[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
IMPROVING FEDERAL CONSUMER
PROTECTION IN FINANCIAL SERVICES
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
JUNE 13, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-40
U.S. GOVERNMENT PRINTING OFFICE
37-556 PDF WASHINGTON DC: 2007
---------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866)512-1800
DC area (202)512-1800 Fax: (202) 512-2250 Mail Stop SSOP,
Washington, DC 20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York PETER T. KING, New York
MELVIN L. WATT, North Carolina EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana RON PAUL, Texas
BRAD SHERMAN, California PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts WALTER B. JONES, Jr., North
RUBEN HINOJOSA, Texas Carolina
WM. LACY CLAY, Missouri JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York CHRISTOPHER SHAYS, Connecticut
JOE BACA, California GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts SHELLEY MOORE CAPITO, West
BRAD MILLER, North Carolina Virginia
DAVID SCOTT, Georgia TOM FEENEY, Florida
AL GREEN, Texas JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin, J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
June 13, 2007................................................ 1
Appendix:
June 13, 2007................................................ 63
WITNESSES
Wednesday, June 13, 2007
Antonakes, Steven L., Commissioner of Banks, Commonwealth of
Massachusetts, on behalf of the Conference of State Bank
Supervisors.................................................... 22
Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance
Corporation.................................................... 16
Dugan, Hon. John C., Comptroller of the Currency, Office of the
Comptroller of the Currency.................................... 14
Kroszner, Hon. Randall S., Governor, Board of Governors of the
Federal Reserve System......................................... 12
Majoras, Hon. Deborah Platt, Chairman, Federal Trade Commission.. 17
Miller, Hon. Thomas J., Attorney General, State of Iowa.......... 21
Polakoff, Scott M., Deputy Director and Chief Operating Officer,
Office of Thrift Supervision................................... 19
APPENDIX
Prepared statements:
Maloney, Hon. Carolyn........................................ 64
Moore, Hon. Dennis........................................... 65
Waters, Hon. Maxine.......................................... 66
Antonakes, Steven L.......................................... 67
Bair, Hon. Sheila C.......................................... 91
Dugan, Hon. John C........................................... 120
Kroszner, Hon. Randall S..................................... 159
Majoras, Hon. Deborah Platt.................................. 180
Miller, Hon. Thomas J........................................ 205
Polakoff, Scott M............................................ 219
Additional Material Submitted for the Record
Frank, Hon. Barney:
Follow-up letter from Hon. John Dugan, Comptroller of the
Currency, dated August 3, 2007, in response to Chairman
Frank's request............................................ 236
Letter from the National Association of Insurance
Commissioners, dated June 12, 2007......................... 237
Bachmann, Hon. Michele:
Additional information requested during the hearing from Hon.
John Dugan, Comptroller of the Currency.................... 239
Waters, Hon. Maxine:
Responses to questions submitted to Hon. Sheila Bair,
Chairman of the FDIC....................................... 241
Responses to questions submitted to Governor Randall S.
Kroszner, Board of Governors of the Federal Reserve System. 246
Responses to questions submitted to Scott Polakoff, Office of
Thrift Supervision......................................... 251
IMPROVING FEDERAL CONSUMER
PROTECTION IN FINANCIAL SERVICES
----------
Wednesday, June 13, 2007
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10 a.m., in room
2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Present: Representatives Frank, Maloney, Watt, Ackerman,
Sherman, Moore of Kansas, Clay, Miller of North Carolina,
Scott, Green, Cleaver, Davis of Tennessee, Ellison, Klein,
Wilson, Perlmutter; Bachus, Baker, Castle, Gillmor, Biggert,
Barrett, McHenry, Campbell, and Bachmann.
The Chairman. The committee will come to order. There are
vacant seats, so if there are citizens who would like to sit in
the seats, please fill them. There are people waiting. We
shouldn't have empty seats.
This is a very important hearing, in my mind, and it is one
which I hope we will produce a lot of information. Contrary to
the prevailing notion, sometimes Members of Congress have
hearings because we want to learn things. I understand that is
not the norm for hearings, but in this case, there is a need
for information, and it is information to fill, in my judgment,
a very clear-cut void.
The preemptions by the Comptroller of the Currency and the
Office of Thrift Supervision were controversial. Many of us in
Congress on both sides did not like them. A former colleague,
the gentlewoman from New York, Ms. Kelly, for example, was a
very strong critic of them on the Republican side. But reality
sets in; those preemptions are not going to be undone in any
substantial way. We have a President in power who would veto
any effort to do that, and by the time we might get a different
President, I do not think we could unscramble that particular
set of eggs.
So I regret the scope of the preemptions. I acknowledge the
extreme unlikelihood of our being able substantially to cut
them back. There was some uncertainty until the Wachovia case
was decided. Those of us who felt it was not an absolutely
clear-cut decision take some solace in the fact it was 5-3; it
would have been 5-4, I believe, if Justice Thomas had not
recused, given his past voting pattern.
But the preemptions are in place, and that leaves us with
the problem, in my judgment, that we, the Federal Government,
have at this point bitten off much more than we are currently
able to chew. Essentially to change metaphors a little bit, we
have bitten off 50 heads, but we don't have the brainpower
ourselves to replace them. What we have done is to eliminate
the major source of consumer protection in the financial area,
because in the American system, for a variety of reasons,
consumer protection has come primarily at the State level.
And let me, as an elected official, explain to people why
there is an institutional reason for that, and why I am
particularly concerned about the need to take serious action
here. I want to say what may be imprudent, but making
international macroeconomic supermonetary policy is more fun
than arbitrating disputes between a cranky customer and a bank
clerk. And it is much better to debate the Basel accords, or
how going forward to do assignee liability in subprime, or any
of a number of other issues that we have, the effect of
monetary policy on employment, those are more stimulating
intellectually, more rewarding than a, ``He said, she said;''
``I did not, yes, you did, no, I didn't,'' dispute.
There is a reason why consumer protection has been more
often done at the State level; State regulators are more likely
to be elected officials than Federal regulators--State
attorneys general, State insurance commissioners, and other
State officials. This is one case where being the closest to
the electorate is a serious fact. And I will tell you, in my
own office, and among Members of Congress, we do a certain
amount of consumer protection because we run for office. And I
will tell you this: If you ask me, where is the greater
intellectual stimulation, where do I think any individual
energy is that I express, where will I get greater results, it
is probably in making broad national policy.
But cumulatively dealing with these individual consumer
complaints is very, very important for two reasons: first, for
the injustice done to individuals; and second, if there is no
consumer protection mechanism in the society, things will go
off track, and there could become this bias against consumers.
Now it is not that I believe that the banks and other
institutions that are regulated are rapacious or greedy beyond
the norm that we are supposed to have in a capitalist system.
It is just that we all make mistakes, and even more of a
problem, we don't like to admit our mistakes; we like to cover
them up, we like to deny that we made them, and we like to
blame other people for them. Those are human traits. I do not
impute them to the banks; I impute them to human beings.
Consumer protection exists to be something of a corrective
force, and here's the problem: I do not think that the Federal
agencies as currently and historically constituted, given their
mission, are at present adequately staffed or oriented or
legally structured to provide consumer protection.
I had a conversation with one bank regulator who told me
that the existence of safety and soundness powers--and, by the
way, we will take 20 minutes on each side. We have only one
panel. This is a serious issue, and so we are going to go to
the fullest extent. However, I want to lay it out so that
people have a sense of where we are on this. We are going to be
within our 20 and 20. I was told by one of the regulators,
well, we can do regulation of consumer protections under our
power to enforce safety and soundness on the banks, the
argument being that a bank that does not treat consumers well
can be called to account because it is jeopardizing its safety
and soundness. I wish.
In fact, done cleverly enough, being unfair to consumers
can contribute to the safety and soundness of a bank. I
believe, for example, that the overdraft fees that people get
hit with, where people go to an ATM and are told by the ATM
that they have so much money, or they read on the ATM--I don't
think we have talking ATMs yet. I guess we do for people who
are vision impaired. But when people learn from the ATM that
they have so much money--and that includes, without them having
asked for it, an overdraft amount--and they write a check for
that, they get whacked with a fee. I wish that jeopardized the
safety and soundness of the banks who did it, but I see no
evidence of that.
The fact is that banks are not stupid, and they do not do
these things to put themselves at risk; they do them because
they make money off of them. And they are there to make money
and provide that money in our capitalist system to people who
are invested in the intermediary function, but there are
abuses.
So here are a couple of problems I want to examine. One,
legally, do the various Federal bank regulators have the
authority to step in and replace the regulations that were done
at the State level? Two, do they have the proper resources for
enforcement? There is no reason why these couldn't be changed.
The fact is that even where State laws have applied, the
visitation rights do not apply; States may not even enforce
those laws where they can apply the law. Why? Are we the
world's best--we, the Federal Government, are we such super-
duper law enforcers that we don't need any help from anybody,
and we can replace everybody else?
I think the opposite is the case. I think that cooperation
in this area of law enforcement is a good idea. My colleagues
want cooperation in other areas of law enforcement on
immigration and elsewhere. I don't understand why we can say
that all of these State regulators, with all of their
experience, are totally incompetent to help us, the Federal
Government, the all-wise, all-knowing, omnipotent Federal
Government.
So we have the legal authority. We have the statutory
powers. We also have the question of the culture, and I hope
that is changing. And then we have this problem, and that is
why I have asked all of you to be here together. And I am going
to ask you all to keep your hands on the table so that nobody
goes like this when we are asking why something isn't being
done. You know, Harry Truman wanted a one-armed economist. I
want regulators without fingers, because I don't want them
being pointed at other people.
Here is the problem: We have been told by some of the
regulators that they are not fully able to do regulation to the
extent that we want because the Federal Reserve Board of
Governors has not used their authority under the Federal Trade
Commission Act to list things. That is why we appreciate
Commissioner Majoras being here, with, by the way, I will say
to you, the full acquiescence of Chairman Dingell, who has the
primary congressional jurisdiction over the FTC. We have a
combination. We are told, well, it is the FTC Act, and the
Federal Reserve has their responsibilities under the FTC Act,
and only they can give responsibilities to the other bank
regulators.
Well, you are all here, and at the very least, when we
leave today, we are going to know who does what, and who is
responsible for what, and whether, in fact, the failure, as
some have said, of the Fed to spell this out does interfere or
not.
So that is where we are. I do believe that we have a common
interest. I do believe that the people here before us from the
Federal side do want to do consumer protection, but it is not
primarily what you were instructed.
I have to say, and I am grateful that the Governor is here,
but--let me give you this example. Former Governor Gramlich
expressed a difference of opinion with former Chairman
Greenspan about consumers, and Chairman Greenspan's response
was very revealing. He said, ``Oh, how can people say I wasn't
interested in consumer affairs? I always followed the staff
recommendation on that.'' Can anyone imagine Alan Greenspan
saying, you know, when it came to interest rates, I always
followed the staff recommendation? When it came to deciding
whether there were problems in the stock market, I always
followed the staff's recommendation? The fact that Alan
Greenspan always followed the staff recommendation in consumer
affairs is confirmation that this was not highest on his
agenda. Alan Greenspan is not a man who is known for being
staff-led. He was not known for his intellectual passivity.
Yes, he goes to the staff, because he didn't become Chairman of
the Federal Reserve, the supereconomic chiefdom of the world,
to worry about a couple of people having an argument about a
bank deposit in Chicago. And if we don't do that better than I
think we would otherwise do it, then we are going to have a
problem. So that is why we are here.
I now recognize the gentleman from Alabama. He has asked
for 5 minutes. It is divided up. So I will just say to the
clerks that he will have his time.
Mr. Bachus. Thank you, Mr. Chairman.
Let me start by saying that I am a strong supporter of the
dual banking system, and I think it has served our country
well. Since the 19th century, where the OCC regulates our
national banks the OCC, and then our Federal banks by the
Federal Reserve and the FDIC, and our State agencies, the
Supreme Court has basically preempted some State regulation on
our national banks and established one national standard, which
obviously provides a great deal of efficiency and ease of
operation.
I think a national standard--OCC preemption--reduces the
costs of the banks. It enhances, I think, their ability or at
least their opportunity, to serve their customers, particularly
in a global marketplace. However, critics have expressed
concerns about--and it is a concern that I share--the adequacy
of the OCC's regime for enforcing consumer protection. I
wouldn't have said that 5 years ago; 5 years ago, I would have
said that I am confident that regulation of our national banks
and our State charter banks is sufficient. But recent practices
have really called into question my judgment that customers are
being well served, really, by both State and Federal
regulators.
When we passed Check 21, we were assured by the regulators
that this was a way to modernize our system, take cost out,
which was an excellent opportunity to modernize and bring our
banking system forward. But we were told that it would not
prejudice customers. Within 6 months, we began to get
complaints that while checks were being debited to the account
realtime, deposits were not. Deposits were being held until the
next day.
I like to cite real examples. And again, a lot of the
people who come to us with these complaints, it is the
principle of the matter. I said that about credit cards. I had
a gentleman who was getting work done at his house, he had a
guy working there, and he paid the contractor an $8,000 check.
Before he paid him, he actually said, ``I have to go to the
bank and make a deposit.'' He went to the bank, made a deposit,
came back, and paid the contractor.
Well, it was about 2:30. The contractor went to a bank
around 5:00 and deposited his check. It was the same bank where
the gentleman had made his deposit. The deposit wasn't
credited, but the check was, because the bank explained to the
gentleman that after 2:00, it was the next business day for
deposits, but not for checks. It was only the deposit which was
the next business day. Now what really enraged this constituent
of mine, and actually I probably had heard this on many
occasions, was that his wife had written two small checks, one
for $6 or $8, and one for about $18. Well, the bank could have
paid those checks, but instead of paying those checks, they put
the larger one in first so it would overdraw the account. He
was actually told by his banker, and I confirmed this, that the
bank had a computer program which took the larger check first
to maximize overdraft charges. And, in fact, that has become a
common practice to take the larger check when there are two or
three checks presented at the same time. It maximizes the
profit of the bank, but it obviously operates to the detriment
of the client.
Now, a lot of the people who come to complain to me, they
have time, they have money, they have resources, and it is not
a life-or-death situation to them. But I am in a district that
has counties where the median income is $18,000. After taxes,
it is $12,000, and when someone writes three or four checks,
and one overdraws their account, and the bank chooses to charge
them for each of those three checks, that is $100. That can
represent half of their disposable income for a week, and I see
that as sharp practice. I see that as unconscionable.
You heard last week, many of you, in the last week or two,
you had appeared before this committee on credit cards. Many of
the practices--I have heard no one defend them as saying they
are fair. I have had no one stand up and say this. I have had
bankers and institutions that do it say, we realize there is a
problem there, but no one is addressing the problem. And all of
these practices are recent practices.
I talk to bankers in Birmingham. I talked to one of the
gentlemen who established one of the large banks in Alabama. He
said that as long as he was there--and he is in his 80's--the
bank never would have done what is being done now. He said they
wouldn't have even thought to have done such a thing.
I mentioned Check 21, clearing the checks, some of the
credit card things. My fear with preemption, I think it can be
a very good thing. It can only be a very good thing if Federal
regulators both work with the State and coordinate their
efforts to protect consumers, and they also get serious about
some of these abusive sharp practices which are not just fact.
Yes, it increases the profits of the bank, but that shouldn't
be--you know, that is not a justification for unfair practice.
The customer has to have a seat at the table. And I would hope
that Federal regulators would promote uniformity in Federal
oversight, but also in strong consumer protection in both
regulation and enforcement. I think that those are steps which
will ultimately improve the bank's ability to serve their
customers.
In this regard, the memorandum of understanding between the
OCC and the Conference of State Banking Supervisors to
facilitate proper referral of consumer complaints to Federal
and State agencies with the regulatory authority is a step in
the right direction, and I hope we will protect customers. But
let me tell you what it won't protect, the two things that we
keep saying that we have, and they are important, but they
don't do the job alone. One is financial literacy. It is very
important, but it is not an end-all, do-all, and disclosure is
not an end-all, do-all. The idea that it is in the agreement,
the customer was given notice of this practice, the chairman
and I discussed yesterday. We are both law school graduates, we
are very proud of our academic record in law school, and yet we
get these disclosures, and we don't understand them.
The practice of the banks, to us, appears as something is
simple, what we call sharp practice or unconscionable. And I do
believe, and many of my Republican colleagues might disagree,
but I do believe the Federal regulators: one, don't carry
forward on the promises that they made to us when we passed
Check 21; and two, if they do not start addressing some of
these egregious practices, I do believe that the confidence of
this committee and this Congress--if the Federal regulators in
concert with State regulators don't protect the customers, I
believe this committee will lose confidence and take action.
There are some on this committee who will never do that,
they will never intervene. They will basically let the market
sort it out between institutions and banks with a lot of
financial resources and customers with almost no resources and
very little ability to protect themselves. It is not a level
playing field. And part of leveling that playing field is
strong consumer protection. It has been a tradition of the
Republican Party. It is a tradition I would like to see honored
both on my side and on the other side. And I know these
regulators; I know the people on the first panel. I know that
they want to do what is right for the customer. Thank you.
The Chairman. How much time has been consumed by both
sides? All right. We have 14 minutes left on this side. The
gentleman has 9 minutes left.
I am going to recognize for 2 minutes the gentleman from
Ohio, Mr. Wilson.
Mr. Wilson. Thank you, Mr. Chairman.
Let me start by saying, first of all, thank you for holding
this hearing today, and I am pleased to be able to give an
opening statement. Let me welcome our witnesses.
I am Charlie Wilson. I am from the Ohio Sixth Congressional
District, and it is ironic we should be doing this today
because just a year ago, I was in the Ohio Senate working on
predatory lending. Ohio, ladies and gentlemen, has been a
victim of predatory lending, and unfortunately we lead the
Nation, the entire Nation, in foreclosures. That is not
something we are very proud of, and we are a proud State with
11.4 million people, and we do a lot of things right. So we
sincerely want to get started on this at the Federal level.
As I said, last year we did Senate bill 185. We ran into
some lame duck problems at the end of the session, and lost
some of the teeth that were in Senate bill 185; however, we
feel that we have made some strides toward helping. We realize
it is a combination of problems that brings about the losses
that we have.
Let me say that it is an honor to have representation of
the Federal Reserve Board, the OCC, the FDIC, the Federal Trade
Commission and all of you who are here today. Thank you for
taking your time, and we hope to be able to get some direction
and learn from you as to what we need to do. I say this not
only as a State legislator, but as a former bank chairman, and
a guy who spent the majority of his life on a bank board and
saw it grow in great increments and did lots of things right.
I might say that when we did a lot of our investigation on
the predatory lending that is going on in my home State of
Ohio, it didn't seem to be the banks, it was more the subprime
and the mortgage companies, and we found different things that
were really being abused that we needed to address. So I really
welcome the opportunity to hear from you today as to what
protections we can put in, what we can do to be able to move
the ball and be able to clear up this cancer that is in our
society.
So I appreciate the opportunity to speak, Mr. Chairman, and
thank you to the witnesses for being here today. I look forward
to hearing from you.
The Chairman. I thank the gentleman.
Next, the gentleman from Louisiana is recognized for 5
minutes.
Mr. Baker. Thank you, Mr. Chairman.
I wish to establish that I have been a preemption advocate
for some time, so my position here is not necessarily
inconsistent with past practices. I have challenged Attorney
General Spitzer in his role as assuming the role of promisee in
the securities marketplace. I was in the majority then, but I
was in the minority, though, supporting that position. I have
now cemented my position in the minority and continue to be in
such a minority.
However, I think to attempt to balance the record just a
bit, the issue of preemption begins in 1819 with McCulloch v.
Maryland, when a State attempted to tax the Bank of the United
States. This is not a revelation that has developed since the
ATM machine. This is something that has been a customary
practice for one principal reason: to provide stability in our
capital markets and solvency among our financial institutions
who engage in risk-taking by extending credit to those who
qualify for the credit they seek.
Let us make clear that this is not about the OCC. The OTS
has a long-standing authority for actions in preemption. In
fact, during the early 1980's, a painful time in the real
estate industry under President Carter, interest rates, prime,
approached 21 percent, and States began to take action to
prohibit individuals from transferring the terms of their
mortgage to the new borrower in order to instill an
artificially low interest rate environment while the prime rate
to the lending institutions themselves were 2, 3, 4, or 5 times
the availability of the funds from the existing mortgage terms.
That was litigated all the way to the Supreme Court, and in
the mid-1980's, it was held as a right of the OTS for the
safety and soundness of the institutions involved and, I would
point out, lost in this debate is the taxpayers of the United
States who stand in good faith and ready to back up the losses
of those institutions should they become insolvent. And need I
remind everyone that in the late 1980's, we ultimately created
the RTC, and many members of this committee spent many long
hours derailing and bemoaning the actions of those thrifts in
Louisiana and Texas which took extreme action to extend the
losses to the American taxpayer. This is not incidental stuff.
It has real-life consequences. Preservation and market
stability is important. It is not necessarily just for those
who are here at the table this morning.
The Credit Union Association, the NCUA, is not represented
here this morning. They have the preemptive right to regulate
not only nationally chartered, but State-chartered, federally
insured credit unions. The National Federal Credit Union Act
requires the regulation of federally insured, State-chartered
credit unions to comply with certain provisions of NCUA's rules
and regulations, not merely a regulator's action, but by action
of this Congress. Therefore, to unwind the preemptive role of
the NCUA from the function of regulating credit unions in this
country, the Congress would have to act. We simply cannot beat
up a handful of regulators and claim it is all at fault.
Beyond the question of the credit union, which I suggest
would not likely be a helpful contribution to the overall
debate this morning, an Executive Order issued during President
Reagan's term, the great defender of free markets, said Federal
action limiting the policymaking discretion of the State should
be taken only when constitutional authority for the action is
clear and certain that the national activity is necessitated by
the presence of a problem of national scope. There is a way to
define the need for preemption to preserve the integrity of our
national capital markets while not at the same time obviating
the States' ability to intercede on consumer protection
advocacy. Both can be done, not mutually exclusive.
When we look back to the authorities of the OCC currently
in question, there are areas where they are not now able to
preempt contract law, criminal law, torts, actionable torts, in
some cases the OTS, even in zoning matters. In other cases, the
OTS doesn't match up exactly, but is similar in context.
So there is an obligation of the regulator for the sake of
the United States taxpayer, whether a bank, whether a savings
and loan, or whether a credit union, to act in a manner which
is reasonable and prudent to ensure the continued solvency of
that financial system. It does not, however, require that a
regulator turn their back on actions which do not serve public
policy well, and joining with State regulators can take action
against those who engage in activities not for the common
economic good or to the prejudice of the individual consumer.
If we can back this down a notch and focus our attention on
where the real problem is, whether a State regulator can govern
the actions of a subsidiary of a national bank really should
not be an issue. Whether you are in the main office in Chicago,
or you are standing next to the potted plant in west Texas, it
is the same institution governed by the same set of rules, and
should they violate those rules, they will be held accountable
by the national regulator; and should they engage in activities
which are found to be cannibalizing the assets of normal,
everyday, hard-working consumers, I will join with every other
member of this committee in seeking out those problems and
providing a Federal remedy, if necessary, if the States are
unable to act.
But if the States are able to act, we should not get in
their way. And I would assume--and questions of those on the
panel this morning--we can determine whether they choose or
will choose to intervene in consumer protection policies and
intercede on the behalf of banks, or will you balance your
judgment between the consumer and stability of our financial
markets.
I yield back.
The Chairman. The gentlewoman from New York, the chairwoman
of the Financial Institutions Subcommittee, is now recognized
for 5 minutes.
Mrs. Maloney. I thank the chairman for yielding and for
organizing this incredibly important issue on the overarching
issues of Federal and State consumer regulation. And I
compliment you on the all-star cast of witnesses who are
assembled today. And as you mentioned, the subcommittee which I
chair is charged with consumer protections, so this is
tremendously important to me, and I would say to all consumers
and all Members of Congress.
Whether it is in the context of credit card regulation or
subprime mortgage lending, the fact of growing OCC preemption
requires us to ask who is best able to make new rules and who
can enforce them.
I do want to mention that I have been involved and
concerned about some of the abuses that Chairman Frank and
Ranking Member Bachus highlighted. Chairman Frank mentioned the
overdraft fees as an abuse, and I want to mention that I have
legislation concerning this before Congress which would call
for notice at ATMs on these overdraft fees.
And in the area that Ranking Member Bachus mentioned on
deposit holds, I had a bill in last year to speed up deposit
holds, and in this Congress I did not introduce it. I was
awaiting the response from the Fed and their report on the bank
adoption of Check 21 enforcement. But it is now clear that the
Fed will not be regulating, or so they have said in their
report, so I will be reintroducing my bill. I do want to note
that Chairman Frank and I wrote a letter last week, literally,
to the Fed urging them to regulate in this area.
On the issue that is before us today, it may be correct, as
the OCC says, that the Watters decision changed the law very
little, if at all, but in legal history books, I believe it
will be seen as marking the end of one era and the beginning of
the next. I hesitate to announce the impending death of the
dual-banking system, but I wonder what meaningful role is left
for State regulators. As an elected official, I believe very
strongly in the statements earlier by Chairman Frank that
elected officials are the most responsive to the needs of the
public, to the needs of their constituents and to the needs of
consumers. And as a New Yorker, I know that an active State AG
is a very effective consumer protector. On the other hand, in
today's global market we may no longer be able to afford the
luxury of having the most banking regulators in the world.
Uniformity may be an advantage we can no longer afford to do
without.
So I would like to see the Federal regulators prove that
they can take up this responsibility and build a record on
consumer protection to match the record they have built on
safety and soundness. For instance, I would like to see the Fed
use its authority in unfair and deceptive practices to regulate
in both the subprime mortgage area and in the credit card area
to ban abuses. As I suggested at last week's hearing, maybe we
should extend the power to the other agencies as well so that
there would be more regulatory vigilance. Joint rulemaking
would give a seat at the table to the various sectors and
provide more input and different views.
I would like to see the OCC and the FDIC ramp up their
staffing and resources to make it possible for consumers to
call and complain and get a helpful response. Structurally, I
am concerned that the consumer protection sections of the
agencies, that they should have direct access to the top
decisionmakers and have a seat at the head table.
I also think we should support and encourage efforts by
Federal regulators to work with States. For example, the OCC
and the Conference of State Banking Supervisors have agreed on
a model framework for sharing consumer complaints that has been
put into place in my home State of New York with an MOU between
the OCC and the New York State Banking Department. I understand
that 17 other States have followed New York's lead and have
gone forward with such agreements.
I hope we can explore these and other issues, and I very
much look forward to the testimony on this critically important
issue. And I yield back the balance of my time. Thank you, Mr.
Chairman.
The Chairman. I thank the gentlewoman.
I will await the Ranking Member for the disposition of his
last minutes, and I will recognize the gentleman from Kansas
for 4 minutes.
Mr. Moore of Kansas. Thank you, Mr. Chairman, for having
this hearing, and again I want to also thank the witnesses who
are here to testify and to help answer some of our questions
about what we can do to address this issue.
Before I came to Congress, I was for 12 years the elected
district attorney in Johnson County, Kansas, which is a suburb
of Kansas City, and our office early in my tenure investigated
and successfully prosecuted a national oil company charged with
breaking gas pumps to cheat consumers. Things seemed to happen
again and again.
We had problems then. We are having problems now. Consumers
who file complaints with the consumer protection division of my
office, which was really a very straightforward process,
especially compared, I think, to the prospect of filing a
complaint faced by banking customers today when they have a
problem with their financial institution--I don't think the
average person has any idea where to file a complaint when
something has gone wrong with their bank. In the past, a
consumer who had a problem with a bank would often call the
banking regulator or the attorney general's office, but the
role has been significantly reduced in today's atmosphere.
When it comes to Federal regulators, I don't think most
consumers have even heard the name of the several of them--
Federal Reserve, OCC, NCUA, FTC, and OTS--and they all, I
suppose, have seen the sign on the bank doors, FDIC, but they
don't even know what these other institutions do. Even if the
consumer knows the right Federal regulators, it is often then
hard to find consumer complaint resources on the regulatory Web
sites. Some of them require a great deal of searching to find a
telephone number or complaint form. And when the consumer
submits the complaint to the regulator, the process, I think,
can be confusing and intimidating.
Our committee needs to feel confident that if consumers
have fewer opportunities to go to State regulators for
satisfaction, the Federal regulators are doing all they can to
make this process as consumer friendly as possible and using
what they learned from consumers to push financial institutions
for better performance. Generally consumers are seeking
assistance from regulatory agencies because they have
experienced some level of frustration with their bank or their
financial institution. We owe it to them to ensure that the
process they encounter, the resolution they receive is not a
source of greater frustration than the original complaint.
Again, thank you all for being here, and I hope we can work
together and address some of these issues.
Thank you, Mr. Chairman.
The Chairman. The gentleman from Colorado is now recognized
for 2 minutes.
Mr. Perlmutter. Thank you, Mr. Chairman. Thanks for the
opportunity to make a statement this morning.
Recent actions such as Watters v. Wachovia give me some
concerns because it weakens the role that States play in
consumer transactions. The Supreme Court ruling, I believe,
will make it more difficult for State banking consumer
protections, which are considerably, in many instances, tougher
than Federal measures, and I would ask those of you who are
working with the various State regulators to continue to do
that and allow for the States to continue to play a significant
role in connection with consumer protection. In Colorado, we
have really some good consumer protection laws, and some
outstanding regulators, and the States must continue to play a
role.
The other day Chairman Maloney convened a hearing on
consumer protection and credit card practices, and I didn't get
to speak until the very end, the third panel, and I missed many
of you. But I went into sort of a tirade, and I will apologize
for that now. But I did it because I come from a background
representing banks and credit unions and financial
institutions.
But I can tell you that in Colorado, there is a populist
uprising. And Mr. Bachus, I think, hit it on the head, the
chairman hit it on the head. Just looking at the regulation Z--
and people were calling it the periodic statement. For me it is
more confusing than the periodic table because people are
getting charged so many fees and such high rates. That is where
we are coming from, whether it is the ATM charge--in Mr.
Bachus' State, it is $39. Thank goodness in Colorado it is only
$34. If you have a $2 overdraft, you get a $34 overcharge. If
you have--you believed you paid off your card that month, but
you didn't realize there was a double billing cycle, and you
still have 50 cents. You don't pay the 50 cents, so you get a
$25 late charge. That is what people are upset about.
The disclosures are fine and dandy if you can understand
them because they are complicated. I mean, if you look at all
the different fees just on the credit card regulation Z table,
which we have simplified, it is still very difficult for
anybody to understand, you know, not just the ordinary guy
trying to make some kind of transaction.
So Mr. Baker is right about the preemption and the role of
solvency versus the consumer. But what I think all of us are
concerned about is that the consumer, the charges--somebody
called it the other day risk-based lending. I call it profit-
based lending. These fees make a lot of money for the financial
institutions at the cost of the consumers, and they have gotten
out of hand.
Thank you, Mr. Chairman. I will yield back.
The Chairman. All time has expired on this side. I believe
we are through on both sides.
I sincerely apologize for the length of the statements, but
I think it was important for all of you to know how--and I
think on a bipartisan basis we express this--we feel this
concern.
And we are now going to begin. No inferences should be
drawn by the order. I never know exactly what the order was.
Maybe people knew that our two chairs here would be color-
coordinated, and they should be together. But for whatever
reason, we will begin with Mr. Kroszner.
STATEMENT OF THE HONORABLE RANDALL S. KROSZNER, GOVERNOR, BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Kroszner. Thank you very much. Chairman Frank, Ranking
Member Bachus, and members of the committee, I really
appreciate the opportunity to discuss the Federal Reserve
Board's role in protecting consumers in financial services
transactions with you today.
An important part of the Federal Reserve's mandate is
promoting the availability of credit throughout the banking
system. Equally important, the Federal Reserve has
responsibility for implementing the laws designed to protect
consumers in financial services transactions.
In carrying out its responsibilities related to consumer
protection, the Federal Reserve has four complementary roles:
First, we write rules to implement the consumer financial
services and fair lending laws; second, we examine the
financial institutions we supervise for compliance and as
necessary take action to enforce the laws and resolve consumer
complaints; third, the Federal Reserve actively promotes
consumer education through its publications in a variety of
partnerships with other organizations; and fourth, through the
community affairs program, we promote community development and
fair and impartial access to credit.
In my oral remarks today I would like to focus on our role
as rule writer. Many of the laws we implement are based on
ensuring that consumers receive adequate disclosures about the
features and risks of a particular product. When consumers are
well-informed, they are in a better position to make decisions
that are in their best interest. Effective disclosure also
enhances competition and has the capacity to help weed out some
abuses.
Advances in technology have fostered the development of
products that are increasingly diverse, but also increasingly
complex. While this has expanded consumer choices, it also
presents a challenge to ensure effective disclosures about
these complex products.
The Board is committed to developing more effective
disclosures, and we have recently undertaken an innovative
approach, namely using consumer surveys and testing in detail
to understand consumers' needs in order to develop our
regulatory response. Consumer testing can help us improve the
effectiveness of disclosures by providing insight into
consumers' understanding of financial products and their
decision-making processes.
Given the complexity of some products, we must also be
aware of the potential for information overload and design
disclosures that not only are accurate, but clear and simple
enough so that they are meaningful and useful to the consumers.
The Board is keenly aware that disclosures and financial
education may not always be sufficient to combat abusive
practices. The consumer laws implemented by the Board contain a
number of restrictions, and the Board has the responsibility to
prohibit other practices by issuing rules, for example, if the
Board finds they meet the legal standard for unfair and
deceptive practices. Crafting effective rules under the unfair
or deceptive standard, however, presents a significant
challenge. Whether the practice is unfair or deceptive depends
heavily on the facts and circumstances of the individual case.
To be effective, rules must be broad enough to encompass a
wide variety of circumstances so they are not easily
circumvented. At the same time, broad prohibitions can limit
consumers' options in legitimate cases that do not meet the
required legal standard. This has led the Federal Reserve to
focus primarily on addressing potentially unfair and deceptive
practices through case-by-case determinations rather than
through rulemaking. The Federal Trade Commission, which has
authority to prohibit practices from financial services firms
that are not depository institutions, I believe has taken a
similar approach. Because prohibition on unfair or deceptive
practices applies to all the depository institutions as a
matter of law, the banking and thrift agencies can and do
enforce prohibition using their supervised reinforcement
powers.
The Board also addresses concerns about some practices
under other statutes, such as the Truth in Lending Act and the
Truth in Savings Act. For example, the Board adopted a rule to
address so-called flipping of high-cost mortgages and revised
the Truth in Savings Act rules to address concerns about
overdraft protection programs.
In conclusion, the Federal Reserve takes its consumer
protections responsibilities very seriously and is committed to
addressing abusive practices. We will consider how we might use
our authority to prohibit specific practices consistent with
the legal standards in appropriate cases such as when there are
widespread abuses that cannot be effectively addressed on a
case-by-case basis. For example, tomorrow I will be chairing a
hearing to examine how the Board might use its rulemaking
authority to address practices in the subprime mortgage market.
We must be careful, however, not to curtail responsible
subprime lending. Any rules should be drawn sharply to avoid
creating legal and regulatory uncertainty which could have the
unintended consequence of substantially reducing consumers'
access to legitimate credit options.
Again, I want to thank the committee very much for holding
this hearing today, and I look forward to the questions that
you have. Thank you.
[The prepared statement of Governor Kroszner can be found
on page 159 of the appendix.]
The Chairman. Next we will hear from the Comptroller of the
Currency, Mr. Dugan.
STATEMENT OF THE HONORABLE JOHN C. DUGAN, COMPTROLLER OF THE
CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY
Mr. Dugan. Chairman Frank, Ranking Member Bachus, and
members of the committee, I welcome this opportunity to discuss
consumer protection. As the Federal Reserve just said, the OCC
also takes this responsibility very seriously, especially since
retail banking has become a much larger part of the activities
of national banks.
Frankly, our comprehensive approach to consumer protection,
integrating guidance, supervision, enforcement, and complaint
resolution is just not well understood. The fact is consumer
protection is a fundamental part of the OCC's mission, and we
are not simply a safety and soundness regulator as some have
suggested. OCC supervision plays a unique and critical role in
ensuring compliance with Federal consumer protection standards.
Our extensive and continual presence in national banks, from
large teams of resident examiners at our largest banks, to our
frequent on-site examinations of our community banks, allows us
to identify and fix consumer compliance issues early before
they become major problems. As a result, our compliance regime
is not enforcement only. Instead, it is better described as
supervision first, enforcement if necessary.
With supervision addressing so many problems early, that
formal enforcement often is not necessary. For this reason, the
number of formal enforcement actions taken by any bank
supervisory agency is a misleading measure of the effectiveness
of its consumer compliance regulation. Yet when we have needed
to take strong enforcement action, the OCC has not hesitated to
do so, often providing new standards to protect bank customers.
The OCC also has developed a robust process for addressing
consumer complaints. Our Customer Assistance Group integrates
skilled professionals and up-to-date technology to redress
individual problems, answer questions, educate consumers, and
support our consumer compliance supervision.
While we believe this comprehensive approach is effective,
it does have three significant limits: statutory limits set by
Congress, rule-writing limits in that the OCC has no authority
to write most consumer protection regulations; and
jurisdictional limits in that our authority obviously only
extends to national banks.
Let me also briefly share our view of the Supreme Court's
recent preemption decision. The Watters case does not mark a
shift in prevailing law, but it does clarify responsibility and
accountability. In particular, it makes clear that Federal and
State regulators both have important jobs to do, but they are
different. Ours is to regulate and supervise national banks for
which we should be held accountable. Theirs is to regulate
State-chartered entities for which they should be held
accountable.
And to those who argue that there should be both Federal
and State supervision of national banks, that there can never
be too many cops on the beat, I must respectfully disagree. We
believe it is counterproductive for States to focus their
finite enforcement resources on national banks that are already
heavily regulated, especially when there are lightly regulated
State entities, like many subprime lenders and mortgage
brokers, that clearly have been the source of real problems.
You can indeed have too many cops on the same beat if it means
leaving other, more dangerous parts of the neighborhood
unprotected.
We believe consumers benefit most when the OCC and the
States focus on our respective areas of responsibility and find
productive ways to cooperate. The OCC is doing just that. For
example, since last November we have reached agreements with 18
States, as was mentioned earlier, to refer and share complaint
information. Similarly, the OCC and the other Federal banking
agencies have cooperated with the States to extend the coverage
of the nontraditional mortgage guidance and the proposed
subprime lending guidance.
I am also very pleased to announce another cooperative
initiative today on mortgage brokers: parallel examinations of
national banks regulated by the OCC and the mortgage brokers
that they use regulated by the States. This intersection of our
regulatory jurisdictions provides a real and useful opportunity
to coordinate our efforts, especially given the recent
criticism of mortgage broker practices. Though still in the
early stages, and limited in scope, both we and the Conference
of State Bank Supervisors believe this new initiative shows
real promise.
Finally, my testimony provides the following suggested
improvements to Federal consumer protection regulation: First,
joint agency authority, including for the OCC, to write
regulations defining unfair and deceptive practices applicable
to banking organizations; second, a requirement that an agency
charged with writing consumer protection regulations consult
before issuing such regulations with the regulators charged
with implementing them; third, a requirement that consumer
protection regulations be revised and updated more regularly
than they are now in order for the regulations to keep pace
with change; and fourth, the development of a centralized Web
site for complaints by consumers of any banking institution
regardless of charter to help eliminate much of today's
confusion.
Thank you very much. I look forward to answering questions.
[The prepared statement of Comptroller Dugan can be found
on page 120 of the appendix.]
Thank you, Comptroller.
And next, the Chairman of the Federal Deposit Insurance
Corporation, Chairman Bair.
STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, FEDERAL
DEPOSIT INSURANCE CORPORATION
Ms. Bair. Chairman Frank, Ranking Member Bachus, and
members of the committee, I appreciate the opportunity to
testify on Federal consumer protection in financial services.
The U.S. financial system has undergone a significant
change in recent years. Consumers overall have benefited from
the huge number of new and innovative products and services
they can now choose from. But along with all this consumer
choice has come more complexity in product terms and cost
structures. This complexity has created financial pitfalls for
the unsophisticated and unwary. We also see many new players in
the market, many of them beyond the reach of Federal regulatory
agencies.
The greatest weakness in today's financial marketplace is
the absence of clear consumer protection standards applied
uniformly to all participants in the market. As you know,
consumer protection is a key part of our job at the FDIC. We
closely examine our banks for compliance with consumer
protection laws and regulations and take enforcement actions
where warranted. We also devote significant resources to
investigating and resolving consumer complaints. And we
carefully monitor and analyze consumer complaints to signal
problems in particular services or financial institutions.
We have several recommendations for improving Federal
consumer safeguards that would provide stronger, more uniform
protections and help level the playing field. First, as I have
previously testified, the FDIC supports national standards for
subprime mortgage lending by all lenders through HOEPA
rulemaking or by statute. Ideally, national standards would
include a number of elements which I detail in my written
testimony, such as requiring underwriting at the fully indexed
rate, restrictions on prepayment penalties, and restrictions
against misleading marketing.
Second, Congress should consider expanding rulemaking
authority to all Federal banking regulators to address unfair
and deceptive practices under the FTC Act, not just to three of
the five regulators, as is the case under current law. This
change in law would include the prospective input at the FDIC
and OCC in rulemaking to protect consumers; together, we
account for about 7,000 banks.
Third, to enhance enforcement of Federal consumer
protection laws, Congress could consider expanding the Truth in
Lending Act as well as the FTC Act to allow State authorities
to enforce those laws against nonbank financial service
providers. Nonbank providers are a significant portion of
today's market. Allowing more regulators to enforce these laws
would beef up compliance.
Finally, I am a big believer in financial literacy.
Educated consumers are better able to make sound choices and
protect themselves against scams. Integrating financial
education into existing public school curriculum, such as in
math classes, would help kids from all income levels and expose
them to basic financial principles year after year. There are a
number of Teach the Teacher programs offered at many
universities to assist school systems in integrating financial
education into core curriculum, but such programs could greatly
benefit from Federal financial support.
In conclusion, I would say that market competition is the
best way to set prices and allocate resources. However, markets
need rules. Abusive or misleading financial practices not only
hurt consumers, they hurt the reputation of the entire
industry. The FDIC stands willing to assist you and our fellow
regulators in finding ways to serve the needs of consumers and
the markets. Thank you, and I would be happy to answer your
questions.
[The prepared statement of Chairman Bair can be found on
page 91 of the appendix.]
The Chairman. Next, the Chair of the Federal Trade
Commission. And Chairwoman Majoras, we know we are not your
usual venue, so we very much serious appreciate you doing this.
But it did seem to us that having all the regulators together
is really the prerequisite, and we hope that this won't be the
last time you all will be together talking about this issue.
Madam Chairwoman, please proceed.
STATEMENT OF THE HONORABLE DEBORAH PLATT MAJORAS, CHAIRMAN,
FEDERAL TRADE COMMISSION
Ms. Majoras. Chairman Frank, Ranking Member Bachus, and
members of the committee, I am pleased to be here with you and
with my colleagues today.
Because financial issues affect all consumers, whether they
are buying a home, trying to improve their credit rating, or
dealing with rising debt, protecting consumers of financial
services is a key part of the mission at the FTC.
Now, of course, the FTC is primarily a law enforcement
agency. We don't have the same sort of supervisory authority
over particular entities that some of my colleagues here have.
And, of course, we don't have jurisdiction over banks. But
under the FTC Act and several other consumer protection and
financial statutes, the Commission has broad jurisdiction over
nonbank financial companies, including nonbank mortgage
companies, mortgage brokers, finance companies, and some units
of bank holding companies.
The FTC uses three main tools to protect consumers: law
enforcement; consumer education; and policy research and
development. We focus our investigations and prosecutions on
combating and preventing unlawful acts and practices that are
most likely to cause consumer harm. Recently in this area, we
focused on the following: mortgage lending and servicing;
nonmortgage lending and leasing; gift card sales; advance fee
loan scams; debt collection practices; credit and debt
counseling services; and credit reporting.
The Commission has targeted deceptive or unfair practices
in all stages of mortgage lending, for example, from
advertising and marketing through to loan servicing. In the
past decade, the FTC has brought 21 such actions, focusing
particularly on the subprime market.
As a result of these actions, courts have ordered the
return of more than $320 million to consumers. And because law
enforcement is highly effective, indeed, it is most effective
when government agencies cooperate, we have done so whenever
possible and appropriate. For example, we brought an action
against Fairbanks Capital Corp., one of the country's largest
third-party subprime loan services a few years ago with HUD. We
charged that Fairbanks failed to charge consumers' payments
upon receipt, charged unauthorized fees, and reported consumer
payment information that it knew to be inaccurate to the credit
bureaus. And Fairbanks and its former CEO paid over $40 million
in consumer redress.
Attacking debt collection abuses is another critical part
of our agenda. Today, I am announcing the Commission's 20th
debt collection case since 1998. This week, the FTC filed an
action to stop debt collectors who targeted Spanish-speaking
consumers and engaged in repeated egregious violations of the
Fair Debt Collection Practices Act. The case has been filed
under seal, and we are waiting for the judge to rule in our
request for a temporary restraining order.
Another recent area of enforcement has been gift cards, and
we recently brought two cases against sellers of gift cards
that carried concealed fees. Both Kmart Corporation and Darden
Restaurants agreed to settle claims that they engaged in
deceptive practices and advertising in selling gift cards and
are now implementing programs to either refund consumers or
restore fees that were deducted from the consumers' gift cards.
Now, while law enforcement is essential, consumers are best
served if they can avoid the injury in the first place. To
empower them to avoid the harm, we have developed extensive
consumer education programs addressing financial services
focusing on expanding the reach of these materials to get them
out there.
In the last fiscal year, we distributed over 4 million
printed copies of financial education brochures, and had over 6
million hits on the same publications on our Web site. In
addition, we have educated young people who have limited
experience with credit by conducting outreach on college
campuses, at local district college fairs, and in high schools,
including local high schools here in the District.
Of course, financial services markets are dynamic and
continue to evolve, and recognizing that, we and other
policymakers must continually assess how we adapt our policies
and practices, and how we engage in research and policy
development concerning financial services and consumers.
And today the Commission's Bureau of Economics released a
study that confirms the need to improve mortgage disclosures.
The key findings of that study, which we have with us here
today, are: first, that the current federally required
disclosures fail to convey key mortgage costs to consumers;
second, that better disclosures--there was a prototype that our
economists used--can significantly improve consumer recognition
of the various costs; third, that both prime and subprime
borrowers fail to understand key loan terms, and they benefited
from improved disclosures; and fourth, not surprisingly, that
improved disclosures provide the greatest benefit for more
complex loans, whether they were prime or subprime. We look
forward to working with our colleagues on the next steps.
Looking ahead to October, the FTC, in response to a growing
number of complaints about the practices of debt collectors, is
holding a public workshop to examine changes in debt collection
and the impact on consumers and competition, and we hope
whatever we learn there we can use to assist policymakers in
developing further laws, policies, and procedures.
Mr. Chairman, and members of the committee, I appreciate
the opportunity to provide the FTC's input today, and I assure
you that you have our commitment to work tirelessly for the
consumers of this Nation. Thank you.
[The prepared statement of Chairman Majoras can be found on
page 180 of the appendix.]
The Chairman. Next we have Scott Polakoff, the Deputy
Director and Chief Operating Officer of the Office of Thrift
Supervision.
STATEMENT OF SCOTT M. POLAKOFF, DEPUTY DIRECTOR AND CHIEF
OPERATING OFFICER, OFFICE OF THRIFT SUPERVISION
Mr. Polakoff. Good morning, Chairman Frank, Ranking Member
Bachus, and members of the committee. Thank you for the
opportunity to present the views of OTS on the adequacy of
consumer protections in financial services.
Consumer protection, maintaining the safety and soundness
of the thrift industry, and ensuring the continued availability
of affordable housing credit are three critical
responsibilities of the OTS.
On the subject of today's hearing, consumer protection,
there are four important components detailed in my written
statement. Briefly, effective consumer protection by regulators
requires: Number one, an emphasis on consumer protection in
both the examination process and the application process;
number two, an effective supervision program including the use
of formal and informal enforcement actions to address threats
to consumer protection; number three, a robust consumer
complaint mechanism to address issues as they arise and to use
the information in the supervisory process; and number four,
effective training and continuing education of examiners
regarding consumer protection issues.
OTS has a consolidated examination structure that is unique
among the Federal banking agencies. The program combines our
safety and soundness and compliance examinations to better
address institutions' risk during the exam process. Part of the
rationale for this approach is that compliance and safety and
soundness go hand-in-hand. We believe this provides a more
comprehensive assessment of an institution's risk profile, more
accurately exposes weaknesses and deficiencies in an
institution's overall program, and provides us with an accurate
assessment of an institution's overall business strategy.
Our examiners are subject to an intensive cross-training
program to acquire the knowledge and skills needed to lead a
melded examination. We also maintain a cadre of compliance
experts to assist examination teams in handling complex
compliance matters.
Because Federal thrifts may conduct their lending and
deposit-taking programs subject only to the requirements of
Federal law, the OTS is required to ensure that Federal thrifts
conduct their activities and programs in compliance with
applicable consumer protection laws and subject to rigorous
scrutiny of all aspects of an institution's program.
We regularly examine risks for compliance with Federal
protection statutes including the Truth in Lending Act, HOEPA,
RESPA, the Truth in Savings Act, ECOA, the Fair Housing Act,
and the Credit Reporting Act, among others.
We also continually track, investigate, and respond to
consumer complaints involving thrift institutions. We follow up
with the institution on all consumer complaints filed with the
Agency, and we typically process and conclude consumer
complaints investigations within our 60-day timeframe.
In addition, this data plays a significant role in
identifying areas to focus on during on-site examinations in
assessing the adequacy of an institution's overall compliance
management program and in pursuing corrective action that may
be appropriate to address programmatic weaknesses or
deficiencies.
I should also mention that we have finalized the model
memorandum of understanding with the Conference of State Bank
Supervisors to share consumer complaint data between the OTS
and State banking supervisors.
When an institution's lending programs are found to be
potentially predatory or lacking adequate controls to support
responsible lending, there are numerous options that OTS can
take to stop these practices and correct the situation. These
include formal enforcement actions and informal agreements.
While we find informal actions to be an effective mechanism to
address these types of supervisory concerns, we do not hesitate
to use our formal enforcement authority when appropriate.
Fundamental to our continuing oversight of the industry we
regulate is ensuring that institutions conduct their activities
in a manner consistent with sound consumer protection. In my
written statement we describe various programs, publications,
and initiatives that the OTS has worked on its own and
cooperatively with various other agencies and organizations to
promote consumer education and responsibility. We also have
various initiatives to improve financial literacy, and we work
closely with our institutions to encourage them to do the same.
Regarding the adequacy of our existing authority to address
consumer protection issues and potential abuses that may arise
going forward with the programs of OTS-regulated thrifts and
their affiliates, I believe our authority is complete and
adequate. I do not believe that an additional statutory
authority is necessary at this time for OTS to continue to
effectively supervise, regulate, and enforce Federal consumer
protection laws.
I look forward to answering your questions and thank you
for the opportunity to comment.
[The prepared statement of Mr. Polakoff can be found on
page 219 of the appendix.]
The Chairman. Next to represent those involved here, the
attorney general of the State of Iowa, who has been active with
the other State attorneys general, and I believe speaks for
many of them today, Mr. Tom Miller.
STATEMENT OF THE HONORABLE THOMAS J. MILLER, ATTORNEY GENERAL,
STATE OF IOWA
Mr. Miller. Thank you, Mr. Chairman. Mr. Chairman, Ranking
Member Bachus, and members of the committee, thank you for
inviting me, and thank you for listening to the views of myself
and State attorneys general.
The Watters case, I suppose we could debate whether it
changed the law or reaffirmed the law, but that debate is over.
What has happened, though, over the last 5 to 8 years is that
the practice has been changed, the practice of the role of
State AGs and State banking superintendents, in dealing with
consumer complaints in the banking area and related areas. For
decades, we dealt with those complaints, we dealt with those
issues. Now we are prohibited from doing so in many instances.
So the practice has changed considerably under the direction
and institution of the OCC.
So we--like the chairman, like CSBS--think the law should
be changed. We think the States should have the role that they
played for decades, really, starting from the 1960's on, with
consumer protection, but we recognize that the law probably
won't be changed. I think the chairman stated the political
realities very, very well. So what happens next?
I think the huge challenge for the Federal people is the
volume of complaints. This is the potentially intractable
problem--probably millions of complaints each year, some of
them not heard, but out there and maybe will be heard by the
Federal regulators. How do they deal with those complaints? Now
many of those complaints at a national level don't have a lot
of significance, but for that individual person, it has a huge
amount of significance. That is their challenge.
Now, what do we, State attorneys general, think might be
done? Well, first of all, they have considerable rulemaking
power that generally in the past has not been used, in part
because I think they thought the States were doing these kinds
of activities, and we were. So they have rulemaking authority.
And they have enormous power because of their regulatory
authority over the various banks and institutions. So that is
an enormous opportunity, but they can't be reticent, for
whatever reason, to use their authority.
Recently, as a result of a New York Times story, the demand
draft issue has come forward where people can send through
demand drafts, checks that are unsigned, if they get the bank
account number, and clean out a person's account. Well, that is
something the Federal regulators can take care of. In that
story, it indicated that the bank involved, 59 percent of the
checks were returned. Well, consumer protection people would
tell you if it is 2 or 3 or 4 percent, that is fraud in the
biggest, strongest possible letters as a warning signal. So the
Federal regulators need to figure out where the banks--when
they get a certain percentage of checks returned for those
reasons, they have to investigate, and invariably they will
find fraud. And frankly, if they do that, they can do in this
area more than the State attorneys general and do it more
effectively.
Another area is what I call soft-core fraud dealing with
membership clubs and getting people in membership clubs and
banks giving the names and sharing the profits. Banks shouldn't
be doing that. They shouldn't be using their names. The
regulators can stop that, and, again, more effectively than the
States.
The Federal regulators have to get the expertise in
consumer protection. They have some, but they need a lot more,
because as a practical matter, they have a lot more
responsibility. They can draw perhaps on former State officials
that dealt with this area, and many others, to build up their
expertise in the consumer area. And it is also a matter of
focus. The chairman was, as always, brilliant on that, that the
focus has been safety and soundness. The focus of consumer
protection with this increased role has to increase at the
agencies.
And finally, in terms of complaints, I go back to that,
that is something that in an informal way we might help on. But
in any area where there is problems and challenges, there is
opportunities, and I think there is one amazing opportunity
that is present today, and that is for all of us to work
together in the subprime area and on predatory lending. That is
an area where we still have some considerable authority. And if
we work together, what has happened is that some of the bad
actors are out of business; some of the better actors are
continuing in business and have reputational issues. There have
been problems that have been raised for the country. There has
been pain for both consumers and investors. This industry,
which is a chronic one, could be cleaned up if we all worked
together--meaningful, not just lip service, but we got
together, shared our expertise and shared our power, figured
out on an ongoing basis at a staff level--I have a a guy,
Patrick Madigan, who works this all the time. He understands it
completely. There are other people in the State offices and in
the Federal offices. If they worked on it on an ongoing basis,
and the principals, the elected officials, the appointed
officials, came in at the appropriate time, we could clean up
the subprime industry if we worked together, and if we had the
will to use the powers that we all have on a complementary,
comprehensive basis.
Thank you, members of the committee.
[The prepared statement of Mr. Miller can be found on page
205 of the appendix.]
The Chairman. And now my own State bank commissioner,
Commissioner Steven Antonakes, from Massachusetts.
STATEMENT OF STEVEN L. ANTONAKES, COMMISSIONER OF BANKS,
COMMONWEALTH OF MASSACHUSETTS, ON BEHALF OF THE CONFERENCE OF
STATE BANK SUPERVISORS
Mr. Antonakes. Good morning, Chairman Frank, Ranking Member
Bachus, and distinguished members of the committee. My name is
Steven Antonakes, and I serve as the commissioner of banks of
the Commonwealth of Massachusetts. I am also the chairman the
FFIEC State Liaison Committee. It is my pleasure to testify
today on behalf of the Conference of State Bank Supervisors.
I commend you, Mr. Chairman, for calling this hearing to
discuss consumer protection and financial services. The States
have long been recognized as leaders in providing consumer
protection. CSBS is committed to working with Congress and our
Federal counterparts to further the development of a fair and
efficient system of consumer protection that serves the
interest of financial services customers.
As you may know, nearly every consumer protection that
exists at the Federal level or that Congress is currently
contemplating, has its roots in State law. However, as the
result of OCC and OTS interpretations supported by the courts,
it is unclear if the States will continue to have the ability
to serve as the laboratory for innovation for banking consumer
law.
Maintaining a local role in consumer protection and a
strong State banking system is more important than ever as our
Nation's financial system consolidates. As the Nation's largest
banks become less connected with the communities they serve,
they are also finding ways to become less accountable to those
communities through preemption of State law and law
enforcement. CSBS believes that the effective supervision of
the financial marketplace requires a coordinated effort among
the Federal agencies and the States.
Ultimately the goal for Congress and the regulators should
be to create an efficient supervisory structure that allows
institutions to compete effectively and to make their products
and services available to a broad demographic while offering
effective consumer protection and recourse against fraudulent
and abusive practices.
Recently the States, through CSBS, agreed to a framework
for the sharing of consumer complaints and resolutions between
State agencies and the OCC and the OTS. CSBS and the OCC are
also working with the other agencies to develop a model
consumer complaint form. In addition, I look forward to working
with Comptroller Dugan to coordinate examinations of national
banks and State license brokers and originators.
These are all positive steps to improve service to
consumers, however, these efforts do not address our
fundamental concern about the impact of OCC and OTS preemption
on how consumer protections are developed and how they are
enforced.
Recognizing that only Congress can address our concerns, we
would suggest the following:
Congress should require that the FFIEC write regulations
and guidance for consumer protection. This will allow the
States to have more input in the process and result in more
consistent standards for consumers.
Congress should give the FFIEC rule-writing authority for
unfair and deceptive acts and practices.
Congress should consider creating a centralized system for
the collection and distribution of consumer complaints to the
appropriate regulators.
Additionally, banks and their subsidiaries should disclose
who their primary regulator is and how to address consumer
complaints to that specific regulator.
We ask that Congress direct the Federal banking agencies to
list applicable and preempted State laws. The Riegle-Neal
Interstate Branching Act stated that the OCC shall enforce
applicable State consumer protection laws. It is important that
banks, the States, and consumers know which State laws are
being enforced and which have been preempted.
Congress should clarify State enforcement authority and the
limits of applicable State law for federally chartered
institutions. State legislators and attorneys general need a
clear statement of their roles in protecting the citizens of
their States. The current state of confusion is not acceptable.
And Congress should encourage Federal and State
coordination to develop consistent interpretation and
enforcement of applicable State laws.
I urge Congress to continue its examination of the adequacy
of OCC and OTS consumer protections and enforcement. The
States, through CSBS and our involvement on the FFIEC, want to
be part of the solution. We want to ensure that consumers are
protected regardless of the chartering agent of their financial
institution. We want to preserve the viability of both the
Federal and State charter options to maintain a meaningful
choice in charters and the success of the dual-banking system.
Thank you for inviting me to testify. I look forward to
your questions.
[The prepared statement of Mr. Antonakes can be found on
page 67 of the appendix.]
The Chairman. Thank you.
I am going to swap places with the gentleman from Kansas,
Mr. Moore. He will ask in my place, and I will wait until he
would have been reached. I recognize the gentleman from Kansas.
Before that, I want to introduce into the record a letter
from the National Association of Insurance Commissioners, by
unanimous consent, in which they say, ``We would like to share
with you some of the examples of the negative effects of
Federal preemption on State regulation of health insurers.''
They acknowledge that we don't have health, but they are
expressing their concerns about the negative effects of
preemption in that area. That will be part of the record.
The gentleman from Kansas.
Mr. Moore. Thank you, Mr. Chairman, for swapping time with
me here.
I want to ask a question of Mr. Dugan. Pages 21 and 22 of
your testimony indicate that data derived from your customer
assistance group are used in identifying problems at banks. OCC
claims that it fields 70,000 inquiries and complaints each year
compared to the OTS, which received 5,200 complaints in 2006,
and the Fed, which received 1,900 in each of the last 2 years.
And I want to refer to a GAO report in February of 2006
which says, in reporting its performance, OCC includes data on
its response to consumers' inquiries which typically take less
time, thereby overstating its performance on timeliness to
responses or complaints.
Could you break down that number, that 70,000 number, for
me in terms of inquiries versus complaints? Can you give
examples of enforcement actions, formal or informal, that
originates from consumer complaints? Can you break down the
number first, sir?
Mr. Dugan. I can get the number on breaking it down for
complaints versus inquiries in just a moment, but we don't
trace which inquiry leads to a formal or informal enforcement
action. More often than not, these lead to situations where we
assist the consumer by resolving a dispute and providing
financial relief. We have tracked and provided over $30 million
of financial relief to consumers in the last 5 years that was
facilitated through that process.
Mr. Moore. You are familiar with this GAO report in
February of last year, correct?
Mr. Dugan. Yes, I am familiar with it. I am not sure these
are the same ones that you are talking about, but it is the
41,000 inquiries and 29,000 complaints. I am not sure that is
the bar that you were looking at.
Mr. Moore. That is really what I was looking for.
Mr. Dugan. And we are very familiar with that
recommendation. We do break that down directly like that now as
a result of the report. We are quite conscious of that.
Mr. Moore. Thank you.
According to this GAO report, OCC agreed with the
conclusions and recommendations.
Mr. Dugan. Yes, sir.
Mr. Moore. You are going to follow that?
Mr. Dugan. Absolutely.
Mr. Moore. I appreciate that.
I am pleased that some of you mentioned in your testimony,
and the attorney general mentioned in his testimony, that you
are working toward the goal of a uniform consumer complaint. I
think OCC talked about that and OTS and FDIC in your reports.
While you are developing this uniform complaint, which I think
is great, wouldn't it be helpful to create a single toll-free
number--any comments by any of the panelists on that--so people
who had a problem with their financial institution would know
where to go?
I looked at some of the Web sites, and it is very, very
confusing and takes several clicks sometimes to get to a
complaint form or a toll-free number. Any comments about a
single toll-free number that maybe all financial institutions
could use?
Mr. Dugan. Speaking for the OCC, I think this is an idea
definitely worth exploring. We have had some preliminary
discussions in a forum. I think the FTC actually has a number
that they use in these sorts of circumstances. It is more
complicated than it first sounds, but we can do more as a group
to have a centralized, easy-to-understand, easy-to-find
function. And as my testimony indicates, I really do think we
should pursue that.
Ms. Bair. Could I add, since we are the deposit insurer,
the FDIC logo is displayed in all banks and thrifts. Because we
recently needed to change our logo due to the merger of two of
our funds, our Web site and all the information that is sent
out about the FDIC is displayed at banks and will have our Web
site address on it.
Anticipating your question, it only took us two clicks to
get to the complaint form on our Web site. But if we could
improve that and put the complaint form on the FDIC home page,
I am happy to do that. But I do think that de facto we serve as
a clearinghouse now because a lot of people come to us because
they know our name. We would be happy to expand upon that role.
Mr. Moore. Any other comments by panelists up here? Mr.
Kroszner?
Mr. Kroszner. We also have been moving towards having a
single 800 number for all the Federal Reserve banks, because we
have a system of 12 regional Federal Reserve banks. Rather than
have the customer try to find the regional Federal Reserve bank
that is appropriate to them, by 2008 we will have a centralized
clearinghouse with one number for everyone to call. I am very
much supportive of that idea.
We also now have a beta version of the Web site up that if
you have your institution's name, you can type that
institution's name in, and it will tell you whether it is a
Federal Reserve supervisor, an FDIC supervisor, or an FCC
supervisor, etc. Also, if you call that 800 number, there will
be a person who can tell you if it is a Fed institution, or it
is an OCC or other institution, and then direct the person
directly to that. But I think it is extremely valuable that we
do this, and we are working towards that end.
Mr. Moore. A real person you are talking about that
consumers can talk to?
Mr. Kroszner. A real person, not a series of, ``Press 5 if
you would like to wait for 5 minutes.''
The Chairman. In what country will this real person be
working?
Mr. Kroszner. I believe--this will be up in 2008, but I
believe that real person will be working in the United States.
The Chairman. That is reassuring.
The gentleman from Alabama.
Mr. Bachus. Thank you, Mr. Chairman.
Comptroller Dugan, you mentioned the importance of working
with State officials. Could you give us some greater detail on
areas where you have worked with them or you are open to
working with them in the future?
Mr. Dugan. Absolutely. As I mentioned, we have been trying
for some time to figure out a way to share consumer complaint
information, and, last November, after a series of meetings and
good cooperation of the Conference of State Bank Supervisors,
we adopted a model memorandum of understanding where we can
share information about complaints, get referrals, and report
back on the disposition of information. And, as a result of
that, we entered into an agreement first with the State of New
York, and since then with 17 other States, and we are pursuing
that with a number of other States.
We have entered into similar agreements with 14 State
insurance commissioners. When we did our nontraditional
mortgage guidance, it became apparent that a huge part of the
mortgage business is being conducted at the State level, not
just by non-national bank people, but by nonbank-affiliated
lenders. Over half of the subprime mortgages were issued there,
for example, and it became very important for us to have some
kind of agreement by States to adopt similar rules for that.
Lastly, as we just announced today, we have spoken with
Commissioner Antonakes and the State of New York's
commissioner, Superintendent Neiman, to try to develop a way to
look more closely at State-regulated brokers that originate
mortgages that are used by national banks, and have parallel
examinations where we can share information. I believe this
will be particularly important going forward to make sure this
new guidance is being implemented not just by employees of the
banks that we supervise, but by the brokers that they use and
with whom the banks don't necessarily have the same kind of
contact as they do with their own employees.
Those are several types of things. We are open to other
kinds of suggestions. We welcome them.
Mr. Bachus. Complaints that OCC has not taken any
enforcement actions, does that indicate you are not doing your
job?
Mr. Dugan. No. It is something I did try to spend some time
discussing in our testimony. First of all, we do take
enforcement actions. We are not an enforcement-only regime as
is the case in many places that don't have regulated
institutions.
We, because of our extensive presence in the banks that we
supervise, which is also true of the other bank regulators, are
able to effect change much more quickly in a way that never
reaches an enforcement action. We have a series of graduated
steps that we take to effect corrective action beginning with
something called a ``matter requiring attention.'' And, if you
look at our record over the last 5 years, which we did in
anticipating this hearing, we totaled up the number of formal
enforcement actions that we took in consumer-related issues. It
is about 200. Similarly we took about 200 informal enforcement
actions on consumer issues. But if you look at the ``matters
requiring attention'' that start this process, there were 1,500
of them. And that is what you want to see. You want to see
identification early of what those problems are, telling
management to fix this, and they don't result in enforcement
actions but instead result in correction.
The problem for us is that as a public relations matter,
people don't see that. And that is the point really I am trying
to get across, which is you can't measure how well we do what
we do in this area by only looking at formal enforcement
actions.
Mr. Bachus. All right. Let me ask the total panel, anybody,
if you would like to comment. Neither the OCC or the FDIC has
rule-writing authority to define unfair and deceptive practices
under the FTC Act. Is that going to limit your ability to
protect consumers?
Ms. Bair. Well, we enforce UDAP, but we don't have the
ability to write rules. And so because there are no rules, we
are finding out we have to use case-by-case determinations and
consult a great deal with the Fed and the FTC about what is
unfair or deceptive because we don't have the ability to define
these terms.
Rule-writing authority would be extremely helpful,
especially in the subprime area. If you have a rule, you can
have a preventive effect. You can let the industry know as a
whole that certain types of practices are going to be viewed as
unfair and deceptive, as opposed to having to go in bank-by-
bank in the supervisory process. Also, if you take informal
action, it is not public, so there is not any precedential
impact.
It will certainly be used in consultation and coordination
with the other regulators, and I do think it would be helpful.
Mr. Dugan. And I would just add that I agree with that. For
many years it was not clear that banking agencies could even
take enforcement action under unfair and deceptive. The OCC was
the first agency to go down that path. We have taken a number
of enforcement actions on a case-by-case basis, but we do think
it would be helpful to have rule-writing authority.
Frankly, I think it would be most helpful to have it on a
joint basis. Our concern is that if one agency adopts a rule,
people could use other charters to do the same activity,
although I agree with my colleague that as a practical matter
we would probably work together in any event. But I do think
that is important.
Mr. Bachus. Could I ask one other question? Have any of the
regulators or the FDIC found any credit card practices to be
unfair or deceptive? Let me highlight three or four. One is
that they apply your payment to your lowest interest rate.
Another one is universal default where they increase your
interest rate simply because your credit score goes up, or you
approach your credit limit, or you take out a loan to buy an
automobile, or a double-billing cycle, or a short billing
cycle.
Even I now face a situation where you are up here all week,
and sometimes you get home, and you have about 8 days or 6 days
to get that check in the mail. And the cycle continues to
shorten, it appears. And they also--as the chairman documented,
many times they will--even though the payment arrives on a
certain day, it is posted, but it is not credited until the
next day.
Mr. Dugan. We regulate a number of the credit card banks in
the country. We have taken a number of enforcement actions
against credit card banks for unfair and deceptive practices,
primarily subprime credit card practices, and as a result there
are very few subprime credit card providers left in the
national banking system.
Having said that, the types of practices you described,
double-cycle billing, universal default, those are not things
that we have taken or regarded as unfair and deceptive so long
as they are adequately disclosed. The regime that we have
always operated under as a statutory matter is that fees and
charges are not things that we generally regulate unless they
rise to the level of being something that is unfair and
deceptive the way that is defined in the Federal Trade
Commission Act. And if those fees are adequately disclosed,
they have not been treated as unfair or deceptive, and I don't
know of any regulator that has treated them that way.
Ms. Bair. I think those practices are highly troubling, but
even assuming we thought they were unfair or deceptive, we
would not have the ability to write a rulemaking that
determination, whereas, we can write rules on safety and
soundness.
I think previously you mentioned that universal default, in
effect, is piling onto a person who has problems already.
Perhaps you could make a safety and soundness argument to issue
a rule to address the problem of universal default.
However, since we only have 15 percent of the credit card
market, even if we could find authority under safety and
soundness to write a rule, we would be imposing a rule only on
FDIC-supervised credit card issuers that would not apply to
banks not supervised by the FDIC.
The Chairman. And you would pretty soon have 1.5 percent of
the market and not 15 percent if you had rules and he did not.
The gentlewoman from New York.
Mr. Bachus. The Chairman of the FTC was trying to--
The Chairman. I am sorry. Please, Madam Chairwoman.
Ms. Majoras. I was going to add one thing. At the FTC, we
don't have jurisdiction over very many credit card issuers
because so many of them are banks, but where they haven't been,
we have brought cases under deception and unfairness authority.
And we do have a rule that prohibits advance-fee credit card
and loan schemes. A lot of these are out-and-out scams, which
is where we specialize. But I would point out that is one of
the places where we do have a rule, but most of the time we use
our deception and unfairness authority without any rules. We
just use it in our enforcements.
The Chairman. I was glad you mentioned gift cards. That is
an issue where in Massachusetts we went after where you gave a
gift, and pretty soon it was you gave a gift that kept on
shrinking, and you did not know that. By the time the person
cashed the gift card, you looked like Uncle Cheapskate because
it was half of what it was supposed to be.
I congratulate the Comptroller--I think it was the
Comptroller's predecessor. There was an effort by the issuing
banks who were shilling for the merchants there to invoke the
preemption, and the OCC did not go along with that. So we were
able to preserve, I believe, State authority there. But I
appreciate you bringing it out. That is the prime example of
the kind of protection we want to give.
The gentlewoman from New York.
Mrs. Maloney. Thank you, Mr. Chairman. I was impressed with
the list of reforms Chairwoman Bair proposed for Congress. And
I would like to ask the other panelists about some of them,
particularly the Honorable Kroszner and Honorable Dugan. What
do you think of giving the States a greater enforcement role
under truth and lending and the FTC Act against nonbank
financial providers? And also the FTC?
Mr. Dugan. I think it is a good idea myself. You might say
it is easier for me to say because you are not saying it is
providing it against national banks. But I do think that what
recent history has shown is that the less regulated
institution--and here I am not talking about State banks, I am
talking about State-chartered institutions that are not
regulated, like mortgage brokers or mortgage lenders--have been
a significant source of the problem, and I think finding a way
to devote more resources to addressing that issue is a good
thing.
Mrs. Maloney. Mr. Kroszner.
Mr. Kroszner. I certainly agree it is very important to
devote resources to protect consumers, and there are many
things that are outside the scope of what the Federal Reserve
can do in terms of enforcement, and so we very much rely on and
coordinate with the States both for the institution--certainly
for the institutions that we regulate, the State member banks.
We coordinate very much with the States on those institutions.
But there are many institutions, as Comptroller Dugan
mentioned, that are outside of our purview for enforcement, and
so providing appropriate resources to make sure that the laws
are enforced to protect consumers is very important.
Mrs. Maloney. And Chairman Majoras?
Ms. Majoras. There is no question in my mind or anyone at
the FTC about the States' importance in enforcing consumer
protection laws in this country. We work with them all the
time, and we are a relatively small agency, and if we did not
have them working side by side with us, we would do a lot less.
So I will start by saying that.
The FTC has always taken the position that the States don't
need authority under the FTC Act because--Tom could probably
say it better--if not all of them, almost all of them have what
we call little FTC Acts; in other words, they have passed their
own statute that essentially mocks the FTC Act. And so we have
previously said we don't think it is necessary.
We file cases as co-plaintiffs or in big law enforcement
sweeps where we announce cases on the same day all the time,
and it has not inhibited us. The thing to remember is that if
you have too many regulators all enforcing the same statute,
you can end up with some inconsistency. And what the States
have typically done is look to Federal case law under the FTC
Act, and that has kept us all, I think, marching in the same
direction.
Mrs. Maloney. I am also concerned about this, and it has
been touched upon. I am concerned about banks entering into
agreements with unregulated third parties who want to issue
subprime credit cards. And I know the FDIC has investigated
some of these activities, and I would just like to know, or to
get a sense of, how big is the rent-a-charter problem? And is
there a role for the States in this area? And how can Congress
help? Maybe start with the FDIC and the OCC and the Fed.
Mr. Dugan. Well, as I said earlier, we had a number of
significant problems both on the safety and soundness and the
consumer protection side with subprime credit card practices.
We took a number of quite strong enforcement actions, and as a
result of that whole series of actions that we took over a
period of years, there just are not many subprime credit card
lenders in the national banking system anymore.
Ms. Bair. We carefully scrutinize these arrangements
because they are prone to abuse. We are conducting a joint
investigation with the FTC right now concerning the so-called
rent-a-bin arrangements. We have identified about 10. We,
again, closely scrutinize them. I don't know if I can
categorically say they are all problematic, but they are
certainly prone to abuse, and we are carefully reviewing them.
Mr. Kroszner. Fortunately, we do not have any banks that
are engaged in this practice, so we haven't undertaken any
actions because there are no banks doing this.
Mrs. Maloney. Any other comments? And then my time has
expired.
Mr. Miller. This is our great nightmare, of course, the
rent-a-charter situation, where there could be enormous bad
actors using the shield of Federal preemption. I think by and
large, so far, Federal agencies have been fairly vigilant about
that issue, and they really need to be. That is probably the
biggest nightmare that we are dealing with in the sort of set
of circumstances we have been put in with the Watters case and
related cases.
Mr. Polakoff. Congressman, I would offer from the OTS
perspective that rent-a-charters are simply not acceptable, and
if we find it, we stop it. And whether it is credit card,
subprime credit card, payday lending, it makes no difference.
It is not an acceptable practice.
The Chairman. The gentleman from Louisiana.
Mr. Baker. Thank you, Mr. Chairman.
I am appreciative of the fact that there has not been
insurmountable attention given to the preemption issue, but
rather where do we go now, in light of the definitive decision
in the Watters case?
Mr. Dugan, in your testimony you recite the observation
that the FTC Act vests with the Federal Reserve the ability to
regulate unfair or deceptive practices at banks--comparable
authority is invested with the OTS for thrifts, and the NCUA
for credit unions. And so you establish that Congress has acted
with regard to each specific financial sector to provide
consumer advocacy responsibilities, but you go on to suggest
that a unified working group of sorts that could provide for
joint rulemaking opportunity would do great service towards the
absence of venue shopping and having as best we can an
equitable enforcement practice.
I would like to suggest and seek your counsel. Would it not
be advisable, in light of the comments made by those
representing State interests here today, that a representative
of the CSBS at least in an advisory capacity, because it may
not be proper for them to be voting on national bank
regulation, but perhaps they would have perspectives of value,
as well as, of course, the FTC, to provide some sort of working
group format? We have presidential working groups of regulators
that come out with reports which are generally ignored, but we
could have a consumer working group, as an example, solely
focused on consumer advocacy, identifying practices
inconsistent with sound fiscal policy, and leave it then to
each specific regulator to act consistent with others.
If we were to suggest something of that sort, that would
not necessarily in itself require congressional action if
agencies chose to work in such a cooperative manner, quarterly,
semiannually, annually, even if it were just to report to
Congress and say here is what we should do and let us evaluate
that policy, if that is what you deem to be most appropriate.
From what I am hearing from everything is can't we share
information? Can't we work together? No one has the resources
to do this all on their own. Everybody can see problems. You
might see a problem across the fence that is not in your
jurisdiction, and if we got everybody together and had a more
uniform system of consumer advocacy rules, the market wins and
the consumers win. Is that an inappropriate observation?
Mr. Dugan. Not at all. I think it is actually a quite good
observation. I think recently in the last Congress, the State
representative was added to the Federal Financial Institution
Examination Council, FFIEC as we call it, and that would be a
place to share that kind of information.
I think if you go beyond that to rule writing, which is one
of the things you talked about, I think you did hit on one of
the issues that would be involved as a constitutional matter
and appointments matter. It is quite murky if you have a State
official voting on something--
Mr. Baker. Let me be clear. I meant only in an advisory
capacity. They would certainly not want you voting on their
rules. But I think the pressure would be if there was an
identified problem by this group, and generally action were
taken, that those aberrant players who did not subsequently act
to protect their consumers would have immense political
responsibility for their failure to act in light of the public
discussion.
Let me also suggest that, given restricted resources,
multiple 1-800s and multiple Web pages--I note on page 23 of
your testimony that you will have up this summer your own Web
page, which is helpmewithmybank.gov. So, you can log on and
find out what you need to know and then move to the appropriate
regulator.
It might also be appropriate for this group to think about
consolidating those informational resources, because with
everybody having its own Web page and 1-800, that gets to be
confusing, and if there would be a way to consolidate that
where you ultimately end up with a real person who lives in the
United States and can speak in the language with which you are
calling--I know that yours will be bilingual, I think that is
appropriate--you would end up with something of value instead
of having disparate standards which confuse consumers, and they
don't understand exactly with whom they should make their
complaints. This would be something that you guys could
perform, I think, a significant service and perhaps break
through this idea that you don't care about consumers.
Mr. Dugan. Mr. Baker, I totally agree. It is one of the
things that I talk about a little bit in my testimony. As you
heard today, we are all doing different things, and you wonder
if there is a way that we can coordinate and--
Mr. Baker. What gets this started? Do we have to do it, or
can you do it?
Mr. Dugan. No, I think we can do this. I think we can do
this at the FFIEC, and we can also invite our colleague at the
FTC to participate as well. But that is one of the things that
I haven't discussed yet with my colleagues, but I think it is
something that we could do if people were amenable to it, and I
certainly am.
Mr. Baker. Mr. Chairman, I hope you will encourage their
participation in seeking out a negotiated settlement on this. I
take ``yes'' for an answer and yield back.
The Chairman. The gentleman from New York.
Mr. Ackerman. Thank you, Mr. Chairman.
Last week one of our subcommittees held a hearing that
focused on some of the more disingenuous practices within the
credit card industry, and some of our witnesses and Members
made the comment that the Congress has not given the Federal
Reserve enough regulatory authority to sufficiently restrict
some of the egregious practices. Some of them we have talked
about were universal default and double-cycle billing and pay-
to-pay fees.
The question that I would like to ask first is, does the
Federal Reserve feel, Governor Kroszner, that these are
practices that require some type of restriction? In general,
would the American people be better served if the Federal
Reserve were given increased authorities to regulate the credit
card industry?
Mr. Kroszner. Thank you very much.
Certainly we take our responsibilities with respect to
credit cards quite seriously. As you know, in the hearing last
week we discussed a number of the new proposals that we put out
to deal with these issues because we think they are very, very
important issues.
The approach that we have so far taken is primarily through
our regulation Z, TILA, Truth in Lending Act, authorities
through trying to improve disclosure. I think it is true, as
one of the other Members had said earlier, that the current
disclosures are not adequate for consumers to understand what
is going on, and that is why we have really focused on consumer
testing to ask real people real questions about what do they
understand, what can they get out of the forms that they are
seeing? And we went back and forth quite a few times to improve
the information that is out there, not only the accuracy of the
information, but the understandability, the usefulness to
individuals.
I believe that we have--we believe that we have sufficient
authority to deal with these issues as of today; however, we
are continuing to take actions to look further into what needs
to be done in this area and a number of other areas, and
certainly we will not hesitate to come back to Congress to ask
for further authority if we need to.
Mr. Ackerman. Thank you. I appreciate that.
I have a second concern. I get these letters in the mail
all the time, besides the credit card ones, again with
mortgages, and I get a lot of them. Sometimes they are very
official-looking, and I am sure that is not by accident. And
they are designed to make it look like it is from the Federal
Government or sometimes the State government or sometimes some
unknown great official authority. And it is very, very
misleading.
This one does not identify who it is from on the cover.
This one is a similar design. It happened to come from the same
source, I believe. And it says right on the front, Re: Your
current loan with Citibank North America--which is one of the
mortgages that I have a property--Request for immediate action.
I think this is from my bank when I get it. Most people would
think that because it is up there in the return address area.
But it is not.
And there are all sorts of warnings on here that are postal
regulations that everybody knows about. You don't have to put
it on the envelope, but you do if you want to make it look
official: Warning, a $2,000 fine and 5 years imprisonment for
anyone interfering with or obstructing the delivery of this
letter. This is an important letter. There are all sorts of
codes, and then it says, your mortgage recorded in the county
of, and there is all sorts of stuff that actually I once had. I
guess they did not know that I paid that one off and already
switched it to somebody.
And it goes on looking real official-like. And then there
is a big notice on this part of the page: Notice, the Queens
County property code in Jamaica, New York, notification date.
Recent changes in our mortgage policy. There are programs now
available to Queens County residents.
Now, I would think this is some kind of government program
if I was an average person or somebody who is not reading this
carefully because they don't have the time, but gets an
impression and all sorts of things. And they give you--I can
get this deal for a rate of 1.25 percent. Now, if I am a senior
citizen on a fixed income, and I think I had an interest rate
that I am paying now of 6 or 7 or 8 percent or something, and I
am going to be able to pay 1 percent, I don't realize that they
could eventually take my house, or I am going to owe more on
the mortgage than the house is worth, but they don't care
because that is not going to be 1.25 percent for too long.
I get this one that does not have any return address on the
front, nothing on the back, and it says, ``Certificate
enclosed.'' That is all it says besides my address. And it
comes looking like this. That certificate of finance,
preferred, bearer's certificate, made out to me. This looks so
official with big ``equal employment'' thing on there and FHA
things and certificate numbers and guys, you know, half
dressed, carrying shields and swords, and things looking like
they came from dollar bills printed in the color of ink. You
have to read it 10 times to find out that it is not from my
bank, but somebody that wants to snipe my mortgage.
Is this fair? Should the industry not be policing itself,
or should some greater authority be supervising what is going
on here?
Mr. Miller. Congressman, that is deceptive, deceptive in so
many ways, and it is a violation of Federal laws and a
violation of State law, depending on preemption, of course, and
that is the kind of thing that we all should be after.
Mr. Ackerman. Are we after it, though? What is being done?
Mr. Antonakes. I would add in Massachusetts last year we
passed a law prohibiting those very types of deceptive
advertisements featuring the third-party use of a bank name.
And we have taken enforcement actions against entities that we
license and referred others that use these types of
advertisement. I would also just add quickly that we will
enforce that law whether the complaint is against a State-
chartered bank or a national bank.
Mr. Ackerman. I always liked Massachusetts. I hope the
chairman makes a note of that.
Shouldn't there be a Federal role in this?
Mr. Polakoff. I would like to offer that I suspect that did
not come from an insured financial institution. I suspect it
came from a mortgage bank or a mortgage broker, and I think
that is where the emphasis should be focused.
Mr. Antonakes. I would not disagree. They generally come
from third parties. We would enforce the law whether the
complaint was from a State bank or a national bank for the
illegal third-party use of their name, and it has also come
from insurance companies, as well.
Ms. Majoras. Briefly, Congressman, the FTC has enforced
against a number of nonbank mortgage lenders that have made
deceptive representations to consumers, whether it is about
interest rates or fees and the like. We have done that.
Now, just, you know, what it says on the envelope, that by
itself, to be honest is not the only story, because we can also
bring cases when consumers are truly harmed by it. But if you
go inside, and it is telling you that you can get a mortgage at
a particular percentage and can't and so forth, that we have
taken very seriously.
The Chairman. Let me ask, we get letters like this all the
time. How can they send that to me? If I got a letter that like
that, and I wanted to refer my constituent to a place where he
or she might be able to get enforcement action, which of your
agencies should we refer that to? In Massachusetts, it would be
you.
Mr. Antonakes. Absolutely.
Mr. Miller. Our office too, or State attorney general's
office. But there is maybe a larger point here.
The Chairman. Let me ask first, would any of the Federal
agencies--I think that is what the gentleman was getting at. I
wouldn't want his dramatic reading to not get its full impact
here. Would any of the--
Mr. Ackerman. I appreciate the rescue.
The Chairman. Would any of the Federal agencies be
responsive if we were to say, look, what is going on? What can
you do about it?
Ms. Majoras. We do get these things all the time at the
FTC, and we look at them. And incidentally, since we have been
talking about complaint filing, too, we get probably 15,000
complaints a year that would involve actual banks or other
depository institutions.
The Chairman. I would assume, for the three bank
regulators, if it did not come from a regulated financial
institution, you have no jurisdiction. It would be the FDIC.
Ms. Bair. This is right. I am sure this letter did not come
from an insured institution. I see this all the time. I get
these at home. I get the spam faxes. That is one of the reasons
we are urging that State authorities, the attorneys general,
and the Federal supervisors at the State level, be given the
authority to supplement what the FTC already does to go after
the entities that are conducting this type of marketing.
Also we very much work with the Federal agencies with the
hope of rulemaking to expressly say, we think that this is
unfair and deceptive. I don't have the power to write the rule,
but the Fed does, to say specifically that this type of
advertising is unfair and deceptive.
The Chairman. Would the Fed have the right to write that
rule covering both depository institutions and others?
Ms. Bair. Yes, for the extension of mortgage credit they
would.
The Chairman. The gentlewoman from Minnesota.
Mrs. Bachmann. I have a question for the Comptroller, Mr.
Dugan.
Mr. Dugan, I understand that the OCC has entered into some
agreements with the States related to the identification and
enforcement of State laws, and I was just wondering if you
could describe for me some of those agreements?
Mr. Dugan. I think the agreements I was talking about
earlier are the agreements for information sharing about
complaints. So if we get a complaint filed that really belongs
with the States, much like we were just talking about, we would
have a way to get that to the State efficiently, and vice
versa, and if the State got a complaint that related to a
national bank that we needed to take care of, there would be an
efficient process not only for us to get it, but for us to
share information about what we did with it with respect to a
consumer in that State.
And so we entered into a model type of agreement with the
Conference of State Bank Supervisors, and then individually
have been contacting States to try to get them to enter into
agreements so we could do it as a practical matter, and since
December, we have 18 States that have agreed to do that.
Mrs. Bachmann. Thank you. Do the State anti-discrimination
laws apply to the national banks?
Mr. Dugan. State anti-discrimination laws do apply to
national banks by long-standing legal precedent.
Mrs. Bachmann. How about the State unfair and deceptive
practices laws, do they apply to the national banks?
Mr. Dugan. They do if the way they are applied or the way
they are ordered don't actually put in specific requirements
that regulate, or attempt to regulate, the particular banking
activities of a bank. So if it is a general unfair and
deceptive act, what we were talking about earlier, the little
FTC acts, those on its face are not preempted, we would say.
Mrs. Bachmann. What consumer protection laws do not apply
to national banks?
Mr. Dugan. Well, this is an issue of course that has come
up and people have been talking about it recently, and it is
something that the GAO looked at as well. We have pledged to
talk with the States about how we look at which laws we believe
are not preempted, and which ones are. Frankly, a lot of that
got put on hold because of the Watters case and the outcome of
it. Now that it is over, we do recognize that we need to get
more clarity on that. We already have addressed this in
significant ways in our regulations and what we have put out,
but we need to provide more.
I think, as GAO recognized, it is not a situation where it
is practical to go to each State and go through the code and
identify every single one that is or is not preempted. So there
will be principles that we will be articulating in outreach
meetings as we committed to do.
Mrs. Bachmann. Mr. Dugan, could you tell the committee, how
does the OCC's regulation compare with the rules that were
adopted by OTS and NCUA?
Mr. Dugan. To have such a specific comparison, I would love
to be able to get back to you for the record on that. I know
what ours does, but I can't give you chapter and verse on
exactly what theirs do. But I would be happy to respond for the
record if that would be appropriate.
Mrs. Bachmann. That would be fine. We have an example of
one of the State attorneys general investigating student
lending, and that suggests that State attorneys general are
playing a very important role in consumer protection. I wonder
if you could tell the committee what would be the impact on the
national banking system if State attorneys general which bring
enforcement actions against national banks.
Mr. Dugan. Well, I think this is the same question, whether
it is student lending or other issues that the Supreme Court
had to address, which is what is the legislative scheme that
Congress has adopted with national banks. And it has always
been our view that historically the idea has been to have a
uniform set of Federal laws that apply to the national banks
wherever they operate, or whatever part of the country that
they are in. And that is what the Watters case upheld, that if
national banks are exercising their banking powers, whether at
the bank level or at a subsidiary level, it is a set of uniform
rules that applies. And so in those circumstances, State laws
would be preempted.
We believe we have robust ways, as I have tried to outline
in our statement, to address the consumer protection issues
that we have been charged with addressing, and that regime is
established by Congress, by you, and can be expanded or
contracted. And we will faithfully implement those laws, but do
so in a uniform way throughout the country.
Mr. Miller. If I could jump in, I think your question was
what effect would happen if the State AGs enforced the laws,
not what the law is. The effect, I think, would be great. It
would be consistent with our Federal system. The State AGs have
stepped forward and done some innovative things in the
securities area, insurance with Eliot Spitzer, now in the
predatory lending area, as well as in student loans, and the
country is better off for that. Those laws in various forms
weren't being enforced. The AG stepped forward and protected
the public and pursued the public interest, and we are all
better off for it. And it is consistent with our Constitution,
consistent with the great wisdom of our Founding Fathers
concerning checks and balances and federalism. It is an
incredible system that at least in my view is now frustrated by
the recent practices of the OCC and the Supreme Court decision.
Mrs. Bachmann. Attorney General, thank you for your
comments. I wonder, could you also tell me what resources you
have to examine national banks and Federal thrifts for
compliance with State law?
Mr. Miller. We don't, and shouldn't have, resources to
examine them for safety and soundness. We never suppose that we
should do that nor should our colleagues, the banking
superintendents, and they don't. But we have enormous resources
in the consumer protection area. That is one of the bread and
butter of many of our offices. And we bring those and used to
bring those resources to the national banks in an effective
creative way. I think there was one estimate in terms of
consumer protection, the States bring 17 times the resources of
the Federal agencies that are here today in terms of consumer
protection.
Mrs. Bachmann. I have a question.
The Chairman. We are over time.
Mrs. Bachmann. Thank you, Mr. Chairman.
The Chairman. I thank the gentlewoman for those questions.
Mr. Kroszner, I am going to ask you a question, but as we
proceed I am going to make a statement with regard to your
rulemaking authority: use it or lose it. I was struck by the
agreement. The Comptroller and the Chair of the FDIC didn't
agree on everything. It does seem that both are in a position
of being criticized because you did not roll out the rules
which they can use. I don't think case-by-case does it. I don't
think case-by-case in complex situations like we live in is a
good idea. And I think I speak here probably for the majority
of this committee. If the Fed doesn't start to use that
authority to roll out the rules, then we will give it to
somebody who will use it. You reinforce my sense that the Fed
is not the best place to do consumer protection. And all of our
legal traditions about people knowing what they are doing,
etc., having some due process, that is important.
It is also the case, it seems to me, that we don't want to
stop people doing bad things after the fact: we want to deter
people from doing bad things. If you are in a case-by-case
situation you are greatly constrained against penalizing
people. It is one thing to penalize people who have violated
rules. It is another to tell people to stop doing something
case-by-case where they can legitimately say, well, I didn't
know that. And without rules that would be the case.
So I think the rulemaking authority is important. Now,
there is a--again, I would rather see the OCC and the FDIC, and
I assume the OTS would agree on this, but the rulemaking
decision should be joint. And obviously, it is better to have
one set of rules. If the Fed is willing to work with them to do
it, that is fine. But I will tell you if we need to begin to
see the process of rulemaking going into effect for this area.
And the answer is that it is especially true now with the
preemption. Their workload, what they have to do with regard to
consumer protection, has clearly increased as a result of the
most recent decision about preemption, so I think this just has
to happen.
Now, the next two questions. We have--yes, Mr. Kroszner.
Mr. Kroszner. If I might just very briefly respond. We
really do take the consumer protection area very, very
seriously. We have an entire division--this gets back to an
earlier point that you made about monetary policy versus
consumer protection. We have a division of monetary affairs but
we also have a division of consumer community affairs at the
Federal Reserve board, and we have similar divisions at all the
regional Federal Reserve banks, and so we do have it at the
highest level.
The Chairman. I don't think it is what motivates people
mostly. Certainly that wasn't the experience, it seemed to me,
of Governor Gramlich. But there is also a philosophical
distinction. You say specifically in your testimony that the
Fed doesn't think it should use the rulemaking authority. I
believe overwhelmingly this Congress will think that it should.
And I want to put you on notice that it is not a personal
thing, but there is a real difference. And I believe,
particularly now that the role of the Federal regulators has
increased, there has to be a change in the rulemaking
authority. It can be done jointly, but it I think has to be
done. And I think the absence of rules is a serious problem
that needs to be dealt with.
For example, the Comptroller said with regard to the
practices like these that credit card companies engage in that
make a lot of people angry, justifiably, essentially as long as
they are explicit about what they plan to do, they can do
almost anything. Maybe that is the current state of the law. I
will tell you that I think there are some things that are so
counterintuitive to individuals that if you nailed it to their
foreheads, they still wouldn't fully understand it. There are
some things that consumers think, well, that can't be. And I
will say for the credit card issuers, no, we don't want fixed
rates. But there is an intermediate position between rate
setting and simply telling people--let me put it this way in
effect--maybe I will have to clear up the record later. We are
your credit card company. By the way, here on page 7, it says
that we may screw you from time to time and by signing this
application you have waived any objection to that? That is
notification, but it is not going to be enough.
But two other questions specifically. One, we have
unregulated entities, it has been noted in response to Mr.
Ackerman's question. We need at a Federal level, I believe, to
pass some laws to cover currently unregulated entities. I think
that is right. If only the entities that the banks regulated
issued subprime loans, we would not now be in a crisis. The
banks are entitled to have us acknowledge that. There are
entities that make these loans that do other things that are
not now regulated. I think there needs to be a national law.
Exactly how it fits with State law, to what extent it is
preemptive, we will work that out. But it does seem to me that
there needs to be a national law if only to keep institutions
from leaving a State that has strong laws to go to places that
don't.
What I would want from you, and it doesn't have to be
today, is a sense of who should be that regulator? It is one
thing to create the rules. We are going to have to create some
new rules, I believe, about subprime. And we are talking about
unregulated institutions, nondepository institutions. Do one of
you want to take that over? I am serious. Or does it go to the
FTC or does it go to HUD? We are not going to adequately be
able to regulate that unless we create a regulator. I would ask
your advice in writing about that.
The other issue is on the States. I will say that I agree
with much of what you said, but when you talked about your
concern for the overstressed State resources, to be honest,
that did not strike me as your primary motivation. When you
say, oh, you don't want the States involved in this thing
because you have such sympathy with these poor overstressed
State regulators, well, we will worry about them. I appreciate
your compassion in this case, but it does not seem to me that
was your primary motive. I think the States have the resources.
Let me ask you about one specific issue. One entity that
has been very much active in State regulation is the attorney
general in each State; that is why Mr. Miller is here. You
don't have any comparable Federal authority, for example, Ms.
Bair doesn't have any comparable authority. You have the
Justice Department, but it is not the same. The ability to
bring injunctive lawsuits, the ability maybe even to get
punitive damages in abusive cases, but you have to have rules
before you can do that. Are you not somewhat handicapped vis-a-
vis the States? And I would say this to the Federal regulators.
Mr. Antonakes can go to the attorney general of Massachusetts.
In the absence of that kind of legal enforcement, to the extent
that we transfer from the State regime where the supervisors
and the attorneys general work closely together to a national
regime with an attorney general, how is that not a diminution
to some extent of the force with which we can apply these
protections?
Mr. Dugan. Actually, Mr. Chairman, I think we have more
authority with respect to the banks that we regulate. We don't
have to go to a separate agency to get a bank to stop
immediately doing something that we find that violates the law.
We have extraordinary powers under the Federal Deposit
Insurance Act to take formal enforcement action. Long before
you get there, we have the power to get--
The Chairman. You never want to go to court, or you do?
Mr. Dugan. It is actually quite rare that we go to court
because institutions almost always settle because of the great
power that we have as a formal enforcement matter. That is a
reality.
The Chairman. The other point I want to make is, you talked
about matters requiring attention and how many of you deal with
them. You say that many of them are consumer related. I will
close with this: I guess we are talking about things being
unfair and deceptive. I want to get disjunctive. I think we
need to make sure we get things that are unfair or deceptive. A
regime in which deception has to be there does not protect
consumers. There are unfair practices that are not technically
deceptive. And I guess that is the sense. You got it from my
colleague, the ranking member, and others. We do not think you
now are adequately dealing with practices which are unfair,
probably because you don't have the authority. You may need the
statutory authority. You may need the rulemaking. This is not a
personal failing on the part of any of you. But I guess that is
what I would leave you with. In today's world, with the banks
so creatively making money off fees, off overdraft fees--I
mean, I think that there are people who watch their
congressional calendar, and they see when I get a vote on
Friday, so they mail my credit card bill because then I will be
a day late getting back to it. There are so many of these other
practices that are not deceptive, but I believe they are
unfair.
So I will close with this. Somebody is going to have to do
some rulemaking and you are going to have to go beyond
deceptive into unfairness. We are not talking about rate
setting, we are not trying to put anybody out of business, but
I think you have a broad consensus to do that.
Mr. Dugan. I will defer to my colleague after this from the
FTC because they actually have the authority. I think we need
to be careful here, if unfair or deceptive, but the unfair
standard legally under the Federal Trade Commission Act is not
a judgment about unfairness.
The Chairman. I understand that, but you are not here
arguing as a lawyer before the Federal Trade Commission. We
will rewrite the Federal Trade Commission Act with Mr.
Dingell's cooperation. So understand, we are not now into
statutory interpretation, we are into statute writing. And what
I can tell you is, and it may be that you don't have enough
statutory authority, but we have to give you a broader reach to
go after things that are in the perception of the people in
this country unfair. And if the problem is lack of statutory
authority, then it is our job to care about that.
Ms. Bair. I would just say that there can be a restrictive
legal standard. If you are looking at the statutory language in
this area, you might consider adding the term ``abusive.''
``Abusive'' is a standard that is contained in HOEPA that the
Fed is looking at using in the context of mortgage lending. But
``abusive'' is a more flexible standard to address some of the
practices that make us all uncomfortable.
Ms. Majoras. I just wanted to clarify that, in fact, the
FTC Act allows us to attack practices that are unfair or
deceptive, and we do. And we have brought plenty of cases that
attack unfair practices. But it was Congress that went back to
the FTC at one point and said you need to define what
unfairness means, because of course Congress didn't want it to
mean just whatever, whoever happens to be sitting in my seat
thinks it means. So there is a standard.
The Chairman. I appreciate that. When was that?
Ms. Majoras. I think it was in the 1980's.
The Chairman. In the interim, a lot of my good friends work
for financial institutions and they play an essential role in
this country and I am grateful to them and I work with them,
but they have succeeded in angering a significantly large part
of the American people by nickel-and-diming them on credit card
late fees and overdraft fees. And I think you are going to find
a Congress today that is less inclined to restrain you and more
inclined to encourage you to reach out and give consumer
protection.
Mr. Campbell. Thank you, Mr. Chairman. I just have a few
questions for Mr. Dugan here. The first concerns subprime. My
understanding is that over 90 percent of the subprime loans are
not originated in banking institutions that are supervised.
Mr. Dugan. In national banks last year, that is right.
Mr. Campbell. In national banks, okay, last year, great.
Given that statistic, is this an area where a national rule
makes more sense than a State-by-State if over 90 percent of
the loans are not?
Mr. Dugan. It is certainly true that because we have such a
small part of that market, and because we haven't frankly had
the same kinds of problems with the banks that we regulate that
engage in these activities, you do need broader coverage. But
that is exactly why the bank regulators have gotten together
and proposed guidance that applies to all, not only insured
institutions, but companies affiliated with them, which we are
about to finalize, and, getting to your point, we have enlisted
the Conference of State Bank Supervisors to get their agreement
to try to get that same guidance out to the State lenders that
none of the Federal regulators touch.
So do I think that there needs to be some kind of national
standard? The answer is yes, because so much of this market
comes through the States. It can be done by each of the Federal
regulators and each of the State regulators, which is one
approach. Another that has been talked about is the Federal
Reserve addressing some of these issues through their rule
writing authority. And failing that, the last line would be
actual legislation. But it is absolutely imperative that we
have some kind of nationwide approach to this problem.
Mr. Campbell. Just to understand that answer better, that
order you gave is the order that you believe is preferable?
Mr. Dugan. I guess I would say, one, we can do now and are
in the process of doing and working down that path. I think the
second is an area where the Federal Reserve, and Governor
Kroszner, of course, can speak for themselves. But they are
holding a hearing tomorrow to talk about it. And I just think
as a matter of time, precedent and so forth, getting to
Congress is a third practical reality.
Mr. Campbell. Another question along the same lines, but
not just subprime--a lender in one State can make loans to
people in any State. So does that make, if you are looking at
consumer protection, does that make some kind of uniform
consumer protection a better approach?
Mr. Dugan. I think there are certain practices that have
become national products, commodities if you like, and they
raise the same issues over and over again. And those are the
ones that I believe cry or call out more for national kinds of
standards. Because as you say, things can happen in different
States.
Mr. Campbell. And the third question, I think you kind of
touched on in discussing things with the chairman a little, but
just maybe you can elaborate on preemption by you guys. We have
talked a lot about resources relative to State license mortgage
lenders, resources at the State level versus preemption by you
guys. It sounds like you believe that looking for more
resources or more involvement at the State level is something
preferable to preemption by you guys.
Mr. Dugan. I guess what I would say is that I think we do
have adequate resources to put in place a standard. Let me give
you an example. One of the things that I have spoken about
recently is the use of stated income or totally undocumented
income in order to make loans. It is something that we will
address, I think forcefully, in the guidance we are about to
issue to make that no longer the general rule when you do a
subprime loan. If we adopt that guidance, we would be able to
implement that guidance in national banks around the country
wherever they are situated to have that as a standard. There is
no similar mechanism to make sure it gets done in the same way
in the more than half of the market that Federal regulators
don't touch. The States individually are going to do that. But
if they are not actually in those institutions supervising
them, it will take a longer time to do it. That is really what
I am getting at. If you have a finite amount of resources,
rather than devote them all to the really heavily regulated
insured institutions, doesn't it make more sense to devote them
to the States? We do the national banks, hold us accountable,
but that it is a better division of labor in order to achieve
the maximum benefit for the consumer.
Mr. Campbell. Okay. I yield back. Thank you, Mr. Chairman.
The Chairman. The gentleman from Missouri.
Mr. Clay. Thank you, Mr. Chairman. Thank you for this
hearing. I certainly will attempt to observe the 5-minute rule.
I have a set of questions for the entire panel. Recently I was
reading an article entitled, ``Unsafe At Any Rate,'' written by
Elizabeth Warren, and I want to use that analogy that she used.
It is impossible to buy a toaster that has a one in five chance
of bursting into flames and burning down your house. But it is
possible to refinance an existing home with a mortgage that has
the same one in five chance of putting the family out on the
street and the mortgage won't even carry a disclosure of that
fact to the homeowner. Similarly, it is impossible to change
the price on a toaster once it has been purchased. But long
after the papers have been signed, it is possible to triple the
price of the credit used to finance the purchase of that
appliance, even if the customer meets all the credit terms in
full and on time.
The question is this. And Ms. Warren suggested that perhaps
we create a financial services product safety commission.
Should there be more Federal regulation? Why are consumers safe
when they purchase tangible consumer products with cash, but
when they sign up for a routine financial practice like
mortgages and credit cards, they are left at the mercy of their
creditors? The answer given by the author is regulation.
I ask, where are we dropping the ball? What is your answer
to this problem, and where do we go from here? If we could
start with Mr. Kroszner, please.
Mr. Kroszner. Thank you very much. It is certainly
extremely important in all areas to protect consumers, whether
it is health and safety regulation, or their financial well-
being. So these are both very important issues. I do think
there is a bit of a distinction between something like a
toaster and some financial products. I think it is very easy to
objectively define whether a toaster is likely to burst into
flames. With respect to financial products, some things that
could be helpful and useful to certain types of customers may
not be helpful and useful to other types of customers. I think
with respect to a toaster bursting into flames, it is very
clear that one bursting into flames with a one in five chance,
that is harmful no matter who you are, and no matter where you
are. With respect to financial products it becomes a little
trickier, because certain types of products which may not be
appropriate to some people may be appropriate for other people.
So it is much more difficult, I think, to set up those types of
bright line distinctions.
That said, it is very important to make sure that if there
are certain types of practices that are inappropriate, that we
address those, and that is one of the reasons why with respect
to mortgages we are holding the hearing tomorrow on HOEPA to
look to see whether there are sort of certain systematic
patterns and practices that we need to address.
Mr. Miller. Congressman, I said earlier that if the seven
of us at this table really meant it, and worked together, and
used all of our power in the subprime market, and we all have
power, including the States have significant power there, going
forward, we could reform the industry. And I say that because
of what has happened. Some of the bad companies are out of
business, some of the better companies are still there. They
have reputations to deal with. There has been pain for the
people who have been foreclosed on, there has been pain for the
investors. The time is right. If the seven of us and the people
who work for us really work together cooperatively and spot the
various problems and use our expertise, we could really clean
up the industry.
There is one other thing that needs to be done, and that is
that the current situation with all those foreclosures--there
what has to happen is, with us and with everybody in the
industry, they have to have what we call Iowa common sense. And
that is to renegotiate some of the terms so that the consumer,
the borrower, can make the payments and the creditor, the
investor, is better off because they make more money that way
than on foreclosing. We went through that in the farm crisis. I
think more and more people are understanding that. The whole
industry has to understand that, act on it, and that can
ameliorate the current crisis considerably.
So we know what to do. The question is, will the seven of
us do it.
Mr. Clay. Mr. Miller, have the consumers been unexpectedly
caught off guard as far as knowledge of these balloon payments?
Mr. Miller. They have, they have. It is a scandal in the
sense that the mortgages, particularly the subprime mortgages,
are enormously complex. The people are very much at need. They
are the working, the lower working class Americans, who don't
have any margin for error. They have an economic situation,
they need the loan, it is very complex. And in the past, there
has been so much willingness on the part of certain players to
abuse them, they have been taken advantage of, and it is a
national scandal. And we can wring our hands about that, and we
brought some lawsuits and that is good. But the big thing is,
what do we do now? Do we solve the current problem and do we
work together using our powers and using them aggressively
where necessary, always reasonably, or do we all sort of
splinter up, the seven of us up here?
Mr. Clay. Thank you for your response. May I?
The Chairman. Yes, you can continue another couple of
minutes.
Mr. Clay. Ms. Bair.
Ms. Bair. I have a lot of respect for Professor Warren. She
serves on our Advisory Committee on Economic Inclusion.
Although I haven't read the complete report yet, I am familiar
with some of her thoughts on this. I agree with your analysis,
but I am not sure that we need a new financial regulator. There
are seven of us here on this panel. I think there are some ways
that we can improve existing authorities and use them perhaps
more proactively. In a coordinated fashion, I think we can take
care of this problem without a new regulator.
Mr. Clay. Thank you, ma'am.
Ms. Majoras. I would start with this, closure. There have
been comments here about well, closure is not the whole answer.
I understand that. But we released a study today that our
economists have been working on for some time which shows that
even consumers who are fairly educated, and think they
understand the current mortgage disclosure forms, don't.
Because when our people sat down and worked through it with
them, they realized that there were costs and charges and they
didn't have any idea what they are, so people don't know what
this is costing them. We hope we can use this, and we developed
some prototypes on what would work, what consumers would better
understand. Because I do think it has to start with that. Ray
is right in the sense that you have to be careful here because
there are some bad things that happen, but there are people who
did get credit and did get homes that are still paying for
those homes who got them in the subprime market who wouldn't
have gotten them in any other market. We have to remember that,
too, because those people deserve to have a home as well.
Mr. Clay. What is your opinion about the creation of a
financial services product safety commission.
Ms. Majoras. I think I agree with my colleague Ms. Bair
that I think we ought to try to work this out with what we
have. There is no question that we all have different
jurisdiction and so forth, but we all, in some piece, have the
consumer protection aspect here. And we know where consumers
are being harmed and so we ought to be able to attack it with
what we have. And if we don't come through on that, then I
wouldn't blame you for considering something else, but I think
we should start with that.
Mr. Clay. Yes, sir.
Mr. Polakoff. Congressman, there was a recently publicized
supervisory action taken by OTS against the Federal Savings
Bank for--we could characterize it as unfair or deceptive or
aggressive underwriting to take advantage of borrowers. And
when we pursued the action, we briefed the other Federal
banking agency sitting at the table. And I am convinced if they
would have seen a similar situation they would have taken
equally aggressive supervisory action. So I believe when we
find predatory practices, which is entirely different than
lending to the subprime community, when we find it we take
appropriate action and we communicate amongst ourselves to
ensure that there is some sort of level or horizontal analysis.
Mr. Clay. No matter who the perpetrator is?
Mr. Polakoff. If it is within our institutional
jurisdiction, we will take action regardless of the
perpetrator.
Mr. Clay. Yes, sir.
Mr. Antonakes. Congressman, we license mortgage lenders and
mortgage brokers in Massachusetts, and they are not
unregulated. We conducted over 400 exams last year that
resulted in over 100 enforcement actions, 3,700 enforcement
actions by all the States combined against lenders and brokers
collectively. We continue to do work here, we need to do more
work here as well, and we need to work with our Federal
counterparts. The idea brought up by Comptroller Dugan, to
coordinate our examinations of lenders and brokers, is
something I broached 3 months ago, because you can't look at
broker network solely. Certainly sales and marketing practices
of brokers are a concern that needs to be dealt with. But you
also have to look at the internal controls and underwriting
processes that took place at nonbank as well as bank subprime
lenders. And then you also have to look at the funding
structure and also what is going on in the secondary market as
well. I think disclosure needs to be improved. We support the
Federal Reserve using their broad rulemaking authority whereas
we have attempted to deal with the issue with individual State
predatory lending laws, including my own in Massachusetts,
which has only been somewhat successful because not everyone
complies with them. And then also in Massachusetts an attempt
to deal--
The Chairman. You can finish the sentence.
Mr. Antonakes. I would just say trying to deal with the
issue now, as well as in the future, we have set up a hotline
where anyone who is having foreclosure problems can contact us.
We feel that 400 calls in 6 weeks time, trying to refer them to
reputable counseling agencies and also work directly with their
lenders and also mediations as well.
Mr. Clay. I thank the chairman and the panel for the
indulgence.
The Chairman. The gentleman from North Carolina.
Mr. McHenry. Thank you, Mr. Chairman. I am from North
Carolina, and the North Carolina anti-predatory lending law
that has been vaunted here in the halls of Congress is a
wonderful thing that needs to be expanded to the national
level, that somehow it had this fabulous effect in North
Carolina. In the Sunday Charlotte Observer, they have a large
expose that they are continuing, a long series about the
fallouts and the foreclosure rate in North Carolina and that
this vaunted anti-predatory lending law has actually had an
adverse effect in the market. And it sort of brings to mind
something, Mr. Dugan. There is this discussion here in
Washington by consumer advocates that our Federal law isn't
sufficient, that we are not doing enough to protect the public.
Yet when we get into the details about bad lending practices,
predatory lending practices, it seems that--well, it is
apparent that this is not primarily an issue by federally
regulated institutions. We have seen the main abuses occur
through State regulated institutions. Is that a fair
assessment?
Mr. Dugan. I think it is a fair assessment, and I am not
just saying that because I am a Federal regulator. I think, in
a brief filed by the attorneys general, 46 out of the 50
attorneys general agreed that the real predatory lending
practices were not taking place in regulated insured depository
institutions or their subsidiaries. Those tend to be State
chartered companies, some of which have some ties to Federal
regulators, but many of which do not. And just last year, over
50 percent of subprime originations were in completely
nonfederally regulated markets. Not all of those are bad loans,
but some of the problems we have seen, and the more egregious
ones I think, it is fair to say have been at those
institutions.
Mr. Miller. If I can just jump in here.
Mr. McHenry. If I may finish here. I only have a set amount
of time.
Mr. Miller. But you raise some issues directed towards us.
Mr. McHenry. I appreciate that, and thank you so much, but
I will get to you in a second. I have a follow-up to him, and
this is actually my time, respectfully, sir. But to continue
that thought, would that indicate that we need to create
another Federal law? Do we need to go further with our Federal
law or is it kind of adequate? Should the focus be changing the
State-by-State regulations of those State regulated
institutions? Would that be a reasonable conclusion?
Mr. Dugan. I think there are some things that occur in both
markets in the subprime area, and that is why the Federal
regulators got together, as we can do pretty quickly, to issue
proposed guidance in that area. The question is, how do you get
those same kinds of standards to apply to the exclusively State
regulated entities. And that takes action by the States and
CSBS has committed to go down a path of going State by State to
do that. If that works, that may address the problem. If it
does not, that is when people are considering other measures to
get a national standard, whether it is a regulation by the
Federal Reserve, which has its own set of issues, or a
congressional law.
But the first place that we are looking is guidance by the
Federal regulators jointly to be with companion guidance to
follow by the States. Of course the question is, you have to
have uniform application in the States. It is not enough just
to say you are going to do it, you have to do it. But that is
the first place that we are looking.
Mr. McHenry. What is the Federal Reserve's perspective on
this? I know they have taken some action.
Mr. Kroszner. Well, it is certainly very important for us
to coordinate with the States, and it is important for the
States to have sufficient resources to be able to deal with the
issues that they need to deal with with respect to institutions
outside of the Federal regulatory purview. And so we try as
much as possible to cooperate with them.
Exactly as Comptroller Dugan had said, in working up, for
example, the nontraditional mortgage guidance that we issued
last year, we have worked very closely with the States. We have
even sent Federal Reserve staff members to testify before
various State legislatures to try to convince the States that
they should adopt the same types of guidance, same types of
regulation. Some States are able to do that without
legislation. And we have had, I think, a lot of cooperative
success on nontraditional mortgage guidance, and we will be
working exactly the same with the subprime mortgage guidance
that should be coming out.
Mr. McHenry. My time has expired. And if I may just, Mr.
Chairman, to Mr. Antonakes. There is this disparity between the
amount of bank examiners and oversight that we have. And we
have about 1,800 bank examiners for about 1,850 federally
regulated financial institutions. There is a great disparity
about the number of State regulated, State bank examiners
versus the number of State banks. Do you think we have enough
in the way there? And when he finishes up, Mr. Miller, if you
want to chime in. You seem anxious to do that.
Mr. Miller. I am waiting patiently, as long as I get my
turn.
Mr. McHenry. Welcome to Congress. Mr. Antonakes.
Mr. Antonakes. I can speak for my State that we have
adequate resources to fulfill our responsibilities, and I think
it is up to the individual States to make sure in their own
discussions with their administration and their legislatures
that they have what they need to do the job. I would only add
that we have been supportive of the process for the
nontraditional guidance. I would suggest if that takes place
within the confines of the FDIC where we can participate, it is
a far better process. We don't have to wait for the Federal
action to be done. We can do it in companion, in part of that
actual process, and not be locked out of the actual rulemaking
process.
Mr. Miller. The chairman sort of gave the recommendation
early not to have finger pointings on what happened, and it was
a good recommendation that I followed so far. But there have
been repeated statements that most of the loans came from State
regulated places in the subprime area a number of times. And
with some uniformity in questions from the minority side,
although not Mr. Bachus, it has come up a number of times. So
let me just say this, that there is responsibility at the State
and Federal level for the subprime crisis. National banks
certainly had some involvement throughout the whole process,
including in the securitization and in the purchasing of the
loans. There is responsibility to go all the way around. The
only thing I would point out is that Steve's agencies and the
attorneys general were working very hard in this area and
accomplished a significant amount of good despite what
happened. We were much more active than our Federal
counterparts, is what I would leave you with.
In terms of North Carolina, I would be interested in what
the paper is saying on your statute. There have been other
studies that show that your predatory lending statute has
worked very well, that it hasn't dried up credit. And indeed
the Ameriquest case, Ameriquest left North Carolina for an
extended period of time as a result of that statute. And the
abuse that they directed throughout the country was much less
in North Carolina because of your statute.
The Chairman. The gentleman from North Carolina.
Mr. Watt. Thank you. To get the view from that side, and
you get the view from this side of North Carolina, my
assessment is much, much more similar to the one that Mr.
Miller has outlined. And I don't think it does us any good to
engage in this kind of activity, pointing at each other and
casting blame here. My experience is that there is enough blame
to go around for the subprime debacles at every level. And
despite the fact that North Carolina has a fairly aggressive
predatory lending statute, even that doesn't stop unsavory
lenders who are engaging in the business and trying to make a
quick buck. And then there are the subprime lenders that I
still, even after a series of hearings, haven't been able to
figure out who regulates. The ones that are subsidiaries of
national banks at some level, but somehow have some kind of
shield between them and the regulators, I haven't quite figured
that out yet.
So I am not even going to try to engage in this debate with
my colleague from North Carolina. I won't even read the story
that he read quite like he read it, but that is a subject for
another day.
What I would like to know is from my friend from the Fed, I
was pretty abusive to the Fed the other day at the credit card
hearing, but there is one suggestion here that OCC has made,
Ms. Bair has made on behalf of the FDIC, that there needs to be
joint rulemaking authority. OCC, FDIC is not currently
authorized to do some things that the Fed and maybe the FTC are
authorized to do. And they I think, for the first time, I have
heard them affirmatively say Congress ought to expand that
authority.
What is your view and what is the Fed's view on that, if
you would?
Mr. Kroszner. Thank you. That is a very important question.
One thing I think that is very important to realize is that the
enforcement authority is there regardless of whether there is a
particular rule.
Mr. Watt. We are talking about joint rulemaking. You can
only enforce rules that the Fed will make, and I can tell you
that there were a lot of unhappy people in the room when we
were talking about credit cards, when we were talking about the
rules that you all have made or the lack of rules that you all
have made. And there is some dissatisfaction with the lack of
rules that you all have made. So I am going to get to the
enforcement question if my time doesn't run out, but I want to
know, does the Fed have a position on what is being advocated
on giving the OCC and the FDIC joint rulemaking authority
within this area?
Mr. Kroszner. The Federal Reserve Board has not formally
discussed this issue, so we have no formal position.
Mr. Watt. Are you all planning to take up that issue? Would
you encourage them to take it up at your next meeting and let
us have your formal position on it? I think we finally got the
formal position of the other regulators that are sitting beside
you. They have kind of told us that off-the-record, but I think
from my perspective, this is the first time I have heard it in
a public hearing venue where they aggressively said, give us
this joint rulemaking authority. So it would be nice to hear
from you.
Now, second, on the enforcement issue, I am wondering, Mr.
Miller, if the Feds got the regulatory authority under Watters
now to basically have absolute authority to make the rules,
what implications does that have for enforcement of those rules
that are made at the State level by attorneys general even
though the rules that are being enforced are articulated at the
Federal level? Do you have that authority and could I have the
opposite view or the other view on that, maybe it is not the
opposite view, on whether maybe something needs to be more
aggressively done to make it clear that even when you all make
the rules for Federal regulated institutions the States still
have the authority to enforce those rules?
Mr. Miller. In some limited areas, but important areas like
telemarketing rules, when the FTC does telemarketing rules the
States have the authority to enforce that. And in a subprime
area to give us the authority to enforce the Federal rules, I
think, would make a lot of sense for all the reasons that we
have mentioned, including the resources. I would offer one sort
of caution about joint rules. I think that it is important to
give the OCC rulemaking and the FDIC in deceptive and unfair
practices, but if you give all the agencies jointly the rules,
then--
Mr. Watt. I probably misstated that. I am actually
advocating for exactly what you are saying, but then having
them get together and hopefully do it jointly, but giving them
each one independent authority to do it.
Mr. Miller. That would be the way to do it, and have them
consult, of course, and try to work together. But otherwise you
could get into stalemate and lowest common denominator, and I
don't think you want to go there.
Mr. Watt. Just to get the other side on the enforcement
issue from Mr. Dugan and Ms. Bair.
Mr. Dugan. I think there is a statutory prohibition on
unfair and deceptive practices that we are talking about, and
we can take enforcement actions just under that without a
Federal Reserve rule with respect to that. That is something
that we kind of pioneered among all the agencies.
Mr. Watt. I am only talking about State.
Mr. Dugan. On that count, when the Federal Reserve issues a
rule under this that applies to lenders, it applies to all
lenders, not just bank lenders. To the extent it applies to
nonbank lenders you do need an enforcement mechanism. I believe
that, I think this is right, that the State attorneys general
already have that authority to enforce that rule if a rule is
written. I believe that is correct.
I am sorry, that is only with respect to HOEPA, which is
the high cost loan thing. To the extent that is not provided
here, I think it would be a useful thing to do.
Mr. Watt. Thank you very much, Mr. Chairman.
The Chairman. Would that have to be statutory?
Mr. Dugan. I think it would have to be statutory.
The Chairman. To the extent that we have touched on things
where you think we would need a statutory change to fix things
up, follow up with us and let us know.
The gentleman from Georgia.
Mr. Scott. Thank you, Mr. Chairman. Much has been said.
This has been a very, very informative and a very, very good
hearing. But we have a serious problem of lack of faith and
confidence of the financial consumer being protected. We have
soaring foreclosure rates, we have subprime lending, predatory
lending, and deceptive credit card practices. And nowhere is
that more impacted than those at the lower end of the economic
scheme, which makes it all the more serious. And so while some
will argue that the State is in control, or it is the Federal,
these poor people are out there just looking for help, they are
looking for protection. So I think that we need to establish
certain facts. I think one is, without question, State
regulators are in need of clear and concise explanations of
what their role in regulating should be and will be in the near
future, and how State and Federal authorities can work together
to ensure above all else that there is protection of the
financial consumer.
And with that as a premise, I think we need to ask some
questions about the infrastructure at work here between the
Federal and the State level. I would like to ask a series of
questions and maybe get some quick answers because my time is
short. The first thing is, in your opinion, and any one of you
can answer these, or if two can chime in with quick answers, I
would appreciate it greatly. First of all, should Federal
banking law bar States from regulating the activities of State
chartered subsidiaries of national banks?
Mr. Dugan. The answer from the OCC is yes, and the Supreme
Court just agreed with that position.
Mr. Polakoff. And the answer from the OTS is yes.
Mr. Scott. What do you believe should be the appropriate
scope of the National Banking Act?
Mr. Dugan. I think the scope should be to the activity, all
activities in national banks, both from the safety and
soundness and the consumer protection side of what they do.
Mr. Scott. Do you believe that State regulation of national
banks helps or hurts the consumer?
Mr. Dugan. I guess what I would say is that it is
duplicative, and it would be a better use of resources to have
States focus on the place where they can bring the most
attention to things that aren't otherwise done, and that we
should be held accountable to do what we need to do at national
banks.
Mr. Miller. I dissent of course. I think that the States
and the Feds both doing it in this important area is the best
of both worlds and is the kind of federalism and checks and
balances that our Founding Fathers intended for this kind of
situation.
Mr. Scott. You know, I agree with you, Mr. Miller. I love
history, and perhaps one of the most fascinating chapters of
American history is the layout of our financial systems and the
checks and balances that basically the architect of which was
Alexander Hamilton, who made it very clear to us and has yet in
my opinion to receive the proper credit that he rightfully
deserves. But with that, if Hamilton were here, I think he
would ask this question: How much deference should be given to
a Federal agency's determination that their regulations preempt
State law?
Mr. Miller. I think that obviously there should be some
deference, some considerable deference. I think the exception,
though, would be with the OCC and the OTS who are competing
with the States for bank charters, that when that competition
continues, and certainly the temptation or the implication is
that we are going to go easier on you than they will, so come
with us, and then put a different hat on and say, okay, we
preempt the States. That is not a good situation. So I think
because of the existence of that situation, the deference to
those two agencies should be diminished or indeed eliminated.
Mr. Polakoff. If I could offer two thoughts for your
consideration. The first is that preemptions are a rather
fascinating discussion, and recently there have been three
States that have actually preempted their city or county
ordinances. So preemption exists at each level, sir.
The second is that, at OTS, when we are asked for a local
opinion on a preemption issue, we do share that legal opinion
with CSBS and with the affected States. I am not suggesting
that we are asking for an equal contribution, but I do want to
share with you that we do share that before finalizing our
opinion.
Mr. Scott. Thank you very much. I have one other point
here. I have heard from my consumer groups in the State of
Georgia. The State of Georgia has been a leader in the Nation
of foreclosure preemption. You name the abuse, you name a need
for protection for financial consumers, and my State of
Georgia, unfortunately, is the poster child for that. And many
of the folks back home argue that Federal regulators cannot
adequately police consumer protections that they have worked to
promote. Is that a fair statement?
Mr. Dugan. I don't think it is a fair statement with
respect to national banks. But of course we cannot promote
consumer protections with the places where predatory lending is
most in evidence. And it is not in the national banking system,
it is not in insured depositories, it is outside of them. And
we don't have any jurisdiction over that. That is absolutely
true.
Mr. Scott. And then I have constituents on the other side,
national banks for example. They complain that they shouldn't
have to spend the money or time complying with both Federal
regulations and the rules of the various States in which they
conduct their business.
Mr. Dugan. Well, I think that is the essence of the dual
banking system and that is the essence of the national banking
system historically, going back to the very strong advocate of
a national bank charter, which was Alexander Hamilton, which is
that a set of uniform rules that apply to nationally chartered
banks is the system that Congress set up to be and the reason
why it has gotten the kind of deference it has gotten in the
courts over the years. That is the principle.
Mr. Scott. Finally, Mr. Chairman, if I may, just to
conclude, do you believe supervision over national banks and
their subsidiaries is adequate to ensuring financial customers
are being treated fairly? This is especially as a crisis in the
subprime lending market, and foreclosure numbers across the
country are not foreseen as letting up any time soon given the
crisis.
Mr. Dugan. I do believe we have the resources. We are not
perfect. The banks we supervise are not perfect. But I believe
our record on those subprime loans that you are talking about
is a strong one.
Mr. Scott. Thank you, Mr. Chairman.
The Chairman. The gentleman from Texas.
Mr. Green. Thank you, Mr. Chairman. And as usual, Mr.
Chairman, you have provided great oracularity in helping us to
better understand these issues. I believe that the perception
exists in the minds of many consumers, a great number I might
add, that they are being, to use a highly technical term,
``ripped off'' by some of these fees, fees that are noninterest
income. They believe they are being ripped off. And Chairwoman
Bair, on page 3 of your statement, starting in the second
paragraph, a few lines down, you indicate that fee based
overdraft protection programs typically charge customers at
least $20 to $35 for each overdraft. Depending on the size of
the overdraft and length of time for repayment, the effective
annual percentage rate can exceed 1,000 percent. And then you
go on to indicate in the next paragraph that last year insured
institutions obtained 42.2 percent of their net operating
revenue from noninterest income. At some point someone might
conclude that this is rapacious and that it is invidious and
that something more than a notice is appropriate.
The truth is that a disclosure of an invidious practice,
while it would disclose it, it won't eliminate it, and it won't
obviate it. You just tell the person that if you do a certain
thing you will have this practice to contend with. And it seems
to me that at some point we have to try to end some of these
rapacious and invidious practices.
Let me just cite one or two maybe. The ranking member
talked about the overdraft problem. You cash the check and you
make a deposit at the same time you are cashing a check or
writing and having the check honored. The deposit does not have
the same rate of speed with reference to becoming a part of the
system that the check that you have written seems to
matriculate through the system. Credit cards, and perhaps I
should ask this question before I make a statement of fact, so
let me ask. If I charge something on a charge card and right
immediately after charging decide that I don't want it, and I
return it and get a credit to my account, is it true or not
true that the credit may take longer to reach my account than
the charge?
Mr. Polakoff. Congressman, I could offer from a personal
perspective that while it may take longer, there is not an
obligation to pay the amount of the expected credit.
Mr. Green. I understand. But consumers are of the opinion
that these things ought to move at about the same rate of
speed. If you take my money on day one, perhaps I ought to get
credit on day one, especially if I hand it back to you right
after I have made the charge. I charge, I give it right back,
the charge hits my account, but the credit shows up some days
later. These kinds of practices are, I think, what is causing
the consumer to think that some of us are not fulfilling our
obligations to protect them. Universal defaults, double cycle
billing, these things are repugnant to the consumer. And while
I hope that we can cure them with notices, I am not sure that
notices alone are sufficient.
One more comment. Mr. Miller, I really admire your
optimism. You talk about folks getting together and working it
out. There are two great powers, many great powers, but there
are two that I will speak of in the universe. One is ``way
power,'' the ability to find a way. The other is willpower.
Many times we can see the way, but we can't find the will, and
I am hopeful that the will will manifest itself, because if we
do have the will, and I am convinced that this august body can
find a way.
So my question is this: Having said all of this, do you
find any--is there any practice that is rapacious, repugnant,
and invidious to the extent that there ought to be some rule
that would alter it? And I have cited a few. So why don't we
start with the Fed.
Mr. Kroszner. Certainly it is very important to protect
consumers and to make them feel that they are being dealt with
fairly and to make sure that they are dealt with fairly. I
certainly agree with that. And one of the rules--
Mr. Green. May I just intercede? And I would beg that you
accept my interceding for just a moment. Could you kindly start
out with yes or no? That way I will know what you really said,
because sometimes when folks finish, I don't know whether they
have said yes or no. So could you start with yes or no and then
give me all the explanation you would like within about a 10-
second period of time?
Mr. Kroszner. Yes. Under HOEPA, we have undertaken a rule
against loan flipping, which we thought was unfair and
deceptive and inappropriate, and so we prohibited that
practice. Tomorrow I will be holding a hearing where we are
going to be discussing other potential practices that we would
consider for a prohibition.
Mr. Green. Mr. Dugan?
Mr. Dugan. Yes, there are. We have had to take action
against some of these. You know, we don't have the rulemaking
authority. But just to give you one example, in the area of
secured credit cards, we saw a practice where people were
charging the amount of the security to the card, and as a
result, there was nothing left for the consumer to borrow. And
that would be the kind of practice that we certainly would
think rises to the level of something that just shouldn't
happen.
Ms. Bair. Yes, exploding ARMs. These payment-shock
mortgages that people have no realistic chance of repaying, are
what the Subprime Mortgage Guidance is all about, getting rid
of those.
Also, I think regarding fee-based bounce protection, we are
undergoing a careful review of that practice. That product is
used chronically. It is extremely high-priced, and we want to
do more fact-finding about how customers are using it.
Ms. Majoras. Sure. The FTC, we have lots of cases alleging
that facts were deceptive or that they were unfair in the
financial services area. We had one recently in which the
mortgage lenders were providing all sorts of terms to Spanish-
speaking consumers in Spanish, but then changing the terms and
giving them documents in English that they couldn't read that
had wholly different terms for the mortgages. So, yes, of
course there are practices, and we attack them regularly.
Mr. Polakoff. Congressman, absolutely. Our 2005 guidance on
overdraft protection is a perfect example where it is
unacceptable for a consumer to go to an ATM and ask for the
available balance and have included in that the overdraft
protection amount without any notice of the charge associated
with accessing that.
Mr. Green. My final question is, to what extent were these
corrections published?
Mr. Dugan. Ours was published.
Mr. Kroszner. We issued a formal rule.
Ms. Bair. Yes. For subprime mortgages, again, we have
imposed very public formal enforcement actions, and also the
Subprime Mortgage Guidance obviously is public.
Ms. Majoras. We filed a case in court and issued a press
release and the like.
Mr. Green. Thank you, Mr. Chairman. I yield back the
balance of my time.
Mr. Cleaver. [presiding] The Chair now recognizes the
gentleman from California, Mr. Sherman.
Mr. Sherman. Thank you.
Comptroller, if the OCC determined, either by rule or
interpretation, that realistic brokerage is a permissible
activity for national banks, would you then view State real
estate licensing laws as either obstructing, conditioning,
impairing, or interfering with national banks' ability to
engage in such activity, and then go on to preempt those State
licensing laws?
Mr. Dugan. Mr. Sherman, we have no such rule in our book to
permit real estate brokerage and I have no intention of doing
so as long as I am Comptroller.
Mr. Sherman. That pretty much puts that question to rest.
We need consumer protection. We need more of it than we
have now. If we have the States do it, then a lot of people who
live in States where they get inadequate consumer protection, a
few will live in States where consumer protection is so intense
that it interferes with business and raises costs, and the
whole country will suffer, because we benefit from an efficient
national economy. In fact, this union was formed perhaps more
than for any other purpose to give us the benefits of living in
the world's first common market where companies could do
business across State lines and now across the continent.
We could act through the Federal agencies. I think you have
some prodding here today, but there is more for you to do. Or
finally, we could pass laws through this committee. They are
subject to possible veto, and they are also subject to a
congressional schedule that is now being drawn out on the
Floor. I don't know how good we would be at writing good
consumer protection if we do it on 3 hours' sleep, which
appears like it is going to be the norm for a while here in
Congress.
My hope, therefore, is that the agencies represented here
move forward with consumer protection, and there are two kinds
of consumer protection. One is disclosure, where it provides
good information, is always helpful. And the other is when you
prohibit an activity, and the problem there is--I will give you
an example. Let us say you have a group of subprime borrowers,
and they can't qualify for anything but the really tough
subprime loan. If those loans tend to have a one-fifth default
rate, you would say, my God, what kind of lender is making
those loans? We have to stop that. But if you stop it, then you
have stopped--for every foreclosure you have stopped, you have
stopped four people from ever owning a home.
So I don't know what the default rate is. If you aim to
tell those financial institutions that you regulate to aim for
a 1 percent default rate, a lot of people aren't going to be
able to own homes. If you allow them to make such loans on such
extreme circumstances that they have a 50 percent default rate,
first they are going to go bankrupt, but second, we don't want
to see those kinds of loans made.
As a disclosure, we have these credit cards out there, and
the statement tells me what my annual percentage rate is, and
it tells me what my minimum payment is. Should we by law or
regulation require that it say, Mr. Sherman, if you choose to
make the minimum payment, even if you don't use this credit
card for any future purchases, it will take you ``X'' years to
pay us off, and in addition to paying us the ``X'' dollars that
you owe, that we were going to add ``Y'' dollars of interest?
Now, I realize people continue to use their credit cards,
but would it be helpful to American consumers if we knew if I
have this balance at the current interest rate, eliminating the
effect of any teaser rates, this genuine effective rate, and I
choose just to make those minimum payments, what am I in for
both in terms of how long am I going to be making those
payments, and the total amount of interest I am going to pay? I
will let anybody respond to that.
Mr. Kroszner. Certainly our proposal that was discussed in
the subcommittee of this committee a week ago tries to address
exactly that issue. One of the things that we did is we talked
to real consumers and asked them, what do you need to know?
What do you want to know? What is going to be helpful to you?
And then when we have those answers, tried to put that together
in a way that was useful to them, and then asked them, well, is
this helpful? Can you understand that?
And so our proposal is getting at exactly these kinds of
issues, and as part of our proposal, we have discussed
disclosing precisely that type of information. We are now in a
comment period, so we are very open to comments from consumers,
and from other parties who might tell us how useful that is and
how to improve that.
Mr. Sherman. And I hope in the limited time that one of the
things you put forward to consumers was a little table: If you
make the minimum payments, this is how long it is going to
take, this is the total amount you are going to pay, and this
amount is going to be your interest, and this is your
principal.
I do have a quick question on home lending, and that is, we
have seen home mortgages make the people who would never
qualify to be able to pay the fully indexed adjusted amount. So
it is somebody that says, oh, yes, you can qualify for a
$500,000 mortgage because you can afford to make $2,000-a-month
payments, and that is all you are going to have to make for the
first 6 months or a year, at which point it goes to double that
payment. Are the financial institutions that each of you
regulate allowed to regard a borrower as qualified based upon
the teaser rate and not based upon whether they qualify to make
the fully indexed payments that will come about in--and I
realize they only come about if the index doesn't drop, but
assuming the index stays the same.
Mr. Kroszner. This is precisely the issue that we have put
out in our notice of proposed rulemaking on subprime mortgages.
And we have gotten comments in, and the agencies are working
together to finalize that rule. I think when we looked at the
comments--or we are looking at the comments, and we certainly
can't prejudge where we are going to be, I believe there is a
lot of support for--
Mr. Sherman. Isn't this a basic issue of bank solvency? If
they go around loaning $500,000 to somebody who can only afford
to make $2,000-a-month payments, and they say, well, that is a
good-performing loan because we got the $2,000 last month, do
you guys--my time--do you guys call that a performing,
qualified, good asset loan?
Mr. Kroszner. We have always taken safety and soundness
very seriously and looked at the underwriting standards that
are regulating institutions' views. I think the key is making
sure that all institutions use similar types of of high-quality
underwriting standards.
And just to address the previous question, it is precisely
the table that you described that is in our proposal on credit
cards. So I think we have tried to address both of the
concerns.
Mr. Sherman. Thank you for the credit card answer.
Hopefully, for the record, you can provide a somewhat better
answer on the home mortgage issue, and I will yield back.
Mr. Cleaver. Thank you.
The Chair now recognizes the gentleman from Minnesota.
Mr. Ellison. Mr. Dugan, in the Watters case, basically, the
Supreme Court construed the National Banking Act, and
essentially, you know, the Act vested nationally chartered
banks with certain powers and, ``all such incidental powers as
are necessary to carry out the business of banking.'' But
within the statute, doesn't it also say that there are certain
exceptions that are carved out under the Act, and if the
Congress wants to regulate in those exceptions, that they
certainly can, right?
Mr. Dugan. Congress can--we are a creature of Congress. You
can change the National Bank Act in any way that you see fit.
Mr. Ellison. Yes. So I guess my question is this: In the
area of--I mean, I know what the decision says and all, but in
the area of consumer protection, don't you think having more
eyes on the problem to protect consumers would augment the
Fed's work in terms of looking out for the consumer?
Mr. Dugan. As I said earlier in my testimony, I believe
that if we had an unlimited number of resources, and an
unlimited number of staff to have 2 sets of eyes, 3 sets of
eyes, 10 sets of eyes, would obviously put more compliance on
an institution, but we don't.
Mr. Ellison. I know that, but let me just say this. If the
States were allowed to help protect consumers as it relates to
Federal banks or State-Chartered subsidiaries of Federal banks,
that would mean you would have more eyes to protect consumers,
isn't that--
Mr. Dugan. To me what makes the most sense is these are
very heavily regulated institutions that we regulate, and we
believe we should be held accountable for that. That is what we
spend our resources on.
Mr. Ellison. Right.
Mr. Dugan. To duplicate that effort to me doesn't make any
sense.
Mr. Ellison. Sure. Let me ask you the question this way
then. You know, there are banking practices by national banks
and State charters that are owned by Federal banks that have
been called into question to date; isn't that right?
Mr. Dugan. Certainly.
Mr. Ellison. Yes. And as a matter of fact, I think you said
that--and maybe I got this wrong, but I thought you said that
the Fed maybe was--I am not sure of the time period. I think it
was last year--had like 200 formal actions and 200 informal
actions. Did I get that right?
Mr. Dugan. I said the OCC.
Mr. Ellison. The OCC.
Mr. Dugan. 200 over a 5-year period.
Mr. Ellison. My mistake. I misidentified the Agency. But we
are on the same page. That doesn't seem like a lot to me, given
so many of the things that I have been hearing about from my
constituents.
Mr. Dugan. Well, all of what I said was--this is a very
good example. There are many actions that we take that never
arise to even an informal action, particularly in something
that we call ``matters requiring attention,'' and that is where
we first alert bank management of a problem because we are
supervising them and we are in there. We see it. We have a
problem. You need to fix it. And there were, over the same
period, about 1,500 matters requiring attention.
Mr. Ellison. This is over a 5-year period?
Mr. Dugan. A 5-year period on consumer-related issues only.
Mr. Ellison. Fifty States?
Mr. Dugan. It is the national banking system, yes.
Mr. Ellison. Plus the territories?
Mr. Dugan. Yes.
Mr. Ellison. I can even see how that is not that many.
Anyway, let me ask Attorney General Miller about this. Do
you feel that there is room for the States to regulate in the
areas that were precluded by the Watters decision? I mean, do
you feel like you could help the citizens of your State
notwithstanding Watters?
Mr. Miller. We could help our citizens a lot. The States,
the attorneys general, the banking superintendents, have a lot
of expertise, have a lot of resources to contribute here. You
know, it is particularly difficult when there is a State-
chartered institution that is sheltered from our authority or a
State law that we are prohibited from enforcing. It just
doesn't make any sense at all.
Mr. Ellison. For example, if a national bank or a State-
chartered bank that is a national subsidiary had a credit card
section, and they were doing things like, I don't know, double-
cycle billing, universal default, pay to pay, all the stuff we
have been talking about, you can't touch them; is that right?
Mr. Miller. That appears to be the case. And, you know, the
credit card complaint is the poster complaint for this whole
issue, and the whole--why this context that we have gotten into
doesn't make sense. And we will handle that individual
complaint at the local level makes just so much sense.
Mr. Ellison. We live in a country that has negative
savings; people are relying on credit cards to make it. They
are at a competitive disadvantage with the banks, and yet their
own State that they live in is without the power to do anything
for them.
Mr. Miller. That is the dilemma, and that is why it doesn't
make sense.
Mr. Ellison. Let me ask you this question, Mr. Miller. The
argument goes something like this: We don't want the States to
have their own--to be able to regulate in this area or to
enforce in this area because it would drive up the cost of
doing business because it would cost the national banks money,
and, I guess, lawyers, to comply with these various States. So
if this is essentially a cost-saving measure, why don't we see
the costs of lending practices going down? You would think they
would be lower. You would think we would have really cheap
money in America.
Do you have any thoughts on this subject? Could I at least
get an answer, Mr. Chairman? I mean, you know, one could argue
that the cost of money is pretty high because there is only--
you know, when you look at some of the practices we have been
talking about today.
Mr. Miller. I think you can draw that conclusion.
The other thing is that, you know, we are a large, complex,
efficient country. And, you know, today banks and institutions
know how to, in a cost-effective way, efficiently comply with
the whole set of rules and regulations. That is not really what
we are talking about. We are really talking about the authority
question, between States and Federal. We are not talking about
cost here.
Mr. Ellison. Mr. Chairman, unanimous consent for 30
seconds?
Mr. Cleaver. Yes, please.
Mr. Ellison. Now let me ask you, if the national banks and
the State subsidiaries that are owned by those national banks,
if we really should--I mean, do you think we should be seeing
cost savings as a result of the national scheme? And in your
view, are we seeing the benefits of what should be a cheaper,
more cost-effective system, or have we simply given certain
banks sort of a free hand and fewer people to hold them
accountable, and, therefore, they are in more of a monopoly
position and can charge consumers higher prices because there
is fewer people watching them; is that possible?
Mr. Miller. I suppose that is possible. I guess what I am
saying is that obviously we are not seeing lower charges, and
that is either because there really isn't a cost saving by
going to the national system, or if the advocates are right,
there is additional profit. But I think it is really a question
of power and authority and how we treat consumers. I have said,
though, that, you know, I respect the Supreme Court decision. I
have to live with it. The chairman said earlier, I think,
correctly--
Mr. Ellison. I don't.
Mr. Miller. Yes. I mean, you can change it. But the
chairman said earlier, the prospects of changing aren't so
great. So, you know, what do we do now?
And, you know, one of the things I talked about is that
seven of us really work together, use our powers in the
subprimary. We all have power; we have retained power there.
And, you know, we just have this enormous opportunity to change
that system, particularly with bad actors out, relatively good
actors remaining, those with national--with reputational
interests remaining, and having that incentive--some pain being
felt including by the investors and the public knowing this is
a problem.
Going forward, if the seven of us really work together
sincerely and practically, as the two of us at the end of the
table have worked together for the last 5 years, we could have
a much, much better subprime market.
Mr. Cleaver. Thank you.
The Chair recognizes the gentleman from Ohio, who has
worked on this issue in the Ohio Legislature, Mr. Wilson.
Mr. Wilson. Thank you, Mr. Chairman.
Ladies and gentlemen, I am fully aware this has been a
long, long time, so I will be brief. However, I have made some
observations, and I appreciate the seven of you being here, and
so I will just ask my question in this way.
One of the things that came out today to me is that there
are some--we need to work on connecting the dots, be that State
or Federal, how we can ask the FTC to step up, the Feds,
Federal Reserve, and what we can do with the OCC? I think a lot
of questions, Mr. Dugan, were directed to you for some obvious
reasons. So without saying anything negative, I really thought
that Attorney General Miller had some really good observations
in his testimony and saying what things we need to do.
My question would be--and I would like to go through the
seven, and just give me a brief response--is what can we do on
the congressional level to help you connect the dots to put
this together so that we can make a better situation for the
people in America and certainly for those in Ohio? If I could.
Mr. Cleaver. We are going to ask all of you to answer the
question and give the Reader's Digest version.
Mr. Kroszner. The Reader's Digest version is you actually
already have taken a very important first step in including the
Conference of State Banks Supervisors in the FFIEC, the FFIEC
Act. So they are participating, and it is making it easier for
us to coordinate.
Mr. Wilson. Thank you.
Mr. Dugan. We made four suggestions. And for Congress one
would be to give joint rulemaking authority for unfair and
deceptive practices. We also think that when regulators write
rules that other regulators have to enforce or implement, that
they should be consulted as part of that process. I think that
gets very much to your connect the dots kind of thought. And
then I think that Congress should require that these consumer
protection regulations be updated on a regular basis, that they
sometimes can go too long without being reviewed, and that
causes problems for consumers over time. And then lastly--and
this isn't a congressional thing, but it was something that was
raised earlier. I think we all need to get together to adopt a
centralized way of handling consumer complaints so they don't
get confused about who is a national bank, who is a savings
association, etc.
Mr. Wilson. Thank you.
Ms. Bair. Yes. I think you have hit the nail on the head.
As I said in my testimony, we need uniform, consistent, across-
the-board protections. I have called again for national
standards to address abuses in subprime mortgage lending at
both bank and nonbank lenders.
We would like the ability to write rules regarding unfair
and deceptive practices. We need to expand the ability and the
authority of State bank supervisors, as well as State attorneys
general and others who are involved in regulating nonbank
providers, to enforce the existing Federal protections.
And finally, although financial education is not a panacea,
I do think there is an opportunity for Congress to fund more
financial education in public schools in their core curricula.
In the longer term, I think that would help.
Ms. Majoras. I think the crux of the matter is to decide
what we want to do with the nonbank lenders who are the major
participants in the subprime market. They are currently not
regulated at the Federal level. So I think that is one decision
that needs to be made.
Second, we think that mortgage disclosures based on a study
we have just released are inadequate, and we think we should
look at that.
And finally, if you are going to revise the FTC Act, it is
one thing to give others more authority, and I don't have an
opinion on it. That is up to them what they need. But if you
change our standard and our enabling statute, remember that the
FTC enforces in broad swaths of the economy, not just this, and
that would change it for everything.
So I do hope we can work together with those who are making
such proposals because, of course, we use that statute every
day all day, and we know what it can do and what it can't do.
Thank you.
Mr. Wilson. Thank you.
Mr. Polakoff. Congressman, the Reader's Digest version,
three issues. The FFIEC, which is a very effective tool for all
of us. There is a consumer forum, I think the Comptroller
mentioned it earlier, headed by Treasury, and I believe
virtually all of us at the table, including CSBS, and the FTC,
and the banking regulators, sit at that forum and have very
robust discussions, and I think that would--they are the two
most critical aspects.
The last is I would commend CSBS and ask them to remain
vigilant. Right now only 70 percent of the banks have adopted
the nontraditional mortgage guidance. CSBS is very active in
getting other departments to enact that guidance, and I think
that is critical.
Mr. Wilson. Thank you.
Mr. Miller. One of the great roles of Congress is
oversight. I think the most important thing you could do is
hold the seven of us, our feet to the fire, make sure we fully
and fairly and effectively use our powers, and make sure we
work together to protect consumers.
Mr. Wilson. Thank you.
Mr. Antonakes. Well, presuming overturning the decision
isn't an option, we would speak for the FFIEC on an expanding
role and have joint rulemaking through the FFIEC. We think we
are just one of six parties, but we think we bring extensive
consumer experience.
Mr. Wilson. Thank you. And if I may, Mr. Chairman, in my
opening statement, I said what I really felt our issues were,
and the fact that it is not all bank-related, certainly that
most is not. But this has been very helpful to me, and having
sat through this just last year in Ohio, we have a lot of work
to do, and we truly want to be able to bring all seven of you
together in looking at how we can improve on the States and the
Federal level. So I look forward to working with you in the
future.
Thank you, Mr. Chairman.
Mr. Cleaver. Let me express appreciation to all of you. Ms.
Bair, you have spent quite a bit of time with us over the last
few weeks, and we appreciate you coming and being responsive,
as you always have been.
The Congress was in session until about 2 a.m., so you have
seen the hearty Members today, and we feel very strongly about
this. I think the chairman expressed at the opening of the
hearing that this was designed for us to learn, and so I think
that, in fact, has happened. Some Members may want to ask
additional questions, and if they do, they will do it in
writing. And without objection, the hearing record will remain
open for 30 days for members to submit any additional questions
to the witnesses, and to place their responses in the record.
If there are no requests to speak, this hearing is
adjourned.
[Whereupon, at 1:30 p.m., the hearing was adjourned.]
A P P E N D I X
June 13, 2007
[GRAPHIC] [TIFF OMITTED] 37556.001
[GRAPHIC] [TIFF OMITTED] 37556.002
[GRAPHIC] [TIFF OMITTED] 37556.003
[GRAPHIC] [TIFF OMITTED] 37556.004
[GRAPHIC] [TIFF OMITTED] 37556.005
[GRAPHIC] [TIFF OMITTED] 37556.006
[GRAPHIC] [TIFF OMITTED] 37556.007
[GRAPHIC] [TIFF OMITTED] 37556.008
[GRAPHIC] [TIFF OMITTED] 37556.009
[GRAPHIC] [TIFF OMITTED] 37556.010
[GRAPHIC] [TIFF OMITTED] 37556.011
[GRAPHIC] [TIFF OMITTED] 37556.012
[GRAPHIC] [TIFF OMITTED] 37556.013
[GRAPHIC] [TIFF OMITTED] 37556.014
[GRAPHIC] [TIFF OMITTED] 37556.015
[GRAPHIC] [TIFF OMITTED] 37556.016
[GRAPHIC] [TIFF OMITTED] 37556.017
[GRAPHIC] [TIFF OMITTED] 37556.018
[GRAPHIC] [TIFF OMITTED] 37556.019
[GRAPHIC] [TIFF OMITTED] 37556.020
[GRAPHIC] [TIFF OMITTED] 37556.021
[GRAPHIC] [TIFF OMITTED] 37556.022
[GRAPHIC] [TIFF OMITTED] 37556.023
[GRAPHIC] [TIFF OMITTED] 37556.024
[GRAPHIC] [TIFF OMITTED] 37556.025
[GRAPHIC] [TIFF OMITTED] 37556.026
[GRAPHIC] [TIFF OMITTED] 37556.027
[GRAPHIC] [TIFF OMITTED] 37556.028
[GRAPHIC] [TIFF OMITTED] 37556.029
[GRAPHIC] [TIFF OMITTED] 37556.030
[GRAPHIC] [TIFF OMITTED] 37556.031
[GRAPHIC] [TIFF OMITTED] 37556.032
[GRAPHIC] [TIFF OMITTED] 37556.033
[GRAPHIC] [TIFF OMITTED] 37556.034
[GRAPHIC] [TIFF OMITTED] 37556.035
[GRAPHIC] [TIFF OMITTED] 37556.036
[GRAPHIC] [TIFF OMITTED] 37556.037
[GRAPHIC] [TIFF OMITTED] 37556.038
[GRAPHIC] [TIFF OMITTED] 37556.039
[GRAPHIC] [TIFF OMITTED] 37556.040
[GRAPHIC] [TIFF OMITTED] 37556.041
[GRAPHIC] [TIFF OMITTED] 37556.042
[GRAPHIC] [TIFF OMITTED] 37556.043
[GRAPHIC] [TIFF OMITTED] 37556.044
[GRAPHIC] [TIFF OMITTED] 37556.045
[GRAPHIC] [TIFF OMITTED] 37556.046
[GRAPHIC] [TIFF OMITTED] 37556.047
[GRAPHIC] [TIFF OMITTED] 37556.048
[GRAPHIC] [TIFF OMITTED] 37556.049
[GRAPHIC] [TIFF OMITTED] 37556.050
[GRAPHIC] [TIFF OMITTED] 37556.051
[GRAPHIC] [TIFF OMITTED] 37556.052
[GRAPHIC] [TIFF OMITTED] 37556.053
[GRAPHIC] [TIFF OMITTED] 37556.054
[GRAPHIC] [TIFF OMITTED] 37556.055
[GRAPHIC] [TIFF OMITTED] 37556.056
[GRAPHIC] [TIFF OMITTED] 37556.057
[GRAPHIC] [TIFF OMITTED] 37556.058
[GRAPHIC] [TIFF OMITTED] 37556.059
[GRAPHIC] [TIFF OMITTED] 37556.060
[GRAPHIC] [TIFF OMITTED] 37556.061
[GRAPHIC] [TIFF OMITTED] 37556.062
[GRAPHIC] [TIFF OMITTED] 37556.063
[GRAPHIC] [TIFF OMITTED] 37556.064
[GRAPHIC] [TIFF OMITTED] 37556.065
[GRAPHIC] [TIFF OMITTED] 37556.066
[GRAPHIC] [TIFF OMITTED] 37556.067
[GRAPHIC] [TIFF OMITTED] 37556.068
[GRAPHIC] [TIFF OMITTED] 37556.069
[GRAPHIC] [TIFF OMITTED] 37556.070
[GRAPHIC] [TIFF OMITTED] 37556.071
[GRAPHIC] [TIFF OMITTED] 37556.072
[GRAPHIC] [TIFF OMITTED] 37556.073
[GRAPHIC] [TIFF OMITTED] 37556.074
[GRAPHIC] [TIFF OMITTED] 37556.075
[GRAPHIC] [TIFF OMITTED] 37556.076
[GRAPHIC] [TIFF OMITTED] 37556.077
[GRAPHIC] [TIFF OMITTED] 37556.078
[GRAPHIC] [TIFF OMITTED] 37556.079
[GRAPHIC] [TIFF OMITTED] 37556.080
[GRAPHIC] [TIFF OMITTED] 37556.081
[GRAPHIC] [TIFF OMITTED] 37556.082
[GRAPHIC] [TIFF OMITTED] 37556.083
[GRAPHIC] [TIFF OMITTED] 37556.084
[GRAPHIC] [TIFF OMITTED] 37556.085
[GRAPHIC] [TIFF OMITTED] 37556.086
[GRAPHIC] [TIFF OMITTED] 37556.087
[GRAPHIC] [TIFF OMITTED] 37556.088
[GRAPHIC] [TIFF OMITTED] 37556.089
[GRAPHIC] [TIFF OMITTED] 37556.090
[GRAPHIC] [TIFF OMITTED] 37556.091
[GRAPHIC] [TIFF OMITTED] 37556.092
[GRAPHIC] [TIFF OMITTED] 37556.093
[GRAPHIC] [TIFF OMITTED] 37556.094
[GRAPHIC] [TIFF OMITTED] 37556.095
[GRAPHIC] [TIFF OMITTED] 37556.096
[GRAPHIC] [TIFF OMITTED] 37556.097
[GRAPHIC] [TIFF OMITTED] 37556.098
[GRAPHIC] [TIFF OMITTED] 37556.099
[GRAPHIC] [TIFF OMITTED] 37556.100
[GRAPHIC] [TIFF OMITTED] 37556.101
[GRAPHIC] [TIFF OMITTED] 37556.102
[GRAPHIC] [TIFF OMITTED] 37556.103
[GRAPHIC] [TIFF OMITTED] 37556.104
[GRAPHIC] [TIFF OMITTED] 37556.105
[GRAPHIC] [TIFF OMITTED] 37556.106
[GRAPHIC] [TIFF OMITTED] 37556.107
[GRAPHIC] [TIFF OMITTED] 37556.108
[GRAPHIC] [TIFF OMITTED] 37556.109
[GRAPHIC] [TIFF OMITTED] 37556.110
[GRAPHIC] [TIFF OMITTED] 37556.111
[GRAPHIC] [TIFF OMITTED] 37556.112
[GRAPHIC] [TIFF OMITTED] 37556.113
[GRAPHIC] [TIFF OMITTED] 37556.114
[GRAPHIC] [TIFF OMITTED] 37556.115
[GRAPHIC] [TIFF OMITTED] 37556.116
[GRAPHIC] [TIFF OMITTED] 37556.117
[GRAPHIC] [TIFF OMITTED] 37556.118
[GRAPHIC] [TIFF OMITTED] 37556.119
[GRAPHIC] [TIFF OMITTED] 37556.120
[GRAPHIC] [TIFF OMITTED] 37556.121
[GRAPHIC] [TIFF OMITTED] 37556.122
[GRAPHIC] [TIFF OMITTED] 37556.123
[GRAPHIC] [TIFF OMITTED] 37556.124
[GRAPHIC] [TIFF OMITTED] 37556.125
[GRAPHIC] [TIFF OMITTED] 37556.126
[GRAPHIC] [TIFF OMITTED] 37556.127
[GRAPHIC] [TIFF OMITTED] 37556.128
[GRAPHIC] [TIFF OMITTED] 37556.129
[GRAPHIC] [TIFF OMITTED] 37556.130
[GRAPHIC] [TIFF OMITTED] 37556.131
[GRAPHIC] [TIFF OMITTED] 37556.132
[GRAPHIC] [TIFF OMITTED] 37556.133
[GRAPHIC] [TIFF OMITTED] 37556.134
[GRAPHIC] [TIFF OMITTED] 37556.135
[GRAPHIC] [TIFF OMITTED] 37556.136
[GRAPHIC] [TIFF OMITTED] 37556.137
[GRAPHIC] [TIFF OMITTED] 37556.138
[GRAPHIC] [TIFF OMITTED] 37556.139
[GRAPHIC] [TIFF OMITTED] 37556.140
[GRAPHIC] [TIFF OMITTED] 37556.141
[GRAPHIC] [TIFF OMITTED] 37556.142
[GRAPHIC] [TIFF OMITTED] 37556.143
[GRAPHIC] [TIFF OMITTED] 37556.144
[GRAPHIC] [TIFF OMITTED] 37556.145
[GRAPHIC] [TIFF OMITTED] 37556.146
[GRAPHIC] [TIFF OMITTED] 37556.147
[GRAPHIC] [TIFF OMITTED] 37556.148
[GRAPHIC] [TIFF OMITTED] 37556.149
[GRAPHIC] [TIFF OMITTED] 37556.150
[GRAPHIC] [TIFF OMITTED] 37556.151
[GRAPHIC] [TIFF OMITTED] 37556.152
[GRAPHIC] [TIFF OMITTED] 37556.153
[GRAPHIC] [TIFF OMITTED] 37556.154
[GRAPHIC] [TIFF OMITTED] 37556.155
[GRAPHIC] [TIFF OMITTED] 37556.156
[GRAPHIC] [TIFF OMITTED] 37556.157
[GRAPHIC] [TIFF OMITTED] 37556.158
[GRAPHIC] [TIFF OMITTED] 37556.159
[GRAPHIC] [TIFF OMITTED] 37556.160
[GRAPHIC] [TIFF OMITTED] 37556.161
[GRAPHIC] [TIFF OMITTED] 37556.162
[GRAPHIC] [TIFF OMITTED] 37556.163
[GRAPHIC] [TIFF OMITTED] 37556.164
[GRAPHIC] [TIFF OMITTED] 37556.165
[GRAPHIC] [TIFF OMITTED] 37556.166
[GRAPHIC] [TIFF OMITTED] 37556.167
[GRAPHIC] [TIFF OMITTED] 37556.168
[GRAPHIC] [TIFF OMITTED] 37556.169
[GRAPHIC] [TIFF OMITTED] 37556.170
[GRAPHIC] [TIFF OMITTED] 37556.171
[GRAPHIC] [TIFF OMITTED] 37556.172
[GRAPHIC] [TIFF OMITTED] 37556.173
[GRAPHIC] [TIFF OMITTED] 37556.174
[GRAPHIC] [TIFF OMITTED] 37556.175
[GRAPHIC] [TIFF OMITTED] 37556.176
[GRAPHIC] [TIFF OMITTED] 37556.177
[GRAPHIC] [TIFF OMITTED] 37556.178
[GRAPHIC] [TIFF OMITTED] 37556.179
[GRAPHIC] [TIFF OMITTED] 37556.180
[GRAPHIC] [TIFF OMITTED] 37556.181
[GRAPHIC] [TIFF OMITTED] 37556.182
[GRAPHIC] [TIFF OMITTED] 37556.183
[GRAPHIC] [TIFF OMITTED] 37556.184
[GRAPHIC] [TIFF OMITTED] 37556.185
[GRAPHIC] [TIFF OMITTED] 37556.186
[GRAPHIC] [TIFF OMITTED] 37556.187
[GRAPHIC] [TIFF OMITTED] 37556.188
[GRAPHIC] [TIFF OMITTED] 37556.189
[GRAPHIC] [TIFF OMITTED] 37556.190