[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]







                       EXAMINATION OF THE FEDERAL
                      FINANCIAL REGULATORY SYSTEM
                      AND OPPORTUNITIES FOR REFORM

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 6, 2017

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-16



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  AL GREEN, Texas
RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
MIA LOVE, Utah                       DENNY HECK, Washington
FRENCH HILL, Arkansas                JUAN VARGAS, California
TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana

                  Kirsten Sutton Mork, Staff Director
       Subcommittee on Financial Institutions and Consumer Credit

                 BLAINE LUETKEMEYER, Missouri, Chairman

KEITH J. ROTHFUS, Pennsylvania,      WM. LACY CLAY, Missouri, Ranking 
    Vice Chairman                        Member
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
BILL POSEY, Florida                  DAVID SCOTT, Georgia
DENNIS A. ROSS, Florida              NYDIA M. VELAZQUEZ, New York
ROBERT PITTENGER, North Carolina     AL GREEN, Texas
ANDY BARR, Kentucky                  KEITH ELLISON, Minnesota
SCOTT TIPTON, Colorado               MICHAEL E. CAPUANO, Massachusetts
ROGER WILLIAMS, Texas                DENNY HECK, Washington
MIA LOVE, Utah                       GWEN MOORE, Wisconsin
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York


















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 6, 2017................................................     1
Appendix:
    April 6, 2017................................................    43

                               WITNESSES
                        Thursday, April 6, 2017

Baer, Greg, President, the Clearing House Association............     4
Gerety, Amias Moore, former Acting Assistant Secretary for 
  Financial Institutions, U.S. Department of the Treasury........     8
Himpler, Bill, Executive Vice President, American Financial 
  Services Association...........................................     9
Michel, Norbert J., Senior Research Fellow, Financial 
  Regulations, the Heritage Foundation...........................     6

                                APPENDIX

Prepared statements:
    Baer, Greg...................................................    44
    Gerety, Amias Moore..........................................    66
    Himpler, Bill................................................    76
    Michel, Norbert J............................................    91

              Additional Material Submitted for the Record

Luetkemeyer, Hon. Blaine:
    Written statement of the Conference of State Bank Supervisors   104
    Written statement of the Consumer Mortgage Coalition.........   106
    Written statement of the Credit Union National Association...   118
    Written statement of the National Association of Federally-
      Insured Credit Unions......................................   124
    Written statement of the Property Casualty Insurers 
      Association of America.....................................   126

 
                       EXAMINATION OF THE FEDERAL 
                      FINANCIAL REGULATORY SYSTEM  
                      AND OPPORTUNITIES FOR REFORM

                              ----------                              


                        Thursday, April 6, 2017

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:15 a.m., in 
room 2128, Rayburn House Office Building, Hon. Blaine 
Luetkemeyer [chairman of the subcommittee] presiding.
    Members present: Representatives Luetkemeyer, Rothfus, 
Royce, Lucas, Posey, Pittenger, Barr, Tipton, Williams, Trott, 
Loudermilk, Kustoff, Tenney; Clay, Maloney, Scott, and Green.
    Chairman Luetkemeyer. The Subcommittee on Financial 
Institutions and Consumer Credit will come to order. Without 
objection, the Chair is authorized to declare a recess of the 
subcommittee at any time.
    Today's hearing is entitled, ``Examination of the Federal 
Financial Regulatory System and Opportunities for Reform.''
    Before we begin, I would like to thank the witnesses for 
appearing today. We appreciate your participation and look 
forward to a robust conversation.
    We do apologize that we have votes scheduled this morning 
sometime between 10 and 10:30, so we will recess for a period 
of time. If the witnesses want to step out and get some 
refreshments, grab breakfast, whatever, we will be back 
probably shortly thereafter, but we will have to stop for a 
little while and go vote.
    With that, I recognize myself for 5 minutes for an opening 
statement.
    Financial companies are standing on regulatory quicksand, 
having to constantly shift in an effort to stay afloat. There 
are unending attempts to decipher a regulator's wants and 
needs, allowing little to no foundation on which to run a 
business. Ultimately, this world of ambiguous guidance, 
contradictory rules, and aggressive enforcement has led to 
confusion for financial companies seeking to comply with the 
Dodd-Frank Act and other Obama-era rules. But the greatest 
impact is on the customers of those financial companies, who in 
many cases have been left clamoring for access to financial 
services and paying more for the ones they are able to retain.
    Take a look at the boxes sitting on the dais over here. 
These boxes represent the 20,000 to 30,000 pieces of paper that 
the average bank submits to the Federal Reserve for the annual 
CCAR review process. And, in fact, I was talking to one of the 
larger banks last night and I found out that tt can go up to 
100,000 pages. That is 20,000 to 30,000 pages per bank per year 
just for CCAR.
    Despite the amount of information contained in these boxes, 
feedback from the Federal Reserve is limited, leaving some 
institutions to wonder who, if anyone, actually reads the 
material before issuing what has been described as an arbitrary 
qualitative decision.
    To have a picture of what overregulation looks like, allow 
me to provide you with a real-life example. The Mid America 
Bank & Trust was originally founded in 1920 and serves 
communities in my area of the world in central Missouri. For 
nearly 5 years, the Federal Reserve has blocked acquisition of 
the bank. Despite years of document production, there has been 
little communication between the Board of Governors and bank 
leadership, and there is no indication of when a decision might 
be made as to whether or not an acquisition will be approved.
    Mid America Bank & Trust has already lost several 
interested buyers, not because of questions surrounding the 
business, but, instead, because of the delays from the Fed. So 
for 5 years, the Federal Reserve has left this bank, its 
customers, and the communities it serves sitting in purgatory. 
This is all in spite of the fact that, as I understand it, the 
FDIC has given the institution and its products a clean bill of 
health.
    The Consumer Financial Protection Bureau (CFPB) hasn't 
exactly been a poster child for reasonable rulemaking and 
enforcement either. Just yesterday, members of this committee 
heard from Director Cordray directly. The Director continues to 
state that the Bureau has never and would never regulate 
through enforcement. But, as I pointed out to the Director 
several years ago, failure to issue guidance while 
simultaneously subjecting institutions to enforcement actions 
is, in fact, regulation through enforcement. Now, because of 
the Bureau, people need a crystal ball to run their businesses.
    The CFPB rules and policies are a perfect example of, 
``Washington knows best.'' The Federal Government knows what 
types of financial products should be offered and to whom. 
Rules and enforcement actions leave little to no room for 
innovation, despite the fact that American consumers and small 
businesses continue to struggle to get the financial services 
they need to pursue growth and economic freedom. Once again, 
the consumer suffers. Eventually, one must wonder what the 
Federal financial agencies really want: a stable economy; or 
just more control.
    Today's hearing will serve to examine the state of the 
Federal financial regulatory system and to determine what can 
be done to increase transparency and build a strong, steady, 
financial system and U.S. economy. It is long past time to take 
the power out of Washington and return it to the American 
people. It is past time to demand a reasonable regulatory 
structure that fosters innovation and economic opportunity 
while simultaneously allowing for robust consumer protection.
    We have a distinguished panel with us today. We look 
forward to your testimony and your ideas for reform.
    The Chair now recognizes the distinguished gentleman from 
Georgia, Mr. Scott, who is sitting in today for Ranking Member 
Clay. Mr. Scott is recognized for 5 minutes for an opening 
statement.
    Mr. Scott. Thank you very much, Mr. Chairman. I really 
appreciate this.
    First, I want to thank Chairman Luetkemeyer for convening 
this very, very important hearing. Nothing could be more 
important right now than making sure we have a healthy 
financial system, and not just to have the financial system, 
but the most healthy financial system in the world. And I look 
forward to our distinguished witnesses and their testimony.
    But I don't think it would be difficult to say that any 
member on our committee, Democrat or Republican, would disagree 
that our striking the right balance between consumer protection 
and regulatory burden is an important priority for this 
committee. We should certainly and constantly reexamine whether 
we are achieving this goal, and hopefully we can come to some 
conclusions today on that in hearing from our distinguished 
panel.
    But without any reexamination, we must always start looking 
at the lay of the land before us, the data we have in front of 
us. So why don't we take a moment to do just that.
    First, we are, indeed, experiencing record month-over-month 
job growth. For the past 77 consecutive months, we have seen 
positive gains in employment, but I hasten to add, not enough 
gain, and in some ways we are backtracking when it comes to 
many of our urban centers. This is something we need to devote 
more attention to.
    Second, small business lending is trending upward. And 
since the financial crisis, we have seen nearly a 75 percent 
jump in business lending.
    And lastly, we are seeing our housing debt, an enormous 
part of our financial crisis, finally dipping back below the 
previous peak we saw in 2008. So things seem great, but we can 
make them better. But even with all these positive signs, we 
also are seeing some areas in the financial services world that 
still need improvement. For example, I previously expressed 
concerns that some regulations might hamstring the unbanked and 
the underbanked famililes' ability to gain access to important 
financial services.
    Many of your committee, you have followed our progress with 
indirect auto lending. That is a prime example where some 
regulations certainly hamstring the unbanked family. We have 70 
million unbanked and underbanked Americans in our financial 
system.
    But I really want to challenge both sides of the aisle, 
Democrats and Republicans, and our panelists, to begin this 
conversation by reexamining the whole regulatory system, not 
just Dodd-Frank. Dodd-Frank is an important part, but we have 
to look at and examine all sides of our regulatory system.
    I would welcome a constructive bipartisan conversation 
about Dodd-Frank, but let's not forget all the ways that Dodd-
Frank has improved the banking system and health of our 
economy, and how it helped us to come out of the worst 
financial depression we have had since the 1930s.
    So throwing it out completely, as our distinguished 
Financial Services Committee Chairman, Mr. Hensarling, is 
proposing in his CHOICE Act, ignores these positive 
developments and is, therefore, a nonstarter for Democrats. But 
we Democrats equally look forward to working with our 
Republican colleagues to both strengthen our financial 
regulatory system while simultaneously also looking and making 
sure our regulations do not hamper our financial system.
    So, again, I want to thank Chairman Luetkemeyer for calling 
this hearing, and I am looking forward to hearing what the 
witnesses have to say. Thank you, Mr. Chairman.
    Chairman Luetkemeyer. Thank you, Mr. Scott.
    Today, we welcome the testimony of Mr. Greg Baer, 
president, The Clearing House Association; Mr. Norbert J. 
Michel, senior research fellow for financial regulations at The 
Heritage Foundation; Mr. Amias Moore Gerety, former Acting 
Assistant Secretary for Financial Institutions at the U.S. 
Department of the Treasury; and Mr. Bill Himpler, executive 
vice president of the American Financial Services Association.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony.
    And without objection, each of your written statements will 
be made a part of the record.
    Just a quick tutorial on the lighting system: green means 
go; yellow means you have 1 minute to wrap up; and red means it 
is time to pass on the baton.
    So with that, Mr. Baer, you are recognized for 5 minutes.

     STATEMENT OF GREG BAER, PRESIDENT, THE CLEARING HOUSE 
                          ASSOCIATION

    Mr. Baer. Thank you, Chairman Luetkemeyer, Ranking Member 
Scott, and members of the subcommittee.
    I am pleased to appear before the subcommittee today to 
discuss regulatory process. Public input and a transparent 
process tend to produce better regulation, but the current 
trend is clearly away from both. My testimony will highlight 
areas where the administrative process has broken down, harming 
the quality of regulation and the ability of banks to serve 
their customers.
    The first area is the Federal Reserve CCAR stress test. To 
be clear, The Clearing House believes that stress testing is 
the smartest way to evaluate the resiliency of a bank, but the 
CCAR process contains significant procedural and substantive 
deficiencies.
    Under CCAR, banks use models to forecast losses and 
revenues under a severely adverse stress. These models are 
reviewed and approved by the Federal Reserve and are regularly 
back-tested to ensure accuracy. Nonetheless, in determining the 
bank's stress law and, therefore, its effective capital 
requirement, the Federal Reserve discards these results and, 
instead, runs a variety of its own models. Neither the formulas 
for those models nor their combined results have ever been 
subject to notice and public comment or any type of peer 
review. This matters, because banks tend to shift lending away 
from sectors with higher implicit capital requirements under 
CCAR.
    For example, our research shows that the Federal Reserve's 
model has imposed dramatically higher capital requirements on 
small business loans and residential mortgages. Given the 
stakes involved, it is remarkable how little we know not only 
about the contents of these models, but also about their 
performance. This too is a black box.
    We urge that the Federal Reserve continue to engage in 
modeling as part of CCAR, but only as a check on the bank's own 
projections. If a given bank's models are deemed insufficient, 
the Federal Reserve's models can be offered as evidence in 
issuing a capital directive or an order to improve them.
    Although highly unlikely, if the Federal Reserve's models 
ever prove more accurate over time for a given bank, they could 
be adopted instead. Notably, this approach would alleviate any 
concerns that making the Federal Reserve's models public would 
cause banks to cluster into assets that those models favor, 
causing an unhealthy concentration of risk. Once generally 
nonbinding, the Federal Reserve's models could benefit from 
peer review by the academic community in a way that bank 
models, which are necessarily proprietary, cannot.
    A secondary is the CAMELS rating system, which was adopted 
in 1979 when there was no capital regulation, no liquidity 
regulation, and no stress testing. In other words, at a time 
when bank regulation was necessarily subjective. Remarkably, it 
has not been materially updated since. Over that time, CAMELS 
ratings have become progressively more arbitrary and 
compliance-focused, likely because capital and liquidity 
regulation have supplanted them as the best indicators of 
financial condition.
    All of this is significant, because a low CAMELS rating, as 
I believe as the chairman alluded to, is now generally treated 
by regulators as a bar on bank growth. A wholesale review of 
the CAMELS system is required. In the interim, its ratings 
should be made more objective and modernized. For example, the 
bank that is well-capitalized under the 35-plus capital 
standards currently applicable to large banks should be 
presumed to be rated a one for capital.
    Next, living wills. Title I of Dodd-Frank requires large 
banks to construct a prepackaged bankruptcy plan and requires 
regulators to review the credibility of that plan. This 
requirement is important and altogether appropriate. The 
required review, however, has been translated into a shadow 
regulatory regime with real economic consequences. For example, 
the most recent living will process has effectively ring-fenced 
some major bank holding company subsidiaries through capital 
and liquidity prepositioning. The costs of doing so are 
significant, but have never been debated.
    Another area where process appears to have broken down is 
supervision of bank corporate governance. Examiner oversight is 
increasingly subjective and arbitrary, more akin to 
conservatorship than traditional examination, and in almost all 
cases without basis in law or regulation. In some cases, 
examiners attend Board of Directors or Board committee 
meetings, which both chills candid discussion and inevitably 
shifts the agenda away from corporate strategy and real 
economic risk and towards regulatory topics.
    Even when examiners do not attend meetings, they insist on 
detailed minutes so as to judge the participants' performance. 
Examiners are dictating reporting lines within management and 
to the Boards of Directors as well as the proper jurisdiction 
of committees and their agendas.
    Consequently, we now frequently hear from bank management 
that more than half of Board of Directors' time is devoted to 
regulation and compliance as opposed to innovation, strategy 
risk, and other crucial topics. We actually did a catalog for 
our members of all the requirements by regulation or guidance 
that are imposed on bank Boards of Directors. It runs to 144 
pages.
    In all these areas, more transparency and the ability of 
the public to evaluate the wisdom of these policies would, we 
believe, produce better outcomes. And I hope today's hearing 
marks the beginning of a change in that direction.
    Thank you again for this opportunity to testify.
    [The prepared statement of Mr. Baer can be found on page 44 
of the appendix.]
    Chairman Luetkemeyer. We thank Mr. Baer for his testimony.
    Mr. Michel, you are recognized for 5 minutes.

    STATEMENT OF NORBERT J. MICHEL, SENIOR RESEARCH FELLOW, 
         FINANCIAL REGULATIONS, THE HERITAGE FOUNDATION

    Mr. Michel. Chairman Luetkemeyer, Congressman Scott, and 
members of the subcommittee, thank you for the opportunity to 
testify today. The views that I express in this testimony are 
my own and they should not be construed as any official 
position of The Heritage Foundation.
    My testimony argues that there are countless opportunities 
to reform the Federal financial regulatory system. It is full 
of counterproductive overlapping authorities and duplicative 
efforts. There are three main issues that I would like to 
address in my oral testimony.
    First, the U.S. has too many financial regulators. Banks, 
just for instance, could be forced to comply with regulations 
from any combination of the following: the FDIC; the OCC; the 
Federal Reserve; the CFPB; the SEC; the CFTC; the FHA; and the 
FHFA; all on top of State regulators, just to name a few.
    While there is good reason to limit consolidation so that 
the U.S. does not have a single super financial regulator, the 
system is so cumbersome that some consolidation clearly makes 
sense, and the trick would be to consolidate while guarding 
against efforts to apply bank-like regulation outside of the 
banking industry. A reasonable approach would be to reorganize 
so that the U.S. has only one banking regulator and one capital 
markets regulator; and the obvious place to start would be 
merging the CFTC and the SEC.
    These agencies regulate markets that have increasingly 
blurred into one another over the years and that are closely 
tied through common participants and common purposes.
    Indeed, the U.S. is unusual for having separate regulators 
for these markets. On the banking side, Congress could shift 
the Federal Reserve's regulatory and supervisory powers to 
either the OCC or the FDIC, and then merge those two agencies. 
The most important part of that type of reorganization, I 
think, is to get the Fed out of the regulation business. The 
Fed should be conducting monetary policy, nothing else.
    Regrettably, Dodd-Frank took us in the opposite direction 
and expanded the Fed's regulatory role, even though this move 
is counter to the trend found in most developed nations. More 
than a dozen developed countries, among them the U.K. and 
Sweden, have already removed regulatory functions from their 
own central banks.
    My second point would be that the U.S. did not need and 
does not need the Consumer Financial Protection Bureau. The 
CFPB is unaccountable to the public in any meaningful way and 
raises serious due process and separation-of-powers concerns. 
But most importantly, there was no shortage of consumer 
protection from fraudulent companies prior to the Dodd-Frank 
Act.
    Title X of Dodd-Frank created the CFPB, in part, by 
transferring enforcement authority for 22 specific consumer 
financial protection statutes to the new agency. These Federal 
statutes were administered by seven different Federal agencies 
and layered on top of State laws and local ordinances. So it is 
reasonable to say that some consolidation may have been 
warranted.
    Regardless, for decades this framework outlawed deceptive 
and unfair practices in financial products and services. And, 
in fact, if Congress eliminated the CFPB right now, Americans 
would be just as protected against unfair and deceptive 
fraudulent practices as they are with the CFPB. Financial firms 
do not need another Federal supervisor, and Americans do not 
need protection from themselves through the ill-defined 
protection regime against abusive practices.
    My final point is that given the political difficulty in 
making these types of changes, Congress should take a careful 
look at using the reorganization authority under 5 U.S. Code 
Section 901. Granting the President this authority, which has 
been used by Presidents in the past of both parties, is a 
flexible way to enable the Executive Branch to propose viable 
Government reorganization plans.
    These plans could be narrowly targeted to improve the 
efficiency and effectiveness of specific areas of financial 
market regulation, and they can be enacted by Congress more 
easily than if the Legislative Branch had to develop these 
plans from scratch. This route seems like a particularly good 
idea now, because the Trump Administration has started its 
formal review of financial regulation, and specifically 
expressed a desire to improve its effectiveness and efficiency.
    Thank you for your consideration, and I am happy to answer 
any questions that you may have.
    [The prepared statement of Mr. Michel can be found on page 
91 of the appendix.]
    Chairman Luetkemeyer. Thank you, Mr. Michel, for your 
testimony.
    Mr. Gerety, you are now recognized for 5 minutes.

   STATEMENT OF AMIAS MOORE GERETY, FORMER ACTING ASSISTANT 
 SECRETARY FOR FINANCIAL INSTITUTIONS, U.S. DEPARTMENT OF THE 
                            TREASURY

    Mr. Gerety. Thank you, Chairman Luetkemeyer, Ranking Member 
Scott, and members of the subcommittee, for the opportunity to 
be here today and to offer my perspective on the ongoing need 
for effective regulation and supervision of the financial 
system.
    It is important to start in the fall of 2008. A financial 
crisis of tremendous scale and severity left millions of 
Americans unemployed and resulted in trillions of dollars in 
lost wealth. Our financial system had evolved dramatically over 
decades and the regulatory approach had moved in the wrong 
direction. For instance, derivatives were statutorily protected 
from oversight, and subprime lending and securitizations grew 
with little to no oversight.
    When the crisis exposed these massive inadequacies, we were 
faced with the unpalatable choice of either intervening to 
prevent certain institutions from failing, or letting them 
fail, at the risk of imperiling the entire financial system and 
plunging the country into a second Great Depression. Americans 
nonetheless paid a high price and lost wealth, jobs, homes, 
delayed retirements, and college educations.
    We all learned that in the end, our financial system only 
works, and our market is only free, when there are clear rules 
and basic safeguards that prevent abuse, check excesses, and 
ensure that it is more profitable to play by the rules than to 
game the system.
    Dodd-Frank enacted a number of provisions that curb 
excessive risk-taking and hold financial firms accountable. 
However, the policymakers that drafted Dodd-Frank recognized 
that our financial system is dynamic and risks cannot be 
adequately addressed by a one-size-fits-all approach.
    Today, I would like to share with the committee two key 
points. First, the post-crisis Wall Street reforms have 
strengthened our financial system and supported our economic 
recovery. As financial reform was being implemented, the 
private sector added 15 million net new jobs, and household 
wealth grew by $30 trillion. At the same time, real GDP growth 
continued steadily since Dodd-Frank passed and remained 
positive, even as Europe weathered a sovereign debt crisis and 
the U.K. suffered a double-dip recession.
    Within the banking sector, recovery has been strong and 
widespread. The banking system is currently delivering on its 
promise to provide credit to the economy. In the past 2 years, 
community bank lending and earnings growth has outpaced the 
industry as a whole, with more than 10 percent income growth in 
2016 and lending up nearly 9 percent year over year, both 
vaster than the industry.
    Second, Dodd-Frank provides a clear and coherent framework 
to deliver regulation that is appropriate to the risk of 
individual institutions and the system as a whole. Dodd-Frank 
uses clear exemptions, statutory requirements for tailoring, 
and market-based rules to help ensure that regulators are 
focused on a tiered and tailored approach. Regulators have 
responded to the statutory direction and used their discretion 
to consistently respond to legitimate concerns about regulatory 
burden and to create a tiered and tailored regime.
    Let us start with a simple but central point. A $200 
billion bank is not the same as a $2 trillion bank, nor is it 
the same as a $20 billion bank, a $2 billion bank, or a $200 
million bank. The U.S. banking system is far less concentrated 
than our peer developed nations, and this diversity is a 
strength.
    In order to deliver a regulatory system that is appropriate 
to the risk, we must be clear-eyed about the risks we face. 
This means acknowledging that tough standards must apply to the 
largest, most complex institutions, and that we must have the 
tools to handle their failure. It is only by having a clear 
plan and clear legal authority that we can avoid the awful 
choices that we faced in the fall of 2008 between the panic-
inducing failure of Lehman Brothers and the bailout of AIG. 
Removing the authority to liquidate large, complex financial 
institutions the way we have done for banks of all sizes would 
be a return to the policy of too-big-to-fail.
    In closing, it is important to note that the goal of bank 
regulators must not be to satisfy the banking industry, but, 
rather, to satisfy the public interest. For that reason, the 
best test of how regulators are progressing through their work 
is whether financial markets are stable, loans are extended on 
clear and fair terms, and agencies demonstrate consistent 
openness to new approaches and an ability to flexibly apply 
their rules over time.
    Thank you, members of the subcommittee, and I look forward 
to observing my perspective in today's hearing.
    [The prepared statement of Mr. Gerety can be found on page 
66 of the appendix.]
    Chairman Luetkemeyer. Thank you, Mr. Gerety, for your 
testimony.
    Mr. Himpler, you have a very high bar to--every one of the 
previous folks who have testified have come in under 5 minutes. 
So we will test you here.
    Mr. Himpler. Mr. Chairman, I noted that as well, and I 
fully expect to use all 5 minutes.
    Chairman Luetkemeyer. You are recognized for your time plus 
theirs, I guess, huh?

 STATEMENT OF BILL HIMPLER, EXECUTIVE VICE PRESIDENT, AMERICAN 
                 FINANCIAL SERVICES ASSOCIATION

    Mr. Himpler. I like the sound of that.
    Good morning, Mr. Chairman, Ranking Member Scott, and 
members of the subcommittee. I am the executive vice president 
of the American Financial Services Association (AFSA).
    AFSA was founded in 1916 as the only national trade 
association solely focused on consumer credit issues. As such, 
let me state at the outset that we stand shoulder to shoulder 
with members of this subcommittee on both sides of the aisle as 
well as with the CFPB in wanting to see bad actors eliminated 
from the marketplace. However, it is equally important to 
ensure access to affordable credit for all Americans.
    As the Federal Reserve notes, consumer credit balances, 
exclusive of mortgage, stand at roughly $2.5 trillion. Banks 
account for about 60 percent of this credit, but finance 
companies account for almost one-third. Yet, banks and finance 
companies represent very different business models.
    Federal regulators have a long history of effectively 
supervising banks. Finance companies, though, are creatures of 
State law and have been supervised and examined at the State 
level for close to 100 years. Trying to supervise banks and 
finance companies as if they are the same could be disastrous 
for consumers and the economy as a whole.
    To that point, then-Representative Barney Frank, one of the 
authors of the Dodd-Frank Act, wrote to the CFPB in 2011, 
stating that: ``I urge staff to pay close attention to the 
differences in products offered by nonbank institutions and to 
be mindful of Congress's intent in financial reform that State 
consumer protection laws be preserved to the extent possible.''
    He went on: ``For example, there are key differences in 
product characteristics between payday, car title, and other 
high-cost secured loans and more traditional closed-end 
unsecured lending and related products, and the products are 
often regulated differently in various States.''
    He concluded: ``To the extent that State regulation has 
worked to protect consumers with regard to financial products 
offered by nonbank institutions, I encourage the Bureau to 
coordinate and work with States to preserve these 
protections.''
    AFSA believes in the CFPB's mission to help consumer 
finance markets work effectively by putting in place clear 
rules that are consistently enforced. But all too often, it 
feels as if the CFPB is following a ``gotcha'' mentality that 
is more interested in grabbing flashy headlines and punishing 
the industry. Furthermore, despite the CFPB's vast authority, 
it often manages to exceed the limits placed on it by Congress.
    Here are a few examples of what I mean. The CFPB issued a 
short bulletin that attempts to hold indirect lenders liable 
for discrimination resulting from dealer compensation policies. 
This is contrary to Dodd-Frank, which prohibits the CFPB from 
regulating dealers. It is also an example of guidance designed 
to function as rulemaking without due process of law.
    In this instance, the CFPB has pursued disparate impact 
cases against financial services companies without a valid 
legal basis, employing a proxy methodology it knows to be 
flawed, refused to consider nondiscriminatory factors that 
could explain alleged pricing disparities, and employed a 
remuneration process that was designed to achieve a political 
end. As a solution, Congress should work quickly to preclude 
the CFPB explicitly from using disparate impact theory under 
ECOA.
    The second example of the CFPB's overreach can be found in 
its attempt to impose interest rate caps, which Dodd-Frank, 
again, prohibits the CFPB from doing. But that is exactly what 
the Bureau is attempting to do with its small dollar loan rule. 
The proposed small dollar rule imposes substantial and 
burdensome underwriting requirements on loans with a total cost 
of credit that exceeds 36 percent. Because these additional 
requirements are so costly, many lenders will choose not to 
make such loans to needy consumers. Keep in mind, these are 
institutions that had played no part in the financial crisis in 
2008.
    This proposed rule imposes a de facto usury limit by making 
it uneconomical for many lenders to comply with these new 
requirements. In fact, in a hearing last year before this 
committee, the members of the committee pressed Acting Deputy 
Director David Silberman to specify what deficiencies in State 
law the CFPB was trying to address; and the acting Deputy 
Director could not answer the Members of this body. We ask 
Congress to encourage the CFPB to go back to the drawing Board 
on this rule.
    My third example is the CFPB's use of regulation by 
enforcement. Despite the CFPB's authority to write rules, the 
CFPB chooses to govern industry by enforcement orders. But 
these orders are not consistent. For example, in the area of 
dealer compensation that I mentioned earlier, does the CFPB 
expect vehicle finance companies to comply with the enforcement 
order against American Honda Finance Company or the enforcement 
order against Ally? These are two very different orders, and it 
is unclear.
    The CFPB also tries to utilize the unfair prong in UDAAP 
regulation. For example, debt collection practices employed by 
EZCORP were consistent with both Federal and State law, and the 
CFPB did not like them so they labeled them as unfair. The 
CFPB's UDAAP authority should be removed and returned to the 
Federal Trade Commission.
    I see I have exceeded my time. I look forward to the 
questions of the members of this subcommittee.
    [The prepared statement of Mr. Himpler can be found on page 
76 of the appendix.]
    Chairman Luetkemeyer. Thank you, Mr. Himpler, for your 
testimony.
    With that, the Chair recognizes himself for 5 minutes for 
questions.
    And, Mr. Baer, I want to begin with you. We brought a 
visual this morning with regards to the CCAR process that 
represents 20,000 to 30,000 pages. That is the norm for midsize 
regional banks to comply with stress tests. I was discussing 
last night with one of the larger banks, it can go up to 
100,000 pages for some of those folks. And they get back a 
three- or four-page letter saying that you don't comply and you 
didn't hit the model that we had intended for you to do, 
without any guidance as to how to hit that model.
    Would you like to elaborate a little bit on this? I know 
you talked a little bit about it in your testimony, about how--
and quite frankly, it would appear to me, from having an 
examiner background, that examiners are in these banks on a 
full-time basis, the larger banks, and they see this 
information every day, and yet for the banks to have to compile 
this in these voluminous reports seems superfluous to me. Would 
you like to comment?
    Mr. Baer. Sure. Mr. Chairman, yes, if you think about CCAR, 
there are actually really two components: one is the 
quantitative assessment that I referenced in my oral remarks; 
and the other is the qualitative, which has uniquely, of all 
the types of regulations supervised by the regulators, become 
an annual binary public, life-or-death decision that you pass 
or you fail and has not had a lot of standards around it such 
that banks can know whether they are going to pass or fail.
    To the Federal Reserve's credit, I think they have 
eliminated that or proposed to eliminate that for almost all 
banks. We obviously urge them to go ahead do that for all of 
them. There is no reason that capital planning cannot be 
evaluated through the traditional examination process that you 
are aware of, just as any other credit underwriting or 
cybersecurity. So we think that should be subject to the same 
process.
    With respect to the quantitative test, yes, clearly, there 
is an extraordinary amount of data that is submitted. The 
number of people at the banks working on this ranges from the 
dozens to the hundreds, full-time year round. I think there are 
clearly ways that process could be streamlined and the burdens 
of that reduced.
    That said, I do think that one of the great frustrations of 
the banks is that they go to all this trouble. They do all this 
work. They produce projections of losses and revenue under the 
stress, but then those results are discarded and the Federal 
Reserve runs its own models, which they do not see, and 
actually, I think, they don't have confidence that those models 
are better than their own with respect to a particular bank.
    So I think the burdens of this process would be more 
tolerable and more sensible to the extent the results actually 
mattered and weren't discarded.
    Chairman Luetkemeyer. Thank you.
    During your testimony, you also made the comment that a lot 
of examiners attend regular meetings, and sitting there has a 
chilling effect. And I assume they don't participate in the 
meeting unless called upon, but it would seem to me that would 
be an example of them trying to micromanage the bank, which 
they are not supposed to be in the middle of this as a 
regulator. They are supposed to be on the outside trying to 
enforce the law.
    If the bank wants to make decisions based on a business 
model, they should be allowed to do that and not have an 
examiner sitting there to try and have a chilling effect on 
their ability to actually perform what they need to do in order 
to be able to fulfill their mission.
    Mr. Himpler, given the number of comments here with regard 
to the CFPB, the rulemaking process, some of it they do without 
due process when they enforce things and regulation by 
enforcement, would you like to elaborate on the regulation by 
enforcement a little bit? I know, to me, this is really 
problematic from the standpoint that this is an agency that 
promulgates a rule, and then they go out and enforce the rule 
through fines and what have you, and basically, there is no--to 
me, that is a law. And there is only one group around here that 
can make law and that is us, and yet that is what they are 
doing.
    Would you like to elaborate on that?
    Mr. Himpler. I would. First, I would like to see things 
return to regular order, where Congress is making law, as 
opposed to unelected folks in agencies such as the CFPB. I 
think it does go back to the founding author of the CFPB, 
Senator Warren, who expressed at the outset in creating this 
that rules are like fence posts on the prairie; they are 
useless. Lawyers try and get around them. So there is a new 
sheriff in town, and we have to crack a few heads.
    That mentality has continued to reverberate through the 
Bureau. We have had civil investigative demands (CIDs) that 
have been hanging out over companies for years without any 
feedback from the Bureau as to whether or not somebody has been 
cleared.
    We have had different orders with respect to the vehicle 
finance industry, in terms of which order a company should 
follow. And I guess most importantly, the Bureau put out a blog 
last year saying that they had backed off from pursuing this 
type of activity, but that activity still continues in 
examinations.
    Companies come forward with plans to actually try and work 
with the CFPB and get very little credit for it. Discover was 
one of the first enforcement actions that the CFPB took. They 
self-reported and got no credit for it. You would have thought 
the CFPB had identified that and rooted out a bad actor.
    Chairman Luetkemeyer. Thank you. My time has expired.
    With that, we recognize the ranking member, Mr. Scott, for 
5 minutes.
    Mr. Scott. Thank you, Mr. Chairman.
    Let me continue that line of questioning, if I may, with 
you, Mr. Himpler. I listened very intently to your comments 
about the CFPB, but here's the rub: We need to protect our 
consumers from the bad actors out there.
    And I think that my situation is somewhat similar to yours, 
because, as you recall, during the auto indirect lending fight, 
I more or less tried to lead the way in examining. In my own 
estimation, there were errors made, but they were errors made 
basically in the methodology that was applied to determine who 
was being discriminated against, not the function of the CFPB 
going after and trying to do its major function of protecting 
the consumer.
    And, as I mentioned in my testimony yesterday, ours is a 
very complex, complicated financial system. Again, we have 70 
million unbanked/underbanked citizens out there, the most 
vulnerable being many who are low-income African Americans and 
others.
    So the question I want to ask you is--I am not sure you 
agree--don't we need to make sure that all of our consumers, 
especially the most vulnerable, deserve financial protection?
    Mr. Himpler. Thank you, Mr. Scott. I couldn't agree with 
you more. Everyone needs to be protected. But in the area of 
vehicle finance in particular, it is a very fragmented market. 
You have thousands of players who are competing for market 
share. But the lion's share of the folks who are being 
regulated are finance companies, that are creatures of State 
law, that are putting their own capital at risk. It is a 
different business model than banks, that are putting deposits 
on the line for lending activity.
    I think that what we are looking for, and Mr. Gerety got to 
it a little bit in terms of the bank sizes that he mentioned, 
but where he stopped was a $200 million bank. What I am talking 
about is institutions that are below $200 million, in terms of 
activity. They are providing a meaningful service and just want 
clear rules for the road. It is kind of like a sheriff pulling 
over somebody where there is no speed limit posted.
    Mr. Scott. All right. Mr. Himpler, thank you very much for 
that.
    I want to go to you, Mr. Michel, because you outline 
somewhat thorough your recommendations, which were basically 
mergers, and you recommend merging, for example, the CFTC and 
the SEC. Do you not feel that kind of merger with two distinct 
entities would bring more confusion and less order to our 
financial system, given the fact of their jurisdictions? The 
CFTC strictly deals with this area, the commodities futures 
trading, and more or less handles this growing derivatives 
market, swaps, all of that business, cross-border, and dealing 
with a very growing and complex $800 trillion piece of the 
world's economy. So I don't see how that fits together.
    Mr. Michel. I don't think there would be any more confusion 
than there is confusion between what is a swap and a 
securities-based swap. I think that an artificial distinction 
was made in Dodd-Frank Title VII. And those markets are--
although commodities are not the same as securities or 
derivatives necessarily, they are essentially all financial 
instruments that are I would call cousins. And the distinction 
that we have been making legally over time has grown to the 
point where it is almost pointless.
    Whether you are trading futures, whether you are trading 
derivatives, whether you are trading indexes, whether you are 
trading stocks, you are trading some sort of financial asset in 
the market and these things are very similar.
    Mr. Scott. The other point you mentioned, which I have some 
experience with, was the overlap and the confusion that takes 
place with our Federal regulators and our State regulators. And 
I spent 28 years in the Georgia Legislature, 14 now in 
Congress, and I can speak to that.
    One case in mind was we had to deal with Fleet Finance and 
their predatory lending. They were allowed to come into the 
State and use our usury laws for paying down second mortgages. 
But the point is that it was because we were able to get a 
better working relationship between what the Feds were doing 
and what the State was doing, and this was a new frontier we 
had to create.
    But I see my time is up. Thank you, sir.
    Chairman Luetkemeyer. The gentleman's time has expired.
    With that, we go to the vice chairman of the subcommittee, 
the gentleman from Pennsylvania, Mr. Rothfus, who is recognized 
for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman.
    Mr. Baer, I would like to ask you a couple of questions. I 
have concerns about whether the current regulatory framework 
properly recognizes the various business models and risk 
profiles of banking organizations. Custody banks, for example, 
are very different from investment banks. The one-size-fits-all 
regulations are pushing banks to a one-size-fits-all business 
model and balance sheet. This homogeneity cannot be good for 
the financial system or financial stability.
    Do you have any opinion as to whether more tailoring is 
needed to preserve this diversity in business models?
    Mr. Baer. Thank you, Congressman. I think custody banks are 
a terrific example of that, in the sense that, clearly, their 
primary purpose is to safe-keep assets, but that also involves 
holding very large amounts of deposits. If you think about how 
the regulations affect a custody bank, the liquidity rules 
assume that those deposits, counterfactually, will all run in a 
crisis.
    Now, certainly, deposits are at risk of a run in a crisis, 
but I think we saw in the last crisis that custody banks did 
not see large runs. But even if you assume that that is a fair 
assumption and that lots of those deposits will run and, 
therefore, that you need to hold a Treasury security against 
that deposit to be able to fund that run, you then for a 
custody bank also have the leverage ratio, which requires you 
to hold the same amount of capital against that Treasury 
security as you would against a junk bond or an illiquid loan.
    So they are put in a very difficult position, even though 
they are in an extremely low-risk business, of having to hold 
very large amounts of liquidity and capital on the liquidity. 
The same liquidity that is being held for a safety and 
soundness purpose, they are holding 6 percent capital against 
that, and that really doesn't make a lot of sense.
    Mr. Rothfus. I plan on introducing legislation shortly that 
would exclude custody bank funds held at a central bank from 
supplementary leverage ratio calculations. How would this 
measure impact the viability of custody banks?
    Mr. Baer. I think it would assist not only custody banks, 
but to potentially applying that to dealers, it would assist 
them in meeting liquidity requirements. It is interesting--
actually, I just came back from Europe--that the Bank of 
England recently took just that step and deducted deposits on 
reserve at the central bank from the leverage ratio in the 
United Kingdom. So clearly, it is something they have thought 
about and makes a lot of sense.
    One of the ideas behind the leverage ratio is that in a 
crisis you don't really know what any asset is going to be 
worth, and you go to that sort of ratio because you may have 
the risk weights wrong. But in no crisis has anybody ever 
gotten the value of cash wrong, or specifically cash on reserve 
at the Federal Reserve.
    Mr. Rothfus. Dr. Michel, in your testimony, you wrote, 
``Leading up to 2008, financial firms funded too much 
unsustainable activity, largely because of the rules and 
regulations they faced, including the widespread expectation 
that Federal rules had guaranteed safety and soundness and that 
the Federal Government would provide assistance to mitigate 
losses.'' I find this interesting, because one of the main 
narratives that we hear from the left is that the financial 
crisis was caused by banks that got out of control because of 
deregulation.
    Can you elaborate a bit more on which rules and regulations 
had the greatest impact in the lead-up to the crisis?
    Mr. Michel. Sure. And first of all, I will reiterate that I 
think it is absolutely insane for people to say that there was 
deregulation and that there was no oversight of this activity. 
All of this activity took place under the direct supervision of 
the Federal Reserve, the FDIC, and the OCC, at the very least.
    I think if I were to sort of prioritize the rules that were 
screwed up and that contributed to this, I would start with 
capital requirements and then bankruptcy preferences. On the 
capital requirement side, you had a risk weight system that 
incentivized banks to load up on mortgage-backed securities, to 
not hold mortgages, and to lower their capital charge for just 
doing the mortgage-backed securities, which were guaranteed, 
everybody knew, by the Federal Government, for the most part.
    On the other side of that, with the bankruptcy laws, a lot 
of the funding for these vehicles, through swaps and repos, 
were given exemptions from the bankruptcy safe harbors. So all 
the counterparties in those markets had very little reason to 
care how much of it they were writing and who they were writing 
it with, because they knew that they would be in the front of 
the line and be the first ones out the door with their money.
    Those would be my two main categories of those rules.
    Mr. Rothfus. Are there similar rules, regulations, and 
practices today that are setting the stage for financial 
instability down the road?
    Mr. Michel. Well, we have changed the risk-weighting a 
little bit, but we haven't really fixed it, in the sense that 
we are still depending on this crazy idea that the Federal 
regulators or any group of any particular persons can get 
together and know exactly what those risks are going to be, 
what those financial assets are going to be worth going 
forward.
    And that is just not true. We have proven that already. And 
we have not fixed that part. And we are going through all the 
CCAR exercises as if we know exactly how a bank is going to 
operate in a crisis and exactly what is going to happen in a 
crisis and exactly how much money is going to be there to 
protect it. History shows that that is not a good idea. That is 
what we have been doing, though.
    Mr. Rothfus. Thank you. I yield back.
    Chairman Luetkemeyer. The gentleman's time has expired.
    I now recognize the ranking member of the subcommittee, Mr. 
Clay from Missouri, for 5 minutes.
    Mr. Clay. Thank you, Mr. Chairman.
    And I would like to ask unanimous consent to place in the 
record a letter I have here from Public Citizen on the 
importance of Dodd-Frank and financial regulation.
    Chairman Luetkemeyer. Without objection, it is so ordered.
    Mr. Clay. Thank you.
    Thank you, Mr. Chairman.
    Earlier this year, the President issued an executive order 
directing the Treasury to consult with all members of the 
Financial Stability Oversight Council and produce a report on 
whether the current financial regulatory system meets several 
high-level noncontroversial principles. If the Administration 
produces a report that resembles Chairman Hensarling's radical 
rollback of Dodd-Frank, known as the wrong CHOICE Act, it would 
be very controversial and poorly received.
    Mr. Gerety, as a former Treasury official, what would your 
advice to the Treasury be as it conducts its review? Should 
they be focused on trying to dismantle the CFPB, repeal the 
Orderly Liquidation Authority of the Dodd-Frank rollbacks?
    Mr. Gerety. Thank you, Ranking Member Clay.
    I am glad to offer my perspective. I will note, just as a 
factual matter, the consistent review and regular engagement 
with agencies on how rules are working is a standard practice 
of the Treasury Department. We conducted such an engagement in 
the spring of 2009, and we regularly engaged, at the behest of 
the President and the Treasury Secretary, over the years in 
lots of discussions.
    So I think that the fact of doing a review, as the Chair of 
this subcommittee said earlier, is a natural part of the 
responsibility of any Federal regulator or policymaker in 
Congress or in the administrative branch.
    In terms of the recommendations, I think the central 
question is how we articulate the regulations, the statutes, 
and the guidance in ways that are appropriate to the risk, and 
how do we build on the progress we have made, to make our 
financial system stronger, to make our financial system more 
fair, and also make it more effective.
    In particular, I would highlight areas like small business 
lending, where we have spent a lot of effort to try and promote 
small business lending among community banks. We did 
investments in community banks to help them support small 
business lending. And I think also along the theme of 
simplification, especially for the smallest banks in our 
system.
    Mr. Clay. Thank you for that response.
    Mr. Gerety, it seems that despite evidence to the contrary, 
Republicans and industry lobbyists think that the financial 
protection for consumers and community banks in Dodd-Frank are 
harming them and the broader economy. However, I know that 
Democrats work with representatives of trade associations, such 
as the Independent Community Bankers of America, to craft 
wholesale exemptions for small financial institutions.
    For example, community banks and credit unions under $10 
billion are not supervised nor subject to enforcement actions 
brought by the CFPB. And while they are subject to consumer 
protection rules, they were subject to these rules even before 
Dodd-Frank was passed.
    Indeed, all of CFPB's $12 billion worth of enforcement 
actions, providing relief for 29 million consumers, have been 
against large banks and nonbanks, direct competition to the 
community banks and credit unions.
    Mr. Gerety, would you please comment on how the Dodd-Frank 
Act promoted community banking and shifted the regulatory focus 
to more risky large banks and nonbanks that can compete with 
small banks and credit unions?
    Mr. Gerety. Thank you. I think this is a really important 
point about the structure of Dodd-Frank. It is not just that 
there are affirmative exemptions, such as the one that you 
mentioned with the CFPB supervision; but also, there is an 
affirmative targeting of making sure that the toughest rules 
apply to the largest and most complex institutions.
    This happens in specific directions. For instance, under 
Title I of Dodd-Frank, there are specific enhanced prudential 
standards that only apply to the largest banks in the system. 
And those standards are further tailored by statutory mandate. 
So that the so-called G-SIBs, the globally systemic, the money 
center banks with trillions of dollars on their balance sheet, 
are subject to different rules. It is also true that with 
issues like derivatives or securitization, which community 
banks and smaller regional banks simply do not participate in, 
the weight of those rules do not fall there.
    So, in terms of both its affirmative exemptions and its 
direction in terms of creating tough standards, Dodd-Frank 
explicitly and implicitly carves out community banks. I think 
there is still work to do to make sure that the rules--already, 
the banking agencies have talked about simplifying the Basel 
III rules, making sure that those issues are easier for 
community banks to comply with. And I think that is a very 
fruitful direction and should be taken further.
    Mr. Clay. Thank you for your response.
    My time is up.
    Chairman Luetkemeyer. The gentleman's time has expired.
    The gentleman from Florida, Mr. Posey, is recognized for 5 
minutes.
    Just a minute, Mr. Posey--votes have been called, so we are 
going to try and get in hopefully two more people, two more 
questioners here.
    So go ahead, Mr. Posey. Thank you.
    Mr. Posey. Thank you, Mr. Chairman.
    Mr. Himpler, yesterday, Director Cordray appeared before 
the committee. And, as you know, the Consumer Financial 
Protection Bureau has a mission, and let me just state it 
precisely here: ``To make consumer financial markets work for 
consumers, arm people with information, steps, and tools they 
need to make smart financial decisions.''
    I am interested to hear your opinion about whether or not 
you believe the CFPB is, in fact, adhering to their mission?
    Mr. Himpler. Thank you, Mr. Posey.
    And I guess my first response would be to kind of follow on 
the discussion that Mr. Gerety and Mr. Clay had just a second 
ago about independent community banks.
    That exemption is afforded to the community banks because 
of the high burden of having a Federal regulator adding to the 
regulations that you are already facing at the State level. 
Representing finance companies that are providing both small 
dollar credit as well as vehicle finance, we would love to work 
with Mr. Clay and the members of this subcommittee and of the 
full Financial Services Committee to get that exemption so that 
there is a level playing field for all financial institutions.
    We are willing to play by the same rules as everybody else, 
but what we are talking about is a difference between 
profitability, sustainability, and the ability to provide 
affordable credit or being out of business and having to 
shutter your doors.
    One example of where I think the CFPB has missed its 
mission is in the area of its consumer complaint database. I 
don't think it really provides any information to consumers. 
Information that is gathered in that database, namely through a 
narrative field that customers are able to utilize, is not 
verified; and, most importantly, consumer information is not 
safeguarded.
    So, from my perspective, that is something that really 
needs to be addressed, in terms of meeting its mission, in 
terms of providing helpful information and protecting the 
consumer.
    Mr. Posey. Again, offhand, can you think of any other steps 
you think should be taken to get back on course with the 
mission?
    Mr. Himpler. I would say also, in the area of enforcement, 
our concern is that the Bureau is regulating by enforcement. It 
is not providing clear guidelines in the vehicle finance space, 
in terms of utilizing not so much its abusive authority under 
unfair, deceptive, and abusive practices, but the unfair prong. 
That has really never been used by regulators before. The 
reason it hasn't been used is it is very hard to create any 
sort of objective standard.
    Like I said at the outset in answering your question, our 
members are willing to play by the same rules as everybody 
else, and we do. What we don't think is in the best interests 
of the consumer is creating a ``gotcha'' environment where you 
don't know what the rules of the road are.
    Mr. Posey. Yes. I think that the CFPB indicated at one time 
they might be required or requested to issue something like 
50,000 opinions on interpretations of their rules. And they 
kind of committed to doing at least one to three a year, and to 
date they haven't done any. Do you see that as problematic?
    Mr. Himpler. Again, in the vehicle finance space, they 
issued a four-page bulletin to provide guidance to lenders in 
the vehicle finance space. They have at least three public 
enforcements. They have other private enforcements. None of 
them look like each other. And the Director has said it is 
regulatory malpractice for financial services players not to 
follow these orders. Which one do we follow?
    Mr. Posey. We get statistics that we are now losing 
something like a community bank a day or something. It is just 
unbelievable. Do you think this is a root cause of that?
    Mr. Himpler. I do think that is a root cause. We don't 
represent the community banks, but they are great players. 
Everybody has a part to play in this. But another proposed rule 
by the CFPB is its arbitration rule. The Director's own 
economics team said that arbitration is better than litigation 
for the consumer, in terms of time, convenience, and monetary 
awards. And yet, his own statement when he rolled out this rule 
totally contradicted that.
    I will stand here and tell you today that a significant 
number of financial players that are small and community-based, 
if that rule goes into effect, those businesses will go out of 
business, because they can't afford the risk associated with a 
class action lawsuit.
    Mr. Posey. Thank you, sir.
    Thank you, Mr. Chairman.
    Mr. Himpler. Thank you.
    Chairman Luetkemeyer. The gentleman's time has expired.
    We are going to get one more questioner in here before we 
recess.
    The gentleman from North Carolina, Mr. Pittenger, is 
recognized for 5 minutes.
    Mr. Pittenger. Thank you, Mr. Chairman.
    Mr. Himpler, I would like to ask you, do you think that 
there has been an uptick in the enforcement actions by the 
Bureau since the November elections? Is that your sense?
    Mr. Himpler. I do think that it has been sustained. But a 
lot of the enforcements are now through the supervisory 
process. And so what we have happening, as opposed to the more 
public orders that we have seen, is a lot of the enforcement 
orders are in the supervisory process, and they are not a 
matter of public disclosure. So it is very hard for our members 
to actually articulate what is happening to them.
    But I will tell you that, again, in the vehicle finance 
space, the CFPB said last December that they were moving on 
from this. I can tell you clearly they have not moved on from 
this and they have, in fact, probably doubled down on this.
    Mr. Pittenger. Do you feel like, in a sense, the CFPB has 
moved the goalpost?
    Mr. Himpler. I'm sorry, I missed your--
    Mr. Pittenger. Do you feel that, in a sense, the CFPB has 
moved the goalpost? Do you have any examples of that?
    Mr. Himpler. I do think that it is interesting with respect 
to the bulletin that they put out. They put out a clear 
standard that was not achievable by industry. The vehicle 
finance industry is very fragmented, and nobody was willing to 
step forward. It said that all compensation to dealers had to 
be flat. Nobody was willing to go there.
    The first public settlement that they came out with dealt 
with monitoring. Two subsequent ones dealt with capping the 
compensation. And I can tell you another one actually came 
forward and offered to cap compensation and were still 
penalized for doing so.
    Mr. Pittenger. Thank you.
    Mr. Michel, how was consumer protection handled before the 
creation of the CFPB?
    Mr. Michel. It was fragmented. It was spread around several 
different agencies. If you go through Title X, I believe 
subtitle (h), of Dodd-Frank, you can see part of what was done, 
which is it literally shifted enforcement authority for 22 
Federal statutes into the Bureau. So, unfair and deceptive 
practices, primarily enforced by the Federal Trade Commission 
(FTC), are all under all of those authorities. And banking 
regulators also had the authority, although not the explicit 
statute requirement, the authority to enforce laws under those 
rules as well on top of State regulatory agencies, all policing 
fraud. So the fact that there is deceptive and unfair 
practices, fraud--you cannot, as a business, lie about what you 
have sold me; you cannot mislead me; you cannot trick me--all 
of this was done prior to Dodd-Frank.
    As Congressman Clay alluded to a moment ago himself, 
smaller banks were subject to consumer protection laws prior to 
Dodd-Frank. That is the body of that framework that you see 
there in Dodd-Frank.
    Mr. Pittenger. Do you think that process provided more 
protection to consumers or do you think the CFPB provides more 
protection?
    Mr. Michel. The CFPB, the only argument you can possibly 
make is that we have consolidated that authority in one agency, 
and that is fine. But it didn't have to be the CFPB. It could 
have been the FTC. In fact, I think it made a lot more sense to 
be the FTC. They have a Bureau of Consumer Protection. That is 
their mission.
    Mr. Pittenger. Was there any benefit in consolidation?
    Mr. Michel. I would say, yes, there would be benefit in 
consolidating, and it was quite fragmented. So, yes, but not 
with the CFPB because the CFPB goes much further than that, and 
it is not really designed primarily to enforce those statutes. 
It is not an enforcement agency per se, like the FTC. And what 
you have--the agency is primarily designed to go much further 
than that, particularly with abuse of authority, which is ill-
defined and will not be defined under the Bureau and is not 
defined under the statutes.
    And it is really designed, if you look at the intellectual 
architects Gill and Warren, the idea is that you have to 
protect consumers against themselves or from themselves. That 
is a very different concept than what was in consumer 
protection law prior to Dodd-Frank.
    Mr. Pittenger. Many members of the Financial Services 
Committee have spoken to Fed Chair Yellen about the need to 
tailor regulations to specific institutions. Do you think the 
prudential regulators do enough to tailor these regulations to 
an institution or to smaller groups of institutions?
    Mr. Baer?
    Mr. Baer. Sure. I would agree, Congressman. Certainly, more 
can be done. I think we already talked about the custody bank 
example. There are certainly other examples, for example, the 
living will process, which is a large resource drain on firms 
that are actually quite easy to resolve and don't need that 
level of planning.
    I will also just say--and there has been a lot of talk 
about the CFPB in terms of tailoring. I think, as Mr. Michel 
notes, at least in theory, the statute transferred consumer 
enforcement authority away from the banking agencies and to the 
CFPB. I think what has happened, though, in reality is that the 
banking agencies have re-christened every consumer compliance 
violation as a safety-and-soundness issue using the amorphous 
concept of reputational risk, meaning, ``If you do something I 
don't like, somebody else might not like it; that will hurt 
your reputation, and, therefore, you have a safety-and-
soundness problem.''
    So that is another example. Maybe it is a different kind of 
tailoring, but that jurisdiction wasn't really transferred. It 
was more duplicated.
    Mr. Pittenger. Thank you.
    My time has expired.
    Mr. Luetkemeyer. The gentleman's time has expired.
    And, with that, we apologize to the witnesses. We do have 
to go vote. Votes have been called. We will take a recess here 
and probably reconvene around 10:45 roughly.
    [recess]
    Mr. Luetkemeyer. Let's reconvene the hearing. I again 
apologize for the interruption, but we do have to go do our job 
from time to time.
    So, with that, we want to again thank the witnesses for 
their indulgence, and we will continue the questioning.
    Mr. Williams, the gentleman from Texas, is recognized for 5 
minutes.
    Mr. Williams. Thank you, Mr. Chairman.
    Mr. Himpler, as you know, yesterday our committee had the 
opportunity to hear testimony from CFPB Director Cordray. From 
his testimony, you would have thought that community financial 
institutions, which facilitate a significant amount of lending 
in my district in Texas, are doing great. But perhaps the 
Director hasn't been to rural Texas, where many credit unions 
and community banks have simply closed.
    So, last year, 329 Members of Congress and many of the 
members of this subcommittee sent a letter to Director Cordray 
calling on him to invoke his authority to exempt community 
financial institutions from CFPB regulations. Yet, instead, he 
went ahead and released a 1,300-page rule on small-dollar 
lending, which applies to community banks and credit unions. I 
am not quite sure he got the message, but in your opinion, why 
does a small bank or a credit union need a 1,300-page rule to 
tell them how to make a $500 loan to their local customer or 
member?
    Mr. Himpler. Thank you, Mr. Williams. It is good to see you 
this morning.
    I don't know why any community financial institution needs 
a 1,300-page regulation. Most of the small-dollar products are 
fairly clear on their face. We do not represent payday, but it 
is a very clear disclosure. Most small-dollar extensions of 
credit are only a couple of pages in length, if that. There are 
clear disclosures of APRs. And the rule that the Bureau has 
come forward with will cripple access to credit, particularly 
in the communities that you are talking about.
    The whole rule, I must admit, I find personally offensive. 
No one would dare ask members who have premium or gold credit 
cards to have a cooling-off period after they paid off their 
monthly statement for March or April, but that is exactly what 
we are doing to working- class and lower-income folks. And to 
me, that is unfair.
    Mr. Williams. And staying with that line of questioning, 
Mr. Himpler, I want to talk about an issue that, unfortunately, 
I did not have time to discuss at yesterday's hearing. In March 
2013, the CFPB issued a bulletin that allegedly provided 
guidance for indirect auto finance companies. We now know this 
was the Bureau's way to get around Section 1029 of the Dodd-
Frank Act, which explicitly excluded them from the CFPB 
oversight and rightfully left the duty to the FTC.
    As the story goes, the CFPB used a now debunked study 
citing disparate impact to hold the indirect auto finance 
companies liable for discrimination resulting from dealer 
compensation or markup. So why is the Bureau continuing to 
utilize this methodology in enforcement actions against banks 
and indirect auto finance companies?
    Mr. Himpler. That is probably a question best suited to the 
Bureau. I can tell you that, having worked with the CFPB and 
represented indirect auto for 13 years now, the staff has this 
kind of stuck in their craw that dealers are exempt under Dodd-
Frank, and the only way to address that shortcoming that they 
see is to do it through vehicle finance companies, like the 
ones that I represent. And despite the fact that they have 
issued a bulletin--or actually a blog--last December calling a 
truce, that may be the case for public enforcement orders, but 
it is not the case in supervision and enforcement that stems 
from that. That continues to go forward. And even in instances 
where finance companies are trying to do the right thing and 
meet the Bureau halfway, I am afraid that all too often the 
Bureau is still looking for the flashy headline.
    Mr. Williams. I agree with you. In their semiannual report, 
the Bureau has dropped ECOA auto lending enforcement from its 
fair lending priorities just this past year. The Director 
himself has said that the CFPB has abandoned work in this 
space. You have touched on that. Yet, in my opinion, the damage 
has already been done. So, by my count, the CFPB has already 
extorted hundreds of millions of dollars from these auto 
lending companies. In your opinion, why do you think the Bureau 
has abandoned work in this space?
    Mr. Himpler. I think the curtain has been pulled back on 
their flawed methodology, the fact that they were unwilling to 
account for nondiscriminatory factors that we presented to them 
to explain any disparities that they found, and the fact that 
you had bipartisan pressure trying to get the Bureau to come 
forward with some sort of regular order. Even in just trying to 
figure out how they did the methodology, in terms of trying to 
duplicate their efforts, it took industry a year-and-a-half for 
them to even turn over the computer code. That is just silly, 
Congressman, and uncalled for.
    Mr. Williams. Thank you for your testimony.
    I yield back.
    Mr. Luetkemeyer. The gentleman yields back his time.
    The gentleman from Georgia, Mr. Loudermilk, is recognized 
for 5 minutes.
    Mr. Loudermilk. Thank you, Mr. Chairman.
    And, Mr. Himpler, welcome, and thank you for being here 
today.
    Mr. Himpler. Thank you for having me.
    Mr. Loudermilk. Yes, well, maybe we will have a little more 
productive meeting today than what may have happened yesterday 
when it comes to actually getting some questions answered.
    To follow on kind of the direction that Mr. Williams was 
heading in, some of the questions I asked yesterday were not 
adequately answered. There were a lot of things said but I 
don't think Director Cordray actually addressed the question at 
hand. A lot of it has to do with the CFPB and their database.
    And let me kind of just pose a question I did to Mr. 
Cordray yesterday and see if you can help me get to some of the 
answers, at least what you believe the truth would be there.
    In their annual report, which came out Monday, their 
numbers showed that in 2016, the CFPB handled 291,000 consumer 
complaints, and about 17,000 of them were resolved with 
monetary relief for the customer. Now that equates to only 6 
percent of the complaints being resolved with monetary relief, 
and 94 percent had no monetary relief.
    So my question was, does this low number show that the vast 
majority of their claims really have no merit? Or is it just 
incompetence in the agency? Or is it a priority issue in your 
opinion? From your knowledge, could you help me with that?
    Mr. Himpler. I would actually like to give the Bureau a 
little bit of credit here. I think the fact that you have such 
a low numerical value associated with monetary rewards means 
that the lion's share of complaints that come into the Bureau 
may not warrant a monetary award. We have had complaints come 
in regarding one of the captive auto finance companies under a 
particular brand, and they didn't actually finance the car; it 
was financed by one of their competitors. And it took them a 
while to sort it out and make sure the complaint got to the 
right consumer, and it was resolved. That is just one instance. 
But I do have other problems with the database.
    This is reputational risk at its finest. No one in our 
industry can afford to take on their Federal regulators, let 
alone a Federal regulator that has ``consumer protection'' in 
the title. What is the upside to that? Okay? Then you have 
numerous mistakes. They have now put in place a narrative field 
that allows consumers to put something online that is totally 
unverified. Well, how do you correct that? Once the damage is 
done to a company, it is hard to get your reputation back.
    Mr. Loudermilk. I agree.
    Mr. Himpler. And probably most importantly is the fact that 
they don't protect the consumer's private information on this 
database. If the whole goal of the CFPB is to protect the 
consumer, protecting their private information should be at the 
forefront.
    Mr. Loudermilk. I appreciate you going in that direction 
because that is really where I was going. Without the 96 
percent, there has to be a large number that are--let me use 
the term ``frivolous.'' In his testimony yesterday, Director 
Cordray said that, once the company has an opportunity to 
respond--this is when a customer posts something on their 
website, a complaint--that they confirm that there was a 
commercial relationship with the customer. That is the extent 
of any confirmation. Why will they not go and at least try to 
validate the complaint? Because, as you say, once that 
reputation has been damaged by a consumer protection agency, it 
is irreparable; it is very difficult.
    Mr. Himpler. That is correct. I think, at the end of the 
day, although it is listed as a consumer complaint database, 
there is no real interest in terms of looking at both sides of 
the equation. As I said at the outset of my statement, we share 
the CFPB's mission to protect consumers, but that has to be 
balanced with ensuring the availability of credit. And all too 
often, I am concerned that the Bureau does not have that 
balance in mind.
    Mr. Loudermilk. So is the purpose of the database just to 
name and shame companies, or should they have a disclaimer on 
there that says it is a fact-free zone, or ``This is fake 
news?'' It is really what I see is happening.
    Mr. Himpler. As entertaining as that is, yes, something 
needs to be done, particularly in this space in terms of 
protecting reputational risk because that comes at a cost. It 
will drive companies out of business.
    Mr. Loudermilk. Thank you.
    I yield back.
    Mr. Luetkemeyer. The gentleman's time has expired.
    The gentleman from Tennessee, Mr. Kustoff, is recognized 
for 5 minutes.
    Mr. Kustoff. Thank you, Mr. Chairman.
    Mr. Baer, good morning to you. I recently had the privilege 
of talking with a good community banker in my district in 
Fayette County in west Tennessee who talked about the Community 
Reinvestment Act. He said, while the intent of the CRA was to 
create fair lending practices, current test criteria are often 
so stringent, so tough, that it makes it impossible for smaller 
institutions to provide credit to those who want to reinvest in 
the communities that they live in.
    We know that the CRA was designed to ensure that financial 
institutions were providing capital and meeting the financial 
needs of the communities in which they operate. Regulators have 
ensured that these institutions meet the requirements of the 
Act through tests that look at the bank's lending, investments, 
and services. Until recently, these tests provided a clear 
benchmark for a bank to meet its CRA responsibilities. However, 
lately, regulators have been increasingly including in their 
CRA examination criteria, unrelated to the CRA, including 
compliance with other financial laws or consumer regulations 
that have their own standards and penalties for violations. I 
bring all this up because, in your testimony, of course, you 
mentioned that one institution was graded by the OCC as 
``outstanding'' but yet then was later downgraded to--I think 
you said--``needs to improve''--because of issues related to 
the bank's account management. Does that seem like a reasonable 
process to you?
    Mr. Baer. No, Congressman. I think the important point is 
that that process or that kind of behavior actually undercuts 
the value of the Community Reinvestment Act. As you note, the 
legislative history and clear statutory purpose of the 
Community Reinvestment Act was to ensure that banks were 
meeting the credit needs of all the people in the communities 
they operate in. And the grade is outstanding; it is 
outstanding for meeting credit needs. That is the focus of the 
statute. And it is a good example of how the examination regime 
around this has actually worked pretty well in the sense that 
the standards, the three tests you mentioned, are applied 
rather objectively. Banks know what they need to do to get a 
satisfactory rating, what they need to do to get an outstanding 
rating, and they can benchmark that and know where they are. 
That is all somewhat ancient history now but certainly not true 
now.
    What has happened is that any consumer compliance violation 
now can result and likely does result in a downgrade of the CRA 
rating. There are plenty of other consumer laws to punish that 
kind of behavior, whether it is informal supervisory or formal 
enforcement action or State action or Justice Department 
action. So it is not like this sort of behavior would go 
unpunished but for the CRA. But the unfortunate consequence of 
adding the CRA to the list of punishments for that kind of 
behavior is it diminishes the transparency of how it is applied 
to banks, and it really gives them less of incentive to stretch 
to make the extra loans to become either satisfactory or 
outstanding.
    Firms used to actually like, even aside from the compliance 
aspect, sort of the marketing of being an outstanding CRA 
institution. But if you tell them going into the exam, ``Well, 
you have an unrelated consumer compliance violation; you are 
going to have a `needs to improve' no matter what you do,'' 
that really undercuts for everybody--the banks and then also 
the communities who want the lending--the value of the CRA.
    Mr. Kustoff. Thank you very much, Mr. Baer.
    Mr. Michel, if I could, your testimony about the CFPB, I 
heard that; I think we all heard that in your testimony and 
your opening statements.
    Yesterday, when Director Cordray appeared, I had a line of 
questioning involving the unfair, deceptive, or abusive acts or 
practices, the UDAAP authority that was granted to the CFPB. As 
we look at the statute as written, it appears that there is 
little guidance as to what actually constitutes an abusive act 
or practice. Without clear and consistent guidance to make sure 
what that determination is, the Bureau now apparently has the 
discretion to make unilateral decisions that ultimately result 
in the elimination of a useful practice and service for the 
consumer.
    If I could ask you, in your opinion, has the CFPB 
adequately defined what constitutes an ``abusive practice?'' 
And is more clear, concise guidance needed for the CFPB to 
demonstrate further transparency in the process?
    Mr. Michel. They haven't clearly defined it, and Mr. 
Cordray has said that they don't want to define it and 
shouldn't define it. And that is not the rule of law. That is, 
``We are going to figure out what you did wrong after you did 
it, and we will tell you.'' It is absolutely 100 percent 
counter to the rule of law and the type of governmental system 
that we have in the United States.
    And then the next part of your question, as to whether they 
should clarify that, the only thing that we know is that it is 
not unfair or deceptive. So it has to be something else. Well, 
the question should be, what is wrong with unfair and 
deceptive? In other words, if unfair and deceptive is not okay, 
is not enough protection, then let's talk about something else. 
But that debate was never really had. So I don't think that we 
should waste any time trying to force them to come up with a 
better guidance for abusive. I think that should be thrown out. 
It is, in my opinion, superfluous.
    Mr. Kustoff. My time has expired. I yield back.
    Mr. Luetkemeyer. The gentleman's time has expired.
    The gentlelady from New York, Mrs. Maloney, is recognized 
for 5 minutes.
    Mrs. Maloney. Thank you so much, Mr. Chairman, for calling 
this hearing. And it is very good to see Mr. Baer and some 
other constituents here and all the panelists for being here 
today.
    We have a busy day on the Floor. We have one important 
Financial Services bill that came out of this committee that we 
were debating and it just passed unanimously. That doesn't 
happen often in this Congress--unanimous support.
    So, Mr. Gerety, I would like to ask you a question about 
the orderly liquidation authority. One of the main changes, as 
you know, that we made in Dodd-Frank was to give the regulators 
the authority to wind down large nonbank financial institutions 
when they fail. The FDIC has long had the authority to wind 
down commercial banks, but they did not have the authority to 
wind down large noncommercial banks like Lehman Brothers and 
AIG.
    And I distinctly remember one weekend, the beginning of the 
weekend with 11 investment banks in my district; at the end of 
it, every single one of them had failed. Yet, I give strong 
support to the FDIC. They very, very expertly worked with the 
private sector to save the commercial banks, to wind them down, 
to merge them, to keep them moving. So we were really forced 
with two decisions: we could either bail it out, like we did 
with AIG; or we could let it fail, which we did with Lehman. 
Neither was a good option, as we all know, and, if anything, 
contributed to more confusion and pain in the financial crisis.
    Dodd-Frank gave the regulators a third option: an orderly 
wind down that prevents a government bailout but does not harm 
the broader markets so that they would have another tool, God 
forbid, that we have another financial crisis, but that we 
could better manage it.
    So, Mr. Gerety, I would like to ask you to talk about the 
structural change and why it is important and what would happen 
if--some of my Republican colleagues are very intent on 
repealing the orderly liquidation authority, although it says 
expressly in the statute that no taxpayer money should ever be 
used or can be used. So it is really prevention of using 
taxpayer money and gives them another tool to really react to 
the crisis as the FDIC was able to do with the powers that were 
given to them.
    So your thoughts on that, and any other panelist who would 
like to add or comment on it, we would like to hear what you 
have to say.
    Mr. Gerety?
    Mr. Gerety. Thank you, Congresswoman Maloney. I think this 
is such an important issue, and you have laid out the facts, as 
we saw them in 2008, so eloquently.
    I think there are a couple of principles at stake that are 
really important to highlight any debate about how we handle 
the failure of a large complex financial institution. The first 
principle, which you have outlined, is the fact that this 
authority did not exist in 2008. The choices were limited and 
the fact that those choices were limited was a massive problem 
for the American people.
    The second is that market discipline works when firms have 
the ability to fail. Market discipline does not work if firms 
are--if the market does not believe that the firms have the 
ability to suffer from their own mistakes. And so I think we 
have seen already--in the implementation, the development of 
the capital rules to go along with orderly liquidation, the 
strategies of the single point of entry that give that 
credibility--we have seen the markets react positively. And 
when I say ``positively,'' what that means is they have taken 
away the assumption that the government will step in. The 
ratings agencies have noticed this as well. So I think moving 
in the opposite direction would be a move away from market 
discipline and move toward too-big-to-fail.
    I think the second thing is that there is often a 
discussion about bankruptcy versus orderly liquidation. I think 
it is important to not see those as substitutes. Certainly, 
this House has worked on a bankruptcy bill focused on Financial 
Services. That should be seen as a compliment. It cannot be a 
substitute for the approaches that we know have worked and the 
approaches that we know need to be differentiated for financial 
services companies because of their extreme size and their 
different structure than regular corporations in America.
    Mrs. Maloney. I would like to ask Mr. Greg Baer if he would 
like to comment.
    Mr. Baer. Sure, thank you, Congresswoman.
    I think it is important to note, as I think Amias did, that 
under the statute, and quite sensibly, the first option is 
bankruptcy. That is why banks are submitting living wills and 
either all now have or probably soon will have credible living 
wills under the Bankruptcy Code. So, at that point, it is 
really a cost-benefit analysis: What is the cost of retaining 
Title II? What is the benefit?
    Given--you can argue the benefit is low in the sense that 
banks are now extremely resilient at extremely high capital 
liquidity levels. There is a credible bankruptcy process using 
the single-point-of-entry strategy that Amias mentioned. And 
there is even liquidity available because their prepositioning 
liquidity or the trigger for bankruptcy is now sufficiently 
high that there will be liquidity available through the living 
wills.
    On the other hand, there doesn't really seem to be much of 
a cost at this point of retaining Title II as a backup plan in 
the sense that, as noted, markets are pricing the debt as if 
there will be no government support. So there is not a moral 
hazard being created or an unfair subsidy. That has been 
validated by the GAO, by two other recent studies, and by the 
rating agencies now as well as.
    So it is a backup plan. I think it is an unlikely-to-be-
used backup plan, but it appears to be a backup plan for which 
there aren't a lot of costs to retaining.
    Mrs. Maloney. And it would have been a backup plan that 
would have been helpful in the 2008 crisis, and we don't know 
what the next financial crisis is going to be. As you said, 
banks are very well-capitalized now. So it won't be like the 
last one; it will be something different. So having tools to 
respond might be helpful.
    Thank you all for your testimony.
    Thank you, Mr. Chairman.
    Mr. Luetkemeyer. The gentlelady's time has expired.
    With that, the gentleman from Michigan, Mr. Trott, is 
recognized for 5 minutes.
    Mr. Trott. I thank you, Mr. Chairman, for calling this 
hearing. And I want to thank the panel for spending time with 
us this morning. And as has been mentioned, we spent about 5 
hours yesterday with Mr. Cordray. And I am not sure how 
productive of a discussion it was. But I want to share with you 
a couple of the statements he made and get your thoughts.
    Mr. Michel, at one point, Mr. Cordray said, ``Certainly no 
one can claim that their voices are not heard at the CFPB.'' 
And when I had occasion to ask him a few questions, I told him 
I was astonished at that statement because I go home every 
weekend, and I talk to REALTORS and title agencies, and 
mortgage brokers, and debt collectors, and attorneys, and 
small-business owners, and they are all terrified of the CFPB. 
In fact, one constituent recently said that the CFPB is like 
the Mafia. They show up, and they say: ``This is a nice 
business you have here; I hope nothing happens to it.''
    So I want to get your thoughts on whether you feel there is 
an adequate framework for people to bring questions, honest 
business people to bring questions to the CFPB; if not, maybe 
give me a few examples of their failure in that regard; and 
then, finally, what the consequences for our economy are of an 
operation that runs itself providing guidance through 
enforcement.
    Mr. Michel. I have heard firsthand--and Bill probably has a 
thousand times more firsthand accounts than I do--of people who 
say that this is not true, that the CFPB does not listen to 
them, in the mortgage industry and outside of the mortgage 
industry. So I don't think--no, I don't believe that that is 
accurate. I don't believe they do listen. That is not why they 
are there.
    We had Dennis Shaul, who is an ex-Barney Frank staffer, 
talk to us about how different the Bureau became versus what it 
was pitched as it was going to be. So, no, I don't agree with 
him at all.
    Mr. Trott. Great.
    Mr. Himpler, let's go to another statement he made. I 
questioned him on his press releases, particularly a press 
release that was issued August 26, 2016, regarding First 
National Bank of Omaha. The press release made it sound like 
the First National Bank of Omaha had basically admitted guilty 
to egregious transgressions and where they were just a terrible 
organization. But then, when you look at the settlement 
agreement, section 2, there is no admission of guilt of any 
kind.
    So you mentioned a few minutes ago they are prone to flashy 
headlines, and I am just wondering if you think some of the 
press releases issued by the CFPB in connection with their 
settlements of enforcement actions are accurate and largely 
whether you believe there is really a due process issue when 
you consider the fact that fighting the government really is a 
tough row to hoe for many companies given the reputational risk 
and, again, what the consequences of that method of operation 
is.
    Mr. Himpler. Thank you, Mr. Trott.
    And if you will indulge me, I would like to comment on your 
question that you asked Mr. Norbert just to start off.
    Don't take our word for it. The Small Business 
Administration, under the previous Administration, actually 
opined on this because a lot of the rules that the CFPB have 
put forward have to go through a small business review panel to 
anticipate the impact on small businesses if they were to go 
forward. The SBA said that the CFPB was not listening to folks. 
That is--and Norbert is correct: I do have plenty of other 
examples. I would love to talk to you about them offline.
    A lot of the discussion, even Mrs. Maloney's previously, 
was about big institutions, too-big-to-fail. We are talking 
about institutions that are too-small-to-succeed. If you guys 
don't get it right, with all due respect, you can have serious 
consequences and take a lot of folks that have institutions and 
access to credit in rural areas right out of the equation.
    With respect to the press releases, more often than not we 
see press releases that don't reflect the orders that the 
Bureau puts forward. More importantly, sometimes the parties 
that are subject to those orders don't even see the order until 
it has actually been issued by the Bureau. That is being 
convicted before you even see the indictment, sir, and there is 
nothing more unfair than that.
    Mr. Trott. When I asked the Director about his press 
releases, his response was, ``I know the facts.'' And it 
sounded--and I don't know that he particularly appreciated this 
analogy--like the line from, ``A Few Good Men,'' when Jack 
Nicholson was on the stand and he said, ``You can't handle the 
truth,'' and he is acting as judge and jury. So how would he 
feel if I drafted a press release saying, ``Director Cordray 
admitted responsibility for sex and racial discrimination at 
the CFPB and retaliatory actions against his employees, 
apologized, said it would never happen again, but no one there 
is going to be fired as a result of their bad behavior.'' I 
know the facts. I read the National Review articles. How can 
you dispute that?
    Mr. Himpler. Sir, as far as I know, all of the public 
orders in the vehicle finance space, none of the companies 
admitted to guilt. That was part of an agreed-to consent order, 
and the press releases all, from top to bottom, say that they 
are guilty and then, in the fine print, say, ``Nothing in here 
accurately reflects the order.''
    Mr. Trott. Thank you for your time.
    I yield back.
    Mr. Luetkemeyer. The gentleman's time has expired.
    The gentleman from Kentucky, Mr. Barr, is recognized for 5 
minutes.
    Mr. Barr. Thank you, Mr. Chairman.
    And I appreciate the testimony from our witnesses.
    Dr. Michel, I was particularly interested in your proposal 
to remove the supervisory responsibilities from the Fed and 
transfer them to other regulators, and proposals to consolidate 
regulatory activities. As chairman of the Monetary Policy 
Subcommittee, I have raised that proposal with Fed Governors 
and regional bank presidents. And as you might imagine, I got a 
little push back on that idea.
    What they have said to me is that their supervision informs 
their monetary policy. Can you speak to that argument?
    Mr. Michel. I am not surprised. And I think that is scary. 
That is not the way this is supposed to work. Monetary policy 
in a fiat money system--the central bank is supposed to provide 
liquidity to the system. It is not supposed to be making bank 
determinations or bank safety-and-soundness determinations and 
picking and choosing who to lend to. That is the problem, 
literally.
    So the way to stop that is to let the Federal regulators do 
the regulating on the safety and soundness and let the central 
bank provide liquidity to the system. It can do that in a very 
open and transparent process without emergency lending 
authority, without regulatory authority. It is all it has to 
do.
    Mr. Barr. To the extent that the CHOICE Act, or other 
reform efforts here in Congress, maintains this concept of a 
stability oversight council, even if Congress were to remove 
its designation authorities, should the Fed participate in an 
FSOC?
    Mr. Michel. In the unfortunate event that you retain the 
FSOC, no.
    Mr. Barr. To your point about overlap, duplication, and 
inconsistency in the excessive number of these regulators, 
could you address the argument that multiple regulators can in 
fact lead to greater accountability and talk about that in the 
context of this argument of the race to the bottom?
    Mr. Michel. The research on this is pretty muddled. There 
are arguments for regulatory competition and that you get 
better outcomes that way. There is very little support for the 
race-to-the-bottom hypothesis, and there is also some support 
for the idea that regulatory competition turns out to largely 
end up being a myth. If you look at bank failure rates--and 
this just one example, admittedly muddled research--but one 
example is that bank failure rates across the different Federal 
regulators were pretty much the same. So it is pretty hard to 
say that there was sort of like a charter shopping thing going 
on and that some regulators were being tougher or easier on 
others. That is--
    Mr. Barr. One final quick question, if I could, and then I 
want to move on to Mr. Baer. Talk about your proposal of 
regulatory consolidation in the context of the dual banking 
system, and specifically, what do you propose with respect to 
State-chartered Fed members? Who would be regulating them 
besides the State financial institutions regulator?
    Mr. Michel. I think you would just have to go to the FDIC. 
That would be my preference.
    Mr. Barr. Mr. Baer, I was interested in your testimony, 
particularly about the CCAR qualitative assessments over bank 
capital planning processes. Talk about the arbitrariness of 
that and why you think we should get rid of that qualitative 
assessment.
    Mr. Baer. I think the place to start is the regulators and 
the examiners, including the Federal Reserve, routinely assess 
the quality of bank's processes and their compliance with law 
across a whole wide range of activities, whether it is credit 
underwriting, cybersecurity, trading, anything.
    In none of those cases do they feel the need to announce 
publicly at the end of the year, pass or fail. They work 
diligently with the institution throughout the course of the 
year. Their findings are reflected in an examination rating, 
and that system works.
    Especially in an area like capital planning, you already 
have the quantitative assessment, which is--and I think will 
continue to be--public. But the real question is, what is the 
value added by having that final assessment be public and 
binary? There has also been, I think, a real sense--and I think 
some public reports--around this function has been transferred 
largely from the exam teams to Washington. I think the 
standards are not particularly clear. There isn't a lot of very 
good feedback such that we routinely hear that firms simply do 
not know going into that week whether they are going to pass or 
fail, which is not the way the exam system--
    Mr. Barr. Sorry to cut you off.
    But in my remaining time, Mr. Himpler, can you address the 
unique challenges associated with the regulation of finance 
companies as opposed to banks, credit unions, and other 
lenders?
    Mr. Himpler. Sure. This is not a problem with the CFPB. It 
is a problem in D.C. Washington, D.C., is a bank-regulated 
town. Finance companies and a lot of community banks are 
creatures of State law. They have been effectively regulated at 
the State level for close to 100 years. And trying to put 
community institutions through the same pace as some of the 
bigger institutions and the tens to hundreds of billions just 
doesn't work.
    Mr. Barr. Thank you.
    I yield back.
    Mr. Luetkemeyer. The gentleman's time has expired.
    With that, we recognize the gentlelady from New York, Ms. 
Tenney.
    Ms. Tenney. Thank you, Mr. Chairman.
    Thank you to the panel for being here.
    I like what I am hearing from Mr. Himpler, as a Member from 
rural suburban central New York, where we have a number of 
small businesses and some of the largest out-migration of 
people, businesses in the Nation and--I just found out today--
in my district some of the highest property tax rates based on 
per 1,000.
    I want to focus a little bit on Operation Choke Point and 
just the nature of Operation Choke Point and how it focuses on 
small-dollar lenders, payment processors, and companies that 
are believed to be reputational or moral risks. And I am 
concerned about what could happen in my district, particularly 
because we do have a number of small businesses that would 
probably fit that definition, one being Remington Arms, the 
oldest continuously running manufacturing firm, which happens 
to be large. But there are other smaller offshoots, such 
Oriskany Arms, that could be targeted by an Operation Choke 
Point--a small startup that is making firearms right now for 
hunting and personal protection. But Remington also provides 
for our military. But other smaller businesses, whether it is 
payday lenders, check cashers, coin dealers, some people who 
provide some kind of services for people who are largely 
unbanked because of the massive regulation of so many of the 
big banks.
    As we regulate the big banks, we end up hurting the small 
banks even more. And as a small-business owner, it is sort of a 
parallel; we know we have a hard time complying with New York's 
regulatory burden as a small business, but we can't afford to 
hire compliance agents just like in a smaller bank.
    And I was just struck by your comment about too-small-to-
succeed. I would like to say they are too small to be cared 
about by a lot of politicians and bureaucrats. Small 
businesses, small lenders, and people who are in these persona 
non grata categories.
    I am just concerned that some of these tactics that the DOJ 
and the FDIC are using are almost like threats to increase the 
scrutiny on these types of lenders. I know we have written a 
number of letters, and I know I am getting--we have written a 
number of letters to the FDIC and the OCC about Operation Choke 
Point and how it is affecting our industry.
    I just want to know--and I guess I would single out Mr. 
Himpler, since you have the great quote of the day with ``too 
small to succeed''--can you wager a guess--and I think you 
could probably give me a more educated answer--as to why the 
government agencies believe that these licensed legal 
businesses that I have described should not have access to the 
banking system and why we put them into the underground? And 
maybe you could answer why they are so targeted, it appears, 
from the regulators.
    Mr. Himpler. Thank you, Ms. Tenney. In full disclosure, I 
wish I had come up with that quote, but I heard it from someone 
else.
    I think your point is dead on. And whether we are talking 
about Choke Point or whether we are talking about using the 
unfair prong of UDAAP, you have folks in the regulatory 
community, be it at the CFPB, the FDIC, or others, who feel a 
need to stand in judgment of hardworking Americans and how they 
utilize the credit system. And whether we like it or not, the 
FDIC can say that they are no longer deploying Choke Point. 
That message has not gotten down to the rank and file. Our 
members are still being subjected to the questions that call 
into question whether or not they are a moral provider of 
credit.
    Our association is 100 years old. We were formed with 
consumer groups in order to provide access to credit for 
hardworking Americans at the turn of the last century, folks in 
steel mills, folks in factories and the like, that banks 
couldn't provide credit to. And we take great pride in the fact 
that we are able to work directly with the consumers that we 
serve, but the CFPB and the FDIC and others have made it 
increasingly difficult by not following a rule of law, not 
providing clear guidelines and coming up with squishy 
standards, such as unfair because somebody doesn't think it is 
appropriate. All we are looking for is to be treated fairly.
    Ms. Tenney. Do you think that some of these are targeted or 
calculated attempts to eliminate an industry that might not be 
or someone that is involved in a banking institution or 
financial institution of this nature that is just not desirable 
in their world?
    Mr. Himpler. I do think that is the case, and I don't want 
to cast aspersions, but I think what we are dealing with, 
especially at the Bureau, is a lot of very young examiners 
right out of college, very idealistic, who think that they know 
better than the folks that they serve.
    Ms. Tenney. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Luetkemeyer. The gentleman from California, Mr. Royce, 
the chairman of the House Foreign Affairs Committee, is 
recognized for 5 minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    Mr. Baer, I appreciate your expertise on the issue of 
combatting money laundering and the financing of terrorism. We 
had a hearing last week, and I shared my concern at that time 
that we are misaligning our resources and hindering legitimate 
consumers and businesses from accessing capital. And I 
specifically referenced the Clearing House's research on the 
subject, which concluded that the billions in bank resources 
spent on AML/CFT compliance have limited law enforcement or 
national security benefit. Now that was the conclusion.
    Now, to be clear on this, I know you agree that banks 
should be spending ample resources on AML/CFT compliance, as do 
I. But we have missed the mark on creating a framework that 
emphasizes identifying and catching the bad actors. So 
examiners seem, at this point, to be more concerned with 
quantitative metrics. So the metrics are, you know, how many 
compliance officers have been hired or suspicious activity 
reports have been filed? But I am looking here for your 
direction in terms of what legislative steps would you have 
this committee take to better align our regulations with the 
goal of protecting the financial system from illicit financing, 
which was the original intent.
    Mr. Baer. Thank you, Congressman. And thank you very much 
for your leadership on this issue, which has been continuing 
and important.
    I think what we see--and it wasn't just the Clearing House. 
We worked on this report with experts in law enforcement, 
national security, global development, diplomacy, and everyone 
really came to pretty much the same conclusions, both about the 
problems with the system and the ways to fix them. The 
fundamental problem is not a resource problem; it is a 
management and leadership problem.
    The analogy I use is you have one person teaching the 
course and another person drafting the exam and grading the 
test. And law enforcement and national security and development 
folks and others are not engaged in the enterprise of telling 
banks how to spend that money. They don't give them direction, 
goals, priorities.
    Instead, as you note, they are graded by bank examiners who 
do what bank examiners do, which is look for policies and 
procedures and rigid adherence to those policies. So what law 
enforcement and national security want are financial 
intelligence units that think very cleverly about how to find a 
human trafficker or terrorist financier. And what the examiners 
have to in practice do--because they are actually excluded from 
that process. They really don't know what happens after these 
CCARs are filed. Law enforcement doesn't talk to them. National 
security doesn't talk to them. They check boxes. And that is 
not a really very smart system.
    A lot of this could actually be reformed by Treasury, TFI, 
and FinCEN working with the regulators. Congress can certainly 
help in certain areas, I think, expanding information-sharing 
under 314(b) of the PATRIOT Act. And then, really importantly, 
and I know this Congress, this committee has in front of it 
legislation from Representative King and Representative Maloney 
on so-called beneficial ownership or eliminating the use of 
anonymous companies to cloak who owns--
    Mr. Royce. Right, right. That probably would be a huge step 
if we could do that.
    I have to turn to Mr. Michel. We have already seen the 
failure of a model that separates consumer protection 
regulation from safety-and-soundness regulation with respect to 
the GSEs. As the former Fed Chair Alan Greenspan noted after 
the financial crisis, ``Fannie and Freddie paid whatever price 
was necessary to reach the affordable housing goals put in 
place by Congress in 1992.'' Now the result of that was that 
the GSEs purchased more than $1 trillion in junk loans. When we 
rang the alarm bell, when we tried to pass legislation--I had a 
measure on the House Floor to rein in the GSEs--our efforts 
were blocked as a tax on affordable housing. We had two 
agencies tasked with entirely different, often conflicting, 
objectives at the time.
    So my question is, are you concerned that we have gone down 
this road with the CFPB? For example, I look at the plan to 
overhaul overdraft rules. If the CFPB gives borrowers 21 days 
to repay an overdraft rather than requiring it to come out of 
the next deposit, does it not morph into a line of credit that 
the bank will need to hold capital against? In other words, 
where do safety-and-soundness concerns come into play here? 
Where does the prudential regulator have that responsibility to 
take a look at that issue, if you can respond? Do you have that 
same concern?
    Mr. Himpler. I'm sorry. I didn't hear the last part.
    Mr. Royce. Do you have that same concern?
    Mr. Michel. Oh, well, yes. And I don't think adding another 
regulator on top of the process does anything to fix this. And 
I think the whole premise is wrong in that the idea that 
finance companies, community banks, or big banks don't want to 
succeed and want to lend to people that cannot pay them back--
the whole thing is twisted. So you have to start by uprooting 
that. That is my opinion.
    Mr. Royce. Thank you very much.
    Mr. Chairman, thanks.
    Mr. Luetkemeyer. The gentleman's time has expired.
    I would like to go to a second round. I have a couple of 
follow-up questions myself, and Mr. Barr has a couple.
    So, with that, we will recognize the gentleman from 
Kentucky, Mr. Barr, for 5 minutes.
    Mr. Barr. Thank you, Mr. Chairman, for giving us a second 
round here.
    And as you all know, Mr. Michel and Mr. Himpler, Director 
Cordray was in front of our committee yesterday, and I raised a 
concern with him about the Bureau's regulation on international 
remittances, and I shared with him a concern that was raised 
with me from a constituent about the Fort Knox Federal Credit 
Union. And as you can imagine, the Fort Knox Federal Credit 
Union serves many servicemembers who are deployed overseas, and 
they simply want to be able to send some of their paycheck back 
home to their spouses while they are deployed.
    And because of the Bureau's overly burdensome regulations 
and the implementation of those rules, the credit union had to 
basically get out of the business, and that obviously was a 
huge inconvenience for those servicemembers and their families.
    Director Cordray's excuse was that Congress made him do it 
and that it was our fault that this was happening. And, while, 
Mr. Himpler, you don't represent credit unions per se, but you 
all are observers of the Bureau. I just took a look at the 
statute, the Dodd-Frank law, Section 1022, which actually 
requires the Bureau to look at cost-benefit analysis and to 
mitigate costs such as this.
    Does the Bureau have the discretion? Does Director Cordray 
have the discretion to ease the regulatory burden on regulated 
parties so that these kinds of consequences do not occur? And 
by the way, I asked him--the credit union in question called 
him thinking that this was an unintended consequence, and they 
reported to me that Director Cordray himself told them, no, 
this was an intended consequence. Can you comment on that?
    Mr. Michel. Sure. He absolutely has the discretion to go 
the other way. It is one of the bizarre things, from my point 
of view. I understand what was going on in that environment 
when they passed Dodd-Frank. But from my perspective, you don't 
want--either side of the aisle--you don't want to create an 
agency like this because you might find yourself in a situation 
where you are on the opposite end of what you just created. 
Even if the Trump Administration doesn't fire Director Cordray, 
there will be a new Director. If that is somebody like, just 
say, I don't know, Todd Zywicki from George Mason, he will have 
the discretion to reverse a lot of this stuff, just outright 
authority to do it, and then not do anything else that he 
doesn't want to do.
    Mr. Barr. Mr. Himpler, can you comment on Director 
Cordray's pointing the finger at Congress instead of looking at 
what the Bureau can do itself to ease the burden on regulated 
entities like this Fort Knox Credit Union that no longer can 
serve its deployed servicemembers?
    Mr. Himpler. Thank you, Congressman. Yes, I can.
    I think one of the basic problems here when it comes to, 
not only remittance, but also other consumer products is that 
very few people--especially at the CFPB, but I would say just 
as equally at some of the other Federal regulators--have no 
experience in extending credit to consumers, have no experience 
in some of these products, be they remittance products, be they 
an installment loan, be they a subprime vehicle finance loan 
because you are trying to extend credit to a college grad that 
needs to finance his car to get to his first job.
    Mr. Barr. I would just note that the Bureau seems to be 
able to have the discretion to ban financial services and 
products. I don't know why it doesn't have the discretion to 
help servicemembers deployed overseas send some of their 
paycheck back to their spouses back home. I think that is 
absurd.
    Mr. Baer, one final question. This idea of gold plating of 
U.S. standards, we believe, as the financial CHOICE Act 
reflects, we believe that large systemically important 
institutions should be required to maintain or at least be 
incentivized to maintain healthy levels of capital. But can you 
speak to the apparent need for the government to impose 
requirements that go well beyond anything that we impose on 
banks around the world and the effect that this gold-plating 
idea may have on the competitiveness of American banks as they 
compete in a global economy?
    Mr. Baer. Sure. Yes, gold plating is generally referred to 
as where U.S. regulators go off to the Basel Committee or the 
FSB and negotiate an international standard and then come back 
and dramatically increase the stringency of that requirement 
for U.S. banks and U.S. banks alone.
    The competitiveness aspect is difficult to tease out, 
certainly at a time when European banks particularly are in 
difficulties and U.S. banks are doing well. We may see that 
over time. I can't tell you I have seen research to demonstrate 
that right now.
    I think the bigger concern is simply the effect on economic 
growth and, in particular, certain types of lending as a result 
of higher standards than at least an international body thought 
was necessary. And that is true not only with respect to the 
ones that have been officially gold-plated, like the leverage 
ratio or the LCR, but if you think about the Federal Reserve 
CCAR stress test, there is a European stress test which bears 
no relation to it. So that is actually a whole construct that 
has no international parallel in any meaningful way except 
perhaps in the United Kingdom.
    So there are certainly benefits to U.S. banks that have 
accrued from being the best capitalized and the most rapidly 
recapitalized postcrisis, and I don't think anyone would 
dispute that. And it has helped them competitively in a lot of 
ways.
    But there are certainly areas where you see overlaps 
between these gold-plated rules. We talked about one earlier 
with respect to custody banks. And you also see with the way 
that they have imposed ring-fencing on foreign banks operating 
in the United States.
    They are having, if not competitive effects, real effects 
on the ability of those firms to serve U.S. customers, whether 
they be corporate or individual.
    Mr. Barr. Thank you.
    I yield back.
    Chairman Luetkemeyer. The gentleman yields back.
    I have just a few follow-ups to kind of clarify a few 
points very quickly here.
    Mr. Baer, you talked at length about the Community 
Reinvestment Act. And one of the things that I have seen--you 
did a good job of explaining the Act and some of the concerns, 
probably some reforms that need to be done.
    One of the things that I have seen is that the examiners 
now use this as sort of a punitive way to sort of--a carrot-
and-stick approach where we will hold the exam open until you 
do something, or we will keep you from being able to merge a 
bank until you put a facility over here.
    Is this something that you see yourself other places, how 
they are misusing some of these laws and leveraging against for 
other activities, trying to micromanage the bank?
    Mr. Baer. Absolutely, Mr. Chairman. It is not just the 
Community Reinvestment Act. It is why I focused so much of my 
testimony around the CAMELS requirements and those standards, 
and a whole host of unwritten rules now that say, for example, 
if you have a consent order pending for any reason, even 
something unrelated to the kind of expansion you want to do, 
that effectively puts you in what the regulators now call the 
penalty box.
    And if you look at why there hasn't been more growth, be it 
branching, mergers, acquisition, among, for example, midsize 
banks that everyone expected would be growing, it is because 
many of them have been in the penalty box for years. Because 
there is another unwritten rule that if you get a consent 
order, you can't get out of it for generally at least 2 years 
and often more; and during that whole time, you are in the 
penalty box, whether you are making good progress or not.
    So, again, Congress never enacted any of these obstacles to 
expansion. In fact, if you look at the Bank Merger Act, or the 
National Bank Act or the Bank Holding Company Act, there are 
explicit standards for when you should be allowed to expand. 
And yet, there are new invented rules that have come along over 
the past few years that have really stopped this in their 
tracks.
    Chairman Luetkemeyer. And the arbitrariness of their 
actions really is breathtaking sometimes. The bank that I 
referenced in my opening testimony is someone from my area, and 
they have a very unique product at the bank. It is not illegal, 
they had it approved by the banking regulators, but it is a 
unique product. And as a result of that uniqueness, now that 
they want to sell the bank, the regulators are trying to get 
them to divest themselves of this product. Well, that is one of 
the reasons that the other banks want to purchase them is 
because it is a money-generating activity that can help pay for 
the purchase of the bank.
    And yet, they have been holding this open now for 5 years 
to try and keep them from doing this. This is the kind of 
nonsense that is going on, and that is why this hearing is here 
today, to see how these rules are being used and abused. So 
thank you for your comment.
    With regards to the CAMELS rating, I would like for you to 
just explain a little bit more what your concerns are with that 
and your suggestions for reworking it, because I think this is 
very important.
    Mr. Baer. Sure. The CAMELS rating, again, this was started 
in 1979 by the FFIEC, which is sort of the umbrella group for 
the regulators when they examine, and it rates you according to 
capital asset, asset quality management, earnings, liquidity, 
and then the S for sensitivity to interest rate, particularly 
market risk, was added probably a decade or so later.
    The oddity is that when they adopted it, they had a series 
of subjective standards that examiners should look at in 
deciding whether you have good capital. Now, almost 40 years 
later, we have dozens of capital requirements that banks have 
to meet, and including the stress test for the larger 
institutions. And to the extent that you meet all of those, 
there really doesn't seem to be a very good argument that your 
rating should be anything other than one.
    The same with liquidity, if you comply with the liquidity 
coverage ratio, which the regulators have explicitly designed 
to be a comprehensive look at the quality of your liquidity 
position. And, in fact, examiners--and they frequently do not 
give you a one or even a two for those things--they don't 
engage in a robust discussion or analysis of why, 
notwithstanding the fact that you have met all the requirements 
that their agencies themselves have created, you can't get a 
good rating.
    And there is also another unofficial unwritten rule that if 
you have a three for management, you can't have better than a 3 
for composite. And, of course, there are legal consequences in 
terms of your ability to expand if you have a three for either.
    We look at what has happened over time as the CAMELS rating 
has sort of been divorced from financial condition, because 
that is being taken care of by capital and liquidity 
requirements. It has really become a compliance rating system. 
And that is what drives your management rating, that is what 
drives your overall composite rating, and that is what really, 
if you think about what has made the examination process so 
much more draconian, subjective, and really in a lot of areas 
arbitrary, it has been that move away from CAMELS as a 
wholesale look at your financial condition to really a focus on 
your willingness to engage in compliance activities that the 
examiners want you to engage in.
    Chairman Luetkemeyer. Thank you, Mr. Baer.
    Mr. Michel, you talked a lot about the reorganization of 
these financial regulators. And one of the things in my 
discussions with a couple of the Fed presidents has been that 
they would like to see all of the Fed presidents be on the Fed 
Board instead of a rotating situation.
    For instance, if a Fed president is not on the Board, that 
area of the country is not represented, per se, as other areas 
are on and off, when the New York Fed has their permanent 
position there. To me, there is a fairness issue there. Would 
you like to comment on that?
    Mr. Michel. Sure. And the way that it is set up is 
definitely a relic of the founding of the Fed in early 1900s, 
and there are a lot of issues like that. But this is one where 
it really doesn't make any sense anymore not to have everybody 
rotate on and to give the New York Fed a special sort of place 
there for various reasons.
    I think you could even make the argument that the West 
Coast district is overly large now, based on obviously the way 
the population was when we started it.
    The Federal Open Market Committee conducts open market 
operations through a system that was created for the technology 
at that time, and we have outstripped that. So these are all 
issues that could easily be addressed. I think the New York Fed 
one seems to be, although the New York Fed won't like it, a 
slam dunk, in that it really doesn't make any sense anymore not 
to have everybody rotate on.
    Chairman Luetkemeyer. Thank you.
    With that, we want to conclude the hearing here.
    The title of the hearing today was, ``Examination of the 
Federal Financial Regulatory System and Opportunities for 
Reform.'' I have a whole list of the different bills or laws 
and actions that you all have discussed today, and we are going 
to use this hearing as a predicate to go out and have some more 
hearings and do some bills and some things, and we certainly 
appreciate your testimony along that line.
    As a followup here, we didn't get a lot of testimony from 
the other side over here today and some of our members had to 
leave early.
    So I would like to allow a minute or so--no 5-minute 
testimony now. I have a plane to catch, too. But if each of you 
would like to take just a minute to either summarize something 
that you thought was important that you didn't get a chance to 
discuss or respond to somebody else or present a new idea that 
we didn't have here, I would certainly entertain that 
opportunity. I will give you that opportunity.
    So, Mr. Baer, if you would like to start first, why, we 
would certainly--
    Mr. Baer. Mr. Chairman, I think the hearing has actually 
been quite good in doing a good survey of the procedural issues 
that we are now facing in banking. I think your anecdotes and 
some others were quite powerful in demonstrating how a 
breakdown in process actually makes a real difference to the 
way that banks are able to serve the community.
    And I also think it is an area that is really ripe for 
Congressional oversight, because, again, we are talking about 
unwritten rules that have no basis in law and have no basis in 
regulation. Sometimes, they have basis in guidance, but often 
they don't even have basis in guidance.
    And so I think it is--I guess maybe that is the one thing 
that we haven't focused a lot on, though--and I think someone 
alluded to it--is that we really now have regulation by 
guidance, regulation by enforcement.
    And I think all of that is why Congress needs to keep an 
eye on this and make sure that the regulators actually are 
running a transparent process, not just because it is fun to 
run a transparent process and it is fair, but because that 
actually makes for better regulation.
    Chairman Luetkemeyer. Very good. Thank you.
    Mr. Michel?
    Mr. Michel. I would just sort of dovetail on that. I think 
we focus a lot on the CFPB and their discretion to do these 
things, and in some sense you see that in other banking 
regulators. Not just in some sense, but you often see that. 
Everybody knows that the bank examiners come in and say 
something about too many loans in one area or another, and you 
have to stop doing it. And so this is a discretionary sort of 
process that has evolved that I think you have a really good 
case to make for simplifying and fixing that problem by doing 
something like what you had in the CHOICE Act. It is an 
election. You can choose to go into a simpler regime. I think 
there is a lot of room to expand that. I know we didn't get to 
talk about that here, but I like where that is going.
    Chairman Luetkemeyer. Very good. Thank you, Mr. Michel.
    Mr. Gerety?
    Mr. Gerety. Thank you, Mr. Chairman, and thank you again 
for the opportunity to be here today.
    I think the most important theme that I would pick up in 
the testimony today is just the great diversity of our banking 
system. We talked earlier today about rural banks. I was 
looking at data yesterday. The average rural bank with $50 
million to $100 million in deposits earns about $1 million a 
year. At $10 billion, the average bank earns more like $100 
million, $120 million a year. So even within the community bank 
space, there is just tremendous diversity.
    And I think one of the major themes that needs to be 
focused on in any conversation about how to improve our 
financial regulatory system is about how do you simplify the 
burdens for the smallest banks in the system and not use those 
as a reason to roll back really important reforms for the 
largest and most complex institutions.
    Chairman Luetkemeyer. Great observation. Thank you, Mr. 
Gerety.
    Mr. Himpler?
    Mr. Himpler. Thank you, Mr. Chairman. I also want to thank 
you for holding this important hearing today.
    I think I would reiterate what some of my colleagues have 
already said, in terms of the rural bank at $50 billion in 
deposits making a million dollars. We have small finance 
companies that are struggling with the same compliance burden 
as JPMorgan Chase. We are talking about the difference between 
keeping the doors open and affordable access to credit and 
closing those doors, because you just can't live under the 
burden as a small business.
    For example, in its supervisory process in the auto space, 
the CFPB issued a larger participant rule. They captured in 
their net 90 percent of the overall market. That goes well 
beyond the largest of the large, even the large. Anybody that 
qualifies as large, they captured those folks. And what it 
means is that some of the small finance companies are not going 
to be able to extend access to credit to that single mom who 
needs a car to get to work.
    Chairman Luetkemeyer. Thank you, Mr. Himpler.
    And, again, thank all of you for being here today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And, with that, this hearing is adjourned.
    [Whereupon, at 11:43 a.m., the hearing was adjourned.]






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                             April 6, 2017




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