-Frank Act Five
Years Later: Are We More Free?''
Before proceeding further, I would like to sadly inform all
Members who may not be aware that the gentlelady from Missouri,
Mrs. Wagner, lost her mother earlier this week, so she will not
be here for today's hearing. And if you could certainly keep
her and her family in your thoughts and prayers.
I now recognize myself for 3 minutes to give an opening
statement.
Today, the committee holds the third of its three hearings
looking at some of the consequences of the Dodd-Frank Act upon
its fifth anniversary. Earlier, we explored how in many ways,
Dodd-Frank has made us less prosperous and the economy less
stable.
Today, as Americans commemorate the 228th anniversary of
the signing of the Constitution, perhaps the greatest document
devised by the mind of man, we explore how Dodd-Frank has,
regrettably, made us less free.
We hold these hearings because too many of our fellow
citizens have still not achieved economic recovery for
themselves and their family, and many are losing hope. We want
their lives to be better; we want them to thrive, achieve their
dreams, pursue happiness, and earn success.
But none of that is possible without basic economic freedom
in the rule of law, bedrock principles upon which our republic
rests. Dodd-Frank erodes the economic freedom and opportunity
that empowers low-income Americans to rise and generate greater
shared prosperity.
Dodd-Frank moves us away from the equal protection offered
by the impartial rule of law towards the unequal and
victimizing rule of political bureaucrats. Of all the harm
Dodd-Frank inflicts, this is the most profound and disturbing.
Dodd-Frank exemplifies the insidious belief among many
Washington elites that the American people cannot be trusted to
make good decisions for themselves so government must do it for
them. Without Washington's coercive mandates we might just pick
the wrong health plan, the wrong mortgage, the wrong financial
advisor, or maybe even, God forbid, the wrong lightbulb.
Perhaps the ultimate expression of this elitist attitude is
the Bureau of Consumer Financial Protection. Why? Why in
America would we trust one American to decide which financial
products and services the rest of us are allowed to have?
Pray tell, how does Dodd-Frank empower people to rise when
it centralizes power in secretive distant bureaucracies and
takes away consumers' freedom to make their own choices? This
is not the rule of law; it is the rule of rulers.
Equally offensive is the Financial Stability Oversight
Council. By defining vague statutory terms in any fashion that
pleases them, this amalgamation of regulators can exert
ultimate functional control of almost any large financial firm
in our economy, and do so with utter disregard for due process.
Again, this is not the rule of law; it is the rule of rulers.
Quite simply, Dodd-Frank hurts the poor and the unemployed
when it smothers opportunities for their success with
oppressive and costly rules that squeeze small businesses and
devour dollars that could otherwise be used to secure a good
job and a career path for those who need them.
To restore upward mobility, fight opportunity inequality,
and create a healthier economy, it is time to move beyond Dodd-
Frank. It is time to reinvest in the power of economic freedom
and the American people, reestablish the rule of law, and then
watch the American people rise and create a nation of boundless
opportunity for all.
I now recognize the gentlelady from New York, Mrs. Maloney,
ranking member of our Capital Markets Subcommittee, for 3
minutes.
Mrs. Maloney. Thank you, Mr. Chairman, for calling this
third hearing of the committee.
Today, we meet to debate the merits of the constitutional
challenges that have been brought against the Dodd-Frank Act
and to consider whether the Act has made us ``more free.''
However, I am afraid today's discussion won't be much of a
debate.
In at least four cases, Federal district courts have
rejected constitutional challenges against the Consumer
Financial Protection Bureau (CFPB), the Financial Stability
Oversight Council (FSOC), and the Orderly Liquidation Authority
(OLA).
But today I would like to focus on the challenges to the
Consumer Financial Protection Bureau because one of the most
frequent criticisms of Dodd-Frank in these court challenges is
that the CFPB is somehow a threat to individual liberty because
the Bureau is not, ``accountable to Congress.'' I agree that it
is important for the CFPB to be accountable to Congress, but
exactly what does ``accountable'' mean?
Webster's dictionary defines the word accountable as,
``required to explain actions or decisions to someone.'' By
this definition, the CFPB is definitely accountable to
Congress. In fact, we are having a hearing next week in which
Director Cordray will be here to explain his actions and
decisions to this committee.
Every court that has addressed the issue of the CFPB's
constitutionality has concluded that it is perfectly
constitutional. In fact, just a few months ago a Federal court
upheld the constitutionality of the CFPB and stated that the
CFPB is, ``no venture into uncharted waters. It is a variation
on a theme--the independent regulatory agency with enforcement
power--that has been a recurring feature of the modern
administrative state.''
So instead of arguing about whether the CFPB undermines the
``rule of law,'' this committee would be better off recognizing
that Dodd-Frank is the law and working cooperatively to improve
the law.
Thank you. I yield back, and I look forward to the
testimony of our guests today.
Chairman Hensarling. The Chair now recognizes the gentleman
from Texas, Mr. Neugebauer, chairman of our Financial
Institutions Subcommittee, for 2 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman.
This hearing poses the question: Are we more free? And as I
look at the government, particularly the structure of our
financial regulatory system, I think the answer most surely is,
we are not.
Seven years ago this week, Lehman failed. And in the
following weeks our financial institutions experienced more
failures. Government response focused on the suspension of free
market principles by policymakers.
Looking back at this crisis, I can't help but think about
the quote from Rahm Emanuel: ``Never allow a good crisis to go
to waste.''
You see, the financial crisis provided political cover for
suspending the rule of law and allowing the government to pick
winners and losers. Crisis is often invoked to rationalize both
government discretion and the waiver of rule of law.
Crisis also produced Dodd-Frank, which cemented principles
that provide to the government broad and unchecked tools to
micromanage private companies and the financial habits of
American consumers.
One such example is the creation of the Orderly Liquidation
Authority, OLA, over financial institutions in distress. Under
OLA, once a financial institution is in the hands of the FDIC,
the government can pick winners and losers of the firm's failed
creditors.
This process subverts the carefully calibrated rules
designated to protect all creditors under the bankruptcy
principles. Further, OLA's original intent to liquidate failing
firms has been distorted under the single-point-of-entry
approach, to focus instead on reorganization of the firm with
taxpayers taking the risk. Under this framework, the basic
expectations of the rule of law that rules will be transparent
and knowable in advance are subverted.
When the government is granted this much power, we surely
cannot be free. I hope this committee will continue to take
steps to restore the rule of law for our financial markets.
With that, Mr. Chairman, I yield back.
Chairman Hensarling. The gentleman yields back.
Today, we welcome the testimony of a distinguished panel of
witnesses.
First, Dr. Matthew Spalding, who is the associate vice
president and dean of educational programs at Hillsdale
College. Dr. Spalding is the executive editor of the ``Heritage
Guide to the Constitution.'' He was previously vice president
of American Studies at the Heritage Foundation. He is a senior
fellow at the Claremont Institute for the Study of
Statesmanship and Political Philosophy. And he is a graduate of
Claremont McKenna College and the Claremont Graduate School.
Ambassador Boyden Gray is founding partner of Boyden Gray &
Associates. Mr. Gray has held a number of senior positions in
government service, including as White House Counsel to
President Bush 41, and ambassador to the European Union.
He practiced law for 25 years at an international law firm
and clerked for Chief Justice Earl Warren. Ambassador Gray is a
graduate of Harvard College and the University of North
Carolina at Chapel Hill.
Professor David Skeel, of the University of Pennsylvania
Law School, is the author of a number of books on financial
services and law. In addition to Penn Law, he has taught at
Georgetown University, the University of Virginia, the
University of Wisconsin, and Temple University. He is a
graduate of the University of North Carolina and the University
of Virginia Law School.
And I wish to announce to all Members that we will be
excusing this witness, Professor Skeel, at 12:30 due to a
previous commitment.
Mr. Deepak Gupta is a founding principal of Gupta Wessler
PLLC. Mr. Gupta specializes in Supreme Court appellate and
complex litigation on a range of issues, including on
constitutional law matters.
He was previously Senior Counsel for Enforcement Strategy
at the CFPB. Mr. Gupta is a graduate of Georgetown University
Law Center and Fordham University.
Last but not least, and no stranger to this committee,
Professor Todd Zywicki of George Mason University School of
Law. Mr. Zywicki previously practiced law in an international
law firm, and worked for Judge Jerry Smith at the U.S. Court of
Appeals for the 5th Circuit.
He has published many articles in leading journals and has
held academic appointments at a number of institutions across
the country. He is a graduate of the University of Virginia Law
School, as well as Clemson University and Dartmouth College.
Each of you will be recognized for 5 minutes to give an
oral presentation of your testimony. For those of you who have
not testified before, there is a lighting system before you.
Yellow means that you have 1 minute to go, and red means it is
time to stop and yield to the next witness.
Dr. Spalding, you are now recognized for a summary of your
testimony.
STATEMENT OF MATTHEW SPALDING, ASSOCIATE VICE PRESIDENT AND
DEAN OF EDUCATIONAL PROGRAMS, HILLSDALE COLLEGE
Mr. Spalding. Thank you, Mr. Chairman.
My testimony this morning focuses on the broader issue of
the rule of law and the rise of bureaucratic government, and I
will summarize it by making four points.
First, the rule of law is the most important and
significant and influential accomplishment for the long history
of human liberty. One need only read Shakespeare to see that
Anglo American history for 1,000 years is replete with the
back-and-forth between despotism and the slow development of
the concept of the rule of law. English kings regularly sought
to get around the law by exercising the prerogative power.
It is associated with four key components: first, a regular
process of law enforcement and adjudication, not arbitrary
will.
Second, rules binding on rulers and the rulers alike and
the ruled. No one is above the law. No one is privileged.
Third, there are certain unwritten rules and generally
understood standards with which lawmaking must conform. No ex
post facto laws, but there is due process.
And lastly, the rule of law is based on and emphasizes
centrality of lawmaking as the authoritative source of those
laws. In America, we can add to the Declaration of
Independence, based on natural rights, the idea that legitimate
governments are organized and structured according to the
consent of the governed, and a carefully designed and
maintained written Constitution where the primary functions of
governing--lawmaking, executing, and enforcing the law--are
divided into branches with independent, unique powers that
can't be delegated away.
The modern state has a very different view that grows out
of a faith in science applied to public policy. The 19th
Century progressives took this argument and Americanized it to
reshape the old constitutional rule of law system into a more
efficient form they call the administrative state.
Politics were to remain in the realm of expressing
opinions, but the real decisions and details of governing would
be handled by administrators or experts, separate and immune
from the influence of politics and public scrutiny.
The United States has been moving down this path for some
time in fits and starts from the initial progressive-era
reforms through the New Deal, but a significant shift and
expansion occurred more recently under the Great Society and
its progeny, Democratic and Republican. Whereas initial
regulations dealt with targeted commercial activity, there was
a turn in the 1970s to broader regulations concerning wide
areas, such as the environment, employment, civil rights, and
health care.
And the modern phase we are currently under is even a vast
expansion to even more areas, and everything must be dealt with
comprehensively, meaning centrally, uniformly, and
systemically, by administrative apparatus that is more
complicated and expansive than ever.
The Affordable Care Act is an example of that, but so is
the Dodd-Frank Act. It requires administrative rulemakings
reaching not only to every financial institution but well into
the corners of everything in the American economy. Its new
bureaucracies operate outside of the public eye and are subject
to virtually none of the traditional checks.
The CFPB is literally outside the rule of law. It has its
own source of revenue, insulation from legislative and
executive oversight, and broad latitude and discretion to
determine and enforce its own rulings, which is to say, define
its own limits of its own authority.
The result, and my conclusion, is that the rise of
bureaucratic government has changed the structural workings of
the United States Constitution to the detriment of liberty and
self-government. When Congress writes legislation that uses
very broad language that turns extensive powers over to
agencies, the result is that most of the practical decisions,
for all intents and purposes, of lawmaking public policy are
willingly, by Congress, delegated to others whose rules, there
is no doubt, have the full force and effect of laws passed by
Congress.
Modern administrative forms of governing consolidate the
powers of government by exercising the lawmaking power,
executing their own laws, and then judging their application in
administrative courts, guiding individuals through rulemaking
based on increasingly broad and undefined mandates with more
and more authority over an ever-wider range of subjects, all
the while less and less apparent and accountable to the
political process and popular consent.
This is not merely an aspect of modern political life, a
necessary adaptation. It is a new and all-encompassing form of
political organization.
And so here we are 800 years after England's barons forced
King John to sign the Magna Carta, and we are seeing the
institutionalization of the very forms of prerogative power
that, once practiced by feudal monarchs and against which the
whole development of the rule of law was directed, operating
outside the law and not responsive to the democratic
institutions of government.
We should all--Republicans and Democrats alike--recognize
and fear this new state of things, whether it is coming from
the left or the right. If this becomes the undisputed norm of
how things work in America, the characteristic of the modern
state, I fear for the future of our experiment in self-
government.
Thank you.
[The prepared statement of Dr. Spalding can be found on
page 112 of the appendix.]
Chairman Hensarling. Ambassador Gray, you are now
recognized for a summary of your testimony.
Mr. Gray. Thank you very much.
STATEMENT OF THE HONORABLE C. BOYDEN GRAY, FOUNDING PARTNER,
BOYDEN GRAY & ASSOCIATES
Mr. Gray. Thank you very much for the opportunity to
testify. I have talked about these issues before, and I have
enclosed the testimony with my prepared text so that everything
will be included here before this committee.
The structural difficulties with the Dodd-Frank Act are, I
think by now, fairly well known, and they have not been cured.
The courts are beginning to get into it, and I hope that you
will, also.
For example, the Orderly Liquidation Authority has
legislation introduced in the Senate by Senator Cornyn and
others to fix the favoritism and the discretion that is
included in that legislation--included in Dodd-Frank, and
including the secrecy and the penalties for disclosure to the
public of what is happening.
The structural difficulties for the titles that I am going
to talk about and have been involved in litigation against are
Titles I, II, and X: the FSOC; the OLA, which you have
mentioned; and the CFPB, which has also been mentioned. What
appears to be the characteristic is just a stripping of all
accountability among the political branches.
There is no White House supervision over the executive
actions--or the agency action taken in any of these titles.
There is virtually no congressional oversight. There may be a
hearing, but Congress doesn't have control over the CPB's
budget, and it doesn't have control over the OLA's budget.
The OLA, the Orderly Liquidation Authority, has the ability
to raise money, to borrow money from the Treasury and get it
paid back from a fee. It is called a fee, but it is really a
tax on the financial community, which bypasses Congress' taxing
authority and takes away from Congress, of course, as a result,
Congress' ability really to follow what is going on.
And then for all three titles, there is truncated judicial
review. In the case of the first two titles, the key issue
identified by the White House as the most important defense, if
you will, from abuse is that the agencies involved have to find
that there is a systemic danger to the financial stability of
the United States, but that standard, both as a matter of
statutory construction and constitutionality, is expressly
excluded from judicial review by the statute. Whether the
courts will accept that exclusion is another question, but
nevertheless, there it is.
The CPB has gotten the most attention of all of the
agencies because it is doing the most at the moment. But it,
again, is insulated from review by the White House, insulated
from review by the Congress. It gets its money from the Federal
Reserve, and the courts are required to exhibit deference to
whatever the CPB says no matter what jurisdiction has--or
belongs to other agencies that share the execution of these
statutes.
The CPB has caused a lot of difficulty, along with Dodd-
Frank, in just heaping regulations on all banks. The big banks
don't like it, but they can live with it, and they can pay for
it. And as the chairman of JPMorgan once said, ``It is my
moat--M-O-A-T--my protection against competition.'' Goldman
Sachs has said much the same thing.
And this makes it very hard for community banks to survive.
They have been consolidating at a very, very rapid rate. And
the liquidity that I think local communities are used to is
drying up as the community banks contract.
Some of the people on this panel have said, well, this is
really nothing more than the nondelegation doctrine. It is a
lot more. It involves all branches of the government, all
three.
It is a much more serious problem than nondelegation, but I
would submit that the nondelegation problems here are severe
enough to cause dramatic change in the way these statutes are
written and your attention.
Thank you.
[The prepared statement of Ambassador Gray can be found on
page 60 of the appendix.]
Chairman Hensarling. Professor Skeel, you are now
recognized for your testimony.
STATEMENT OF DAVID A. SKEEL, JR., S. SAMUEL ARSHT PROFESSOR OF
CORPORATE LAW, UNIVERSITY OF PENNSYLVANIA LAW SCHOOL
Mr. Skeel. Thank you for giving me the opportunity to
testify. It is a great honor to be here.
The last time I was here, I said that it sends chills
through my spine when I sit in this room, and it does, but
somebody said maybe we should turn down the air conditioning.
So maybe I shouldn't say that.
I would like to focus on the single most puzzling and
worrisome feature of the Dodd-Frank Act. After previous
economic crises, lawmakers have nearly always made a concerted
effort to correct any departures from the rule of law. The
Dodd-Frank Act did precisely the opposite.
The Dodd-Frank Act set up a corporatist partnership between
the government and the largest financial institutions that
perpetuates, in my view, some of the worst abuses of the
bailouts of 2008 and 2009. The bailouts themselves repeatedly
subverted rule-of-law principles.
When Bear Stearns was bailed out in early 2008, its sale to
JPMorgan Chase flagrantly violated Delaware corporate law. In
the AIG bailout, the government illegally acquired nearly 80
percent of AIG's stock. Troubled Asset Recovery Program (TARP)
money was used for purposes for which it clearly was not
intended.
Rather than restoring the rule of law, the Dodd-Frank Act
reinforced the partnership between the government and the
largest banks, as Ambassador Gray just mentioned. And it
invites regulators to channel policy through the banks by
putting almost no rule-of-law curbs on their regulatory
discretion.
Let me briefly mention two examples.
The most important source of regulation for the biggest
banks right now is the so-called stress tests they are required
to undergo, and the requirement that the banks prepare living
wills. It is not any of the other regulations in Dodd-Frank and
elsewhere; it really is the stress tests and the living wills.
The stress tests and the living will process are highly
secretive in most respects, often quite arbitrary, and put no
real constraints of any kind on regulators' discretion.
The second example is the new resolution rules in Title II
of the Dodd-Frank Act. When the FDIC takes over a bank, the
bank is given almost no opportunity to respond. There is no due
process whatsoever involved.
And although Title II purports to create creditor
priorities, an orderly priority scheme for an orderly
liquidation, the FDIC actually can pick and choose which
creditors it would like to pay and which do not get paid.
Moreover, the FDIC has announced its intention to ignore
one of the few very clear commands that the Dodd-Frank Act does
provide. Although it is instructed to liquidate any big banks
it takes over--and the liquidation requirement was added with
great fanfare late in the legislative process--the FDIC has
developed a strategy that would ignore this command and
reorganize the troubled bank instead.
The cost of these and other radical departures from rule-
of-law principles are enormous. Many of these costs--again, as
Ambassador Gray just mentioned--will actually fall on the small
and medium-sized banks that lend money to small and medium-
sized businesses throughout our country.
My hope is that you all will re-work these features of the
Dodd-Frank Act and establish rule-of-law principles as the
foundation, once again, of American financial regulation.
Thank you.
[The prepared statement of Mr. Skeel can be found on page
97 of the appendix.]
Chairman Hensarling. Mr. Gupta, you are now recognized for
your testimony.
STATEMENT OF DEEPAK GUPTA, FOUNDING PRINCIPAL, GUPTA WESSLER
PLLC
Mr. Gupta. Chairman Hensarling and distinguished members of
the committee, thank you for the opportunity to testify this
morning.
I am going to be focusing my remarks on what I think is the
Dodd-Frank Act's crown jewel, the Consumer Financial Protection
Bureau, and in particular, the accountability critiques of the
Bureau and the constitutional critiques of the Bureau that we
heard from Ambassador Gray. I will make three basic points.
The first is that the CFPB has already proven that it is
protecting the freedom of consumers to achieve the American
Dream, and Congress should resist efforts to gut the agency.
When we talk about the CFPB, we should not lose sight of the
fact that Congress created the Bureau in response to an epic
financial crisis--a crisis that touched the lives and
livelihoods of millions of Americans and threatened the
financial system's very stability.
Underregulated and unregulated risky financial products set
off a wave of millions of foreclosures and depleted as much as
$9 trillion in home equity. In just a few years of existence,
the CFPB has already returned $11 billion for more than 25
million consumers harmed by illegal practices and has reined in
some of the worst abuses. That includes $14 million that the
Bureau won back from the payday lender Cash America for
targeting and illegally overcharging members of the military.
And the Bureau's victories go beyond the numbers. Across a
range of products and services, it is already making financial
products more transparent and serving as a much-needed
watchdog.
The Bureau is working to level the playing field both
between financial institutions and consumers, and between large
financial institutions and small financial institutions. And
that makes all of us more free, not less free.
Yet the Bureau's opponents--those who stand to gain by
exploiting consumers--are trying to hamstring its efforts and
alter its structure to make it less effective. Those efforts
should be stopped.
Second, the basic accountability critiques of the CFPB and
Dodd-Frank are groundless. We should all care about whether our
institutions of government are transparent and accountable, but
the CFPB, which was specifically designed to resist capture by
special interests in the financial industry, is at least as
accountable to the public as were the existing banking
regulators before and during the crisis.
And in several respects, the Bureau is actually more
accountable. Its budget is capped. Its rules can be vetoed by a
committee of other regulators, something that is not true of
any other agency in Washington. And it is subject to special,
time-consuming small business reviews that only the EPA and
OSHA similarly face. Finally, the CFPB has also gone beyond
legal requirements, using technology to make itself more
directly responsive to the American consumer.
The third and final subject I want to address is the
constitutional challenges to Dodd-Frank. These challenges are
extreme. And they are utterly lacking in legal merit, and have
failed across-the-board in the courts.
In the 5 years since the enactment of Dodd-Frank, its
opponents have invoked every conceivable constitutional
principle, from the separation of powers to the void for
vagueness doctrine to procedural due process, in an effort to
turn back the clock on consumer protection. As I said, these
efforts have failed in every court that has considered them.
And these legal challengers are truly at the fringe. To see
that, look at the recent D.C. Circuit case Big Spring--that is
Ambassador Gray's case--where there were no amicus briefs; none
of the major financial institutions or trade groups supported
those challenges.
Unfortunately, however, these challengers tell us something
about the moment we live in, in which every political
disagreement, from health care to immigration, seems to become
constitutionalized. When we don't have the votes to do what we
want here, we take it across the street to the courts.
And we can have a legitimate policy debate about Dodd-
Frank. We should. But we should be clear that that is not the
same thing as a constitutional debate.
The main constitutional arguments against Dodd-Frank are at
odds with at least 80 years of settled precedent. Most of them
are really disguised nondelegation arguments, arguments that
Congress somehow delegated too much or too vague authority to
the agency.
That doctrine hasn't successfully been invoked in the
courts since 1935, at the height of judicial resistance to the
New Deal, and it has only worked once in the Supreme Court's
history. As Justice Scalia has explained, the Court has never
felt qualified to second-guess Congress regarding the degree of
policy judgment that can be left to agencies.
The challenges based on Presidential removals similarly
seek to turn the clock back to 1935, when the Supreme Court in
Humphrey's Executor removed virtually identical for-cause
removal procedures for Federal Trade Commissioners as we have
with the CFPB.
So at the end of the day, these arguments are not really
attacks on Dodd-Frank or the CFPB as much as attacks on the
very foundations of the modern administrative state.
Thank you.
[The prepared statement of Mr. Gupta can be found on page
66 of the appendix.]
Chairman Hensarling. Professor Zywicki, you are now
recognized for your testimony.
STATEMENT OF TODD J. ZYWICKI, FOUNDATION PROFESSOR OF LAW AND
EXECUTIVE DIRECTOR OF THE LAW AND ECONOMICS CENTER, GEORGE
MASON UNIVERSITY SCHOOL OF LAW
Mr. Zywicki. Thank you, Chairman Hensarling, and members of
the committee.
By coincidence, yesterday in the mail I just happened to
receive the Human Freedom Index, and one of the things I found
from that is today the United States has sunk to 20th in the
world in economic freedom, and one reason is because we sunk to
19th in freedom of our financial system, tied with, among
others, Panama and Mauritius and a few others, lagging behind
countries such as Poland and a few others.
Now, what this simple number is telling us is that we are
learning the hard way lessons we have learned in the past,
which is giving more power, more money, and less democratic
accountability to Washington bureaucrats is not a recipe for
improving the freedom and prosperity for American families.
We see it every day in the impact on American families and
small businesses, as they are losing access to mortgages, small
business loans, and credit cards.
We see it in initiatives such as Operation Choke Point, an
initiative which has targeted completely legal businesses, such
as firearms dealers, payday lenders, and home-based charities,
all under the theory of so-called reputational risk, while
other controversial industries such as abortion clinics have
escaped the net.
We see it in a crushing regulatory burden that is driving
community banks out of business at twice the rate that they
were shrinking prior to Dodd-Frank.
We see it in Jamie Dimon's remark that was referenced
earlier, that Dodd-Frank has built a bigger moat around the
big, too-big-to-fail institutions, protecting them from
competition. And we see community banks leaving entire markets
such as mortgages because of the regulatory burden and the risk
of liability that they confront under those.
We see it in the inability of small businesses to get a
loan to start a business, to build a business, to grow a
business over time. Why? Because community banks provide most
of the small-business lending in this country and most of the
agriculture lending, as well.
And it is reflected in the fact that last year, for one of
the first times in recent memory, we saw more small businesses
disappear than were founded in the United States, in part
because of Dodd-Frank shutting off access to small-business
capital.
We see it in the continued inability of many consumers to
be able to obtain mortgages because of the one-size-fits-all
regulatory burden that Washington is imposing on banks all over
the country, depriving community banks of, among other things,
one of their greatest competitive advantages, which is the
ability to engage in relationship lending with consumers, and
the rule-of-law concerns about the threat of put-back liability
for mortgages that end up going sour later.
We see it in the CFPB's attack on auto dealers through its
claim of alleged discrimination, an industry over which the
CFPB doesn't even have jurisdiction. What they have done here
is basically weaponized American banks, as they have done with
Operation Choke Point, to go after and enforce as an arm of the
Federal Government at the whim of bureaucrats.
Yet, they have given no notice and comment rulemaking; they
have never given any formal enforcement action. They
promulgated their attack on the auto dealers through a five-
page guidance document that contains no cost-benefit analysis,
no analysis of the impact on consumers.
And we saw an article last week in The Wall Street Journal
about what the impact on consumers has been. As a result of the
CFPB's attack on auto dealers, the average American is now
paying more for a car loan than they were previously.
What is the methodology they use for this? So-called
Bayesian Improved Surname Geocoding, a concoction they came up
with after the fact and which is shredded as completely
scientifically unreliable in a report by Charles River
Associates, yet they seem to continue doing it.
We see it in the CFPB's unbelievable data-mining
operations. They scoop up hundreds of millions of credit card
accounts every month, tens of millions of mortgages, tens of
millions of bank accounts data, payday lending data, and the
like.
Yet, they still have given us no explanation why they need
so much data when there is no real regulatory purpose for
needing data on this scale, and at the same time, they admit
that there is a threat that this data could be compromised. As
someone who just received a letter last week from the IRS
telling me that I was a victim of identity theft, I am not
comfortable with the Federal Government taking this much of my
personal data without some good reason.
What we have seen, unfortunately, is something that we saw
and learned our lesson about the hard way in the 1970s. In the
1970s, we unleashed unaccountable bureaucrats on the economy,
and what we saw was declining American competitiveness,
declining American entrepreneurship, and restrictions on
freedom.
We are doing the same thing today under Dodd-Frank, and
American consumers and small businesses in the economy are
suffering.
Thank you.
[The prepared statement of Mr. Zywicki can be found on page
124 of the appendix.]
Chairman Hensarling. Thank you.
I thank each of you for your testimony. Without objection,
each of your written statements will be made a part of the
record.
The Chair now yields himself 5 minutes for questions.
Professor Zywicki, on page two of your testimony you
mention that a loss of the rule of law is ``laying the
foundation for the next financial crisis.''
And Professor Skeel, I think you say something similar on
page seven of your testimony when you say that departures from
the rule of law might ``magnify the consequences'' of the next
financial crisis.
So first Professor Zywicki, and then Professor Skeel, could
you elaborate on those comments? How is the erosion of the rule
of law in Dodd-Frank laying the foundation for the next crisis?
Mr. Zywicki. Thank you for asking that question.
It really has to do with what by pretty much common
consensus is the entrenchment of the too-big-to-fail regime.
Nobody seriously thinks that if there is another financial
crisis, anybody will actually comply with the rules laid out in
Dodd-Frank under the Orderly Liquidation Authority.
And what we have learned over time is that lack of respect
for the rule of law creates a moral hazard problem. What we saw
last time around is that the reason we ended up bailing out the
big banks, Secretary Paulson said, was because the market
expected us to bail out the big banks.
According to the studies we have--evidence is mixed, but
most of this evidence points in the direction that there is
still a too-big-to-fail subsidy for the largest banks, at least
according to the GAO report. They said it has gotten smaller,
but it is still there. And one would expect it would get bigger
if we actually reach that point.
As long as the government has the ability to bail out banks
and is not constrained by the rule of law, people are going to
expect that they are going to do that. That creates its own
moral hazard problem, and that creates an entrenchment of too-
big-to-fail.
Chairman Hensarling. The same question for you, Professor
Skeel.
Mr. Skeel. There are a couple of ways in which it seems to
me Dodd-Frank has made us riskier rather than safer.
One of them is the effect of the so-called Volcker Rule,
which prohibits banks from engaging in propriety trading. The
effect that is already having--it has just gone fully into
effect, and not even fully into effect, recently--is it is
pushing a lot of basic banking activities such as market-making
and trading for clients' accounts, outside of banks.
And so what is going to end up happening is banks are going
to be doing less of this. They are concerned about regulatory
intrusion in what they are doing, and it is impossible to tell
where the lines are.
So this is going to end up outside of the banking system,
and whatever potential problems there are down the road are
going to blow up away from regulation, it seems to me.
The other thing I will mention is not so much in the Dodd-
Frank Act itself, but in the litigation against the big banks
after the crisis. The government leaned on the big banks, as
part of the partnership that was set up, to acquire troubled
institutions. JPMorgan was leaned on to acquire Bear Stearns;
Bank of America was leaned on to acquire Merrill Lynch.
And then the government turned around and whacked them with
a bunch of litigation that bears no relationship to traditional
litigation. Much of the recovery goes to States and to people
who were not harmed by the alleged misbehavior.
Next time around, those banks aren't going to be there.
They are not going to agree to buy anything in a crisis, and so
if we have another crisis, there is going to be no way to
minimize its effect or to preempt it.
So those are two of the ways, I think, that we are in more
dangerous waters now than we were--
Chairman Hensarling. Another aspect of your testimonies
that is somewhat similar, particularly in your close, Professor
Zywicki--you indicate that this erosion of the rule of law
ultimately is going to essentially hurt the unemployed, and
low- and moderate-income persons the most.
I think, Professor Skeel, you used the term
``corporatism,'' to where the average American can't afford a
high-priced lobbyist or a presence in Washington.
So what aspects of the erosion of rule of law in Dodd-Frank
are hurting the unemployed, low- and moderate-income, Professor
Zywicki?
Mr. Zywicki. That is exactly right. What people don't
appreciate is that the rule of law exists for all of us. It
exists for the small banks, the small businesses, and the rest
of us.
In a world of chaos, in a world where nobody knows what the
rules are, the big banks, the Goldman Sachs or the JPMorgans,
they can hire the lobbyists and the lawyers to weave their way
through this, to figure out the regulatory burden, to create
the contacts that they need in order to get through this
process.
The rest of us can't afford high-priced lawyers; we can't
afford lobbyists. All we can do is try to comply by the rules
as they are written. And when the rules are constantly shifting
around, when the rules are subject to push and pull of special
interests and that sort of thing, the rest of us get the short
end of the stick.
Chairman Hensarling. Well, in an attempt to set a good
example for other Members, I see my time has expired, so I
won't go any further.
The Chair now recognizes the gentlelady from New York, Mrs.
Maloney, ranking member of our Capital Markets Subcommittee.
Mrs. Maloney. Thank you. Thank you very much.
Mr. Gupta, as you know, prior to Dodd-Frank the
responsibility of enforcing consumer financial protection laws
was spread across seven different agencies, and it was not a
priority for any of them. And because these agencies all
enforced consumer financial protection laws differently, that
inconsistency was very confusing and frustrating for the
financial industry.
And because it was not a priority, consumer protections
were not thought about. It was an afterthought. It was the
secondary thought, the third thought, or not thought about at
all.
So we came out with things called the no-doc mortgages. The
joke in New York was if you can't afford your rent, go out and
buy a home, because they didn't even look at anything. They
just signed up knowing that this was a disaster, collecting
their fees, going on and creating a financial crisis.
In fact, many people argued back then that what really
undermined the rule of law was the inconsistent enforcement, or
not even looking or caring at all about consumer financial
protection laws. If you looked at the responsibilities of
agencies, they had this, and then you got way, way down there,
they might mention consumer protection. And it wasn't
protected.
So my question to you is, doesn't consolidating the
responsibility for enforcement of consumer financial protection
laws into one Bureau actually promote the rule of law?
Mr. Gupta. Yes, exactly, Congressman Maloney, it does.
And I agree at a high level of generality with some of what
Professor Zywicki said about the rule of law. For the rule of
law to work, the rules have to be the same across-the-board. We
can't have special rules for some people and different rules
for other people.
And this was a central insight in creating the Consumer
Financial Protection Bureau. As you said, you had these
regulatory responsibilities spread out across a very confusing
patchwork of different agencies with partially overlapping
authority that left gaps which created very strange incentives,
where you had, for example, the Office of Thrift Supervision--
an agency that, thankfully, no longer exists--competing to
basically offer the least regulation possible, and institutions
could choose which regulator they wanted. That was a
nonsensical system.
And, we hear critiques about the Bureau's funding scheme,
but it was even worse with some of these agencies. They were
actually getting their funding from the folks they were
supposed to be regulating, rather than through congressional
appropriations.
So it was a very bad system that we had, and part of the
idea of the CFPB is, let's bring all of these institutions
under the same umbrella. Let's bring nonbanks and banks under
the same umbrella so that you can't have products offered by
one kind of institution that are not allowed to be offered by
another institution.
So if we care about rule of law, we should celebrate this
consolidation so that we have a single set of rules that
everyone has to play by.
Mrs. Maloney. Mirroring some of your comments is a set of
letters from a coalition of consumer groups on the
constitutional challenges to Dodd-Frank.
And I ask unanimous consent to place this into the record,
if I may.
Chairman Hensarling. Without objection, it is so ordered.
Mrs. Maloney. Okay. Thank you.
Mr. Gupta, can you discuss how Dodd-Frank and the CFPB's
implementation of Dodd-Frank has been tailored to fit the
unique needs of smaller banks, and credit unions, and consumer
banks? When you worked for the CFPB, did you find that the
Bureau was aware of and responsive to the needs of smaller
institutions?
Mr. Gupta. Thank you for the question. I think it is an
important question because we hear today a lot of criticisms of
the Bureau that are sort of made in the name of small banks or
community banks. And I think what is really happening is that
larger financial institutions or opponents of the Bureau are
using smaller community banks as a guise to make criticisms
that are really not about those smaller institutions.
The Bureau cares a lot about those smaller institutions and
makes a lot of effort to specifically reach out to those
institutions. There is no question that they are hurting. They
were hurting before the CFPB was created. They face a lot of
challenges.
It is built into the DNA of the CFPB. There is a $10
billion threshold so that banks under a certain threshold are
not subject to CFPB enforcement. But it is also part of the
charge of the agency to make sure that small banks are not
harmed simply by being small, and that the regulatory
compliance burden on them doesn't put them out of business.
So that is something that the agency cares a lot about. I
think simply by having the same set of rules by all actors in
the consumer financial marketplace, we ensure that doesn't
happen, that the smaller players aren't squeezed.
Thank you.
Mrs. Maloney. Thank you.
My time has expired.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Texas, Mr.
Neugebauer, chairman of our Financial Institutions
Subcommittee.
Mr. Neugebauer. Thank you, Mr. Chairman.
I want to review what I think I just heard. What I just
heard is that consolidating the power to one agency to make
unilateral decisions on the types of financial products that
will be available promotes the rule of law and increases
economic freedom for America's consumers.
Professor Zywicki, what would be your response to that?
Mr. Zywicki. I actually don't have a problem--and I have
testified before--with actually having systematized the Federal
consumer protections system in one agency. I oppose the idea of
having a completely unaccountable agency that operates in
violation of the Constitution and, in fact, does go out and
ride herd on American consumers.
I think that the unfortunate thing to me, as somebody who
has spent his life working in this field, is we had a great
opportunity with Dodd-Frank to create a truly innovative 21st
Century consumer protection agency that would promote
innovation, would promote consumer choice, and would promote
lower prices for consumers. Instead, what we got was a
throwback to the 1970s, like a Jurassic Park-type agency that
learned nothing from the experience of the last 30 or 40 years
about what makes a responsive, innovative consumer protection
agency.
Instead, we have old-fashioned command-and-control
regulation that is restricting choice, raising prices, and
restricting innovation, and I think that is a real tragedy.
Mr. Neugebauer. Professor Skeel, does consolidating all of
this power and giving the government unilateral control over
our financial markets promote the rule of law and promote
economic freedom?
Mr. Skeel. My answer I think is a little bit more mixed
than Todd's answer. I do think there was a problem before 2008,
and the one danger with multiple regulators was that they were
competing with each other. And you can get a race to the bottom
if you are not careful how you structure that interaction, and
I think we had it before 2008.
So it seems to me there are some things to be concerned
about with the CFPB, with consolidating the power. I have some
concerns about not having oversight of the funding. I have some
concern about the difficulty of overturning rules put in place
by the CFPB.
But I, like I think Professor Zywicki suggested, think the
idea of a consumer bureau is a good idea.
Mr. Neugebauer. I think the concern I have is that
basically, there is a lot of talk about the Orderly Liquidation
Authority and how the rule of law, and you have the government
picking winners and losers, but I think who ends up being the
losers in all of this that we don't think about--I think
Professor Zywicki was trying to go to that point--is that now
we have consolidated all this power into one agency with one
person, and that person is basically telling the American
consumers what kind of financial products that are appropriate
for them.
How that promotes freedom in America is beyond my wildest
dreams. I don't know how anybody can defend that that is in the
best interest.
And what is happening, because of the thought out there in
the credit markets that you can get haircuts arbitrarily, that
the rule of law will not be followed, that raises the risk
premium for the people who are actually buying car paper and
how that trickles down to that single mom who is out there
working two jobs trying to keep the wheels on her life, is the
fact that her interest rate on her car may be increased because
now the people who finance--buy car paper are concerned about
whether the rule of law will be followed in the future.
And so I think the two things that are wrong there are,
one, we have consolidated all that power--and by the way, the
founders never intended to have a big, massive consolidation of
power in the government. The power was supposed to reside in
the people and not the government, and basically what we have
done is we have tried to make utilities out of the financial
markets with the government having the controls.
Professor Zywicki, you wanted to--
Mr. Zywicki. Yes. I will just add, we know how to design a
regulatory agency. The Federal Trade Commission has been around
for a century. It has congressional appropriations; it has a
bipartisan commission structure; it has a dual mission of
competition and consumer protection. It has worked for 100
years.
And all of a sudden, now we are going to just spring this
new thing on the economy that has none of those advantages.
Mr. Neugebauer. I see my time has expired, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Ms.
Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
Mr. Gupta, later today the Small Business Committee is
holding a hearing to examine the effects of the Dodd-Frank Act
on small financial institutions and small business access to
credit. And this is what we know: The CFPB is required to
comply with both the Regulatory Flexibility Act and the Small
Business Regulatory Enforcement Fairness Act, SBREFA, to
specifically examine how small entities will be affected by the
agency's new regulation.
In listening to Professor Zywicki, he said that Dodd-Frank
has hindered the ability of small businesses to access credit
and to access capital. Yet according to the Thomson Reuters/
PayNet Small Business Lending Index, access to credit continues
to improve for small businesses.
The index, which measures the volume of U.S. small business
lending, reached its highest level ever in June 2015. Small
business lending is up 19 percent over the same period in 2014.
Also, the Wells Fargo/Gallup Small Business Index poll,
conducted in July 2015, indicated a plus-11 percentage margin
between the 33 percent of small business owners who say credit
was easy to get in the past 12 months.
How do you reconcile that, Professor Zywicki?
And, Mr. Gupta, could you please explain how the CFPB
implementation of that Act has been tailored to fit the unique
needs of small business bank and credit unions that, after all,
yes, Professor, they are the one who lend to small businesses?
Mr. Zywicki. I haven't carefully studied all the particular
surveys that you reveal.
Ms. Velazquez. I will show them to you.
Mr. Zywicki. I would be happy to look at them. I have seen
other ones that point the other way.
What I also know is that--we know that community banks do a
lot of the small business lending in this country, and we also
know that community banks are shrinking and disappearing, and
that is having an impact on small communities and access to
small business credit and the like. So I would be happy to look
at the surveys that you suggest.
Ms. Velazquez. Professor, yes, I welcome you to look at
both polls conducted by reliable sources. Don't come here and
make such an assertion that Dodd-Frank is killing access to
capital when the facts are demonstrated that you are wrong.
Mr. Gupta?
Mr. Gupta. Thank you. I also haven't reviewed those
studies, but--or polls, but I am not surprised to hear it. It
is hard for me to see how the Consumer Financial Protection
Bureau is inhibiting access to credit for small businesses.
This is not--the Consumer Financial Protection Bureau first
of all doesn't regulate business-to-business lending, right? It
only regulates consumer lending.
And we hear the claim that the community banks or the small
banks are being strapped. It is true. But as I said earlier,
that was true even before the crisis. It is because community
banks and credit unions faced a whole host of challenges in the
financial marketplace.
There is absolutely no evidence whatsoever of any
correlation or causation between the existence of the CFPB or
its regulation and the problems that are facing community
banks.
So I am not surprised at all to hear those findings.
Ms. Velazquez. Thank you.
Mr. Zywicki, you have stated that the CARD Act would have a
disastrous effect on the consumer credit market. However, the
data have shown that not to be the case.
What do you make of this data? Would you say that the CARD
Act has been helpful to consumers?
Mr. Zywicki. First, on the impact of the CFPB on community
banks, I am just referring to a Mercatus study where 60 percent
of small banks said that it has a significant impact on their
bank earnings and that the regulatory cost imposed on them by
the CFPB is causing a problem.
With respect to the CARD Act, I have written a 65-page
paper analyzing the data on this, and the data is quite clear,
which is that the studies that believe that the CARD Act has
helped consumers are methodologically flawed because they
simply do not account for the Federal Reserve regulations that
came before the CARD Act. They are simply worthless studies.
In fact, what has happened is consumers lost trillions of
dollars of credit access, low-income consumers lost access to
credit cards--
Ms. Velazquez. Okay. I hear you.
Mr. Zywicki. --and fees and interest rates went up.
Ms. Velazquez. Thank you. And so you will say--
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from New Jersey, Mr.
Garrett, chairman of our Capital Markets Subcommittee.
Mr. Garrett. I thank the chairman for this important
hearing.
And I think the majority of the panel would agree with the
axiom that our country lives by, that no one is above the law.
If you would just nod in agreement if you agree with that?
I see Mr. Gupta nodding, but I think your statements belay
that. Your statements are that someone is above the law.
You lay out a pretty good case, that prior to the CFPB,
other agencies had a bad system as far as their funding and
their mechanism. But instead of correcting the problems in
those other systems or formats, we created a new system, the
CFPB, which is above the law.
Why do we say that? If you have come to our hearings in the
past, this panel knows--Mr. Gupta, you would have learned--that
when we asked the CFPB and Rich Cordray, ``Are you answerable
to the House?''
He replied, ``No.''
``Are you answerable to the Senate?''
``No.''
``Are you answerable to the President of the United
States?''
``No.''
``Are you answerable to the inspector general?''
``No.''
``Are you accountable to anyone?''
``Well, no.''
So here we have an agency that is above the law, and how
you can come here and say we have had a problem before--and I
agree, we did--but now you propose or you support an idea that
we actually have a system of government where some individual
is above the law is beyond me.
You say also that there should not be special rules for
some and not for others. If you dig into the testimony that we
have here today, if we look in Dodd-Frank, that is exactly what
we have.
Ambassador, you talked very plainly about that very fact
with OLA and with FSOC, saying that what we have done in Dodd-
Frank is something unheard of in the history of this country,
and that is what? Take away judicial review.
And in the OLA situation, you actually take away judicial
review except for arbitrary and capricious, which means, Mr.
Gupta, that your statement that there should not be special
rules--there are special rules.
And whom are those special rules for? It is not the middle
class, it is not the lower income, it is not the minorities, it
is not for women.
Those special rules are for whom? The insiders, the well-
connected, the rich, the powerful, the lawyers, those who are
able to find their way around the system and get to the
solutions that they need, unlike the regular people who don't
have access to those.
That is not just me speaking; that is various economists
who are quoted in the testimony of the panel here today--I
think, Professor, you raised that in some of the testimony
here--that it is the rich and the powerful, the insiders who
are able to play the game, those who are making lofty salaries,
and the regular American people are the ones who are hurt.
Professor Skeel, would you want to comment in 10 seconds?
Mr. Skeel. I have said most of what I had to say about the
Consumer Bureau. I focused more on the other parts of Dodd-
Frank. But--
Mr. Garrett. Let's take a look at the Consumer Bureau for 1
second, then. Local auto dealers--we all have local auto
dealers. One of the things that Dodd-Frank and the CFPB is
trying to do is to do what? Just tell the banks that they have
to have a uniform level of lending.
Whom does that benefit? When some average person goes in to
get his car loan, there should be a level of lending. Whom does
that benefit? That benefits the banks, the Wall Street
insiders, the people who now will make a larger profit on the
loans.
Whom does that hurt? The poor, the middle class, the
minorities who, in the past, went to an auto lender and could
actually get a lower rate. How? By competition.
Anyone want to--
Mr. Skeel. I will jump in for a second on that. I agree
with you that there are some pretty significant problems with
some of the things the Bureau is doing. The auto lending is a
concern to me.
It is also a concern to me that the qualified mortgage
requirements are pretty close to making illegal other forms of
mortgages that have benefited many consumers in the past. So I
think there is a risk to what turns out to be command-and-
control regulation--
Mr. Garrett. Dr. Spalding, you referenced that the history
of where law comes from is--first was--or not law, but where
power comes from goes to the strong and the forceful through
force and fraud. And whom does that go to? Those who are in
power. And whom does that hurt? And that is the weak.
I am paraphrasing what you said in your testimony. But now
we have come to a civilized society where that is not the case.
But doesn't Dodd-Frank turn that on its head? Doesn't that
take away the rule of law and the equal treatment to all and
due process rights to all? And isn't that, at the end of the
day, meaning that what Dodd-Frank does is help the 1 percent
and hurt the 99 percent?
Mr. Spalding. Oh, absolutely. I think Dodd-Frank is a
perfect example of how we have completely turned things on
their head.
The American Revolution was precisely to overthrow that old
regime, and as the only non-lawyer on this panel, I would point
out the obvious sometimes, which is that we are being ruled by
someone else who is not responsible to us. That is a blatant
violation of everything the American Constitution stands for--
in technical detail, which my legal friends who have been
pointing out, but in general. And the Legislative Branch should
be very aware of that violation.
Mr. Garrett. Thanks a lot.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Sherman.
Mr. Sherman. Mr. Chairman, the subject of this hearing is,
are we more free? I would hope that banks would be less free to
rip off consumers and less free to rip off the U.S. taxpayer
through some new bailout program.
Dr. Spalding, you talk about the regulators having too much
power. They clearly do.
We punted the power over to them, and we can take it back
if we reach bipartisan agreement, but we can't take it back if
it is only going to be Republican proposals that we will find a
way to block in the House, the Senate, or at the President's
desk. Congress will be powerful when Congress acts in a
bipartisan way.
There is massive illegality. It was best exemplified by
Secretary of the Treasury Paulson who just commented for a
newspaper. His philosophy was to just act boldly and ignore the
statute. That is what he did. And he got away with it.
The better example is the Iran Sanctions Act, which several
Administrations ignored for more than a decade. And then we
should be surprised that we aren't able to get a better deal in
Vienna. If you ignore the Iran Sanctions Act because it
requires sanctioning international oil companies and you don't
want to do that, you are not only violating the U.S. law for
the benefit of those who do business with Iran, you are gutting
American foreign policy.
This body, when we passed Dodd-Frank, required the SEC to
deal with the credit rating agencies--the only game where the
umpire is selected and paid by one of the teams.
Debt issuances are far more significant than stock
issuances. They involve trillions rather than billions or tens
of billions of dollars--not any one issuance, but overall. And
the SEC's response was to just issue a report saying that they
are not going to do what Congress instructed them to do, and
the statute gave them a way to weasel out. It said, ``or they
can adopt another plan.'' So they decided to do nothing at all.
We are told by Professor Zywicki about bailouts and how
there is this subsidy the big banks get, as if the problem is
Dodd-Frank. We didn't have Dodd-Frank in 2008.
Everybody on Wall Street was convinced we would pass a new
law to bail them out. And guess what? They were right.
And Dodd-Frank doesn't provide a way for government money
to be put at risk for the benefit of the creditors of giant
financial institutions. But you know what? Everybody on Wall
Street thinks that if it comes to it again, we will do the same
thing again. And they are probably right.
There is only one way to end too-big-to-fail, and that is
to say too-big-to-fail is too-big-to-exist. That is why Bernie
Sanders in the Senate and myself in the House have introduced
the Too Big to Fail is Too Big--break them up. That is real
capitalism.
But you don't find support--enough support on either side
of the aisle for that. I think we have two cosponsors in the
House and no cosponsors in the Senate for the only bill that
will prevent us from being back in 2008 and being told we have
to pass some new statute, or just have the Administration
ignore the law completely and bail out the big banks.
We need small business lending. That is why this committee
needs to pass the member business lending bill for the credit
unions.
Credit unions are prevented from making small business
loans. You would think that instead of breaking the social
contract and having TARP and giving money to the banks, we
would just allow the credit unions to make small business
loans.
Democrats control the Executive Branch of Government. They
are using Operation Choke Point, as I believe Mr. Skeel pointed
out, against those--who was it that mentioned Operation--
Professor Zywicki. I am always raising the--always the same
hands.
Anyway, I think it has been pointed out that we will not
always control the Executive Branch of Government and the
``reputational risk'' won't be that a bank provides a checking
account for a payday lender or the Republican Party or some
other disreputable organization. There will come a time when
the DCCC or an abortion clinic cannot get a bank account. That
is a giant threat to democracy because if we are going to
regulate abortion or we are going to regulate payday lending,
we should do it here in Congress by majority vote, not secret
statements by bank regulators, ``Oh, don't give that group a
checking account; choke them off.''
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Luetkemeyer, chairman of our Housing and Insurance
Subcommittee.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
We very seldom ever get anything right here in Congress.
Whenever we pass a bill it is either the pendulum swings too
far or it doesn't swing far enough.
And I think in this environment what we have done with
Dodd-Frank is we have swung it too far, and what we have done
is created an environment within which the bureaucracy believes
that they can do more than what the law actually allows them to
do because they are--we are overreacting to the situation
created in 2008, they are overreacting to the law itself.
I think when you do that, I think Professor Zywicki made
the comment a while ago that the lack of the rule of law
creates a moral hazard problem, and I think we have done that
with Operation Choke Point.
I am the gentleman who carries the bill, and we passed it
out of committee here recently, and I think that the Oversight
and Government Reform Committee's own reports of the emails of
these two agencies, FDIC and DOJ, indicate a collusion there
and even a disagreement among themselves whether doing
something is even legal. CFPB is jumping in on this as well,
although they won't quite admit to it.
But, Professor Zywicki, have you ever seen a precedent like
this before for a government agency to try and choke off
legitimate businesses doing legal business from access to
credit to actually drive them--or access to financial services
to actually drive them out of business?
Mr. Zywicki. I have never seen anything like it. In the
past, agencies have--in situations in which a payment processor
is clearly involved in sort of facilitating a fraud, things
have happened.
But to target entire legal industries and say, ``We are
going to choke off the air that they need to breathe basically
because we don't like those industries and so we are going to
declare a reputational risk,'' I have never seen anything like
it, and I would have never dreamed that anybody would even
think that was an appropriate use of government power.
Mr. Luetkemeyer. Dr. Spalding, in your testimony you have a
quote from John Adams, and let me read from your testimony: The
classic American expression of the idea of the rule of law
comes from the pen of John Adams when he wrote the
Massachusetts Constitution in 1780, in which the powers of the
commonwealth are divided in the document ``to the end it may be
a government of laws, not of men.''
It looks like with Operation Choke Point, we have ignored
the law, and we have a government of men. What do you think?
Mr. Spalding. No, that is exactly right. The reason why
these ideas of consolidation and efficiency are problematic is
that is not the end of government. You, as the Legislative
Branch, decide where exactly to draw those lines, but you must
be careful about having gone too far. Process is important.
Rule of law is there to prevent, on both sides of the
political aisle, that kind of corruption--moral corruption,
political corruption, just administrative corruption and small-
mindedness--from taking over our politics. This is clearly the
rule of men, and the whole system of American constitutional
government, why power is divided, why power is checked against
each other, is because we don't trust individual men and women
to rule. That is why we have popular government in the first
place.
Mr. Luetkemeyer. With Choke Point, though, we are not only
allowing--we are allowing men to have their own interpretation
of the law and allow their own outside ideas, political
philosophies, moral judgments, and moral values to be imposed
on somebody and not the rule of law.
Mr. Spalding. That is exactly right. You also remember in
the Federalist Papers when James Madison says the accumulation
of all powers in the hands of one--executive, legislative, and
judicial. That is the very definition of tyranny.
It is not what they do. It is the very idea of putting it
all together in one place in the hands of one, based on their
own passions and political own opinions, tends to cause
problems.
Mr. Luetkemeyer. Thank you.
Mr. Gupta, you were in an enforcement branch of the CFPB at
one time. Is that correct?
Mr. Gupta. Correct.
Mr. Luetkemeyer. I had a discussion yesterday with a
business that was fined by CFPB because they had a word in
their documents that down the road CFPB is getting ready to
propose a rule that will make that noncompliant. Now, let me go
over this one more time. We have a situation where CFPB is
fining an entity for what a rule down the road is going to
hopefully--and it may not even go into effect, but they are
proposing a rule down the road that it would be noncompliant.
Now, is that something that whenever you were there that
you would have done?
Mr. Gupta. No. I am not--
Mr. Luetkemeyer. Can you tell me the reasoning on how that
is legal?
Mr. Gupta. I am not familiar with the facts of that case,
and I suspect if you have only heard from one side, it might be
more complicated than that. But the CFPB has a variety of
tools. It has enforcement and it has rulemaking, and--
Mr. Luetkemeyer. Okay, let me--
Mr. Gupta. --lots of other agencies are like that. There is
nothing wrong--
Mr. Luetkemeyer. My time is running out, and I just want to
make one more comment here.
What has happened with regard to Dodd-Frank, is now not
only are the financial services folks supposed to be worried
about complying with all these rules, they now have to be
clairvoyant. They now have to have a crystal ball on their desk
to be able to see down the road what may be proposed so that
they will not be in noncompliance at some point.
That is how far they have gone. That is how out of control
this agency is and what Dodd-Frank has allowed to happen with
this environment.
Mr. Gupta. I certainly saw nothing like that when I was--
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Hinojosa.
Mr. Hinojosa. Mr. Chairman, I ask unanimous consent for my
statement to be made a part of the record so that I can go
right into questions.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Hinojosa. Thank you.
My first question goes to Mr. Gupta.
The general gist of this hearing today is that an army of
unaccountable bureaucrats over at the Consumer Financial
Protection Bureau and the Federal Reserve and the Financial
Stability Oversight Council have essentially overthrown the
Constitution and the Congress via a regulatory coup d'etat.
What do you make of these allegations? Why would the CFPB be
any more unconstitutional than, say, the Federal Reserve?
Mr. Gupta. Right. In fact, the CFPB is a lot more
accountable than the Federal Reserve. And it is true that there
are features of the CFPB that are new. They are designed
primarily to resist industry capture, which was a problem
before the crisis with the existing regulators.
But the various component parts of the CFPB that are being
attacked here are nothing new. So there have been complaints
about--we heard from--Congressman Garrett I guess is no longer
here--that the Director of the CFPB is accountable to no one.
In fact, the Director of the CFPB is removable for cause by the
President, and that is the same system that we have for the
Federal Trade Commissioners, and Professor Zywicki held up the
Federal Trade Commission as an example of how to design an
agency.
So that is nothing new. The Supreme Court in 1935 said--in
a case called Humphrey's Executor--that is a perfectly
permissible removal mechanism and is consistent with the
separation of powers.
We also hear complaints that there is too much delegated
authority to the agency--for example, the authority to define
unfair and deceptive acts and practices. That is authority that
the Federal Trade Commission has had for 100 years, and it is
no different from authority that we delegate to agencies like
the Environmental Protection Agency to consider environmental
protection rules, and that Justice Scalia himself has said is
perfectly permissible.
So the arguments that are being made here--this is why I
said in my opening remarks--they are really efforts to attack
the administrative state as a whole. The constitutional
underpinnings of these arguments, if they were accepted,
wouldn't simply attack the CFPB; they would sort of demolish
the administrative state as a whole.
And I think at least the first witness we have heard, Dr.
Spalding, is open about that. I think his testimony is an
attack on the administrative state as a whole.
Mr. Hinojosa. After that explanation, then tell us how the
Bureau and the Council are accountable to the American people
and to the Congress?
Mr. Gupta. As you know, the Bureau is subject to
congressional oversight and is up here--if there is another
agency in Washington that has to face congressional hearings
more than the CFPB and its Director, I am not aware of it. I
think the average, if you look at the number of times they have
been up on the Hill, is about once a month since the Bureau's
inception.
So they are subject to congressional oversight. They are
subject, as I mentioned earlier, to small business reviews that
only two other agencies face. They are subject to the Financial
Stability Oversight Council, a committee of other regulators
that can conclude that--if they think that a substantive
consumer protection rule poses a threat to the economy, they
can actually gang up on the CFPB and veto the CFPB's rules.
The CFPB is subject to a really wide panoply of
accountability measures that most other agencies are not
subject to. So that is why I said in some ways this agency is
more accountable than other regulators.
Mr. Hinojosa. Thank you.
Mr. Gupta. But to the extent that it is insulated from the
appropriations process, that is a good thing.
Mr. Hinojosa. Thank you for that explanation. My time is
running out very quickly, and so I thank you for your
responses.
My next question is to Professor Skeel.
Mr. Skeel, in the first footnote of your written testimony,
you note that you believe that the Bureau has been a valuable
and necessary innovation. Can you elaborate on what you meant
by that?
Mr. Skeel. What I meant was what I was referring to
earlier, and that is I do believe that there were real problems
with consumer protection and that the major agencies who had
responsibility had conflicts of interest. And we did not have
effective consumer protection in the financial services space
before 2008.
I do think there are some rule-of-law issues with the
Consumer Bureau. I think there are legitimate concerns about no
accountability with the funding and with the difficulty of
altering what the Bureau does, but I believe the Consumer
Bureau was necessary.
Mr. Hinojosa. I agree with you.
And I want to put into the record that I was here at the--
in the year 2007 at the end of that year and the first quarter
of 2008, when we heard many of the leaders on the other side of
the aisle say, ``We don't want any more regulations. We are
doing fine. The financial system is strong.'' Vice President
Cheney said that. Secretary Paulson said that.
And then all of a sudden, by the third month they wanted us
to help the financial system be saved because they took us over
the cliff.
You are absolutely right.
Chairman Hensarling. The time of the gentleman has expired.
Mr. Hinojosa. I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from Michigan, Mr. Huizenga, chairman of our Monetary Policy
and Trade Subcommittee.
Mr. Huizenga. Thank you, Mr. Chairman.
And I am a little flabbergasted by Mr. Gupta, who believes
that somehow just because Congress created the CFPB that
somehow the CFPB is accountable to it, since Congress then
proceeded to put it outside of its purview. From the funding
side itself, oversight--congressional oversight is very
different than power of the purse. That is the constitutional
power that we had.
So, Professor Zywicki, if you want to touch base on that. I
am curious if this is, I think as you laid out, that this
probably isn't even constitutional in the structure of it, and
certainly isn't smart to do that. So if you don't mind touching
on that.
I really want to get to, because we just had a graphic up
there about business lending, how suddenly that has become
apparently very easy to get business loans now that we passed
Dodd-Frank. As a small business owner, I would like to actually
give some testimony against that.
But when we are talking about consumer credit, in 2013 the
Federal Reserve Board had a report which found that 22 percent
of consumers who borrowed to buy a home in 2010, one out of
every five, would not have met underwriting requirements of the
qualified mortgage. That is the kind of damage, I think, that
we are seeing from CFPB--maybe not intended, but that is the
effect.
And again, this is the Fed saying who this is going to
affect is 34 percent of the African American borrowers, and 32
percent of Hispanic borrowers in 2010 would be unable to meet
the debt-to-income ratio requirements but for the temporary
GSE-backed loan exemption that the CFPB has so graciously given
to everybody.
So, but guess what? If you can give it you can take it
back, and that is the fear.
So, Professor Zywicki, do you have a comment?
Mr. Zywicki. I will try to be brief.
First, we all know that you have to--that the only way to
make bureaucracies accountable is to have carrots and sticks,
otherwise it is just a dog and pony show when they come up
here. And the power of the purse is, of course, is Congress'
first prerogative. And this is an agency that is engaging in
widespread policymaking on the economy and should be subject to
the power of the purse.
It is also the case, yes, that removal for cause has been
held by the Supreme Court to be constitutional, but the idea of
one person running the entire agency? What we have learned over
time is the reason why the FTC works to the extent it does is
because the bipartisan process of deliberation, the ability of
dissenting Commissioners to speak, that sort of thing, that we
basically substitute internal accountability into deliberation.
And the Supreme Court has basically said if you have a
commission, that is good enough. I don't know that they have
said that unleashing one person on the economy like this is
not.
Just a final word about your comment on CFPB and mortgage
lending, which is one of the astonishing things about the
qualified mortgages rule is as it is depriving consumers of
credit, they did nothing to increase requirements on
downpayments, for example. So the chairman asked earlier, how
will this exacerbate the next crisis? One of the reasons is
they didn't do anything about one of the primary causes of
foreclosures, which was negative equity. By not requiring
higher downpayments and that sort of thing, they did nothing to
stave off that problem.
Mr. Huizenga. Thank you. I appreciate that.
Ambassador Gray, I would like to really quickly have you
touch on the SIFI designation situation. In your testimony you
wrote about the wide latitude granted to FSOC by Dodd-Frank to
designate these SIFIs. Is it constitutionally appropriate to so
drastically alter a designated financial company's standing
within a greater global financial system?
So if you wouldn't mind just commenting on that?
Mr. Gray. The latitude that the FSOC has, that the
government has--it is a little agency that is set up by Dodd-
Frank--the latitude is very, very wide, and the only standard,
the only limit to the designation of a financial institution is
that it may be in trouble and therefore may endanger the
financial stability of the United States. The problem--
Mr. Huizenga. Is there an impending threat to that right
now?
Mr. Gray. I don't think there is any, but there is a case
that has been brought that is a designation made of MetLife. It
is an insurance company. It doesn't pose a threat to anybody.
I could go into--I don't have time to go into the--
Mr. Huizenga. Yet they have been designated, correct?
Mr. Gray. But they have been designated, and there is no
way really to review it because the courts are prohibited from
reviewing a question about whether the designation actually
endangers the--or poses a risk to the economy of the United
States.
So there is no accountability. The designation is final.
There is no appeal. There is no appeal to you; there is no
appeal to the courts; and there is no appeal to the White
House.
I am sure that designation is going to fail, but I think it
is going to be followed by more and more and more as the
government continues to try to strengthen its hand and broaden
its power. That is always the case with bureaucracy.
Mr. Huizenga. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Scott.
Mr. Scott. Thank you, Mr. Chairman.
Professor Zywicki--I hope I got your name right there--
Mr. Zywicki. Perfect.
Mr. Scott. --your testimony certainly intrigued me in your
talk about Dodd-Frank. I want to mention just one of the issues
you talked about, the impact with community banks, auto
dealers, and you mention Operation Choke Point.
Now, what I try to find is ways we can work up in this
committee in a bipartisan way to get a solution to the problem,
to solve unintended consequences. And I want to get your take
on this.
Operation Choke Point is basically right now an
investigative issue, really in the hands of the Justice
Department and the Federal Trade Commission. And it is based
upon basically one big example with payday lenders with one
bank, Fair Oaks Bank, I believe, in North Carolina, that they
have done.
My concern comes in with this is a growing--rapidly growing
industry of online electronic transactions. More and more
people are now shopping at the mall online. Malls are being
replaced with online. They go on, they get what they want from
eBay, then they go to something like PayPal, a transaction
payment processor, to get this.
So the accounts for our consumers that need protection on
this rests within this wheel of which at the center of which
are your electronic payment transaction processors, a growing,
growing business. My concern is that--and the reach of this
Justice Department on some of these cases, there is an
excellent opportunity here for Dodd-Frank to work if it is used
to work here, because what will happen is if we are not
careful, because of this action by some bad--one or two bad
actors--and let me say, everybody is a good actor until they do
something bad, so how do you catch them?
And so I am concerned about these people who are vitally
important to the consumer who goes online, and they have to
have confidence with that payment processor. So don't you see
some value here where Dodd-Frank, and particularly with the
consumer protection angle of that, can come in there and make
sure that we are not throwing the baby out with the bath water
in this Operation Choke Point and really doing a devastating
hit on some innocent people like our payment transaction
processors?
Can't Dodd-Frank be a positive role to make sure that
doesn't happen?
Mr. Zywicki. Thank you, Congressman Scott. I agree with
pretty much everything you said, and the nuanced way in which
you said it, which, as I alluded very quickly earlier, I worked
at the Federal Trade Commission. I understand that the ability
to have this sort of power does have a legitimate power, and
the FTC is using it.
In situations where a payment processor is basically
knowingly engaged in and facilitating fraud, it has been a
longstanding power to be able to do that. The problem is once
you move beyond that very narrow area, which the DOJ has tried
to claim that is all Operation Choke Point is, when in reality
it seems to be much, much more.
We don't know how much more because they are so--it is
really like a Black Ops operation, as far as I could tell. It
is really hard to find out who they are targeting, why they are
targeting them, and that sort of thing.
And I agree with you that one of the tragedies of Dodd-
Frank is that we are driving consumers out of the mainstream
financial system. We have taken away bank accounts as a result
of the Durbin Amendment; we have taken away credit cards as a
result of the Credit Card Act; we have targeted--and payday
loans are disappearing. And we are driving more and more
consumers online.
I agree with you that online lending and the way in which
that is done raises for me real concerns that other things do
not. That is not to say it is inherently corrupt, but giving
somebody online your bank account information raises for me
particular concerns.
And so I share your concern, and I share a recognition that
there can be a legitimate power here, and I just don't like the
sort of targeting of big groups.
Mr. Scott. Well, okay.
My time is up. Thank you.
Mr. Zywicki. I hope I was agreeing with you--more or less--
[laughter]
Mr. Scott. But the point I am trying to make is that this
is a growing industry that is going to grow by even more leaps
and bounds, and if we don't have something in there to deal
with these unintended consequences to protect both sides of the
equation, both the processors and the customers they rely on.
Thank you, sir.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Duffy, chairman of our Oversight and Investigations
Subcommittee.
Mr. Duffy. Thank you, Mr. Chairman.
I think it appropriate on Constitution Day that we
celebrate the idea that man could be free, the idea that man
could govern itself, that Americans could make decisions for
themselves. They didn't need the elite to govern them. They
didn't need the elite to make decisions for them.
Sadly, I think that we are having that debate again 200 and
some odd years later because there are some across the aisle--
and they don't want to say it; I know they were called out by
Mr. Gupta, who basically said Americans are stupid. They are
dumb. And there is a belief that Americans are too stupid to
make decisions for themselves.
I don't believe that to be the case. I think if we have
disclosure, if we have good information, Americans make the
best choice for them and their family. And bureaucrats at the
CFPB don't know what is best for them.
And so it brings me to the idea of the administrative state
versus elected representatives--who is more accountable?
There was a really bad health care law that was passed. I
am hearing stories about monthly costs going up from $800 to
$1,300 and $1,400 a month. To all of my friends across the
aisle who voted for that, what happened to many of them?
To the panel, what happened?
They got voted out. They lost their elections. Many of them
are no longer here because America said, ``That is a bad law.
That doesn't work for my family.'' And they held them to
account.
Because it wasn't special interest who on that day carried
the Obamacare legislation. The real accountability came when
they had to go back home and face their constituents who said,
``I am going to vote you out.'' And so now, they are no longer
here.
But I want to talk about the CFPB a little bit because I
think there is this perception that special interest has no
impact on the CFPB because they are an agency that isn't funded
through Congress, right? They are unaccountable; they can do
whatever they want with their single director.
So there was a recent study that came out and it says the
Consumer Financial Protection Bureau released a study
indicating that arbitration agreements restrict consumers'
relief for disputes with financial service providers by
limiting class actions.
Now, does anyone on the panel have an idea on how this
study might impact the special interests? Anybody?
Ambassador Gray, enlighten me.
Mr. Gray. The first think that comes to mind is the
plaintiffs' bar, which--
Mr. Duffy. I agree. The plaintiffs' bar.
Does anyone disagree with that?
Mr. Gupta, yes?
Mr. Gupta. I do disagree with that. There is--
[laughter]
Mr. Gupta. This is a--the CFPB's--
Mr. Duffy. Credibility--
Mr. Gupta. --study on arbitration is the most rigorous
empirical study on the prevalence of arbitration in consumer
contracts. You asked them--
Mr. Duffy. Oh, I know your objection. Let me ask you a
question, though. Do you think that the trial bar tried to
communicate and impact the CFPB in regard to their decision
with regard to class action lawsuits and arbitration?
Mr. Gupta. Well, obviously.
Mr. Duffy. Answer my question.
Mr. Gupta. --obviously everyone weighed in on the study--
Mr. Duffy. Of course, they did. And are you telling me
special interests don't have an impact on the CFPB?
Mr. Gupta. It is an empirical study, and it is really hard
to argue with the conclusion of the study, which is that--
Mr. Duffy. Who is going to--
Mr. Gupta. --class action bans ban class action.
Mr. Duffy. As Democrats in the Senate and the House lost
their jobs when they were held accountable to the American
people, who at the CFPB can be held accountable for bad
decisions? Are any of them up for election? None of them.
And to argue that this is a better form of government, that
you know what is best--that we have this debate today is
incredibly frustrating.
The QM rule--that I have small credit unions and banks
that--a banker wants to lend to a family that they know and
they will take their risk on; they are not going to send it
into the market. But they have known the family and the dad and
the mom and the brothers and sisters. They want to take a risk
on this family.
The CFPB says, ``Oh no, you can't. And if you do, there is
additional liability if that loan goes bad even though you have
all the risk of the loan because it is on your books.'' Come
on.
Mr. Gupta. These are really arguments against consumer
protection at all--
Mr. Duffy. No, they are not.
Mr. Gupta. --or administrative agencies.
Mr. Duffy. No, they are--and we might have a debate on the
administrative agencies, but not about consumer protection. I
believe in disclosure. I believe people should know the deal.
They should know what they are getting into.
But I also believe that if they know the deal, let them
decide if it is right for them.
With regard to payday lending, you know what? If the credit
unions and the banks won't give me a loan and you take away
this source, where am I going to go? I am going to go to Vinny
down the street or I am doing really bad things that affect our
society.
Mr. Gupta. Payday loans are often not that different from
Vinny down the street. We are talking about interest rates that
exceed $1,000 and that trap people in a cycle of debt.
Mr. Duffy. I would love to have a better solution.
I am concerned that on the settlement side that it is not
just going to victims; it is going to third-party groups,
ACORN-esque groups that you will argue, oh, this is great for
the American people, but you are going to drive money into
third-party groups not funded through Congress, not funded
through the appropriations process.
It is just like the DOJ's settlements with banks. It
doesn't go to the Treasury. It doesn't go to victims, all of
it. A great portion of it goes to left-wing community
organization groups and not through the congressional
appropriations process.
And I know my time is done, Mr. Chairman. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Pennsylvania,
Mr. Fitzpatrick, chairman of our Terrorism Financing Task
Force.
Mr. Fitzpatrick. Thank you, Mr. Chairman, for calling this
hearing, ``Dodd-Frank Five Years Later.''
I think that most of the members of this committee probably
were not in Congress when the law was passed for the reasons
Mr. Duffy indicated. I was one who ended up here because of a
series of bad laws and the voters in my district decided to
send a new Representative.
And we feel that we have been robbed of the ability to make
a lot of the decisions, even though they are tough decisions.
These are tough votes that we should have been sent here to
make.
And I do appreciate the acknowledgement of my colleague,
Mr. Sherman, who indicated earlier--he said we punted in
passing Dodd-Frank. Essentially, we punted to the bureaucracy.
So I want to talk a little bit about the regulatory branch
of government and I want to discuss the amount of regulations
that have been passed, rules and regulations under Dodd-Frank--
not just those that have been passed but those that have been
discussed, those have been threatened, those that have been
noticed and are being discussed now, and the impact of not just
those that have been passed but those that may be passed on
institutions, and how do they affect Wall Street?
My understanding is Dodd-Frank was passed in order to rein
in Wall Street, but we have heard several references today to
Mr. Dimon's comment that a larger moat was created around him.
Wall Street seems to be benefiting from Dodd-Frank 5 years
later.
The impacts really seem to be on the small Main Street
community institutions, the small community banks in districts
like my district in Bucks County, Pennsylvania, and consumers,
as well, and innovators.
And so, Professor Zywicki, perhaps you can start. Who
really bears the brunt of this new massive wave of regulations
that have come under Dodd-Frank that we haven't had a chance to
vote on?
Mr. Zywicki. I haven't looked at all the methodology, but
one estimate was that so far it has imposed $21.8 billion and
60.7 million paperwork hours on compliance costs. It is
estimated that over the next 10 years it could be $895 billion
in reduced gross domestic product and $3,346 per working-age
person.
I haven't seen a lot of other estimates. I give that as
some sense of at least what some economists think about this.
And I think you are exactly right, which is the cost of
Dodd-Frank is falling on people with the least--the fewest
options, the least flexibility in their budgets, and that sort
of thing. We are driving people out of bank accounts; we are
taking away people's credit cards; we are taking away people's
mortgages.
And upper middle-class people largely can avoid that. We
can carry the higher balances in order to keep a free bank
account. Smaller people can't, or--and it is lower- and middle-
class people who are really bearing the brunt of this law.
Mr. Fitzpatrick. Dr. Spalding, we have spoken at great
length today about the impact of Dodd-Frank, and for good
reason. But in many ways Dodd-Frank is a symptom of a larger
disease, which is the growth of the--sort of the modern
administrative state that Mr. Duffy spoke about.
You have written about this development and how it is a
departure from our founding principles. Can you explain the
difference between our founders' vision of the government and
that of the progressives who have given us this modern
bureaucracy?
Mr. Spalding. Thank you for the question. My testimony does
go to that answer to some extent.
In short, the American founders wanted to control the
powers of government and make them responsible. That is why we
have a Constitution in the first place, to get around the
problems that the English kings had.
Powers were divided into branches. Branches operated the
main functions of governing--lawmaking, executing,
adjudicating.
Those are grants of powers from the sovereign people. That
is why you can't delegate those powers to someone else. Someone
else can't exercise the lawmaking power.
The problem with the modern administrative state--and I am
launching a challenge to the modern administrative state. It is
constitutionally illegitimate, and we have clearly crossed a
Rubicon. Congress has lots of power to regulate. I don't object
to regulations, per se.
But we are clearly operating in another world. These things
that Dodd-Frank is doing, these are laws. They are passing laws
that you have not approved.
That is practicing the lawmaking power. The courts might
not say that it is delegation, but it clearly is, and the
Legislative Branch must recognize that.
The idea is based upon the notion that, using modern
science and using the best forms of efficiency and consistency,
someone else can rule us better. You are our representatives to
make sure that doesn't happen.
So it is a violation of delegation, but it is more largely
a violation of the whole concept of the rule of law and the
rule of laws rather than the rule of men.
Mr. Fitzpatrick. My time has expired. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Green.
Mr. Green. Thank you, Mr. Chairman.
And thank you, to the witnesses, for appearing today.
Let me start by asking each witness this question, and you
may respond by simply raising your hand if you agree: If you
were a Member of Congress and you had an opportunity to vote to
repeal Glass-Steagall--to repeal it; that would be the essence
of your vote--would you vote to repeal Glass-Steagall? If so,
would you kindly extend a hand into the air?
I am not sure about the gentleman on the end. I see four--
all right. All right. Everybody would repeal Glass-Steagall.
All right. If you had an opportunity in Congress to repeal
Dodd-Frank in its entirety, would you repeal Dodd-Frank?
One? All right. Two.
Mr. Spalding. That depends on the definition of
``entirety.''
Mr. Green. Repeal it entirely--entirely as in entirely.
Mr. Spalding. The Legislative Branch has the ability to--
Mr. Green. Okay, let me just go on. I really don't want to
debate it with you. I trust that we can get back to it later.
So we have at least one person who would repeal it in its
entirety. All right.
Now, let's do this. Let's just examine what has happened in
this whole question of, are we more free. More free to do what?
More free to go back to 3/27s and 2/28s, when you had 2
years of fixed rates and 28 years of variable rates? Same thing
with the 3/27s--go back to teaser rates that coincided with
prepayment penalties so that if you tried to get out of a loan
that you were in you would have to pay this huge penalty to get
out, which most people couldn't do?
Go back to no-doc loans, such that people could come in and
get a loan and walk away with a monthly payment that they
couldn't afford because they didn't have the documentation to
acquire the loan? Go back to liar loans, when you could
literally fabricate a story that wouldn't be validated and get
a loan that you couldn't pay?
Go back to the yield spread premium, when consumers were
ripped off by persons who accorded them loans for higher rates
than they qualified for? Literally, you could qualify for a
loan at 5 percent and the person working with you that you had
a great deal of confidence in would give you a loan for 8
percent and get a kickback.
All of that was legal because we allowed it to be legal. So
go back to a time when people were free to just rip off the
consumer, just take advantage of consumers, just do whatever
you could to make money off of unsuspecting consumers.
Many people don't know that they were ripped off by the
yield spread premium. And I use that highly technical term
``ripped off'' because we need to be clear and concise about
this.
Consumers are being taken advantage of even today with
other products that are out there, and the CFPB is doing its
best to try to eliminate some of these products.
So we are talking about going back to a time when we could
generate loans without liability. The people who were
generating the loans knew that they were going to pass them on
to someone else, the liability wouldn't remain with them, and
as a result of being able to pass them on, they would take just
about anything they could to get their numbers up so that they
could make more money by passing more loans on to the secondary
market.
And as a result, consumers would be--again, highly
technical term--ripped off. A generation of wealth was lost. We
had literally 9 million jobs lost as a result of this crisis;
we had 5 million homes lost as a result of this crisis; $13
trillion of families' wealth was destroyed as a result of the
crisis.
Dodd-Frank was the solution that we came up with that is
not perfect, that we could tweak, that we could mend rather
than end. Unfortunately, there are a good many people who want
to see the demise of Dodd-Frank.
Dodd-Frank is not the problem. The problem is a Congress
that is unwilling to work together to maybe amend some aspects
of it, but not to end Dodd-Frank in its entirety.
I would say to you, my dear friends, as I close, I don't
concur with you on Glass-Steagall. It took 66 years to
eliminate Glass-Steagall. Glass-Steagall separated investment
banking from commercial banking, and prevented people from
gambling with consumer dollars that were federally-insured.
I don't know how long it is going to take, but people right
here in this Congress are going to do everything that they can
to end Dodd-Frank just like they ended Glass-Steagall.
Thank you. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Royce, chairman of the House Foreign Affairs Committee.
Mr. Royce. I appreciate the time here.
And a quick question, because when we travel overseas with
the Foreign Affairs Committee, I often have conversations with
foreign leaders about issues that go to the heart of the
importance of rule of law and the role that it plays in
encouraging foreign investment, and the role that it plays in
political stability, and how badly these foreign nations need
the rule of law, need the credibility that comes with it. So it
is a little bit of a shock to me that on our own shores, we
have blatant examples of discretionary choice and political
influence running afoul of the rule of law.
In Europe in the 1930s, there was this concept of fluid law
and it didn't work out very well. The rule of law for the
United States has been sort of a cornerstone.
So you get into these areas with fluid law--the SIFI
designation process is just one I would make an example of, and
I appreciate several of my colleagues raising this issue this
morning. I worry that the costs of what economists call here
the cloud of political risk that comes into play--Professor
Zywicki referenced this--this is one of the consequences, this
is one of the mistakes in Dodd-Frank, one of the things that we
did not get right.
And that effect could be permanent. It could be long-
lasting.
And so, Mr. Gray, we have seen how the CFPB has strayed
well outside of its legal boundaries, expanding its reach now
into telecom companies and seeking information protected by
attorney-client privilege, and even indirectly trying to
regulate auto dealers and so forth. Given the agency's design,
are you surprised by any of this behavior?
Mr. Gray. I am not surprised, because there is nothing to
constrain them. There is no check or balance. There is no
operation of the separation of powers that would conduct an
oversight role to rein them in.
The White House can't do anything about it. The Congress
can hold hearings, but they are not supposed to review the
budget. That statute, as I recall, actually says the Congress
can't review the budget. I don't expect anyone is going to be
arrested for doing so, but the budget is not in your hands, and
that is where your power comes from.
The courts are required to defer to whatever the agency
wants to do under the Chevron Doctrine. That is true even in
the case of rulings, say, on what is abusive. The agency has
refused to spell out what the law means by notice and comment
rulemaking, which is the hallmark of American administrative
law, one of the geniuses of post-war development.
It is going to be, ``I know it when I see it.'' It is going
to be an ad hoc decision made after the fact, and so nobody
knows before they are zapped.
Mr. Royce. There is going to be fluid law that is
constantly evolving, constantly requiring new interpretations
by the regulatory community, constantly causing costs out
there--compliance costs. This is one of the reasons I opposed
Dodd-Frank.
But there is another aspect here which is--and the chairman
is well aware of this, as well--the fact that the prudential
regulators have the responsibility for safety and soundness,
and taking them out of this equation and not allowing them to
weigh in on these decisions also has a long-term risk in terms
of the first responsibility, which is safety and soundness.
If we were smart, what we would have done was put this
function underneath the prudential regulators. It might
surprise some to know that every former prudential regulator
that I talked to, whether Democrat or Republican, felt that
this was a profound error in the legislation.
Mr. Gray. Sir, if I might just sort of add--
Mr. Royce. Yes.
Mr. Gray. --one thing about the rules about making
mortgages, it is just a--I grew up in the South, and the South
didn't have a lot of big banks until all of a sudden they did
have some big-size banks. But the hallmark of the growth of the
southern banking industry was making character loans, loans
based on people's understanding of the character of the person
who was borrowing, the knowledge of the family, knowledge of
that person.
And there are Fed studies saying that character loans are
better than the cookie-cutter loans that are now being
required. But you can't make a character loan anymore.
Who benefits from that? Nobody.
Mr. Royce. We have choked off so many loans.
Mr. Gray. Nobody.
Mr. Royce. Mr. Chairman, thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Virginia, Mr.
Hurt.
Mr. Hurt. Thank you, Mr. Chairman.
I thank the Chair for continuing to focus on the
anniversary of Dodd-Frank 5 years later.
And I thank each of the panelists for appearing today.
I represent Virginia's 5th District. It is a sprawling,
rural district, south side, Central Virginia. Over the August
break we were--had the chance to travel across the district and
visit across the 23 counties and cities that I represent. Many,
many Main Streets along the way.
And we had the opportunity to visit with families, small
businesses, small farmers; had the opportunity to stop by
several banks, community banks in Charlotte County, Fauquier
County, Halifax County. These banks are important to these Main
Streets because they provide a tremendous amount of capital
that is necessary now, in a way, more than ever, because of the
job losses that we have seen over the last several years. There
was a recent study which indicated that 70 percent of loans
made in the agricultural sector are made by community banks.
So as I talked to the bank presidents and the compliance
officers at these institutions, I think, Mr. Gupta, they would
be very surprised, maybe even relieved, to find out that
actually Dodd-Frank has not been the cause of their decline. I
think they would be relieved to know that their customers are
really benefiting from Dodd-Frank and the Consumer Protection
Bureau. And I appreciate Mr. Zywicki's responses to your
statements.
And I won't pursue that any further and move on to
something that is a little--is more in the big picture.
I wanted to ask Mr. Spalding and Mr. Gray about this: The
Richmond Federal Reserve recently published something called a
Bailout Barometer. I don't know if you are familiar with it,
but it is an estimate that the financial safety net covers some
$26 trillion in liabilities, or 60 percent of the total
liabilities of the financial system.
And I was wondering from the standpoint of too-big-to-fail,
and from the standpoint of moral hazard, what is the threat to
the taxpayer when we have accumulated this amount of backstop
by the Federal Government? What is the threat to the consumer?
What is the threat to our free markets?
If Mr. Gray wants to go first, and then Mr. Spalding, I
would love to have you address that.
Mr. Gray. I think the threat is not first to the taxpayer
but to the Fed. It is money they print; it is money they sort
of manufacture. Their balance sheet is something totally unique
in the history of America. I don't know how they are going to
work their way out of it, but it is going to be inflationary,
it is going to dilute, it is going to degrade the quality of
the savings of most Americans in order to have this happen.
And banks are not going to do any more lending. They are
probably going to do less lending than they would have without
this crisis, and that is the basic issue. A complicated
economic one, and I am not an economist, but this is a basic
issue about when they should start raising interest rates.
And I think they got themselves in a fix, which is the
direct result of the government's encouragement of loans that
couldn't be repaid. And the reason loans couldn't be repaid is
because the local banker wouldn't make a loan that he knew he
couldn't repay or that would irritate his neighbor, because he
would have to see his neighbor in church or at the Safeway.
No, the loans were made because Fannie Mae and Freddie Mac
had an insatiable appetite to cook up any loan they could do,
and so if you got a broker, going to make a loan, and is not
then responsible for it because he shoved it off to the Federal
Government or a Federal Government agency, it all--it is all
easy to do. And why not? Why would you not do that?
So the government bears a huge responsibility for having
caused all this. There is nothing in Dodd-Frank which does
anything about Fannie Mae or Freddie Mac, or about any of the
other practices that actually led to the crisis that we had and
the crisis that we haven't gotten out of.
And I am sorry to say, I can't give you an answer for the
Fed, because it is going to take years to work out.
Mr. Hurt. Thank you, Mr. Gray.
Mr. Spalding?
Mr. Spalding. That was a very good answer, and I defer to
it. I would just, again, point out a general point. Vast
operations of the administrative state of this magnitude going
into large reaches of the economy, whether it is the health
care economy or the financial economy, displaces and completely
takes the place of market mechanisms. And in doing so, it
prevents the market from making its natural adjustments. The
rule--
Mr. Hurt. And who suffers?
Mr. Spalding. The average person suffers. I mean--
Mr. Hurt. The consumer.
Mr. Spalding. --the role of Congress is to uphold the rule
of law, maintain contracts, make sure that there is a certain
legal fairness in how it operates, watch out for the problems,
but otherwise let it correct itself so that the real
opportunity in the marketplace can serve the American people.
Mr. Hurt. Thank you, Mr. Spalding.
My time has expired.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from North Carolina,
Mr. Pittenger.
Mr. Pittenger. Thank you, Mr. Chairman.
Ambassador Gray, thank you particularly for your great
service to our country over the last many decades. I remember
meeting you a long time ago and I'm just grateful to have your
expertise involved with us today.
I would like to ask you, as it relates to CFPB and how it
has strayed out from its own legal boundaries, expanding into
the telecom industry, impacting its own attorney-client
protection privileges, regulating automobile dealers, is this a
surprise to you?
And what do you envision in the future? It seems to me that
we have relegated those--the laws to--in the hands of these
individuals and other regulators, so would you kind of expand
on that, please?
Mr. Gray. I never underestimate the ingenuity of a
bureaucrat to expand.
[laughter]
And I wouldn't really want to predict where they will go.
But I do think the automobile lending issue is very
instructive.
I happen to know--a very close friend of mine was head of
the National Association of Auto Dealers, and they threw
everything they could into this fight to get exempted. Now, you
might argue that, boy, they really abused their monetary power
or whatever to get this exemption, but they did get it.
But it is like Mr. Cordray said--or the President said when
Mr. Cordray was rejected by the Senate the first time around,
``I will not take no for an answer.'' So they have gone after
the dealers anyway.
And that kind of defiance is what really scares me. We are
at a point--and this is a slightly different point, but it
encapsulates so much of what keeps me awake at night, frankly;
not all nights, but some nights. The agencies have captured,
have aggregated so much power--not just the ones you are
talking about here and out in the financial industry, but EPA,
one could--FDA, one could go on--they have so much power that
they can threaten to go blackmail their subjects into
submission, into accepting whatever they want to dish out to
them.
They can threaten them not to seek judicial review, which
has happened in the automobile industry. All of the regulations
against the automobile industry, the auto industry had to
promise not to challenge for 8 years of the Obama
Administration.
It is hard to believe, but they had to make a promise--I
have seen it in writing, and they have published it. The EPA
has published it. Why they would be proud of it I don't know,
but they got a promise from the Ford Motor Company, for
example, that they would not challenge anything the DOT or the
EPA ever did to them.
So this is the way it is going across the government,
across the administrative state. You are dealing with a
microcosm--a very big microcosm, a very good example. And if
you can fix it and get the pendulum going just in the other
direction, you would serve an enormous benefit to the American
people because the administrative state is out of hand.
Mr. Pittenger. Thank you, sir.
Ambassador Gray, you have also referred to how the moat is
protecting against competition. Can you discuss further how the
current regulatory barriers to entry are harming small
businesses and institutions, while helping the largest ones?
Mr. Gray. This is not a new problem of what is known in the
administrative trade--perhaps you should ask Professor Zywicki,
he may be more expert. He teaches where this doctrine was
developed; so do I part time--George Mason.
But it is a common thing across the regulatory state that
regulations help big business by creating barriers to entry to
competition. It is as simple as that. And big government likes
big business because the progressives like not to have to deal
with 10,000 little guys; they are very happy to deal with 3 or
4 really big guys.
Mr. Pittenger. Can you give us some examples, please, of
how it has harmed the smaller institutions?
Mr. Gray. I referred to it in my testimony and others have
mentioned it. To me, the best example is the demise--not the
demise yet, but the harm to consumer banks because of the
inability to cope with the regulations that are the moat for
their much, much bigger competitors like JPMorgan.
And that is, I think, the best example. There are others.
There are many others that are like that.
Take the drug approval process; it takes much too long. The
FDA asks for way too much information during these clinical
trials when they know that once the drug gets out in the
marketplace to millions of people, they will really then find
out what the reactions are, and that is when they really do
find out, and that is when they can make corrections.
But to think they can do that--it is arrogant to think they
can do that in these relatively small clinical trials, compared
to public approval or public distribution. And I am sorry to
speak too long, but that hurts the small drug companies because
they can't afford an 8-year, $2 billion drug trial.
Mr. Pittenger. Thank you. My time has expired.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Pennsylvania,
Mr. Rothfus.
Mr. Rothfus. Thank you, Mr. Chairman.
Professor Zywicki, in a recent op-ed for The Wall Street
Journal, former Senator Phil Gramm argued that President
Obama's progressive legacy is destined to fail in the long run
because he enacted vague laws and abused his executive power to
impose policies that are unpopular with the American people. In
making this case, Senator Gramm points out that all of the
President's Executive Orders can be overturned by the next
President, and that Dodd-Frank can be largely circumvented
using exactly the same discretionary powers that President
Obama used to implement it in the first place.
Do you agree with Senator Gramm?
Mr. Zywicki. Absolutely. That is the nature of the modern
administrative state that we have been talking about.
And one of the things I--I think it is awful, but--
Mr. Rothfus. What sort of costs would this lingering
uncertainty have for the U.S. economy?
Mr. Zywicki. Huge costs. In order to make a loan, you have
to be able to predict the risk of the loan. To the extent that
political risk in the regulatory environment is shifting
around, that makes it more difficult to price the risk of the
loan, and so you have to either raise interests rates or you
have to reduce risk exposure.
Mr. Rothfus. Let's--
Mr. Zywicki. And so it impacts banks probably more than any
other sector of the economy.
Mr. Rothfus. Let's translate that to people. All too often
when Congress debates issues relating to the rule of law or
government expansion and overreach, we tend to spend too much
time on the underlying policy and lose focus on why the debate
matters in the first place.
We need to be focused on the impact of Washington, D.C., on
people--on the family who is trying to purchase their first
home, on the entrepreneur with a promising startup, on the
small business who wants to expand their operations and hire
more of the local community. As we look back on 5 years of
Dodd-Frank, how have average Americans been impacted?
Mr. Zywicki. I think a great example is when we--is the
auto dealer attack that they are doing and this--we don't have
scientific--the scientific and economic experiment, but what we
discovered is exactly what we expected from what we know. The
Wall Street Journal says that everybody has to pay more for a
car loan now because of this uncertainty and this overreach by
the CFPB.
Mr. Rothfus. So are Americans more or less free to pursue
the American Dream as a result of Dodd-Frank?
Mr. Zywicki. Clearly, we are all less free as a result of
this vagueness and this lack of rule of law.
Mr. Rothfus. Mr. Gupta, you claim on page 10 of your
written testimony that Dodd-Frank and the CFPB work to protect
the interests of smaller banks. I have to tell you, this
committee hears from community bankers all the time, and they
vigorously argue the precise opposite.
Are you really claiming that Dodd-Frank has enhanced the
competitive position of community financial institutions?
Mr. Gupta. I think the picture is complicated and--
Mr. Rothfus. Let me tell you, it is not complicated for a
small community bank in my district which spent 2,000 hours
going through a CFPB regulation. What would you say to that
small community bank which has limited resources, versus a
large bank which has lots of resources?
Mr. Gupta. Yes. No, I sympathize with the plight of
community banks. As I said earlier, I think they are facing a
lot of challenges and--
Mr. Rothfus. Are there more or fewer community banks today
than there were when Dodd-Frank--
Mr. Gupta. There are certainly fewer, and that was
happening already. That is an independent process that has been
happening--
Mr. Rothfus. Has it accelerated the process?
Mr. Gupta. --before Dodd-Frank, and I--
Mr. Rothfus. Has it accelerated the process?
Mr. Gupta. No, I don't think that--
Mr. Rothfus. Professor Zywicki--
Mr. Gupta. --the existence of the CFPB is accelerating that
process.
Mr. Rothfus. I'm sorry, reclaiming my time, Mr. Zywicki,
would you care to comment on that, whether Dodd-Frank may have
accelerated the process?
Mr. Zywicki. The only study I know about this, and the one
that everybody seems to think is a good study, is from the
Kennedy School of Government, which says that community banks,
the assets are shrinking at twice the rate they were before
Dodd-Frank.
Mr. Rothfus. One of the things we see with the CFPB is that
we have a single director.
Mr. Gupta, Chairman Frank thought that a five-member
commission was an acceptable structure for the Bureau. Is he
wrong?
Mr. Gupta. I think--
Mr. Rothfus. Is he wrong?
Mr. Gupta. I think you can have a legitimate debate about
how to set up an agency. I think that the CFPB was set up in
the right way. I think the problem with five-member agencies--
Mr. Rothfus. Originally, Chairman Frank thought a five-
member commission was a good idea. Is he wrong?
Mr. Gupta. I think he would support the current structure
of the agency if you asked him today, and I think that was the
right decision. And the reason I think it was the right
decision is--
Mr. Rothfus. Reclaiming my time here, I would like to move
over to Dr. Spalding--
Mr. Gupta. Let me just finish. There are agencies in
Washington that are five-member commissions that do nothing,
like the Nuclear Regulatory Commission and the Federal
Elections--
Mr. Rothfus. Are you saying that the SEC does nothing?
Mr. Gupta. No, but I think a lot of agencies that have
multimember commissions become deadlocked and incapable of
doing anything, and that is the problem--
Mr. Rothfus. The CFTC does nothing?
Mr. Gupta. I'm sorry?
Mr. Rothfus. Do you think the CFTC does nothing?
Mr. Gupta. No. I don't think all multimember commissions
are incapable of doing something, but it is a risk.
Mr. Rothfus. Yes, but Chairman Frank thought it was a good
enough idea to put into his original legislation.
If I could go to Dr. Spalding, Mr. Gupta claims in his
written testimony that the CFPB must carry out its work
insulated from the ``partisan vagaries of the appropriations
process.'' He is arguing that the American people, through
their elected Representatives, deserve no say in how their
government spends their money and governs on their behalf.
This turns the American project on its head. Was that the
founders' vision?
Mr. Spalding. Absolutely not. The argument that I am
hearing in defense of the administrative state appears
otherwise--is the same you get from Woodrow Wilson forward
about the modern administrative state: You must protect these
decision-makers from the public, from Congress--
Mr. Rothfus. In the administrative state, where does
sovereignty rest, in the people or in the government?
Mr. Spalding. It rests in the government. The government
both secures rights, and the court tells what those rights
are--
Mr. Rothfus. Doesn't that turn the--
Mr. Spalding. --and the administrators carry out those
policies and tell us how to run our lives.
Mr. Rothfus. Doesn't that turn the American experiment on
its head, where it shifts the sovereignty to the government
instead of the people?
Mr. Spalding. It completely turns it around.
Mr. Rothfus. Thank you. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the ranking member of the
committee, the gentlelady from California, for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman. Sorry I
could not be here with the committee earlier today.
And I am just wondering if we have learned anything new.
This is the third hearing we have had on Dodd-Frank reform, and
when I came in, I asked my staff if we learned anything new
today? And of course, they responded that we have not.
Let me just say, as I have said over and over again, that
Dodd-Frank is the law, and we have the responsibility to
enforce it.
We believe that on this side of the aisle, we have been
very responsible in the way that we have handled all of those
who do not think that Dodd-Frank should have been signed into
law. We have said over and over again, where there are
technical problems, where there is confusion, where there needs
to be some modest modification, we are prepared to do that.
And we have demonstrated that in the way that we have
worked. We have not attempted in any way to dismiss the
concerns that have been raised.
But honestly, Mr. Chairman, I don't know if we are spending
our time holding these hearings over and over again in a way
that is productive for our constituents or for this House, et
cetera.
I know these lawsuits have been filed. Let me just kind of
go through a few of them.
The lawsuits that filed alleging the unconstitutionality of
the CFPB tend to come from rather fringe actors in the
financial marketplace.
The State National Bank of Big Spring is a $340 million
Texas bank, and it was not supported by any amicus briefs, by
any other parties when it filed its lawsuit. Morgan Drexen was
a debt settlement firm which appears to have sued in
retaliation for a CFPB enforcement action and now has filed for
bankruptcy. ITT is a for-profit post-secondary school that has
had regulatory run-ins with the CFPB, the SEC, and industry,
where I have worked to correct abuses for much of my career.
So I don't think I am going to ask a question. I don't want
to take these gentlemen through that.
I just want to say--I want to remind all of you what
happened in this country when Lehman Brothers failed and all of
a sudden we understood the impact that was going to have on all
of the financial services industry, not only in this country,
but offshore. And we were poised for disaster.
We ended up with a subprime meltdown. Many communities have
been devastating by the exotic products that were on the
market, where people signed up for mortgages they couldn't
afford, they were not vetted properly, no-documentation loans,
on and on and on.
We should all want to have to correct what took place in
this country that took us into a recession, almost a
depression. And so these attempts to somehow dismantle Dodd-
Frank, and to talk about how it is unconstitutional, and to
continue to hold these hearings, is a waste of time.
And so while I am here, and I respect the chairman for
providing the leadership that he needs to provide on this
committee, I just wish we could take up some--I need to talk
about what is happening in America with the homeless population
that just appears to be expanding--16 percent. I need to talk
about the lack of affordable housing.
I need to talk about what we are going to do about real
consumer issues and how this committee is going to look out for
these consumers, who expect this Congress to work for them and
not just the biggest, riches banks and financial institutions
in America.
And so I have 20 seconds left, 19 seconds left, 18, 17, 16,
15, 14, 13, 12, 11, 10, 9, 8, 7, 6, 5, 4, 3, 2, 1. There is
nothing left to be said.
Thank you.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Maine, Mr.
Poliquin.
Mr. Poliquin. Thank you, Mr. Chairman. I appreciate it.
And thank you all very much for being here today.
I represent Maine's 2nd District, which is the real Maine;
it is not northern Massachusetts. It is Western, Central,
Northern, and Down East Maine. We have about 650,000 of the
hardest-working people you could possibly imagine. They are
honest.
I go back to the district every weekend, and what I hear
all the time from our small business owners is that, ``Please,
Bruce, help us get the government off our back.'' I talk to our
credit unions and our small community banks, and they are
spending more time dealing with government regulations than
they are expanding their businesses and pushing out credit and
loans to folks who really need it.
And the problem with that, of course, is that your economy
is not growing the way it should be and folks aren't getting
the jobs they need so they are more dependent on the
government. We have one heck of a problem now.
There is an outfit here in Washington, D.C., called the
Competitive Enterprise Institute, if I get this right, and they
have taken a look at all the regulations--now not at the State
level, but at the Federal level--and they compute that the cost
of regulations to the American economy is about $1.7 trillion
per year. That is about one-tenth of our economic output.
Of course, businesses who have to suffer these regulatory
costs pass along those costs in the prices that they charge for
their goods and services. So if my math is right, every family
in America is now paying about $15,000 per year for these
Federal-only regulations.
Dodd-Frank is one of those problems. Now, I understand when
the housing market collapsed because folks were pushing out the
ability to buy homes even though you might not have a job, or
you didn't have to put any money down, and you couldn't afford
the homes but you were pushed into those homes. And that caused
a real problem for our economy.
But now you have this big net--we do a lot of fishing up in
Maine--and this big net is smothering everybody who should be
able to swim through that net.
I will give an example. Let's say you have someone who is a
great furniture-maker in Bangor, and they also run an organic
farm. And they are trying to put aside about $100 a month to
save for their retirement. And they have a fellow down in
Lewiston who is a financial advisor who is helping them with
that retirement savings.
And if you believe the study done by a fellow who used to
run the CBO saying, if these investment management firms that
are running these retirement plans come under the SIFI
designation, too-big-to-fail, it means their costs are going to
go up to run these accounts, the rates of return of what they
can charge are going to go down to the tune of about 25 percent
over the long run, and so the nest egg, the retirement nest egg
for this organic farmer and the fellow who is also working in
the family who is making furniture are going to go down, which
means more dependence on the government and less freedom.
The bigger our government gets, the smaller the people get.
And this is a real problem.
So this, in my opinion, is not fair. Government is supposed
to work for our people. Where is the compassion in the fourth
branch of government, these regulators who write the rules that
we all have to live by and our businesses have to work by?
Ambassador Gray, you have done an awful lot of work on the
SIFI designation, the too-big-to-fail, under the Dodd-Frank
umbrella. And I would like to know what you think, sir, about
an asset management firm, a pension fund investment firm that
runs other people's money, represents no risk to the economy,
if all of a sudden they are designated as too-big-to-fail, they
have additional regulations, more costs, they offer less
products for our savers, and the rates of return go down.
How does an investment firm--how does a pension fund
management firm that is trying to help our retirees and kids
going to college--how do they deal with a SIFI designation? How
do they determine if, in fact, they are ever going to be
designated so and how do they respond?
Mr. Gray. Of course, in many ways that is a really good
question, the $64,000 question. The vagueness of the charter of
much of the CFPB's business model is so unclear that you
wouldn't know.
There is no way a pension fund, a mutual fund, an insurance
company can pose a systemic risk to anybody--except maybe to
itself, but certainly not to a widespread community. And why
that is included and why that is possible is only because the
terms are so vague, and there is no accountability, and there
is no court ability to say no, you can't do this. The courts
are cut out of the key decision about whether or not there is a
risk to the underlying economy.
I really can't answer your question except to say that it
is just--something hypocritical about a comment I just heard
about the implication that we on, say, my side, our side, your
side, are representing big business, when I have been at the
same time criticized for only having as a plaintiff to
challenge some of this a little teeny $270 million bank in Big
Springs, Texas, which no one had ever heard of, and must be
useless. And why should it carry any weight, because it hasn't
gotten any big-bank amicus briefs filed to support it, as if
somehow it has no legitimacy as a small bank and can only be
legitimate if it were joined by JPMorgan as an amicus.
I will tell you that we can't get any amicus briefs. It
took 18 months to find Mr. Purcell, one of the great, great
people I have met in Big Springs. Actually, I met him there; he
has been here, and wowed this committee in testimony some
months ago. The only reason we got him at all is because we
were really lucky.
But my own law firm cheering me on, ``Go. Go, Gray. Go, go,
go, go, go.'' And I said, ``You know, I don't need your money
but I would like a face or two just to show your face to
show''--no, no, no, no, no, no, no, no. We are not going to
take that risk. We are not going to--one bank examiner's
examination can knock out a bank in 24 hours, so I think we
will just take a back seat.
But go to it. Go to it. You have all--you have everything
at our back--at your back.
Thanks a lot, old firm.
But that is the problem. No one wants to help out in this
because the power of the government is so intimidating. But we
are going to prevail. We are going to prevail.
Mr. Poliquin. Thank you very much. Let's keep pushing back
against this law. Thank you very much.
Chairman Hensarling. The time of the gentleman has long
since expired.
The Chair now recognizes the gentleman from Arkansas, Mr.
Hill.
Mr. Hill. Thank you, Mr. Chairman.
And I thank our panel.
I particularly want to thank Ambassador Gray. I certainly
think of a hallmark of my career as our service on the White
House staff for President Bush 41, and thank you. I know you
looked back fondly this summer with the commemoration of the
Americans with Disabilities Act that you were such an
instrumental leader on, in having that passed in the Congress.
Chairman Royce was talking about how the consumer
protection rules were basically under the guidance of the
prudential regulators, and for me that is no academic exercise,
for I was a CEO of a consumer and commercial bank until
December 31 of 2014, so this hearing, Mr. Chairman, is no
academic exercise to me. I have run an institution under the
first 5 years of Dodd-Frank, or 4\1/2\ years.
And to me, the CFPB really was a redundant exercise, and
let me explain why, because I never once in over 2\1/2\ decades
of commercial banking ever saw a State or a Federal regulator
shirk their consumer protection responsibility under Federal
law. So I just want to repeat that at every hearing; that is
the way I feel very, very strongly.
And I heard today from both Mr. Green and the ranking
member that where Dodd-Frank has gone too far, we should work
in a bipartisan way to amend it, mollify it. I couldn't agree
more, and I would like to thank the chairman and our bipartisan
group who are working to take care of one of those things right
now, which is this new HUD-1 RESPA form, the TRID form, and
trying to get bipartisan support here in the House and the
Senate to remove the penalties in the implementation of that
Act.
Mr. Cordray has refused to do that in his own authority at
the CFPB, and we have now had to ask Congress to delay the
possible penalties to players on that rule of the CFPB.
And I want to side with the consumer here. Some 230,000
Americans refinance or buy a new home every month, and they are
going to be the one who are victimized by this confusing rule
that didn't get implemented properly either due to a technology
reason or a misunderstanding at a real estate brokerage or a
title company or a bank. So I hope we can get this bill passed
before October 3rd so that our title and commercial banks,
mortgage bankers, and real estate agents all have some
confidence that they can go into this new closing regime but
not be penalized either by the Federal Government or through
civil liability.
And I want to thank Mr. Sherman, and certainly Mr. Pearce,
for their help on this committee, and you, Mr. Chairman.
We can't defend bureaucratic intransigence at the expense
of our home-buying public.
I love this hearing on the rule of law. It is exceptional.
I thank the chairman. I want to echo appreciate for it.
And I want to turn to Mr. Gray and Mr. Skeel.
The missing man in this formation--where the airplanes fly
over at a funeral, the missing man formation--sort of in the
Dodd-Frank Act, the missing man is reform of the GSEs, Fannie
Mae and Freddie Mac. Mr. Gray referenced equal treatment for
privately--or similarly situated creditors.
You were referring, I think, to GM in your testimony, but I
think that might apply in the Fannie Mae and Freddie Mac
conservatorships.
And, Mr. Skeel, you talked about the 100 percent sweep that
is now in place between Treasury on Fannie and Freddie, the so-
called third amendment to their conservatorship.
It struck me that it is--that may not even have been a
legal action, given the conservatorship statute. I would like
both of you to address that.
Ambassador Gray, if we could start with you?
Mr. Gray. The actual example I was thinking of was the
bailout of AIG, where certain creditors were treated
differently than others, and some got paid 100 cents on the
dollar, and others didn't. And in the Chrysler bankruptcy, the
Indiana Pension Fund lost everything just because of the way
the government played favorites.
And that kind of favoritism is what is codified in the OLA
Title II section of Dodd-Frank, and I think it is a very
dangerous way. The old-fashioned way of doing it is the right
way: a level playing field, everybody gets treated the same.
And I wish we could get back to that, and I think there is
legislation pending in the Senate, as I may have said in my
testimony, proposed by Senator Cornyn and others, that would
try to resurrect the historic bankruptcy principles.
Mr. Hill. Dr. Skeel?
Mr. Skeel. I do believe there were great problems with what
was done in 2012. In 2008 Fannie and Freddie were taken over,
they were put in conservatorship by the government, and they
were left there for a period of years. And lo and behold,
Fannie and Freddie started to make money again, and so Treasury
changed the deal and basically made it impossible for private
shareholders to get anything.
I am not a constitutional law scholar, but it sure looks
like a taking to me. There is some litigation on this. The
plaintiffs lost one hearing, but there is some other litigation
going on.
The worst effect of this, in my view, is it has reduced any
incentive for you all to do something about Fannie and Freddie.
As long as they are sitting there in limbo and they are making
money, there is no pressure to fix them, and Dodd-Frank did
nothing to fix them.
Mr. Hill. Thank you, Mr. Skeel.
And thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
Professor Skeel, I understand that you have asked to be
excused at this time, so we thank you for your testimony and
you are excused.
The Chair now recognizes the gentleman from Minnesota, Mr.
Emmer.
Mr. Emmer. Thank you, Mr. Chairman, and thanks for holding
this hearing.
I appreciate all the witnesses being here this morning and
sharing with us the benefit of your expertise.
As we have been reminded today, Dodd-Frank was drafted in
response to the financial crisis of 2008 and 2009, during which
the Federal Government bailed out a large number of financial
firms at taxpayer expense. At the time of enactment, the law
was 2,300 pages which required Federal regulators to create
more than 400 new rules.
Forgetting for a moment that almost 40 percent of the rules
needed to implement the 2,300 pages have yet to be finalized,
my colleagues on the other side of the aisle argue that real
GDP growth has rebounded since Dodd-Frank was signed into law.
They say that despite the fact that our average GDP growth
since 2010 is about 2 percent.
Now, forgetting for a moment also that if we look back in
history at the history of economic recoveries after major
economic crisis in this county, the rebound has been much
stronger, I want to ask--and I guess I will ask Professor
Zywicki--my understanding is the way we calculate GDP is we
include government spending in that number.
Mr. Zywicki. That is correct, yes.
Mr. Emmer. And my understanding also is that government
spending accounts for about 2 percent of that calculation--
close to it, anyway.
Mr. Zywicki. I would have to take your word for that.
Mr. Emmer. All right. If that is true, regardless of the
number, government spending is included. It doesn't give us an
accurate view as to how our private economy or our private
economic growth has occurred since 2010. Isn't that fair,
Professor?
Mr. Zywicki. That is absolutely right, and pretty much all
economists agree on that.
Mr. Emmer. And while there are many factors, including
excessive regulation beyond the excessive and vague regulation
created by Dodd-Frank and an overly burdensome tax system that
contributes to the lack of private economic growth in this
country, I have to say I am beyond surprised to hear Mr. Gupta
say that an unaccountable, Soviet-style organization ruled by
one appointed bureaucrat who isn't subject to judicial review
should be considered the ``crown jewel'' of the Dodd-Frank
experience.
Based on the facts and information I have received directly
from my constituents, by the way--both involved in the
financial industry providing opportunity, and the consumers who
are looking for capital to buy cars, buy homes, to start
businesses and create new opportunities--to suggest that there
is absolutely no correlation between the actions of the
Consumer Finance Protection Bureau and the problems faced by
our community banks, credit unions, and, yes, our constituents,
the consumers, who are losing access to the capital necessary
to do these things I just described, frankly is out of touch
with the reality that those of us who have been sent here to
represent these folks--our experience outside of this academic
bubble known as Washington, D.C.
In addition to all of the other problems with Dodd-Frank,
we have an unelected, unaccountable political theocracy called
the CFPB that is directly impacting the freedom of Americans to
pursue their dreams.
Small banks are eliminating or planning to discontinue
certain products and services, including residential mortgages,
mortgage servicing, home equity lines of credit, and overdraft
protection--just some of the most obvious ones. And nearly 64
percent of small banks that have been surveyed are actually
making changes to the nature, mix, and volume of mortgage
products as a direct result of Dodd-Frank and the dictates of
the CFPB.
Also, as a direct result of the substantial additional
compliance costs required by Dodd-Frank, we are losing smaller
banks and credit unions at an alarming pace, as they either
cease to exist or are absorbed into larger financial
institutions.
And now the CFPB, that some seem to think is accountable
and responsive to the needs of consumers and of this country,
is going to eliminate credit access for those with little or no
other reasonable option, and it is going to violate the
principle of Federalism by invading the States with another
misguided top-down Washington approach when it comes to payday
lending and other opportunities that are available.
I really hope the members of this committee and Members of
Congress, on both sides of the aisle, can find a way to correct
the mistakes of Dodd-Frank and make the CFPB truly accountable
before it causes even more serious damage to this country and,
frankly, my constituents.
Thank you, Mr. Chairman. I yield back.
Mr. Gupta. If I can, I just want to be on the record--
Chairman Hensarling. Time--
Mr. Gupta. I am opposed to Soviet-style dictatorships and
political theocracies. I wanted to clarify that--
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Williams.
Mr. Williams. Thank you, Mr. Chairman.
And I would like to thank all of you for being here today
and for your testimony, and also say hello to my friend,
Ambassador Gray.
It is good to see you, and thank you for your service to
our country.
This whole dialogue is really personal to me. I am a small-
business owner. I have been in business for 44 years, a family
business since 1939.
And in full disclosure, I am one of ``them''--I am a car
dealer. And so when you start talking about Dodd-Frank, you
start talking about the CFPB, and you start talking Operation
Choke Point, it gets personal with me.
So my first question to you, Mr. Zywicki is, in your
testimony you stated, ``Lacking the authority to reach the auto
dealers, the CFPB came up with a creative solution--it decided
to hold the financial institutions--the indirect lenders, in
other words--responsible for any alleged discriminatory lending
patterns by the auto dealers themselves.''
You and I spoke about this before during your last
testimony before this committee, but I think it bears me
repeating.
We are currently seeing this play out with Ally Financial,
who, although it has settled--I quote, ``settled''--with the
CFPB, has yet to actually pay out any funds to those who were
discriminated against. In fact, the process for how funds from
the settlement are being distributed is somewhat unknown and
certainly definitely vague.
Now, you also highlighted the CFPB's allegations of
discrimination by auto dealers as examples of regulators
exceeding their bounds of the rule of law in order to force
banks to do their bidding and limit consumer choice.
So, question: Aren't legal businesses entitled to due
process, and should they, as in the case of auto dealers like
me, understand that the process is being used to back up
alleged discrimination?
Mr. Zywicki. That is exactly what is going on here is by
evading anything that resembles the rule of law--there is no
notice and comment rulemaking here; there is no study of the
impact on consumers. Basically, what they have done is in this
sort of nudge-nudge, wink-wink, backroom way in which
Ambassador Gray indicated that they can push around the banks
now because they are so interwoven with them, they are just
imposing this rule on the auto dealers, and the auto dealers
have no say in it, they have no opportunity to object to it.
And I think this is just an example of an out-of-control
entity conscripting private financial institutions to do their
bidding and to go after people that they don't like. And it is
exactly like Operation Choke Point in that way.
Mr. Williams. And what they don't understand is the
consumer tells us if we are doing a good job or a bad job, and
the government doesn't understand that.
Mr. Zywicki. That is right. Yes.
And another thing with the auto dealers is they don't
understand that you are selling cars, not loans, right? The
financing and selling of the cars goes together.
It is a very complicated process, and they are just so
obsessed with this one little part of it--of a larger
transaction that those are the kind of--that is why we have
notice and comment rulemaking, right, so you can point out to
somebody, ``You don't know what you are doing,'' right? It is
an opportunity to basically explain the complexity of this
transaction and explain the impact on consumers, and this is
what happens when we remake the entire car dealer industry with
a five-page informal guidance.
Mr. Williams. With that being said, we both mentioned
Operation Choke Point. How does Operation Choke Point undermine
the rule of law, in your opinion?
Mr. Zywicki. Operation Choke Point is one of the most
frightening government initiatives I have seen, and one of the
things--we have talked about the rule of law--that is awful
about all this is they took an idea that was not necessarily
unsound, but what we have seen again and again and again over
the past several years is just the Executive Branch pushing
things beyond any sort of reason, right?
And that is the case here, which is it is just blatant
targeting of companies and industries that they don't like, and
using this vague notion of reputational risk while there are
other equally plausible targets that they are not going after
purely because of political and ideological reasons.
Mr. Williams. I think most would agree competition and
consumers should drive the economy, not these regulations we
see from the Federal Government.
Mr. Zywicki. That is right. And that is what is awful about
Dodd-Frank is that Dodd-Frank now basically is picking and
choosing the winners and losers among banks based on who can
best arbitrage, pull strings, and bear the regulatory burden,
rather than the playing field of fair and free competition and
markets.
And what it is doing is making the big banks bigger,
killing the small banks, getting rid of innovation and consumer
choice, and supplanting marketplace competition with the heavy
hand of bureaucratic central planning.
Mr. Williams. And in the end, the consumer is the one who
is affected.
Mr. Zywicki. That is right. They know best, not Washington.
Mr. Williams. In my short period of time, Dr. Spalding,
quickly, Operation Choke Point--if you had to describe it to
the Nation's Founders, what do you think their reaction would
be?
Mr. Spalding. The problem is that Cass Sunstein has this
theory of nudging things along; this is a shove, all right, so
push comes to shove. The problem is that this is government
actively forcing people to do things and directing their
behavior. It clearly violates the whole concept of self-
government.
Mr. Williams. Thank you, Mr. Chairman. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from Utah, Mrs.
Love.
Mrs. Love. Thank you, Mr. Chairman.
Mr. Zywicki--is that--did I pronounce that correctly?
Mr. Zywicki. That is great.
Mrs. Love. Okay, great.
We have heard a lot today about the centralization of power
and how it has unleashed arbitrary regulatory discretion and
empowered interest groups beyond any time in American history.
Ultimately, this trend has succeeded in taking power out of the
hands of people, and that is what I want to concentrate my
questions on today.
A couple of things that you mentioned in your testimony are
particularly concerning to me and my constituents--for example,
the fact that the CFPB is data-mining American families'
personal financial data. Obviously, my constituents don't want
their credit card purchases to be tracked by Federal
Government. Do you know what the CFPB is collecting this data
for?
Mr. Zywicki. They have never explained what they are
collecting it for, or why they need so much of it, or why they
couldn't do with less. A while back, economist Thomas Stratmann
submitted a letter where he estimated that the CFPB is
collecting 70,000 percent more credit card accounts than they
need for any legitimate regulatory purpose.
Mrs. Love. What was that percentage?
Mr. Zywicki. 70,000 percent, in order to get statistical
significance, as an economist would say. And so, there may be a
legitimate regulatory purpose, but is there a legitimate
regulatory purpose why they need 991 million credit card
accounts instead of 500 million or 2 million?
The answer is ``no.'' They could do a couple million at
most is all that is necessary.
Mrs. Love. Okay.
Do you have an answer for that, Mr. Gupta, as to why they
are collecting this data--
Mr. Gupta. I think--
Mrs. Love. --so much data?
Mr. Gupta. --there is so much misinformation about this
issue that has been put out.
Mrs. Love. Okay.
Mr. Gupta. What the CFPB is doing is really no different
from any of the existing regulators that all have been
collecting similar data. This is--
Mrs. Love. So you are actually saying that pretty much all
of the--
Mr. Gupta. The prudential regulators, the ones that
existed--
Mrs. Love. All of the regulators--
Mr. Gupta. --before Dodd-Frank. And this is not
transaction-level data; it is account-level data. It is
anonymized. It doesn't have information about American
citizens.
The reason to collect this data is not to spy on people or
to collect--
Mrs. Love. So, what is it for?
Mr. Gupta. --information about individuals. It is to get an
aggregate picture of the market. We should want regulators to
understand what is happening in the market.
Mrs. Love. Would you assess that most consumers actually
know that this data is being collected?
Mr. Gupta. This is data that mostly is already public. This
is data about--
Mrs. Love. Okay.
Mr. Gupta. --who owns automobiles, who owns--
Mrs. Love. So are you assessing--are you saying that most
constituents--if I put this video up today, that most of my
constituents, most of America knows that all of this data is
actually being collected?
Mr. Gupta. I think most of your constituents would know
that mortgages are available in public land records--
Mrs. Love. Okay. Wait a minute. Hang on a second. Hang on
one second. This is the problem.
Where you say most of my constituents would know, that is
the problem with Washington. You don't know what my
constituents think.
Every time I have had about five town hall meetings in the
last week of August, not one constituent knew that their
financial data was being collected.
What responsibility do you think the CFPB has to make sure
that they know that their financial data is actually being
collected, and what right do they have to actually collect that
data?
Mr. Gupta. I think the Bureau should be completely
transparent about it.
Mrs. Love. I agree.
Mr. Gupta. And I think they have been. And I think--what I
was saying earlier is that I think your constituents would know
that mortgages--that who owns what house and the mortgage data,
that is available in public land records, and the same thing
with automobile ownership records. I think they would
understand that the DMV has that information about them.
The information that the CFPB is collecting is primarily
that information that is already public. And to the extent it
is information from financial institutions, it is anonymized,
it is not transaction-level data--
Mrs. Love. And again, I still have heard no reason as to
why this information is being collected, and I am telling you
right now I think it is the responsibility of the CFPB to stop
collecting this data or at least tell the American public why
this is being collected.
Another question I wanted to ask is that we mentioned that
the CFPB's intrusion on the business of auto dealers has,
according to recent reports, resulted in higher interest rates
for car loans for consumers.
Again, please explain to me, Mr. Zywicki, how that actually
helps the poorest among us and those who are struggling to make
ends meet?
Mr. Zywicki. Obviously it doesn't, and this is what happens
when you make a regulation--or whatever this is; you can't call
it a regulation because it is not--in the back rooms in the
ways that they are doing here.
Just one note on the data-mining operation, as this
committee will know, Director Cordray was once asked, ``Why
don't you notify consumers and give them a chance to opt out
from having this information sent to the CFPB?'' And he said,
``Because nobody would participate and so the program wouldn't
work.''
So I think to say that people kind of implicitly understand
it isn't very accurate.
Mrs. Love. My time is very short. I have 6 seconds.
But I just want to make a note and let every American who
is watching this right now know that their information is
actually being mined. Their financial information is being
mined, and the CFPB has yet to tell us why it is being mined,
why they need this information.
I again would like to make sure that we let the American
public know that this government has gotten so big that we
cannot navigate through that. They have no idea what people are
collecting, why they are collecting it, and I think that this
is something that every American should know, and I just want
to make sure that we put that on record.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Kentucky, Mr.
Barr.
Mr. Barr. Thank you, Mr. Chairman. Thank you for holding
this hearing examining the Dodd-Frank Act 5 years later, are we
more free, and especially holding the hearing on Constitution
Day, where we can examine whether or not the Dodd-Frank law is
consistent with the Constitution's separation of powers and the
rule of law enshrined in the Constitution.
In particular, I think it is timely to make this assessment
or examination into the constitutionality of the Dodd-Frank law
in light of the fact that the D.C. Circuit in July has revived
a constitutional challenge to the structure of the agency and
conferred a standing to a small $340 million community bank in
Texas.
But I would like to first focus on this issue of the
nondelegation doctrine. Mr. Gupta, in his testimony, dismissed
the arguments against the constitutionality of the agency,
saying that these were merely a thin-veiled attempt to breathe
life into the nondelegation doctrine, which some of us believe
actually is a pretty profound and important provision in
Article I, Section 1 of the Constitution: ``All legislative
powers herein granted shall be vested in a Congress of the
United States''.
So I would like to ask Ambassador Gray and Dr. Spalding, as
students of the Constitution, what the word ``all'' means, and
whether or not ``all'' implies that Congress should be
permitted to delegate legislative power to another branch of
government.
Mr. Gray. I believe, obviously, it clearly does not. My
colleague to my left thinks that the nondelegation doctrine was
buried in 1937 with the sick chicken case, the Schechter
Poultry case. Cass Sunstein, the great Harvard-law Poobah,
administrative-law Poobah, has once said nondelegation doctrine
had 1 good year and 111 bad years.
But in fairness, there haven't been many statutes--or any
statutes--thrown out since Schechter, but it has led to the
creation of a very powerful doctrine of construction called the
nondelegation canon of construction, and the courts have been
using it to narrow statutes to avoid the problems of too much
delegation. And this, I think, is something to bear very much
in mind.
One of the recent cases, Whitman v. American Trucking, or
vise-versa--Justice Scalia looked as though on the surface he
was throwing out a nondelegation challenge but, in fact, he
accepted the challenge, ruled that it was valid to the extent
of saying that an agency can't act unless it has a significant
risk that it is addressing. And that is a lot of what the CFPB
does. It doesn't appear to be addressing any significant risk
of anything.
Mr. Barr. So if I may just jump in here, when you look at
the open-ended delegation and the unfettered discretion that
Congress delegated these authorities to the CFPB, and when you
see guidance that circumvents the Administrative Procedure Act
(APA), that doesn't involve notice and comment rulemaking,
where the agency is not listening to congressional feedback--
bipartisan congressional feedback--do you believe that there is
a nondelegation doctrine problem with the structure of the
CFPB?
Mr. Gray. Absolutely, and I have said so. The legislation
says that the Congress has to defer to what the agency rules,
but the Whitman case says equally clearly that in a case of
nondelegation challenge, the agency has no say in--
Mr. Barr. In fact, you have circumstances where the CFPB is
specifically circumventing the expressed intent of Congress by
indirectly regulating auto dealers--not lenders, auto dealers--
through the guidance that doesn't even involve notice and
comment rulemaking.
Dr. Spalding, did you want to just quickly jump in on that?
Mr. Spalding. No, I think--I completely agree with
Ambassador Gray.
The thing I was going to point out is the underlying
problem here is not nondelegation per se; it is a complete
breakdown of the separation of powers. Just because the courts
are unable to see the obvious, which is this nondelegation has
really gone into a new form, does not mean Congress should not
and must not protect its own legislative powers.
These regulatory agencies, this one in particular, are
clearly exercising your lawmaking powers that ``all'' means all
and they must stay in article one.
Mr. Barr. Professor Zywicki, really quickly, Mr. Gupta says
that the CFPB comes before Congress and that the CFPB is bound
by the APA.
To me, that is like saying King George is accountable to
Thomas Paine simply because Thomas Paine is providing feedback
to King George. Can you comment on Mr. Gupta's argument that
the Bureau is, in fact, accountable?
Mr. Zywicki. I think the Constitution has this right.
Congress has the power of the purse, and the Executive Branch--
you have to be accountable somewhere in a real way, and they
are not.
Mr. Barr. Thank you.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
There are no other Members in the queue.
Thus, I would like to thank all of our witnesses for their
testimony today.
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.
This hearing stands adjourned.
[Whereupon, at 12:55 p.m., the hearing was adjourned.]
A P P E N D I X
September 17, 2015
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