    [Senate Hearing 114-909]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 114-909

                        THE ADMINISTRATIVE STATE V. THE
                     CONSTITUTION: DODD-FRANK AT FIVE YEARS

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

                                    HEARING

                                   before the

                        SUBCOMMITTEE ON THE CONSTITUTION

                                     OF THE

                           COMMITTEE ON THE JUDICIARY
                              UNITED STATES SENATE

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION
                                   __________

                                 JULY 23, 2015
                                   __________

                               Serial No. J-114-26
                                   __________

             Printed for the use of the Committee on the Judiciary

                    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                            www.judiciary.senate.gov
                                www.govinfo.gov
                                    ______

                       U.S. GOVERNMENT PUBLISHING OFFICE

    53-397                     WASHINGTON : 2025

                           COMMITTEE ON THE JUDICIARY

                      CHARLES E. GRASSLEY, Iowa, Chairman
    ORRIN G. HATCH, Utah                 PATRICK J. LEAHY, Vermont, Ranking
    JEFF SESSIONS, Alabama                 Member
    LINDSEY O. GRAHAM, South Carolina    DIANNE FEINSTEIN, California
    JOHN CORNYN, Texas                   CHARLES E. SCHUMER, New York
    MICHAEL S. LEE, Utah                 RICHARD J. DURBIN, Illinois
    TED CRUZ, Texas                      SHELDON WHITEHOUSE, Rhode Island
    JEFF FLAKE, Arizona                  AMY KLOBUCHAR, Minnesota
    DAVID VITTER, Louisiana              AL FRANKEN, Minnesota
    DAVID PERDUE, Georgia                CHRISTOPHER A. COONS, Delaware
    THOM TILLIS, North Carolina          RICHARD BLUMENTHAL, Connecticut

                Kolan L. Davis, Chief Counsel and Staff Director
          Kristine Lucius, Democratic Chief Counsel and Staff Director

                        SUBCOMMITTEE ON THE CONSTITUTION

                          JOHN CORNYN, Texas, Chairman
    THOM TILLIS, North Carolina          RICHARD J. DURBIN, Illinois,
    LINDSEY O. GRAHAM, South Carolina      Ranking Member
    TED CRUZ, Texas                      SHELDON WHITEHOUSE, Rhode Island
    DAVID VITTER, Louisiana              CHRISTOPHER COONS, Delaware
                                         AL FRANKEN, Minnesota

                   Noah J. Phillips, Republican Chief Counsel
                   Joseph R. Zogby, Democratic Chief Counsel

                                C O N T E N T S

                                  ----------

                               OPENING STATEMENTS

                                                                       Page

    Cornyn, Hon. John................................................     1
    Durbin, Hon. Richard J...........................................     3
    Leahy, Hon. Patrick
        Prepared statement...........................................   156

                                   WITNESSES

    Calabria, Mark A.................................................    12
        Prepared statement...........................................   146

    Gray, C. Boyden..................................................     5
        Prepared statement...........................................    32

    Gupta, Deepak....................................................     6
        Prepared statement...........................................    77
        Questions submitted with no response returned................   157

    Levitin, Adam J..................................................    10
        Prepared statement...........................................   127
        Responses to written questions...............................   159

    Rao, Neomi.......................................................     8
        Prepared statement...........................................   107

                                    APPENDIX

    Items submitted for the record...................................    31

                        THE ADMINISTRATIVE STATE V. THE
                     CONSTITUTION: DODD-FRANK AT FIVE YEARS

                                  ----------

                            THURSDAY, JULY 23, 2015

                                  United States Senate,
                              Subcommittee on the Constitution,
                                    Committee on the Judiciary,
                                                        Washington, DC.
        The Subcommittee met, pursuant to notice, at 2 p.m., in
    Room 226, Dirksen Senate Office Building, Hon. John Cornyn,
    Chairman of the Subcommittee, presiding.
        Present: Senators Cornyn [presiding], Tillis, Durbin, and
    Franken.
        Also present: Senator Lee.

                 OPENING STATEMENT OF HON. JOHN CORNYN,
                 A U.S. SENATOR FROM THE STATE OF TEXAS

        Chairman Cornyn. This hearing of the Constitution
    Subcommittee of the Senate Judiciary Committee is called to
    order, and I thank all of our witnesses for being here with us
    today. I look forward to an interesting exchange.
        This week marks the 5th anniversary of the enactment of the
    Dodd-Frank Wall Street Reform and Consumer Protection Act.
    Eight hundred fifty pages long, 16 titles, vague standards on
    critical issues, and requiring nearly 400 different rulemakings
    and an alphabet soup of new bureaucracies, this law is too big
    not to fail. Fail it has. When President Obama signed Dodd-
    Frank into law, he said it would end ``too big to fail.'' But
    it did not. The big banks are bigger, and the small banks are
    saddled with regulations that make it hard to compete.
        This perverse result should surprise no one. From the
    start, Dodd-Frank was a wish list of new administrative
    authority, much aimed at problems that did not cause the
    financial crisis. As I tell the community bankers in Texas,
    ``Wall Street may have been the target, but you are the
    collateral damage.''
        Today's hearing is intended to explore many of the
    constitutional issues raised by Dodd-Frank. In its conception
    and implementation, Dodd-Frank would be unrecognizable to our
    Founding Fathers. Take the Consumer Financial Protection
    Bureau: vague and vast authority, Congress has no power of the
    purse, the President cannot remove the Director at will, and
    courts must defer broadly to the Bureau, even though and even
    when it lacks expertise. These are serious constitutional
    flaws, and the results are an affront: a President that
    violated the Constitution to appoint the Director; a Bureau
    collecting sensitive financial data on millions of Americans
    without adequate protections or legally required approval;
    employees reportedly being told to redo examinations because
    they did not find violations; and a Director who upsets long-
    standing precedent and overrules his subordinates to increase
    the liability of targeted businesses.
        However much this should shock us, it should not surprise
    us. This is what happens when you give incredible power to
    unaccountable bureaucrats.
        James Madison, of course, wrote in ``Federalist 47'', ``The
    accumulation of all power, legislative, executive, and
    judicial, in the same hands, whether of one, a few, or many,
    and whether hereditary, self-appointed, or elective, may justly
    be pronounced the very definition of tyranny.''
        Our Constitution clearly separates powers and for good
    reason. Dodd-Frank does not. The Financial Stability Oversight
    Council is another example. Based on vague standards and no
    real check, the FSOC decides which companies the Government can
    subject to additional regulation and liquidate under Title II's
    Orderly Liquidation Authority, a process itself involving
    frightening violations of due process.
        For that, we have a solution. Senators Toomey, Lee, Crapo,
    and I have introduced the Taxpayer Protection and Responsible
    Resolution Act which would replace Title 2 with a bankruptcy
    process that announces the rules in advance, gives parties due
    process, and protects the rule of law.
        Let us now turn to today's witnesses:
        Ambassador C. Boyden Gray is a founding partner of Boyden
    Gray & Associates. A graduate of Harvard University and the
    University of North Carolina Law School, he served in the
    Marine Corps and then clerked for Chief Justice Earl Warren. He
    has had a distinguished career as a regulatory lawyer and
    served as, among many other positions, Counsel to President
    George Herbert Walker Bush. In litigation regarding the
    constitutionality of Dodd-Frank, Ambassador Gray represents the
    State National Bank of Big Spring, one of our wonderful
    community banks in Texas.
        Mr. Deepak Gupta is founding principal of Gupta Wessler. He
    graduated from Fordham University and Georgetown University Law
    Center and directed the Consumer Justice Project at Public
    Citizen. From 2011 to 2012, Mr. Gupta served as senior
    litigation counsel and senior counsel for enforcement strategy
    at the CFPB.
        Professor Neomi Rao teaches at George Mason University
    School of Law. She graduated from Yale University and the
    University of Chicago Law School. She clerked for Judge Harvie
    Wilkinson on the Fourth Circuit and later for Justice Clarence
    Thomas at the U.S. Supreme Court. Professor Rao has served this
    Committee as Counsel for Nominations and Constitutional Law and
    as Associate Counsel in the Office of Counsel to the President.
        Professor Adam Levitin teaches at Georgetown University Law
    Center. He graduated from Harvard, both undergraduate and law
    school, and received a graduate degree from Columbia University
    as well. Professor Levitin clerked for Judge Jane Roth on the
    U.S. Court of Appeals for the Third Circuit and served as
    Special Counsel to the Congressional Oversight Panel that
    supervised the Troubled Asset Relief Program, known as TARP,
    and currently serves on the CFPB's Consumer Advisory Board.
        Dr. Mark Calabria is the director of financial regulation
    studies at the Cato Institute. He holds a Ph.D. in economics
    from George Mason University and served as Deputy Assistant
    Secretary for Regulatory Affairs at the U.S. Department of
    Housing and Urban Development and after that as a member of the
    professional staff of the Committee on Banking, Housing, and
    Urban Affairs.
        I welcome all of you again, and I appreciate your being
    here and for sharing your expertise and testimony with the
    Committee.
        Let me turn to the Ranking Member, Senator Durbin, for any
    comments he would care to make.

              OPENING STATEMENT OF HON. RICHARD J. DURBIN,

               A U.S. SENATOR FROM THE STATE OF ILLINOIS

        Senator Durbin. Thanks, Mr. Chairman. The title of this
    hearing, ``The Administrative State v. The Constitution: Dodd-
    Frank at Five Years,'' sounds like a prize fight. But the truth
    is the main event we are watching these days is the Republican
    Party versus Wall Street reform.
        It is no secret that since the Dodd-Frank Wall Street
    Reform and Consumer Protection Act was enacted 5 years ago,
    Republicans have been obsessed with ending it and really
    turning Wall Street loose again.
        The Republican Party platform specifically calls for the
    repeal of this law. The top three members of the Senate
    Republican Leadership were all at one point cosponsors of a
    bill entitled ``The Dodd-Frank Repeal Act.'' Just a few days
    ago, in the GOP weekly address, House Financial Services
    Committee Chair, Jeb Hensarling, said, quote, ``It is time we
    commit to making sure this anniversary is Dodd-Frank's last
    anniversary.''
        It seems the GOP is committed to gutting Dodd-Frank any way
    they can, either in Congress, in the courts, or they hope under
    a Republican President who will have the ability to appoint or
    remove the heads of regulatory agencies. I do not understand
    this hostility to Wall Street reform. Some people have a very
    short memory.
        What do they have against the Consumer Financial Protection
    Bureau, the only Federal agency that puts the interests of
    consumers first? This agency has taken on credit card
    companies, payday lenders, for-profit colleges, and others who
    have tried to trick and trap consumers with rotten financial
    products. Holly Petraeus has made her work at the Consumer
    Financial Protection Bureau a focus on military--men and women
    in the military and their families being exploited. What is
    wrong with having an agency that really is trying to protect
    our military families?
        The CFPB so far has achieved over $10 billion in relief for
    17 million consumers through its enforcement actions. Is that
    bad news or good news? I think it is good news.
        Have the Republicans forgotten why Dodd-Frank was created?
    In 2008, we were standing on the precipice of the greatest
    economic meltdown in the United States of America since the
    Great Depression. How did we get there? It started years
    earlier with the growth of subprime mortgages, which were often
    fueled by predatory lending practices.
        I remember many years ago debating a previous Senator from
    Texas, Phil Gramm, on the floor of the U.S. Senate in 2001,
    over an amendment I offered to curb predatory subprime lending.
    He fought my amendment, and it failed by one vote. Senator
    Gramm said, and I quote, ``Some people look at subprime lending
    and see evil. I look at subprime lending, and I see the
    American dream in action.''
        Senator Gramm's view prevailed. Subprime lending continued,
    and it did not take long for mortgage companies to start
    securitizing these shaky mortgages and for Wall Street to
    create unregulated derivatives based on them. It was a huge,
    fast-growing house of cards that the financial industry put
    together, and our regulatory system was unprepared. The
    financial regulators were either co-opted or behind the curve.
    It all fell apart a few years later in 2008, when one financial
    giant after another collapsed: Bear Stearns, Lehman Brothers,
    Merrill Lynch, AIG, Washington Mutual, Wachovia, and a host of
    smaller entities. It was a time of panic. Credit markets froze;
    the stock market swung wildly. We went into a recession. We
    were losing 800,000 jobs a month in the United States. Millions
    saw their home values diminish or lost their homes in
    foreclosure. They also lost a substantial part of their
    savings.
        Who suffered the most from Wall Street's misbehavior? Main
    Street Americans. Unemployment rose above 10 percent, 8 million
    jobs lost. GDP, home values, and household wealth dropped
    significantly. Foreclosures in the millions.
        It was clear we had to get out of the recession, and we
    did. Our economy has stabilized since those dark days, thank
    goodness. It was also clear we needed to reform our financial
    regulatory system and curb risky, predatory financial
    practices. Congress embarked on a deliberate effort to pass
    Wall Street reform. We spent 7 months on Dodd-Frank between the
    introduction of the House bill and its enactment in July 2010.
    The legislation was thoroughly debated in Committee, on the
    floor, and in conference. Much thought went into crafting
    reforms that comply with the Constitution. Dodd-Frank does not
    place unrestrained power in the hands of regulatory agencies.
    While the law includes commonsense mechanisms to keep Wall
    Street and its allies from co-opting regulators, there are
    meaningful checks and balances.
        With respect to this Committee, the Constitution
    Subcommittee, constitutional challenges have been brought
    against Dodd-Frank. I am happy to debate their merits again
    today. I note that in at least four separate cases--one in
    California; one in Indiana; two in my home State of Illinois--
    Federal district courts have already rejected constitutional
    challenges to the Consumer Financial Protection Bureau, and
    none of the other constitutional challenges to Dodd-Frank's
    core provisions have yet to gain any traction in court.
        I will also note the irony of this effort to overturn Dodd-
    Frank. The other party has long complained about judicial
    activism, but it has now become the standard operating
    procedure for the Grand Old Party. When they lose in the court
    of public opinion, they ask judges to overturn the law, and
    that is what happened with the Affordable Care Act. That effort
    was doomed to failure, and so is this one.
        In closing, I would say this: When the banking industry
    comes to Capitol Hill and asks Congress to undo Wall Street
    reform and rewrite the rules their way, I hope my colleagues
    will remember those grim and ghastly days of 2008. We almost
    went over the edge of the cliff because of Wall Street's tricks
    and rigged games and the inability of our regulators to stop
    them. We do not need to go back to those days. We ought to move
    forward.
        Chairman Cornyn. As you can see, Senator Durbin and I are
    of one mind on the issues that are raised here. We look forward
    to hearing from the witnesses, but first will you stand and be
    sworn? Raise your hand. Do you affirm that the testimony you
    are about to give before the Committee will be the truth, the
    whole truth, and nothing but the truth, so help you God?
        Ambassador Gray. I do.
        Mr. Gupta. I do.
        Professor Rao. I do.
        Professor Levitin. I do.
        Dr. Calabria. I do.
        [Witnesses are sworn in.]
        Chairman Cornyn. Thank you very much. Mr. Gray, we will
    hear from you first, please.

               STATEMENT OF HON. C. BOYDEN GRAY, FOUNDING
                PARTNER, BOYDEN GRAY & ASSOCIATES, PLLC,
                             WASHINGTON, DC

        Ambassador Gray. Thank you very much for the opportunity to
    talk about these issues, which I think are very, very
    important. My written testimony goes through the details, which
    I think are fairly well known as to why I and others, some on
    this panel, think that there are portions of Dodd-Frank that
    are unconstitutional. I just want to make some preliminary
    comments about the result of this.
        The result of the lack of oversight that is so much part of
    this legislation is a regulatory flood which is very hard to
    challenge, here, in the courts, in the executive branch. This
    leads to a bias for large institutions which can afford the
    regulations and which in turn leads to larger Government to
    monitor what these large institutions do, and this is a bad
    spiral. The biggest banks have grown, doubled in size since the
    crisis, and the smaller banks--as you say, the collateral
    damage--have been disappearing. With them the consumer
    financing or small business financing that is so necessary for
    job growth in this country; 80 percent of new jobs are small
    business. The community banks have really suffered.
        The biggest banks, Wall Street, you might say, does
    complain loudly about this legislation, but they do benefit.
    The chairman of one of the largest banks has referred to Dodd-
    Frank as his ``moat''--that is, his protection against
    competition. Another chairman of one of the largest banks has
    said, ``Never have regulatory barriers to entry been so high as
    they are now.'' I do not think either of those banks is anxious
    to get rid of their protection against competition.
        The Fed has reacted, I think, well in recent months to
    raise the capital requirements for these very large
    institutions, but that, unfortunately, does not help the
    community banks at all. They never were at fault for any of
    these loans. These loans were the result of the insatiable
    hunger by Fannie Mae and Freddie Mac, which were not addressed
    in this legislation, for subprime loans. The community banks
    now really cannot make a lot of loans like they used to or
    issue a lot of mortgages as they used to because character
    loans, which were the basis for the community banking system in
    the United States, are basically off limits. I think that is a
    great loss. There are studies that show that character loans
    have far greater reliability than cookie-cutter, check-the-box
    loans, and that loss is very, very serious.
        The problems with the Consumer Bureau are illustrative of
    other sections of Dodd-Frank, including Sections 1 and 2,
    Titles I and II. There is no executive branch oversight. There
    is no removal authority on the part of the President. You here,
    in Congress, are handcuffed because the money comes from the
    Fed, not from you. The courts are required to give deference to
    whatever the consumer agency wants to do, even at a time when
    the courts are raising serious, serious questions about the
    propriety of the doctrine of deference.
        Some say, ``Well, there is congressional oversight,'' but
    congressional overseers get answers to questions like, ``Well,
    what does that matter to you?'' I think Cordray was heard to
    say to one question about the size of the cost of their new
    offices.
        We see the results, of course, with the data gathering,
    which is detailed in my testimony and in others', and I think
    that is a dangerous thing. We know about the disappearance of
    the smaller banks. I was gratified to read that Barney Frank
    suggested that maybe designating an ordinary insurance company
    as a SIFI may have been overreach. I think there is a lot more
    than just that one instance.
        Thank you very much. I would be happy to answer whatever
    questions you have.
        [The prepared statement of Ambassador Gray appears as a
    submission for the record.]
        Chairman Cornyn. Thank you, Mr. Gray.
        All of your written statements will be made part of the
    record, without objection. Mr. Gupta.

                  STATEMENT OF DEEPAK GUPTA, FOUNDING
             PRINCIPAL, GUPTA WESSLER PLLC, WASHINGTON, DC

        Mr. Gupta. Chairman Cornyn, Ranking Member Durbin, Members
    of the Committee, thank you for the opportunity to testify here
    today on the constitutionality of Dodd-Frank, and, in
    particular, Dodd-Frank's crown jewel, the CFPB, where I was
    senior counsel 3 years ago. My testimony makes three basic
    points.
        The first thing I want to address is the subject of this
    hearing, the constitutionality, the constitutional challenges
    to Dodd-Frank. In my view, these challenges are extreme and
    utterly lacking in legal merit, and the cases, the four cases
    that Senator Durbin mentioned, I think bear that out. The
    courts had no difficulty dispatching these challenges.
        In the 5 years since the enactment of Dodd-Frank, its
    political opponents have invoked every conceivable
    constitutional principle--from the separation of powers, to
    procedural due process, to the void-for-vagueness doctrine--in
    an effort to turn back the clock on financial reform and
    consumer protection. These efforts, as I mentioned, have
    failed, and they have not got the buy-in of major financial
    institutions or trade groups. In fact, in the D.C. Circuit
    case, the Big Spring case, the most high profile of these cases
    in which Ambassador Gray represents the plaintiffs, there are
    no amicus briefs from any of those organizations or
    institutions. The legal challenges we are talking about today
    are truly at the fringe.
        Unfortunately, I think they are emblematic of the moment
    that we live in. As Senator Durbin mentioned, we live in a
    moment in which every major political disagreement, it seems,
    gets constitutionalized, from health care to immigration, and
    now financial reform and even consumer protection are no
    exception.
        In this hearing I hope we can keep two things separate from
    each other. We can have a legitimate policy debate about the
    Dodd-Frank Act and about consumer protection. Let us not
    confuse those debates with constitutional debates. It is very
    important that we keep them separate lest we make the courts
    the only branch that has the final answer on these kinds of
    topics. I think conservatives should appreciate that as well as
    people on the other side of the aisle.
        The principal constitutional argument that is made is
    really a kind of disguised nondelegation argument. The argument
    is basically that we are handing power to these administrative
    agencies and the grant of power is too vague or too broad. That
    kind of argument, that nondelegation theory, has not been
    successfully invoked since 1935 at the height of judicial
    skepticism to the New Deal. That shows you how extreme it is.
    Even Justice Scalia has explained in a 2001 opinion that the
    Court has never felt qualified to second-guess Congress
    regarding the degree of policy judgments that can be left to
    agencies.
        The next batch of challenges concerns Presidential removal.
    The complaint here is that the President does not have enough
    control over the CFPB because the Director can only be removed
    for cause. This argument, too, seeks to turn the clock back to
    the same year, 1935. That is the year in which the Supreme
    Court in a case called Humphrey's Executor held that the exact
    same language, limiting removal of Federal Trade Commissioners,
    met constitutional scrutiny.
        At the end of the day, these constitutional arguments on
    Dodd-Frank and on the CFPB are not so much attacks on those
    particular pieces of legislation or agencies, but on the very
    foundations of the modern administrative State.
        The second point I want to make, turning now away from the
    constitutional precedent, is that the basic accountability
    critiques about the CFPB are groundless, and we should all care
    about whether our institutions of Government are accountable
    and transparent. The CFPB was specifically designed to resist
    capture by special interests. It is at least as accountable to
    the public as were the existing banking regulators that were
    captured before the crisis, and in several respects, the Bureau
    is far 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. It is subject to
    special small business reviews that no other financial
    regulator faces.
        The last point I want to make is something that is more
    immediate to what is going on in this building, and that is,
    you know, the CFPB has already proven that it is working for
    consumers. There are efforts to gut the agency outside the
    normal kind of legislative process. Again, just as with the
    constitutional challenges, those that do not have the votes to
    overturn the law are trying to challenge it in the courts. They
    are also trying to use the back door of the appropriations
    process to gut the agency.
        I just want to flag one issue because I think it has not
    gotten the attention it deserves, and that is, the hard work
    that the CFPB is doing to fulfill its statutory mandate to look
    at the fine print of consumer contracts where there are
    arbitration clauses--and issue, I know, Senator Franken, you
    have worked on. There is an effort now in the House to use
    appropriations language to kill that effort by the CFPB. It
    should be stopped.
        Thank you for the opportunity to testify today, and I look
    forward to answering your questions.
        [The prepared statement of Mr. Gupta appears as a
    submission for the record.]
        Chairman Cornyn. Thank you. Professor Rao.

                   STATEMENT OF NEOMI RAO, ASSOCIATE
                 PROFESSOR, GEORGE MASON SCHOOL OF LAW

        Professor Rao. Thank you very much. Chairman Cornyn,
    Ranking Member Durbin, distinguished Members of this Committee,
    thank you for inviting me to testify on the constitutionality
    of Dodd-Frank Wall Street reform.
        Dodd-Frank has raised serious constitutional questions
    since its inception, but today I will focus on the problems
    with the Consumer Financial Protection Bureau. This Bureau's
    structure and power provides an unfortunate case study of this
    hearing's topic: the Administrative State v. the Constitution.
        Five years of regulation and enforcement demonstrate how
    the lack of constitutional accountability encourages the Bureau
    to exceed its legal authority and undermine the predictability
    and stability of the rule of law. Let me just begin with a few
    first principles.
        Our Constitution is, of course, the supreme law of the
    land. All three branches of the Federal Government have a duty
    to ensure the constitutionality of administration as they
    exercise their respective powers. Importantly, this means the
    Supreme Court has no monopoly on constitutional interpretation,
    and judicial doctrine does not exhaust the meaning of the
    Constitution.
        Thus, in determining whether the CFPB is constitutional and
    whether it should be reformed or abolished, Congress may be
    informed by Supreme Court precedent, yet it need not be limited
    by it.
        Let me turn now to some of the problems with the CFPB,
    which have already been mentioned.
        First, the Bureau enjoys an unprecedented degree of
    independence from Presidential control and congressional
    oversight. Such independence, however, finds no place in the
    Constitution. The Constitution creates three distinct branches
    of Government, but no fourth branch for independent
    administrative expertise.
        The CFPB is an agency that implements the law and,
    therefore, it exercises executive power within the executive
    branch. Yet the President cannot remove at will the Director of
    the CFPB. In addition, the agency lacks meaningful
    accountability to Congress because the Bureau sets its own
    budget and, therefore, is not responsive to the appropriations
    process.
        What can be done about this super independence? Judicial
    challenges, such as the one brought by Ambassador Gray, are one
    possibility. The Court could restore the CFPB's accountability
    by invalidating the Director's removal protections. This remedy
    finds significant support in the Supreme Court's recent
    decision in Free Enterprise Fund v. PCAOB. Striking down the
    removal limits would be a limited judicial remedy that would
    not invalidate the agency or its regulatory mandate. It would
    restore a kind of constitutional accountability to the
    President.
        Supporters of the CFPB have defended its constitutionality
    by emphasizing that the Court is unlikely to fix these problems
    of independence. They cite jurisdictional limits like standing
    and cases like Humphrey's Executor that uphold removal
    restrictions.
        While I have argued that courts should address these
    constitutional problems, I agree that these lawsuits face an
    uphill battle. This, however, only suggests the urgency of
    congressional action. Congress can unravel the dangerous
    regulatory independence created by Dodd-Frank, and, indeed,
    there are many bills proposing to do just that.
        Another serious flaw with the CFPB concerns the breadth of
    its delegated authority, and I am not disguising my
    nondelegation arguments. I am bringing them right out in front.
    For example, the Bureau can regulate ``abusive practices,'' a
    term the Bureau has almost complete discretion to define.
        Mr. Gupta and Professor Levitin express a commonly held
    view that the nondelegation doctrine is dead, yet the Supreme
    Court has steadfastly maintained the importance and centrality
    of the principle that Congress cannot delegate its exclusively
    legislative power.
        Admittedly, the Court's nondelegation doctrine has
    permitted many expansive delegations under the toothless
    intelligible principle standard, but this is only a rule for
    courts. It reflects the limits of the judiciary, and it also
    reflects deference to Congress' judgment about structuring
    agency discretion. These institutional limitations simply do
    not apply to Congress.
        Congress can withdraw delegated authority or else provide
    more specific guidance about its enforcement. This would
    promote rule of law values by providing more notice to
    regulated entities. Defining core statutory terms would also
    eliminate the Bureau's ``I know it when I see it'' approach to
    enforcing the abusive standard.
        Supporters of the CFPB have suggested that nondelegation
    arguments are on the fringe. Of course, they are only on the
    fringe if one believes that the full meaning of the
    Constitution is reflected in Supreme Court caselaw. It never
    has been. Moreover, judicial doctrine can and does change. The
    Free Enterprise Fund case, decided in 2010, suggests a
    willingness to reconsider Humphrey's Executor and agency
    independence. Just this past term, Justices Thomas and Alito
    stressed the importance of the nondelegation principle to
    individual liberty.
        May I have another moment?
        The constitutional problems here have real-world urgency
    because an agency lacking accountability will predictably
    expand its powers beyond its legal authority. The CFPB's
    massive data collection, its circumvention of statutory limits,
    its Orwellian enforcement tactics--all reflect an agency that
    answers to no one.
        Let me just be clear that today my arguments are not simply
    about the particular policies of the CFPB. The CFPB's policies
    may be destroying various markets, as critics contend, or it
    might be defending the underdog consumer, as its supporters
    say. It is precisely the function of our accountable lawmaking
    process to reflect these diverse interests. By contrast, an
    independent agency cuts off this debate and compromise.
        Moreover, the agency's expertise is not a substitute for
    representative Government. Expertise does not answer the hard
    questions about what the agency should do and at what cost.
    These are questions that are invariably laden with economic,
    legal, social, political, and even moral judgments. There is no
    independent standpoint with the CFPB, just raw authority of the
    bureaucrats.
        Fixing these constitutional infirmities does not require
    tearing down the administrative state. It only requires that
    administration occur with proper deliberation and
    accountability.
        Thank you for this opportunity to testify. I look forward
    to your questions.
        [The prepared statement of Professor Rao appears as a
    submission for the record.]
        Chairman Cornyn. Thank you. Professor Levitin.

                     STATEMENT OF ADAM J. LEVITIN,
                PROFESSOR OF LAW, GEORGETOWN UNIVERSITY
                       LAW CENTER, WASHINGTON, DC

        Professor Levitin. Chairman Cornyn, Ranking Member Durbin,
    Members of the Committee: Today's hearing is on the
    constitutionality of the Dodd-Frank Act. Simply put, there is
    no credible constitutional problem with Dodd-Frank.
        While the Act does create some novel administrative
    structures, the financial regulatory world is full of agencies
    that do not conform to hornbook administrative law paradigms.
    None of these agencies have previously caused constitutional
    consternation. The Office of the Comptroller of the Currency,
    for example, has been around for over 150 years without a
    constitutional challenge despite being equivalently sheltered
    from Presidential and congressional control as today's bugbear,
    the Consumer Financial Protection Bureau.
        The CFPB was deliberately designed to be somewhat
    politically insulated, with a single Director and independent
    funding. A point that was made repeatedly in the debates
    leading up to the enactment of the Dodd-Frank Act was that the
    existing Federal financial regulators were totally ineffective
    at consumer protection, in part, because of internal deadlock,
    regulatory capture, and political pressures.
        Congress recognized that consumer interests versus banking
    interests were inevitably a David-versus-Goliath mismatch.
    Therefore, if the CFPB were left subject to the horse trading,
    log rolling, and hostage taking of the appropriations process,
    the Bureau would never be effective.
        As it happens, the CFPB is one of the most dynamic,
    innovative, and effective agencies in the entire Federal
    Government. To illustrate, consumer financial protection
    enforcement actions in the decade before the CFPB was created
    totaled far less than $1 billion. In 4 years, the CFPB has
    already obtained over $11 billion in consumer relief, and the
    Bureau is the only financial regulator to finish its Dodd-Frank
    rulemakings on schedule. Clearly, a motivated and politically
    insulated agency produces better results, and nothing in the
    Constitution provides that regulatory agencies must be designed
    to be as ineffective as possible.
        While the CFPB is politically insulated, that does not mean
    it is not subject to oversight. The CFPB is subject to
    congressional budget controls, just not through the
    appropriations process. If Congress wants to change the budget,
    it has to take affirmative legislative action. That would also
    be what is required were Congress to appropriate funds for the
    Bureau. Nothing in the Constitution requires that an agency be
    subject to appropriations, and, indeed, none of the Federal
    bank regulators are subject to appropriations.
        The CFPB has a single Director, but the Constitution does
    not require a multi-member commission. The Comptroller of the
    Currency is not a commission, for example.
        The CFPB's Director is removable only for cause, but,
    again, that is a standard that the Supreme Court upheld in
    Humphrey's Executor. The CFPB is subject not only to the usual
    checks and balances on administrative agencies, but also to
    special ones. The usual Administrative Procedures Act
    requirements and judicial review apply to CFPB rulemakings and
    adjudications.
        The CFPB is the only Federal financial regulator required
    to go through the SBREFA rulemaking process or subject to an
    FSOC veto on its rulemakings or subject to an annual GAO audit.
    The CFPB is also, of course, subject to the usual oversight
    exercised by Congressional Committees such as this one. Most
    importantly, Congress is always free to amend Title X of the
    Dodd-Frank Act. Just get the votes.
        There really is not much to say about the constitutionality
    of the CFPB or any of the other parts of Dodd-Frank, and, you
    know, it is not surprising that there has been little noise on
    these issues aside from Ambassador Gray's lawsuit. If the Dodd-
    Frank Act were so patently unconstitutional, do you not think
    that the American Bankers Association or the Consumer Bankers
    Association or the ICBA or CUNA or some of the major banks
    themselves would have brought litigation? None of them have.
    Surely a lawsuit would have been a lot cheaper for Citibank,
    for example, than the $700 million settlement that it entered
    into with the CFPB this week. Not one of these entities has
    even filed an amicus brief in support of Ambassador Gray's
    suit.
        Let us be clear about what the real issue is behind the
    trumped-up constitutional challenges to the Dodd-Frank Act. The
    issue is not principled concerns about the CFPB's
    constitutionality. Instead, the issue is that certain
    businesses want to be able to continue profiting from illegal
    practices against their customers. The Constitution is not
    being invoked in any sort of principled way to protect
    fundamental liberties. Instead, it is being cited as part of a
    campaign to preserve ill-gotten corporate profits.
        You do not need to take my word for it. Just read the
    published scholarship of Professor Rao. She has actually
    written that the motivation for Ambassador Gray's litigation
    against the CFPB is to eliminate the CFPB rather than to
    correct any alleged constitutional defects.
        Reasonable minds can differ about the policy choices
    embodied in the Dodd-Frank Act, and if the detractors of the
    Act can get enough votes, they can change those policies. The
    constitutionality of the Act is not seriously in question.
        I look forward to your questions and, in particular, to
    have the chance to address the uproar over CFPB data
    collection. Thank you.
        [The prepared statement of Professor Levitin appears as a
    submission for the record.]
        Chairman Cornyn. Thank you. Dr. Calabria.

                 STATEMENT OF MARK A. CALABRIA, PH.D.,
                    DIRECTOR OF FINANCIAL REGULATION
                STUDIES, CATO INSTITUTE, WASHINGTON, DC

        Dr. Calabria. Chairman Cornyn, Ranking Member Durbin, and
    distinguished Members of the Subcommittee, I thank you for the
    invitation to appear at today's important hearing. I also want
    to thank the Subcommittee for its interest in hearing from a
    nonlawyer. I like to think the Constitution is important to all
    of us, not just lawyers. Just in case there are any tough
    constitutional questions, I brought my Cato pocket
    Constitution.
        Over the many years I have worked on financial policy, one
    of the most striking elements continues to be the vast
    delegation of actual decision-making to executive branch and
    so-called independent agencies. I would actually agree with
    some of my colleagues that the CFPB is not new because we have
    been doing this with a lot of other agencies for a long time,
    and that is part of the problem.
        While I share some of the concerns raised, I want to focus
    my time on the CFPB, particularly two aspects, but I do want to
    emphasize in no way should this be interpreted that I do not
    think there are other flaws in the Act or that there are other
    flaws of the CFPB. I am going to quickly talk about the funding
    structure and the bulk collection of consumer data.
        As the Committee has heard, the CFPB sets up a very unusual
    process for funding where it is outside of the budget control,
    it is outside of the appropriations process. As we have heard,
    this is argued to be protective of the CFPB from Wall Street. I
    will set aside the fact that Wall Street is actually not under
    the jurisdiction of the CFPB. It remains at the SEC and the
    CFTC. More importantly, the last time I checked, I could not
    find a single Wall Street lobbyist sitting on the Senate
    Appropriations Committee. Looked a couple times. Could not find
    any.
        What I did see, however, was earnest, hardworking Members
    on both sides of the aisle trying to do the difficult and
    sometimes thankless job of allocating our Federal resources.
    Let me say I have the full confidence in the Chair, Ranking
    Member, and other Members of the Financial Services
    Subcommittee of the Appropriations Committee to competently
    carry out the job of allocating resources to the CFPB. I have
    no doubt they will be able to do that job effectively, whoever
    is in the majority.
        Turning to the data collection, many Members will well
    remember 9/11. I remember it. I was in this building. One of
    the things that came out of 9/11, the PATRIOT Act, was a vast
    expansion of data collection by the Federal Government. We were
    told that only if we had had more information and more data,
    those attacks could have been avoided. Yet as the 9/11
    Commission revealed, it was not a lack of data. It was a lack
    of connecting the dots, the unwillingness to connect the dots.
        Similarly, the financial crisis was met with the same
    demand for more data as if the overheated housing markets and
    mortgage markets were not obvious enough from the generally
    available aggregate data that problems were coming. I will
    certainly emphasize, as a critic of Dodd-Frank, and as someone
    who spent his years up here trying to stop the crisis from
    happening, in no way do critics of Dodd-Frank, certainly
    myself, want to relive it. What we want to do is avoid another
    crisis.
        Unfortunately, the CFPB has become the lead prophet for
    this false idol of more data. As GAO has reported, the CFPB has
    engaged in at least 12 large-scale data collection efforts. At
    least three of these directly identify individual consumers.
    The remainder you can combine outside information and identify
    individual consumers. In my opinion, I do not believe these
    collections comply fully with the Right to Financial Privacy
    Act.
        Let me also say as a former Federal employee and one
    subject to the recent OPM data breach, let me clearly say I do
    not trust the CFPB with my personal data either. In fact, I do
    not want any of the Government to have my personal data.
        Unfortunately, in consolidating all this financial data in
    one place, the CFPB has basically created one-stop shopping for
    hackers and leaves consumers at the risk of identity theft and
    even extortion from hackers.
        Of course, that is just the risk from outside the CFPB.
    Unfortunately, the CFPB's data collection efforts, particularly
    in the area of credit cards, in my opinion poses significant
    threats to our Fourth Amendment protections. As Justice Douglas
    observed in his dissent to California Bankers, ``A checking
    account--may well record a citizen's activities, opinions, and
    beliefs as fully as transcripts of his telephone records.'' Of
    course, credit cards are today's checks.
        Such concerns are not simply the reflections of the
    Watergate-era. As recently as 2012, Justice Sotomayor in her
    concurrence to United States v. Antoine Jones correctly
    observed that, quote, ``Awareness that the Government may be
    watching chills associational and expressive freedoms. The
    Government's unrestrained power to assemble data that reveal
    private aspects of identity is susceptible to abuse.'' I think
    that Justice Sotomayor was underexaggerating the threat there.
    She also, in her concurrence, gave the example of identifying
    medications purchased by online retailers. Of course, such a
    purchase could potentially be identified within the CFPB's data
    base of credit card accounts.
        For a variety of reasons, the CFPB has become a highly
    partisan issue. Were it to use the financial records of its
    critics in an attempt to silence or intimidate these critics,
    it would not be the first agency to do so.
        As Justice Thurgood Marshall sadly observed, ``The
    technique of examining bank accounts to investigate political
    organizations is, unfortunately, not a rare one.''
        The CFPB should end these sweeping data collections. I do
    not think they are needed for--they could actually try to
    respond to the consumer complaints more often. Plenty of
    consumer complaints out there.
        Let me also end with saying, you know, if I thought that
    the benefits of Dodd-Frank outweighed the costs, I would be the
    first to stand up and applaud it. If I thought it would stop
    future financial crises from happening, I would be the first to
    stand up and applaud it. In my opinion, if we continue along
    the path that we are going on today, we are certain to have
    another financial crisis in the next 10 years that will be
    worse than the last one. Thank you.
        [The prepared statement of Dr. Calabria appears as a
    submission for the record.]
        Chairman Cornyn. I thank all the witnesses for their
    testimony. We will go with 5-minute rounds, and I will start.
        All of us who serve in the Congress have taken an oath to
    uphold and defend the Constitution of the United States of
    America, and I find it odd that some of the witnesses would say
    that only the courts can decide or consider questions of
    constitutionality, particularly given the fact that courts by
    the limitation of their jurisdiction to people with standing,
    ripe cases, can adjudicate cases or controversies. Clearly,
    Congress' authority is much more broad, is plenary, and so I
    think it is entirely appropriate for us to consider the
    constitutionality of these laws, even in the absence of any
    litigated case that would raise those issues.
        Ambassador Gray, perhaps you can start. We have heard from
    some of the witnesses the purposes for which Dodd-Frank was
    passed, and most of the concerns, like those raised by the
    Ranking Member, had to do with the subprime crisis, the credit
    agencies on Wall Street that graded the paper that was then
    bought by investors, and the house of cards that was created
    that eventually collapsed.
        Can you tell me what part of that that the State National
    Bank of Big Spring played?
        Ambassador Gray. It played no part whatsoever. None. I do
    not think any community bank contributed to the crisis at all,
    but they are the ones who have suffered--have suffered the
    most. The answer is nothing at all.
        Chairman Cornyn. I believe, Ambassador Gray, you alluded to
    the number of community banks that are simply disappearing. In
    States like mine, in rural areas in particular, where the costs
    of compliance with this new regulatory scheme have simply been
    so burdensome, many community banks have simply ceased to exist
    or have been bought by other institutions.
        Professor Rao, Mr. Gupta, and Mr. Levitin said this
    Committee does not have really any business raising
    constitutional questions. It strikes me that, especially given
    the nature of the regulatory state, with all of the protections
    given to litigants in a court of law, questions of due process,
    notice, and a right to be heard, the right to be heard by an
    impartial adjudicator, not just at the first instance but also
    on appeal, we have seen many instances here of late, for
    example, like the Securities and Exchange Commission that has
    been criticized for basically being the judge and jury and
    executioner without any sort of independent view of the case
    and an opportunity for people to be afforded some of the basic
    elements of what we would consider to be due process.
        Would you comment on that, please?
        Professor Rao. Sure. Thank you. Thank you, Chairman Cornyn.
    Your comments raise one of the other very significant problems
    with the CFPB, which, as you say, combines all the three
    functions of the Federal Government into one. It can make the
    rules, which is a type of legislative function. It gets to
    execute and enforce those rules, which is an executive
    function. It, of course, gets to adjudicate.
        You know, our Framers separated powers precisely so that
    there would be checks and balances in the exercise of Federal
    power. An agency that combines all the powers of the Federal
    Government into one does not have those checks and balances.
    That often leads to abuse, as some of the filed lawsuits have
    indicated.
        Chairman Cornyn. Mr. Gupta, I appreciated your testimony. I
    would just like to ask, given the challenges that someone in a
    bank, a financial institution, let us say a community bank like
    the one that Ambassador Gray represents, given the challenges
    that they have of getting essentially a fair trial in the
    administrative process, number one, the people writing the rule
    are not elected, unlike Members of this panel that can be
    unelected if people do not like what we are doing, along with
    the deference that the courts give under the Administrative
    Procedures Act to the fact finding, and even under the Chevron
    case, a deference in terms of interpreting the law where the
    law might otherwise be considered ambiguous, along with no
    opportunity for an appeal before an impartial third party, much
    as you would, let us say, in a court of law. Isn't the deck
    stacked against small financial institutions like the one that
    Ambassador Gray represents such that you understand why they
    may feel like they cannot get a fair shake?
        Mr. Gupta. Thank you for the question, Senator Cornyn. I do
    not think the deck is stacked at all, and I think part of the
    point--this is in the DNA of the CFPB--part of the point of the
    agency is to level the playing field between big banks and
    small banks. Before the crisis, you had ten different
    regulators with partially overlapping and distinct authority.
    You had different rules for different players in the system.
        The idea of the CFPB is if you have one set of rules for,
    say, nonbanks and banks that are doing the same thing or for
    big banks and small banks, that levels the playing field. It is
    one of the reasons that the community bankers were so
    supportive of this agency throughout the legislative process
    and in its early years.
        Big Spring Bank, by the way, is not actually subject to
    CFPB enforcement at all, which is one of the reasons its
    challenge ran aground on standing issues.
        Let me get to what I think is the heart of your question,
    which is the concern about due process. Of course, we should be
    very concerned about due process, whether it is in the
    administrative process or in the court system. It is just not
    true that there is no right to appeal. In fact, you know, the
    CFPB----
        Chairman Cornyn. My question had to do with an impartial
    third party, not to the agency itself.
        Mr. Gupta. Right, but you can. You can appeal to the D.C.
    Circuit from any adjudication through the agency, and that is
    standard within administrative agencies. I think we have not
    seen that happen yet simply because a lot of the action has
    been happening in the courts. The CFPB can either go to court,
    or it can do enforcement in its own process. But either way you
    have a right, as a small bank or a large bank, to an Article
    III Judge to ultimately decide that question.
        Chairman Cornyn. Senator Durbin.
        Senator Durbin. Thanks, Mr. Chairman.
        I would like to address for a moment this question of
    removal of the Commissioner--pardon me, removal of those who
    are in charge at the CFPB. There has been reference to the Free
    Enterprise case, and I did a quick read here. I would not want
    to have to stand and address the class on it, but the quick
    read I made suggests that the Court found that it violated
    separation of powers to have a second layer of insulation in
    this case so that the Public Company Accounting Oversight Board
    members were removable--removable only for cause by the
    Commissioners of the SEC, and the SEC Commissioners were
    likewise only removable for cause by the President.
        As I understand it, the President under the CFPB has the
    power to directly remove the Director. Is that correct, Mr.
    Gupta?
        Mr. Gupta. That is exactly right. The President's ability
    to remove the Director is unobstructed. The only way in which
    it is obstructed is that there is a for-cause requirement, but
    that has been true of the FTC for 100 years. It is true of lots
    of agencies, and it entirely distinguishes this case from the
    Free Enterprise case.
        Senator Durbin. Professor Rao, am I pronouncing your name
    correctly?
        Professor Rao. Yes, you are.
        Senator Durbin. Do you take exception to that, that the
    distinction made in the Free Enterprise case was a dual layer
    of removal, and in this case with the CFPB, it is only a single
    layer?
        Professor Rao. Yes, Senator Durbin, that is correct. That
    is a correct factual statement of the difference between the
    CFPB and the PCAOB.
        Senator Durbin. That will help me in my grade.
        [Laughter.]
        Professor Rao. My argument is that the reasoning of the
    Free Enterprise Fund case goes beyond the double layer of
    removal protection. If you read that case, it seems quite clear
    that Chief Justice Roberts is talking about the importance of
    removal generally for Presidential control. He suggests that
    the removal power is an essential part of Article II and of the
    President's control as the Chief Administrator.
        While that case does not address the first layer of
    removal, I think its reasoning and its logic strongly casts
    doubt on Humphrey's Executor and agency independence more
    generally.
        Senator Durbin. The FTC decision of many decades ago about
    removal for cause being sufficient?
        Professor Rao. Sure, that case, Humphrey's Executor, from,
    you know, the 1930s, that case said that the FTC Commissioners
    could be insulated for cause removal because they exercised
    quasi-legislative and quasi-judicial powers and, therefore, the
    FTC was not part of the executive branch.
        An interesting thing, Humphrey's Executor is still
    considered to be good law by the Supreme Court. However, its
    reasoning has been strongly undermined. Even Justices who
    recognize that agencies can have a certain amount of
    independence and that for-cause removal restrictions are valid,
    they all recognize that these independent agencies are part of
    the executive branch. That is a very interesting shift in the
    way of thinking about these agencies, and I think that also
    casts doubt on the holding of Humphrey's Executor, because if
    these agencies are part of the executive branch, they should be
    accountable to the President.
        Senator Durbin. My staff just informed me the district
    courts have ruled that the Humphrey's Executor case does apply
    to the CFPB.
        Professor Rao. They need to hold that because they are not
    the Supreme Court. We will see maybe perhaps in another case.
        Senator Durbin. You are hoping your former boss gets his
    hands on this.
        [Laughter]
        Dr. Calabria, you talked about the legal system, a basic
    characteristic of a good legal system is one where private
    parties can read the law and have a strong sense of whether
    they are in compliance. I am dealing with for-profit colleges
    and universities, the most subsidized industry in America.
    Ninety----
        Dr. Calabria. Let us cutoff those subsidies.
        Senator Durbin. Ninety percent--90 percent of their revenue
    comes from the Federal Government. I am dealing with students,
    deep, head over heels in debt to these for-profit schools,
    which account for 10 percent of the graduates from high school
    and 44 percent of student loan defaults. Many of them are
    forced to sign these arbitration clauses which keep them out of
    court so that when they try to resolve their problems, they
    really do not have access to due process. They have access to
    whatever the schools decide will be the rules to play by. Is
    that fair?
        Dr. Calabria. There are at least three or four things in
    there that probably are not fair, so where to start? Certainly,
    I would encourage Congress to rethink the subsidy system that
    encourages this behavior.
        I think the point about arbitration is whether it is
    properly disclosed or not ahead of time. I do not have a
    problem with arbitration if you know what you are getting
    into----
        Senator Durbin. Excuse me. Would you have had a problem
    when you were 19 years old on your first day at college
    deciding whether an arbitration clause in your student loan was
    the right thing for you?
        Dr. Calabria. That is a good question. What I would say is
    I still think if it is clearly disclosed, then to me what more
    do we want? If we are going to say that it is unfair, it is not
    clear to me that it is unfair, if that is your basic question.
        Senator Durbin. I thought I was pretty smart in those days,
    but I am not sure I would have been able to explain an
    arbitration clause as I was signing up for school.
        Dr. Calabria. I am not sure I would have understood
    interest deferment and how the interest rate was going to reset
    and all the subsidies, either. Of course, the whole structure
    of it is unfair.
        Senator Durbin. If the structure is unfair, that is what
    the CFPB is all about, is to get to the question of fairness,
    not whether it is spelled out in that loan agreement, but
    whether it is a fair relationship.
        Dr. Calabria. Let's pull some of this apart. I think we
    probably all agree that it is fine, not just fine but needed,
    to have an agency go out there and get rid of fraud. That is
    agreed with. And then, you know, fairness is fairly subjective.
    If the question is about that I think this party has more
    bargaining power than that party, well, then, I generally do
    not think that the role of the Federal Government is to decide
    what the balance between bargaining is. I think the role of the
    Federal Government is to make sure that you have got the deal
    that you bargained for and that you were not defrauded. I think
    we all agree on that. I certainly am not saying that there
    should be no protections against fraud.
        Senator Durbin. Thank you.
        Chairman Cornyn. Senator Lee.
        Senator Lee. Thank you, Mr. Chairman. I want to thank all
    of our panelists for their very careful attention to detail in
    this.
        Professor Rao, I would like to talk to you about some of
    your testimony and some of the constitutional implications that
    we have here. Would it be fair to say that when the Supreme
    Court articulates a constitutional principle, it is not always
    articulating the extent to which it is willing to enforce that
    principle? Would that be accurate?
        Professor Rao. Yes, I think that is correct.
        Senator Lee. You refer to this in connection with the
    nondelegation doctrine. The Court has been pretty consistent in
    how it has articulated the principle of nondelegation. Much of
    this goes all the way back to Charles de Montesquieu, who
    influenced the Founding Fathers and who understood that there
    is a difference between the power to make law and the act of
    delegating to someone else the power to make a law.
        This principle exists in the nondelegation principle itself
    as articulated in a number of Supreme Court opinions, even
    though it is not necessarily enforced in those opinions. I
    think there is an important point that I believe you make
    reference to in page 7 of your written testimony and the text
    accompanying footnote 33 wherein you make the argument that
    there is also support for this in the Presentment Clause. Do
    you think this represents what could be an independent basis
    upon which some of this authority could be challenged?
        Professor Rao. Under the Presentment Clause.
        Senator Lee. Yes.
        Professor Rao. Because delegations allow the agencies to
    make law without presentment.
        Senator Lee. Yes.
        Professor Rao. Right, it is without either bicameralism or
    presentment, right? Agencies, you know, one of the problems
    with the way agencies exercise power is if they are actually
    setting the rule of conduct and if they are making the
    significant and important questions that the legislature should
    be making, then they are essentially exercising a kind of
    legislative function. As you say, they are doing so outside of
    the requirements of bicameralism and presentment.
        Senator Lee. Right, and so, in the case of Chadha, you had
    a legislative veto that was being challenged both on the
    grounds that there was a lack of bicameralism and because there
    was a departure from the principle of presentment. The Supreme
    Court concluded that, regardless of the bicameralism problem,
    it was enough to say that there was an absence of presentment.
    You did not have bicameral action by Congress followed by
    presentment and signature of acquiescence by the President.
        That was enough for the Court to say, okay, the final bell
    here, the final action being taken is Congress, and it is not
    acting in the manner prescribed by Article I, Section 7, so
    that is a problem.
        It seems to me that there is a corollary to that that says
    that when the final legislative act, as you might say, is
    undertaken by an executive branch agency, they are issuing a
    new rule carrying implications, a new rule of general
    applicability, imposing legally binding restrictions on members
    of the public, could that not also be characterized as a
    legislative act undertaken in the absence of bicameralism and
    presentment as prescribed by Article I, Section 7.
        Professor Rao. I think in some instances it certainly could
    be characterized that way. Of course, the difficulty is that
    the executive branch does have the authority to fill in the
    gaps, right? You know, where they are implementing the laws,
    there are certainly certain rules and regulations that the
    executive branch can properly enact.
        Senator Lee. Sure.
        Professor Rao. The difficulty is separating those
    legitimate rulemaking functions that are part of the executive
    power from the power that is vested exclusively with Congress--
    right?--the lawmaking power. That is a tough line to draw,
    which is one of the reasons why courts, as you say, have not
    wanted to draw that line very often.
        Senator Lee. Correct. It is not always possible perhaps to
    state with mathematical precision in a single mathematical
    formula exactly where that line is crossed. Yet you can know
    when it has been crossed in many instances.
        I would imagine, for example, you would agree that we would
    probably have--in addition to perhaps a nondelegation problem,
    you might well have a presentment problem. If Congress went to
    such a degree of abstraction as to say we shall have good law--
    this is in an act of Congress--and we hereby delegate to the
    herewith created U.S. Commission on the Creation of Good Laws
    the power to create good law, the power to promulgate rules
    carrying the force of generally applicable law that are good,
    and they will also have the authority to implement those laws,
    would that not create a Presentment Clause problem?
        Professor Rao. Yes, that would seem to, even under current
    supreme doctrine, violate the nondelegation----
        Senator Lee. At the time Chadha was decided, in the mid-
    1980s, the practice of using legislative veto provisions, not
    just of adopting a legislative veto provision, but also of
    allowing Congress to exercise either a bicameral or in some
    cases a unicameral legislative veto had become rampant for more
    than 50 years, had it not?
        Professor Rao. Yes.
        Senator Lee. In fact, we had not just dozens, not just
    scores, but literally hundreds of legislative veto provisions
    on the books. Few doubted the lack of constitutionality in
    these provisions. No court had ever held that this violated the
    Constitution. Yet was it any less violative of the
    Constitution?
        Professor Rao. No.
        Senator Lee. It was not. I see my time has expired. Thank
    you, Professor.
        Professor Rao. Thank you.
        Senator Lee. Thank you, Mr. Chairman.
        Chairman Cornyn. We have statements for the record from
    Americans for Financial Reform and 14 other consumer,
    community, and civil rights groups, also from Public Citizen
    and from Ranking Member Leahy. All of them will be made part of
    the record, without objection.
        [The information appears as submissions for the record.]
        Chairman Cornyn. Senator Franken.
        Senator Franken. Thank you, Mr. Chairman.
        Mr. Gupta, thank you for your testimony. You mentioned
    mandatory arbitration in your spoken testimony, and also you
    highlighted the release of the CFPB's study on mandatory
    arbitration clauses as well in your written testimony.
        I have led a coalition of more than 50 Members of Congress
    in urging the CFPB to use its authority under the law to ban
    forced arbitration in consumer contracts, and I was very
    pleased when Director Cordray announced last week that the
    Bureau would be moving forward with a rulemaking on this
    matter.
        However, one of the challenges in this area is that a lot
    of people do not really understand why arbitration is such an
    important issue. It is not always easy to see how it affects
    people's day-to-day lives.
        Based on your experience, can you discuss how mandatory
    arbitration clauses in consumer contracts, financial services
    contracts, how they impact people's everyday lives?
        Mr. Gupta. Thank you so much, Senator Franken, for the
    question and for your work, really important work on this
    issue. I think you are exactly right that the problem here is
    this issue is so important and yet underappreciated because
    every time we get a credit card or we get a cell phone, a
    student loan, chances are that tucked into the fine print
    somewhere is a mandatory binding arbitration clause. You say
    those words, and people sort of tune out. They do not
    understand what it means, and they do not think it is going to
    affect them.
        What it really means is that, you know, when Congress
    passes laws, we think it enshrines some important right, and we
    assume that right is going to be enforceable somewhere. If the
    right just sort of vanishes, then all of the other things that
    you do around consumer protection can become meaningless. That
    is the threat of mandatory arbitration. It means that you are
    giving up, without knowing it, you are giving up the right to
    court, you are giving up the right to a jury, you are giving up
    the right to have the dispute be public, you are giving up the
    right to precedent, you are giving up the right to an appeal.
    If you are talking about consumer claims that are, you know,
    small-dollar claims, which they often are against banks, it
    means that you are giving up any economically feasible way of
    enforcing those claims because they are either going to be
    enforced by people banding together and bringing those claims
    in court, or it is just not going to happen.
        You know, we were debating about this for years. The CFPB's
    study I think completely pulls the rug out of so many of the
    arguments that are made by the financial industry, because it
    is 780-page document, it is the most comprehensive look at what
    consumer arbitration means. It shows that over 2011 and 2012,
    the period that they looked at, the biggest arbitration
    provider, the American Arbitration Association, the CFPB looked
    at how many claims were there under $1,000 that went to the
    Arbitration Association, were actually decided, and what did
    consumers get? The number is not 4,000 consumers or 400
    consumers. It is four consumers. There were four consumers that
    actually got some relief in claims under $1,000 in the American
    Arbitration Association.
        That shows that arbitration is not a better, cheaper, or
    faster way of resolving disputes. It just means the claims are
    going away. It is an exit clause from the civil justice system.
    It is entirely appropriate that the CFPB exercise its authority
    under the law to study this issue and to right the rules as you
    have suggested. I am not surprised that there are efforts now
    in the House Financial Services appropriations bill to kill the
    CFPB's study by paralysis.
        Senator Franken. They want to get rid of their rulemaking
    authority on things like mandatory arbitration.
        Mr. Gupta. Yes, but they are not saying it. They are not
    actually coming out and saying that that is what they are
    doing. Instead, they have come up with this list of, you know,
    100 hurdles that the Bureau would have to jump through to do
    the study and just sort of kill it quietly. I hope that does
    not happen.
        Senator Franken. Let me move on to Mr. Levitin. For 5
    years, Wall Street banks and their allies in Washington have
    gone after the Wall Street reform bill and the Consumer
    Financial Protection Bureau. I think what they are saying is
    very disconnected from what average people think about Wall
    Street and about the need for a consumer watchdog.
        Can you--I know I am running out of time, so I will just--
    can you explain how an agency such as the CFPB is accountable
    and responsive to Congress as well as to the general public?
    Because I have gone to CFPB on mortgages--rules on mortgages in
    rural areas and gotten them to change their rules. I go to them
    all the time and get changes.
        Is that okay, Mr. Chairman? I am sorry.
        Professor Levitin. Thank you for the question, Senator
    Franken. There are some formal ways the CFPB is accountable and
    I think a bunch of very important informal ways that need to be
    considered.
        Formally, it starts with the Senate advice and consent for
    the appointment of the Director. The CFPB is subject to the
    Administrative Procedures Act for rulemakings and
    adjudications. It is subject too judicial review. For major
    rulemakings that are going to affect small businesses, there is
    a special rulemaking process that the CFPB is one of three
    agencies in the entire Government that has to comply with what
    is called the SBREFA process.
        There is an FSOC veto over CFPB rulemakings. It is the only
    agency in the entire Federal Government whose rulemakings can
    be vetoed by other agencies.
        There is an annual audit by the GAO. There are
    congressional hearings. There have been some 55 appearances on
    the Hill in the past 4 years by senior CFPB officials. As you
    note, Members of Congress exercise significant moral suasion
    over the CFPB.
        Beyond that, there are things like--there is just direct
    public input. The CFPB has a consumer complaint data base. Over
    650,000 complaints have been filed. That is a level of consumer
    participation unparalleled by any Federal rulemaking in
    history, I believe. I do not think any rulemaking has gotten
    650,000 comments. This is an important intelligence source for
    the Bureau. It lets the Bureau know what real Americans are
    concerned about.
        The CFPB has a number of specially constituted advisory
    boards. I have the honor of serving on one, which is
    statutorily required, but there is also a Small Bank Advisory
    Board and a Credit Union Advisory Board, which the CFPB was not
    required to create, but it wanted to hear from those smaller
    community financial institutions. Lest you think that these
    yes-men advisory boards, let me point out that the Consumer
    Advisory Board includes the CEO of Advance America, one of the
    largest payday lenders in the U.S.; a senior American Express
    executive; a vice president of the Bank of Hawaii; and a debt
    collection attorney. The CFPB wants to hear not just from
    consumers but from all segments of the industry that it
    regulates, and it is trying to put out really good rules. It is
    not just trying to squash banks. It is trying to find the right
    balance between consumer protection and access to credit, which
    is also part of its statutory mission.
        Senator Franken. I am sorry to have asked a question at
    negative 35 seconds.
        Chairman Cornyn. Senator Tillis.
        Senator Tillis. Thank you, Mr. Chair. Mr. Gray, would you
    like to opine on your view of CFPB's accountability?
        Ambassador Gray. Yes, sir. The point that I think I would
    like to make is that the defects of oversight by the various
    branches of Government are cumulative, and it is the totality
    and the combination of this lack of oversight which I think
    creates the problem.
        There was previous discussion about whether, from Senator
    Durbin with Professor Rao, about whether one or two levels of
    insulation from removability was a problem, and there is only
    one level with the Consumer Bureau, so what is the problem? The
    problem is that ``peek-a-boo'' case, the PCAOB case, the Free
    Enterprise case, what it really stands for, I think, is that
    these problems compound, and when you have two levels of
    separation, it is much worse than just one. When you have at
    the Consumer Bureau not only executive branch formal insulation
    and insulation by you, because you have no oversight
    financial--I mean, taxpayer oversight, and when the courts are
    required to defer to this one agency which may not know
    anything about the subject matter, above all the other agencies
    that may share jurisdiction and do know about the subject
    matter, what you have is a combination which means the agency
    has no limits.
        I think a point I would like to add to that is that I sort
    of welcome the notion that the CFPB is going to engage in
    rulemaking, because at least the public gets a chance to
    provide comment and has some notice as to what the violation
    is. What the Consumer Bureau is more likely to do as a matter
    of practice is--and Cordray has so said publicly--he is not
    going to define ``abusive.'' He is just going to know it when
    he sees it. You are not going to know whether you have violated
    the abusive standard until after you have been charged with it.
    That is--talk about delegations of authority. That is a totally
    wide open delegation of authority and runs counter to the
    development of the law in this country for--well, since the
    Second World War with the Administrative Procedure Act. That
    is--you add that to the other problems, and you have an agency
    that can do anything it wants.
        This data collection exercise makes the Office of Personnel
    Management problems seem to me to be trivial because the data
    breach that--God knows whether the Chinese have already looked
    at my credit card accounts. I do not know. The data breach
    possibilities are enormous, and there has been no rulemaking by
    the Bureau to say the benefits exceed the costs or that they
    balance out. There has been none of that. It has just been this
    big data grab, and what they are going to do with it, nobody
    knows and nobody has any way to find out.
        Senator Tillis. Mr. Gupta, you had mentioned--and, Mr.
    Gray, I may come back to you, because when we were talking
    about the executive branch's authority over the CFPB, you
    seemed to react to at least something that Mr. Gupta said. One
    thing I was curious about, the CFPB, we had a lot of
    discussions about information security and surveillance here a
    few weeks back and were worried about the process--the national
    security priorities over personal security. We dealt with that
    about a month ago.
        The CFPB has access to some of the most detailed
    information about the citizens, and they say, well, we have
    some, but we redact it or we do not use it.
        If the CFPB had a data breach and all of this information
    was exposed, would that be a terminate-for-cause event?
        Mr. Gupta. I think the question assumes----
        Senator Tillis. Could the President fire the head of the
    CFPB if we had that sort of a data breach?
        Mr. Gupta. If the CFPB Director exercised negligence or
    malfeasance, yes; under the terms of the statute, yes. But----
        Senator Tillis. That would seem to suggest that they would
    have had to have been directly involved in the execution of the
    policies or information security. It would seem like they would
    be one level removed. Even though it would be a disastrous
    consequence, it would be difficult for me to determine how they
    could be terminated for cause if that is the standard that the
    President would be held to.
        Mr. Gupta. Negligence is included within that, so I think
    it would meet the standard. Let me be clear because I think the
    premise of the question is, with due respect, its incorrect. I
    know that there has been a lot of talk about the data
    collection at the CFPB. Director Cordray testified about it
    last week. The Bureau simply is not collecting personal
    information about consumers. It is instead aggregating
    information looking for market trends. I want to, if I may--you
    know, I know that Professor Levitin has looked into this far
    more than I have, and I think it would make sense for him to
    address the question.
        Chairman Cornyn. The witnesses will answer. He will ask the
    questions.
        Senator Tillis. Actually, I was trying to get more to
    breakdowns within the CFPB that could be bad management that
    are not necessarily for-cause events that the President could
    not actually make a change in the leadership. That to me is a
    limit to the executive branch's control over the person running
    the show. That was the point I was making. Maybe I used a bad
    example.
        Mr. Gray, you--and I am going over time. One thing I have
    learned with attorneys, if you do not have a lot of questions,
    you do not really need to worry because you are not going to be
    able to ask many of them. I did want to come back. Mr. Gray,
    you seemed to--you did not get a chance to answer this question
    when Senator Cornyn asked Mr. Gupta about executive oversight.
    Did you have any opinion in terms of the limits of the
    executive branch over the CFPB with respect to
    constitutionality?
        Ambassador Gray. With respect to constitional reality--
    again, I would repeat what I said before. It is the aggregation
    of all of these difficulties that creates the central problem.
    I can see that, yes, removal authority would make the CFPB more
    responsive, but you have to have a President who is in a mood
    to remove. I am not sure our current President would be in a
    mood to remove, so I am not sure that in the current
    circumstances that matters so much.
        You go two steps over. What about you guys? What about the
    Senate of the United States? What about the House? Then what
    about the courts? They are all cut out; you are all cut out.
    That gives Cordray the opportunity to say, as I said in my--I
    do not think you were here, maybe, but during my prepared
    testimony, when he was asked the question about the cost of
    their new building, he said, ``What does it matter to you?''
    That is the kind of insubordinate kind of response that you are
    going to get from an agency that----
        Senator Tillis. That is not accountable.
        Ambassador Gray [continuing]. Does not have any
    accountability to anybody.
        Senator Tillis. My last--I just have one question,
    Chairman, and this is a clarification for either Mr. Levitin or
    Mr. Gupta. It was my understanding that the transactional data
    that we are gathering from financial services industry, I
    understand it is being used for aggregating purposes. It was my
    understanding that at the point of entry there is indicative
    data that is being captured. Is that not correct?
        Professor Levitin. It depends on the data set, but
    basically there are three data sets that the CFPB gets that
    have some personally identifiable data. Two of them get
    anonymized, and, frankly, one of them is about auto sales. The
    CFPB might know that someone bought a car. That is not
    particularly useful for a cyber criminal to know that. That is
    data that comes from public records actually, from State and
    DMV records.
        What is important to know is that the CFPB does not have
    your credit card number. If a cyber criminal were to get all of
    the data the CFPB--if there was to be a hacking of the CFPB, it
    is not useful information for a cyber criminal. No one can make
    a purchase using the data that they get from the CFPB. The CFPB
    does not know----
        Senator Tillis. I do not want to go much further, but---so,
    in your view, the data that is captured either at least
    initially before it is redacted or the party is made anonymous,
    there is no point in time that the CFPB receives information
    that could in any way be triangulated to compromise the
    identities of those financial transactions that are being
    captured?
        Professor Levitin. I do not want to say absolutely never. I
    cannot say that there is no possibility. It would be very
    difficult. Most of this is aggregate-level data, so the CFPB
    will not know what your transactions are. They will not know if
    you have an account with Ashley Madison or if you are buying
    firearms or bongs. They do not know that. They do not have
    transaction-level data. They have aggregate account balance
    data. They will know how much a particular individual has on a
    credit card balance, but not what the individual has been
    buying. The concerns that Dr. Calabria raised, those really
    just do not exist here. I understand concerns about, you know,
    Big Brother Government having too much data. That is not what
    is going on here. The CFPB needs this data, among other things,
    to do fair lending enforcement. If you want to look for
    disparate impacts, you have to have data. The attack on CFPB
    data collection is really an attack on fair lending laws.
        Chairman Cornyn. Professor Levitin, let me just follow up
    on that. You are saying at the time that the CFPB receives the
    information from banks, from credit agencies, from motor
    vehicle transactions, none of that has the identity of the
    consumer?
        Professor Levitin. There is one data set--I am sorry. There
    are three data sets that have some consumer identity. One of
    them is a very small data set of about 11,000 arbitration
    cases. It is not an ongoing data collection. It is a one-time
    thing used in support of the report that the CFPB was required
    to author, to undertake as part of the Dodd-Frank Act.
        Two other data sets are rather small, and they do have some
    personally identifiable information. The CFPB anonymizes that
    data, and then the staff works with the anonymized data.
        Chairman Cornyn. It is not anonymous in the hands of the
    financial institution that the CFPB collects it from. It is
    identified by the consumer, I presume. It would be a mortgage,
    it would be a car purchase and the like. Are you saying that
    CFPB anonymizes it?
        Professor Levitin. Some of it, I believe, is anonymized
    directly by the CFPB, but it is important to know the data,
    most of it is not coming directly from financial institutions.
    It is coming from other Federal bank regulators which collect
    the same, if not more data. The OCC has long collected much
    more credit card data than the CFPB does, and we have not heard
    anything about that.
        Chairman Cornyn. I think all of us find it ironic, to say
    the least, that we were debating the National Security Agency's
    meta data collection program where there were three data
    points: There was a phone number, presumably from a foreign
    source that could be matched up perhaps with a domestic phone
    number, which would reveal the time and duration of the call,
    that is it. To go back, then it would be required to go to the
    FISA Court and show cause to get additional information. Yet,
    according to the GAO, the CFPB collects data on 700,000 vehicle
    transactions per month, 10.7 million consumer credit reports a
    month, 173 million mortgages a month, 5.5 million student
    loans, and up to 75 million individual consumer credit card
    accounts monthly.
        I think all of us realize that the more data you collect
    and the more you compare that data with these different
    sources, you pretty well can build a profile of an individual,
    and I strikes me as a lot more intrusive than what--without the
    similar protections that were given under Section 215 of the
    Foreign Intelligence Surveillance Act, because there is not any
    court overseeing the CFPB, and, of course, we have already
    talked a little bit about the hacking concerns in the hands of
    the Chinese or Russian hacker or anybody else, or just a common
    criminal. It strikes me that there is a lot of risk.
        Dr. Calabria, can you talk a little bit about how your
    concerns about the intrusive nature of this data collection?
        Dr. Calabria. Certainly, and let me clarify. You know, it
    is not just a concern about CFPB. I am concerned about the data
    and have long been concerned about the data that other bank
    regulators collect. I feel like a common theme that I sometimes
    hear is, well, other bank regulators do this, therefore it is
    okay.
        For instance, I think Mr. Gupta mentions in his testimony
    that the Federal Reserve performed really badly before the
    crisis. Let me say something. I 100 percent agree with is a
    generality. Therefore, we must make the CFPB more like the
    Federal Reserve.
        No, the Federal Reserve is unaccountable. I testified in
    the other body last week about how unaccountable the Federal
    Reserve is. This is a common theme. To me, if your standard for
    accountability is the Federal Reserve, then I would submit you
    do not actually believe in accountability.
        Let us get to the actual data question. I think Adam
    downplayed this. Reading from the GAO report right now, for
    instance, on the storefront payday lending loans, GAO says as
    many as 40 million total loans are being collected. I do not
    think 40 million is a small number myself. Some of the aspects
    even collected by other bank regulators, such as the HMDA data
    on mortgages, we have long known that you can identify, link
    into courthouse records who HMDA individuals are in those
    records.
        Of course, we hear this every time. What I would emphasize,
    the agency does not actually need this to do its job. It can
    respond and collect consumer complaints. It could actually
    follow up on those consumer complaints. It can investigate
    those consumer complaints. As I talk about in my testimony,
    this is one of the things that the Framers were very concerned
    about with the Fourth Amendment, that you would just see these
    fishing expeditions where you do these wide-sweeping--and so in
    all due respect to my friend Adam, I feel like I read his
    testimony, and there is a presumption of guilt on the part of
    anybody in the financial services industry in his testimony
    there. I think that is the approach of the CFPB.
        To me, let us respond to actual complaints. Let us
    investigate those actual complaints. These broad, sweeping data
    collections where you are just looking for things rather than
    actually responding to things that are illegal is very
    troublesome to me.
        Chairman Cornyn. Professor Rao, I would like to follow up
    on the question that Senator Lee asked. If Congress delegated
    to an agency, ``Write a good law for us,'' and so the agency
    passed a rule or set up--there is an agency to administer or to
    write those rules and to pass those good rules, and then when
    they found a violation, they could adjudicate that and force a
    taxpayer to come before them and have the authority to penalize
    it and the like, you get the idea. Is there any limit to the
    extent to which Congress can simply delegate its
    responsibilities? I understand that the courts have not since,
    what, 1935, I think Mr. Gupta said, actually found a violation
    of the nondelegation doctrine.It strikes me as we have gotten
    on a very slippery slope, and now Congress delegates far too
    much responsibility to people who are simply unaccountable to
    the voters.
        Would you describe where you think that line--where that
    crosses the line?
        Professor Rao. I certainly think that there is a line that
    can be crossed, and the ``Agency''--for, you know--``Goodness
    and Niceness'' or the ``Commission for Goodness and Niceness''
    almost is certainly on the wrong side of that line, and I think
    it would be on the wrong side of that line even under current
    judicial doctrine.
        I think one way that it has been characterized is that
    Congress has to make all of the important decisions that are
    important enough for Congress to make them. It is a bit
    circular, but, you know, it really reflects something that
    Chief Justice John Marshall said many, many years ago about
    what Congress has to decide for itself.
        Chairman Cornyn. As I vaguely recall my legal training, the
    whole purpose of the administrative state was they provided
    expertise and detailed rulemaking that would allow the
    implementation of the basic legal framework that was passed in
    a law by Congress. Dodd-Frank is 850 pages long, and it calls
    for 390 new rules, and many of them include vague standards,
    which I assume under current legal doctrine the courts, rather
    than intrude in that, they would simply defer to the agency.
        Does this massive delegation of authority to Federal
    bureaucrats concern you? What, if anything, would you suggest
    that Congress do about it?
        Professor Rao. I think it is a tremendous concern precisely
    because the idea that Congress cannot legislate is at the
    foundation of our republican form of Government. We have laws,
    and the laws need to be made by people who are accountable to
    the people and not made by agencies that are unaccountable.
        I think it is a tremendous problem, and the solution to it
    is really in Congress' hands to write more--as you mentioned,
    Dodd-Frank is already incredibly long. If it is going to confer
    authority on agencies, that authority perhaps should be more
    specified, right? It should cabin them more.
        One of the problems--I mentioned this in my written
    testimony--is that because the CFPB, for instance, has such
    sweeping authority, it can circumvent even the specific
    limitations that Congress does put on its authority. There is a
    problem with delegations, and even where Congress tries to be
    specific, broad delegated authority allows them to evade those
    limits.
        Chairman Cornyn. Ambassador Gray, in your view, does Dodd-
    Frank's Title II Orderly Liquidation Authority scheme afford
    companies facing resolution due process?
        Ambassador Gray. I mean, no, sir, I do not think it does
    because most of the parties or the counterparties to an
    institution that is undergoing resolution are not supposed to
    be told about it. It is supposed to be done in secret. A court
    is given 24 hours to respond, and if they do not respond,
    whatever the Government says should be the plan will go into
    effect. There is a real gag order in the form of criminal
    penalties if anyone leaks the pendency of the proceeding.
        Most of the people involved are not told until after the
    fact or will not find out until after the fact what has
    happened. I do not know of any precedent anytime in American
    history--maybe the Alien and Sedition Acts going back a couple
    hundred years. I do not know of any recent, modern precedent
    where you have such secret court proceedings.
        I can understand, for example, for a FISA Court involving
    national security, that has to be secret. This is a purely
    domestic matter, and the courts are instructed that they cannot
    review major portions of the basis for the intervention.
    Congress cannot do anything about it until later.
        There is a fiction out there--not fiction, but a narrative
    that the OLA is good because it does not involve any taxpayer
    funds. That also means it does not involve any oversight by the
    Senate or the House. How can this be done without taxpayer
    funds? There is an internal tax that the OLA has. They can get
    unlimited funding by the Treasury to do whatever they want to
    do, and then they can get it paid back by taxing or levying
    fees on the financial community.
        You know, I do not--that is a tax. I do not think it is--I
    am not even sure that is constitutional. It certainly deprives
    everybody of any kind of review over what happens. I am told by
    people on Wall Street and elsewhere that the purpose of the law
    was to codify the kind of occurrence that happened with the AIG
    where certain creditors were paid off 100 cents on the dollar,
    when the regulators could have gotten a hair cut along with
    what they got from other creditors.
        I think your bill addresses these problems in a very
    systematic and fair way and reintroduces, you know, the 100-
    year tradition of bankruptcy law in this country where you
    treat people fairly and with notice and people understand what
    is going to go on, and there is full court review, including a
    resort to the Tucker Act if at the end of the day you feel you
    have been mistreated.
        I certainly wish you luck with your legislation, and I hope
    it gets enacted.
        Chairman Cornyn. The purpose, of course, for our
    legislation is to try to restore the resolution process to a
    legal framework that already exists with rules everybody knows
    about ahead of time which are impartially applied, which is to
    me the opposite of sort of an ad hoc resolution process done in
    secret. We have seen through the GM bankruptcy, where
    favoritism is displayed toward different creditors and some are
    left out in the cold and others are favored, the dangers of a
    politicized process, and including one that does not have sort
    of transparency and preordained rules.
        I would just like to ask two last questions, and then any
    other questions that Senator Tillis has. The President has said
    that Dodd-Frank would end ``too big to fail.'' I would like to
    see a show of hands of everybody who believes that Dodd-Frank
    ended too big to fail.
        The record will reflect no hands were raised other than
    mine, which was not because I think it did but because I was
    trying to be an example for anyone who did.
        Professor Levitin, you wrote Dodd-Frank Act's Orderly
    Liquidation Authority are not and never can be credible
    guarantees against bailouts. Is that still your position?
        Professor Levitin. Very much so. I am skeptical that we
    will ever see Title II actually deployed. No one wants to find
    out how well it is going to work, and because of that, I think
    that if we have a major financial institution that is on the
    verge of failure, there will be a bailout, whether it is legal
    or not, and afterwards we will all wag our fingers and say, you
    know, ``How did possibly happen?'' We will be right back where
    we started.
        Chairman Cornyn. Senator Tillis, do you have anything else?
        [No response.]
        Let me say to each of the witnesses, thank you very much
    for answering our questions and sharing your expertise and
    advice for the Committee.
        This hearing is now adjourned--or I should say, before I do
    that, that there could well be other written questions that
    might be sent, or statements that will be made part of the
    record. We will leave the record open for a while in order for
    that to be accomplished, so just for your information.
        Now, we are adjourned.
        [Whereupon, at 3:32 p.m., the hearing was adjourned.]
        [Additional material submitted for the record follows.]

                                A P P E N D I X

    Submitted by Chair Durbin:

     Americans for Financial Reform...................................   165

     Public Citizen...................................................   175

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