[House Hearing, 111 Congress] [From the U.S. Government Publishing Office] BANKING INDUSTRY PERSPECTIVES ON THE OBAMA ADMINISTRATION'S FINANCIAL REGULATORY REFORM PROPOSALS ======================================================================= HEARING BEFORE THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED ELEVENTH CONGRESS FIRST SESSION __________ JULY 15, 2009 __________ Printed for the use of the Committee on Financial Services Serial No. 111-58 U.S. GOVERNMENT PRINTING OFFICE 53-238 PDF WASHINGTON : 2009 ----------------------------------------------------------------------- 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) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 HOUSE COMMITTEE ON FINANCIAL SERVICES BARNEY FRANK, Massachusetts, Chairman PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama MAXINE WATERS, California MICHAEL N. CASTLE, Delaware CAROLYN B. MALONEY, New York PETER T. KING, New York LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina RON PAUL, Texas GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois BRAD SHERMAN, California WALTER B. JONES, Jr., North GREGORY W. MEEKS, New York Carolina DENNIS MOORE, Kansas JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West WM. LACY CLAY, Missouri Virginia CAROLYN McCARTHY, New York JEB HENSARLING, Texas JOE BACA, California SCOTT GARRETT, New Jersey STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas AL GREEN, Texas TOM PRICE, Georgia EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina MELISSA L. BEAN, Illinois JOHN CAMPBELL, California GWEN MOORE, Wisconsin ADAM PUTNAM, Florida PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota KEITH ELLISON, Minnesota KENNY MARCHANT, Texas RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan CHARLES A. WILSON, Ohio KEVIN McCARTHY, California ED PERLMUTTER, Colorado BILL POSEY, Florida JOE DONNELLY, Indiana LYNN JENKINS, Kansas BILL FOSTER, Illinois CHRISTOPHER LEE, New York ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota JACKIE SPEIER, California LEONARD LANCE, New Jersey TRAVIS CHILDERS, Mississippi WALT MINNICK, Idaho JOHN ADLER, New Jersey MARY JO KILROY, Ohio STEVE DRIEHAUS, Ohio SUZANNE KOSMAS, Florida ALAN GRAYSON, Florida JIM HIMES, Connecticut GARY PETERS, Michigan DAN MAFFEI, New York Jeanne M. Roslanowick, Staff Director and Chief Counsel C O N T E N T S ---------- Page Hearing held on: July 15, 2009................................................ 1 Appendix: July 15, 2009................................................ 55 WITNESSES Wednesday, July 15, 2009 Bartlett, Hon. Steve, President and Chief Executive Officer, The Financial Services Roundtable.................................. 11 Courson, John A., President and Chief Executive Officer, Mortgage Bankers Association............................................ 14 Leonard, Denise M., Vice President, Government Affairs, National Association of Mortgage Brokers................................ 20 Menzies, R. Michael S., Sr., President and Chief Executive Officer, Easton Bank and Trust Company, on behalf of the Independent Community Bankers of America (ICBA)................ 24 Stinebert, Chris, President and Chief Executive Officer, The American Financial Services Association........................ 15 Yingling, Edward L., President and Chief Executive Officer, American Bankers Association................................... 22 Zeisel, Steven I., Vice President and Senior Counsel, The Consumer Bankers Association................................... 17 Zywicki, Professor Todd J., George Mason University Foundation Professor of Law and Mercatus Center Senior Scholar, George Mason University School of Law................................. 18 APPENDIX Prepared statements: Bartlett, Hon. Steve......................................... 56 Courson, John A.............................................. 111 Leonard, Denise M............................................ 145 Menzies, R. Michael S., Sr................................... 158 Stinebert, Chris............................................. 176 Yingling, Edward L........................................... 187 Zeisel, Steven I............................................. 206 Zywicki, Professor Todd J.................................... 211 Additional Material Submitted for the Record Bachmann, Hon. Michele: Editorial from The Wall Street Journal entitled, ``A Tale of Two Bailouts''............................................. 246 BANKING INDUSTRY PERSPECTIVES ON THE OBAMA ADMINISTRATION'S FINANCIAL REGULATORY REFORM PROPOSALS ---------- Wednesday, July 15, 2009 U.S. House of Representatives, Committee on Financial Services, Washington, D.C. The committee met, pursuant to notice, at 10:03 a.m., in room 2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. Members present: Representatives Frank, Kanjorski, Waters, Maloney, Watt, Sherman, Meeks, Moore of Kansas, Hinojosa, McCarthy of New York, Baca, Lynch, Miller of North Carolina, Scott, Green, Cleaver, Bean, Moore of Wisconsin, Ellison, Klein, Wilson, Perlmutter, Donnelly, Foster, Carson, Speier, Minnick, Adler, Driehaus, Himes; Bachus, Royce, Lucas, Manzullo, Jones, Biggert, Miller of California, Hensarling, Garrett, Barrett, Neugebauer, McHenry, Putnam, Bachmann, Marchant, McCarthy of California, Posey, Jenkins, Lee, Paulsen, and Lance. The Chairman. The hearing will come to order. As people know, we are in a very, very serious examination of the financial regulations of the country. It is the intention of myself as Chair to--that is pretty pompous--it is my intention to begin marking up a couple of aspects of this. Most of the complex, systemic ones will be coming in September. But we do have a very heavy schedule of hearings, and I want to invite anyone listening in the audience today or through any other means, please feel free to submit information. We have a serious set of issues here. They are interconnected. We really do welcome information. The hearing today is to receive the views of people in the financial services industry on various regulatory proposals. And I invite people to talk about the full range. Obviously, there is a certain amount of concern about the proposal for a financial customer protection agency, but we also are going to be dealing with the questions of systemic risk for those institutions which are not banks, the question of the resolving authority and how we can extend that. We did have a separate hearing on compensation, but that will be one of the topics. We obviously will also be dealing with questions of derivatives and how much we are going to tighten regulation on that, and the answer is a significant amount. And I do want to note that on this coming Monday, after the Chairman of the Federal Reserve testifies, we are going to have a hearing specifically on the question of ``too-big-to-fail.'' That has become a very important issue that people are concerned about. My own view is that the Administration's approach deals with that in a reasonable way, but it is important that we both be doing it right and be seen to be doing it right. And so on Monday, we are going to be having a hearing specifically to address how we can avoid the danger of a too-big-to-fail regime. How do we have a situation--obviously, the hope is you want to keep them from getting too big and, particularly, you hope to keep them from failing. But how do you deal with that if it happens? So I do recommend to anyone--and I almost want to have an essay contest, except we are not allowed to give anybody anything except through an appropriations bill, and that has gotten tougher than it used to be. But anyone who has any proposal for what we should be doing to substantially diminish the likelihood of any institutions being treated as too-big-to- fail--I am serious--please feel free to let us have them, in writing in particular, because I think there is a general consensus that one of the things we want to come out of this with is a substantial diminution, at the very least, of that problem. Now let me begin my statement. Today's hearing is about the whole set of issues. Obviously, the financial consumer protection issue has attracted a lot of attention, and that is the one that I believe we will be able to mark-up before we go. I just want to read a memo I got from my staff. It is a memo summarizing the large number of complaints we have received both directly from consumers and from Members on both sides of the aisle who have heard from their constituents objecting to practices that the credit card companies are engaging in now that we have passed the bill. Essentially, the argument is that in anticipation of the legislation, a number of things are happening. Senator Dodd, in fact, sent a letter to the Chairman of the Federal Reserve talking about this. As you know, in a compromise with people in the banking industry, we agreed to hold off the effective date. But we were concerned that the effective date being held off might lead people to kind of flood the zone before we could get there. We have had complaints about significant increases in the monthly minimum payment, for example, from 2 percent to 5 percent on existing balances. Again, I want to make clear, in my own mind, there is a distinction between what you do with existing balances and what you do going forward. And I don't think an increase in the minimum monthly payment is a bad thing in every case; and maybe it discourages people from getting too deeply in over their heads. But to raise the monthly minimum on an existing balance is changing the rules after people have started playing. And people could rightly say, ``Well, if I had known that, I would have altered my behavior at the outset.'' One of my colleagues told me that he had people complain that JPMorgan Chase had told him that it was Federal law requiring such increases. That is, of course, not true; and I have no reason to disbelieve people saying that is what they were told by various bank employees. We have other changes being made, some of which are within the law, some of which I think would be prevented by the law. But that, I must tell you, is what strengthens the case for this Agency. We cannot and should not try to pass a law every time there is a set of complaints. What we need is for there to be rules. And it is not our experience that the existing regulators have used statutory authority given to them very vigorously. But this, this flood of complaints--and I must tell you the complaints about the credit card issuance, the credit card- issuing banks--has become a very significant one. There are a couple other points I will make with regard to financial customer protection. I know there will be people who won't want it in any case. I certainly agree that it should not be a situation in which any bank could ever be given contradictory orders. We can guarantee that this law will be written, if it becomes law, to prevent that. I previously expressed my view that the Administration made a mistake in including the Community Reinvestment Act here. I think that is a different order of activity. One other concern that came because, as the Administration sent it, they, of necessity, talked about their plans to abolish--well, to merge the OTS and the OCC and to--I know there are people who think merging the OCC and the OTS is kind of like merging Latvia with the Soviet Union, but we do really see this as a merger because we think there is a very important thrift function that has to be preserved. And in that conjunction, I do not think this committee is going to abolish the thrift charter. I think it is important that we preserve the thrift charter. The problem with the thrift charter is that it is both a charter to engage in thrift activity and, to some extent, a hunting license to go and do other things with less regulation. I believe we are capable of rewriting that so that it is a thrift charter and a thrift charter only and will not get into that. And while I am on thrifts, I just want to have one--we are often criticized, and good things happen and people don't notice, I was pleased to read in the report of the Federal Home Loan Banks, not that they had lost money; they lost money, as we expect for people in the housing business, but they made a point of noting that their losses were significantly less than they would have been had it not been for the alterations that had been made in the mark-to-market rules; that their ability to distinguish between instruments held for trading and instruments that they plan to hold until maturity, which are fully paying, minimize their losses. When you minimize the losses of the Federal Home Loan Banks, you increase their ability to make home loans at a time when we need them. So I do want to take credit, because this committee had a major role in an advocacy capacity on both sides in urging that change in mark-to-market. And we have just had some evidence that it was the right thing to do. The gentleman from Alabama is recognized for how much time? Mr. Bachus. Actually, Mr. Chairman, I don't have an opening statement. I do want to respond to something in your pre-opening statement. The Chairman. Sure. Mr. Bachus. The chairman invited you to submit essays. And I would simply say that they need to be plain vanilla essays. And if they are not, you need to get Elizabeth Warren's okay before you submit them. The Chairman. That sounded like an opening statement to me, but all right. The gentleman from Texas, Mr. Neugebauer, is recognized for 2 minutes. And then I will go right to the gentleman from California for 2 minutes. We split that up. Mr. Neugebauer. Thank you, Mr. Chairman. As we continue to assess the Administration's and the chairman's proposal for regulatory restructuring, we need to take more time to understand the impacts. And I think we just heard the chairman say, there are consequences when we pass legislation. And we heard some of that today. How will these proposals affect the cost of credit for those whom we represent? What are the impacts on the community lender and the constituents and small businesses in our hometowns who count on that credit? At a time when our economy has slowed, and lenders are hesitant to lend, a new regulator would further limit the available credit. New fees to fund this agency mean added costs for consumers at a time when they can least afford it. What do consumers get for this new tax? They get a massive Federal agency to substitute the government's judgment for theirs about what financial products and services best fit their needs. Taxpayers I represent are getting tired of the Federal Government dictating what kind of energy they are going to use, who is going to provide their health care, what kind of credit card they can have, what kind of a mortgage is appropriate for them, even what kind of car they can buy. Our Republican plan is better for consumers. We keep safety and soundness regulation and consumer protection regulation under the same roof, because this structure holds regulators accountable. Our plan requires better disclosure and antifraud enforcement. When the American people receive good information about their financial products and services available and know that the fraudulent behavior will be stopped and punished, we think they are smart enough to make decisions about what products are best for them to use. The problem I have had with this whole process is that we had a lot of legislation on the books. We had regulators in place who were supposed to be doing their job. The problem is that regulators, in many cases, didn't do their job. And so now our answer, rather than going back and holding those people accountable for their action, is to throw a whole new blanket of regulation over the markets to somehow give some indication that is going to fix the problem. What we don't need is more regulation. We need better regulation, we need smarter regulation, and we need regulators doing their job. And I hope to hear from our witnesses today on some commonsense approaches to this so that we can continue to provide credit and not limit the choices of the American people. I don't think the American people are going to be overly excited about their choices being limited. So I thank you, Mr. Chairman, for holding this hearing. The Chairman. The gentleman from California for 2 minutes. Mr. Royce. Thank you, Mr. Chairman. A major component of the Administration's regulatory reform proposal is the creation of a Consumer Financial Protection Agency, which would separate safety and soundness regulation from consumer protections. This idea of separating the two has been around for some time. In fact, we saw that very structure over the GSEs. A weak safety and soundness regulator, OFHEO, was competing with HUD, who subjected Fannie Mae and Freddie Mac to ever-increasing affordable housing goals. And we know how that ended. The affordable housing goals of Fannie and Freddie, enforced by HUD, were the main reason behind the GSEs loading up on junk bonds, which ended up accounting for roughly 85 percent of their losses. Clearly, the goals were at odds with the long- term viability of these firms, and ultimately led to their demise. We are now looking at applying that regulatory framework to the entire financial services sector. As the GSEs have shown, there is an inherent conflict in separating these two responsibilities. And there is also a reason why regulators like James Lockhart, who heads up the FHFA, and Sheila Bair, head of the FDIC, have expressed concern over such a proposal. I think, long term, this Agency will do more harm than good, and based on the GSE history and political interference at the expense of safety and soundness, it should be avoided at all costs. I yield back, Mr. Chairman. The Chairman. The gentleman from Kansas is recognized for 2 minutes. Mr. Moore of Kansas. Thank you, Mr. Chairman, and I thank you for your work to introduce H.R. 3126 to create the Consumer Financial Protection Agency. I look forward to working with you and members of this committee to ensure that we have oversight of any new agency and the regulatory structures. I will be working to add an independent Office of Inspector General to the CFPA, as well as increasing the coordination between all financial IGs to ensure regulatory gaps are identified and addressed. The financial meltdown last year made it very clear that our financial regulatory structure has problems that need to be fixed. We need to make sure that we have a system that protects consumers, investors, and taxpayers. I thank the witnesses for their views on the Administration's proposal. We need to act thoughtfully and carefully, but quickly, to repair the gaps identified in our regulatory system. We also need to make sure that community banks that did not create this crisis are fairly treated under the new system. Thank you, Mr. Chairman, and I yield back. The Chairman. The gentlewoman from Illinois, Mrs. Biggert, for 2 minutes. Mrs. Biggert. Thank you, Mr. Chairman. It is no secret that one of the reasons our country got into this financial mess in the first place is because there simply were too many regulators who weren't doing their job and not talking to one another. Thus, I am very skeptical that for consumers the answer is making government bigger by creating a new Federal agency that is paid for by taxpayers, that tells consumers what financial products they can and cannot have, and tells financial institutions what products they can and cannot offer. There is no question that our financial services regulatory structure is broken; and for both consumers and the health of our financial services industry and the economy, we need to clean it up. However, I fear that we are moving in the wrong direction when we strip from the banking regulators their mission to protect consumers. Instead, we place that responsibility with a new government bureaucracy, an agency that I think should really be called the Credit Rationing and Pricing Agency. Why do I say this? Well, because this new agency, charged with deciding what is an affordable and appropriate product for each consumer, can only result in one or more of three things: First, many consumers who enjoy access to credit today will be denied credit in the future; Second, riskier consumers will have access to affordable products, but who will pay for that risk? It is the less risky consumer whose cost of credit will increase; and Third, financial institutions will be told to offer certain products at a low cost to risky consumers, which will jeopardize the safety and soundness of that financial institution. Secretary Geithner last week couldn't really answer the question, would the safety and soundness banking regulator trump a new consumer regulator if the consumer regulator's policy would put the bank in unsafe territory? We must first do no harm. We must find a balanced approach to financial regulation. I think our Republican plan that puts all the banking regulators and consumer protection functions under one roof is a better answer for the consumer and really gets to the heart of preventing another financial meltdown. I look forward to today's hearing and I yield back. The Chairman. The gentleman from Texas, Mr. Green, for 2 minutes. Mr. Green. Thank you, Mr. Chairman. And I thank you for the introduction of H.R. 3126. I am eager to hear commentary on H.R. 3126. I believe that we can have consumer protection as well as safety and soundness; I don't think these things are mutually exclusive of each other. I don't think that legislation is perfect, but I do think that we can do things to perfect it. And I am interested in being a part of the perfection process to make sure we have safety and soundness as well as consumer protection. Thank you, Mr. Chairman. I yield back. The Chairman. The gentleman from California, Mr. Miller, for 2 minutes. Mr. Miller of California. Thank you, Mr. Chairman. I want to thank you for holding this hearing today. And I believe that everyone in this room would agree that our current regulatory system failed to adequately protect not only the markets, but investors, and it does need to be restructured. However, I believe we need to proceed with caution to ensure that legislation does not overregulate our markets, stifle innovation or take choices away from consumers. I want to thank the chairman for bringing up the issue of mark-to-market. I believe it was in February of last year that I introduced an amendment on a bill, the housing bill, that required the Federal Reserve and the SEC to look at mark-to- market, perhaps take part of it and revisit it and restructure it, and perhaps even avoid implementing portions of it at that point in time. It is sad to say, I think I did that 3 or 4 times, and the Senate removed it from every bill we sent over there. I think, had we moved more aggressively in that direction, perhaps some of the problems we face today might have been avoided. There has been much debate about Freddie and Fannie. I know in 2002-2003, we also passed legislation providing a strong regulator and providing oversight for Freddie and Fannie that perhaps might have avoided some of the circumstances they are facing today. But the concept of not having a Freddie or Fannie there today, when they are providing about 73 percent of all the loans out there and the guarantees in the marketplace, is bothersome to me. And if you include FHA in that, between Freddie, Fannie, and FHA, over 90 percent of the loans made today are taken by those or guaranteed by those companies. The fact is that with liquidity as it is, the banks just don't have the liquidity on hand to make fixed-rate 30-year loans and hold those loans in many cases. I think one thing we didn't do was open Freddie and Fannie up to the high-cost areas. We did that much later, in fact in this last year, but I think had we done that early on there would have been more liquidity in the overall marketplace, and I believe that certain portions of this country wouldn't have been discriminated against because they weren't having the option to participate in the program. I really hope that the comments by this group of distinguished individuals today will be honest, above board, and really tell us your concerns. I am concerned that we overregulate you. We need to allow the market to take its course. We need to allow innovation within the marketplace, and especially within your industry, we need to allow for innovation. I think sometimes we are not timely in implementing programs like mark-to-market. And I think sometimes we react overaggressively after the fact when things have occurred, and I am hoping we don't do that in many cases. I hope we are thoughtful in what we are doing here, we discuss the pros and cons as it applies to your industry, and we come up with something that is reasonable. Mr. Chairman, I thank you and I yield back the balance of my time. The Chairman. The gentleman from Georgia, Mr. Scott, for 2 minutes. Mr. Scott. Thank you, Mr. Chairman, and thank you for this hearing. This is an important hearing. As I have often said, the banking industry is the heart of our financial system, and through it, everything flows. We have so much on our plate as we deal with the President's regulatory reforms: the new financial oversight agency, the Consumer Financial Protection Agency; the Federal Reserve and its role as systemic regulator; the creation of a council of regulators; the FDIC's role; the merger of the Office of Thrift Supervision into the OCC; title rules on banks that package and sell securities backed by mortgages and other debt; proposals that companies issuing their mortgages retain at least 5 percent on their books; and the requirement that hedge funds and private equity funds register with the SEC and open their books to regulation. We have a lot on our plate to deal with in this regulatory reform. And on top of that, how do we make this work with our State, our Federal, and international regulators, all in our efforts to ensure the stability of the financial services sector and protection of the financial consumer? What a challenge we have. It is the banking community that is at the heart of it, and this is why this hearing is so vital and so important. Thank you, Mr. Chairman. The Chairman. The gentleman from Texas, Mr. Hensarling, for 2 minutes. Mr. Hensarling. Thank you, Mr. Chairman. Under the national energy tax, House Democrats want to help decide what cars we can drive. Yesterday, House Democrats announced a plan to help decide what doctors we can see and when we can see them. And now under CFPA, House Democrats want to decide whether or not we qualify for credit cards, mortgages, or practically any other consumer financial product. Yes, there is a troubling trend. The CFPA represents one of the greatest assaults on economic liberty in my lifetime. It says to the American people, you are simply too ignorant or too dumb to be trusted with economic freedom. Therefore, five unelected bureaucrats, none of whom know anything about you or your family, will make these decisions for you. But never fear, surely several of them will have Ph.D. by their names, and they will engage in vigorous discussions about consumer credit issues at very exclusive cocktail parties in Georgetown. This is the commission that will now have sweeping powers to decide under the subjective phrase ``unfair,'' what mortgages, credit cards, and checking accounts you may qualify for. Sleep soundly at night. To take from consumers their freedom of choice, to restrict their credit opportunities in the midst of a financial recession, all in the name of consumer protection is positively Orwellian. Let's protect consumers from force and fraud. Let's empower them with effective and factual disclosure. Let's give them opportunities to enjoy the benefits of product innovations like ATM machines and online banking. And let's not constrict their credit opportunities. A consumer product Politburo does not equate into consumer protection. I yield back the balance of my time. The Chairman. The gentleman from Texas, Mr. Green, for 2 minutes. I am sorry, the gentlewoman from California. Ms. Waters. Thank you very much, Mr. Chairman. I am pleased we have an opportunity this morning to interact with the banking industry. I am particularly pleased that many of our witnesses have indicated they support more regulation for the shadow banking industry, a collection of unregulated lenders who operate outside of State and Federal oversight due to their nonbank status. It was, yes, many of these lenders who preyed on customers with products such as no-doc loans, and helped erode the lending markets which compromised the foundation of our economy. However, I am still concerned with the consumer-related activities of regulated banks. Large banks, in particular, have substantial interactions with the public, be it as a mortgage servicer, as a place for consumers and small businesses to access necessary credit. I would agree with you that additional regulation would be unnecessary were our financial system functioning properly. However, data from the Federal Reserve on the availability of credit shows this is not the case. Likewise, neither do the calls I receive from my constituents, the ones who are facing foreclosure, yet cannot reach their servicer to modify their loan. After all that we have gone through in trying to make loan modifications available to deserving people, we still have people who cannot reach their servicers. And even when they do, the servicers are not working out credible loan modification arrangements. Clearly, the mechanisms we have to protect consumers and ensure their access to credit are inadequate. I believe that a Consumer Financial Protection Agency is vital to the proper functioning of our economy. Our current crisis began when collateralized debt obligations and mortgage-backed securities began to be packed with exotic products such as no-doc and liar loans. It was exacerbated as consumers were continually squeezed with excessive penalties and fees from bank products, reducing purchasing power and leading families everywhere to make tough decisions. A strong regulator, one which focuses solely on consumer safety and champions simpler disclosure and products would have prevented all of this. Thank you, Mr. Chairman. I yield back the balance of my time. The Chairman. The gentleman from New Jersey, Mr. Garrett, for 2 minutes. Mr. Garrett. Thank you, Mr. Chairman. Let me just make two points. The first one--I don't want to single out any single member of this committee, because what I want to say is a reflection on the process and not just the individual, because he is certainly not alone. But this last Monday, in the American Banker magazine, this member of the committee was asked this question: ``How will a dispute be settled between the safety and soundness regulators and the newly formed CFPA?'' And he responded, ``Unfortunately, I can't give you an answer to that.'' He went on to say, ``Your question is a good one, because you have to think about what you haven't thought about, and I haven't even thought about how a dispute between the agencies would be resolved, so I had better figure that out.'' Now this comment, mind you, comes from one of the bill's sponsors, who just a couple of days ago had not thought about a process that is basically fundamental to the issue that is in this bill. As I stated before, I am not singling out a single member, because I think other people have the same questions. They haven't had the time to think this all through, nor has the Administration thought about the unintended consequences of their proposal--this, despite the fact we rush long into the April break--I mean the August break--with the goal of getting this rammed through Congress without having thought it through. Secondly, you know, there was an op-ed by Peter Wallison recently which points out that traditionally in this country for consumer protection we talk about disclosure, adequate disclosure. And it is always assumed if you have adequate disclosure, that regardless of the level of sophistication of the consumer, the consumer would make a rational decision as to what he was doing. If the Administration's proposal is put through, however, the consumer will be told that regardless of the level of his sophistication, his education, or perhaps his intelligence, he is not going to be able to understand what is being offered to him. You know, this Administration has made a fairly dramatic move to make more and more decisions in place of the decisions that have been traditionally been made in the place of the consumer, whether it is in the area health care that you talked about, the bankruptcy process or the like. Quite honestly, I don't think Americans want government bureaucrats deciding if they are smart enough or sophisticated enough to take out a line of credit at the local retailer, or policing whether the credit card that they choose offers reward points or not. When you come down to it, having choices is part of being an American. With that, I yield back. The Chairman. The gentlewoman from Kansas for 2 minutes. Ms. Jenkins. Thank you, Mr. Chairman. For months now, this body has been attempting to relieve the pain felt by our constituents because of today's economic turmoil. However, politicians should not use the current financial crisis as a convenient excuse for a massive overreach of government intervention into our free markets. Smart and lean regulation can be effective, allow free markets to innovate, and balance consumer protection. Innovation is the base of American economic strength. Killing innovation, whether through overregulating or by allowing only plain vanilla products, could hinder access by individuals and businesses to sound, yet creative, financial products. Plus, many of the proposals before us may not address the real faults in the system. The regulatory compliance costs alone may severely impact smaller financial institutions at a time when many of these institutions in Kansas are already struggling. I am eager to hear this week about how we can best reform our system, protect consumers, and allow for vibrant growth. Regulatory restructuring is not to be taken lightly. I urge my colleagues to proceed with caution, taking into account unintended consequences these reforms may have on the financial industry and the consumer. Thank you, Mr. Chairman. I yield back the remainder of my time. The Chairman. We will now hear from Mr. Watt, then we will be able to hear one of the statements, and then we will break. Mr. Watt is recognized for 1 minute. Mr. Watt. Thank you, Mr. Chairman. I really had planned not to give an opening statement, but Mr. Garrett and his comments provoked me; and I did want to be clear that in answering the question that the gentleman asked, I don't think an appropriate response or answer is--just as if you have a safety and soundness regulator, you wouldn't have the consumer regulator overrule the final decision on safety and soundness, I don't think the appropriate response is to have a safety and soundness regulator overrule and be the final word on consumer issues. The Chairman. Would the gentleman yield me his last-- Mr. Watt. I am happy to. The Chairman. First of all, if we have the answers before the hearing, people are upset. And if we have the hearing before the answers, people are upset. If people want to be upset, there is nothing I can do to stop it. I will say this: I can guarantee that any legislation that comes out of here will make it clear that no bank will be faced with any conflicting demands and that there will be, very clearly, a final resolution matter, and no one will be subjected to that double standard. And now we are going to take one witness. And the members may know that in seniority, two people elected at the same time, if there is a member who had prior service that was interrupted, that member gets seniority. So following that principle, the former member of this committee, the gentleman from Texas, as he then was, Mr. Bartlett, will be our lead witness representing the Financial Services Roundtable. STATEMENT OF THE HONORABLE STEVE BARTLETT, PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE FINANCIAL SERVICES ROUNDTABLE Mr. Bartlett. Thank you Mr. Chairman, Ranking Member Bachus, and members of the committee. The focus of this hearing is on the future, as it should be, but I want to begin with an apology about the past--I said this at other times, in other forums, and in other places for perhaps a year; John Dalton, representing the Roundtable and Housing Policy Council, said this the last time he was before the committee--and that is, our sincere--my personal, sincere apologies and those of our organizations for the role that we played and I played in failing to see the crisis in time to help to avert it. So I accept my responsibilities. And we are here to set out some responsibilities to seek reform to avert the next crisis. It is the Roundtable's view and my view that this reform should be comprehensive, should be systemic, and should be quite large in terms of its scope of averting the next crisis. The fact is, there is a lot of blame to go around, a lot of sources of the problem; but the number one problem, it seems to me, that brought us here was the regulatory system that is in chaos in terms of its structure. The current system is characterized much more by silos of regulation than coherent regulation, and that introduces hundreds of different agencies who regulate the same companies with the same activities in totally different ways based on different statutes, different standards, different systems, different goals, with a total lack, or virtually total lack, of common principles and common goals. So I am here today to start with this committee to urge comprehensive reform. The Roundtable supports bold reform, comprehensive reform that will strengthen the ability of our financial systems to serve the needs of consumers and to ensure the stability and integrity and safety and soundness of the financial system. To be clear, the status quo is unacceptable. I am going to comment orally on several components of the legislation or the proposal that has been proposed by the Administration. I have about 15 in total in my written testimony. I will offer four or five. The Chairman. And without objection, all submissions by any of the witnesses on any material will be accepted into the record. Mr. Bartlett. I will comment on four or five of those in my oral testimony. One is the Consumer Financial Protection Agency, no doubt the subject of the largest amount of heat and attention by this committee, as it should be. The Roundtable believes that strengthened consumer protection is an essential component of broader regulatory reform. To that end, we endorse the spirit to ensure sound protections and better disclosures for consumers, but we strongly, strongly oppose the creation of a separate, free-standing Consumer Financial Protection Agency. Rather than create a new agency and bifurcate consumer protection from safety and soundness, we recommend that the Congress enact strong national consumer protection standards for all consumers. We are not here to advocate the status quo; we are here to advocate stronger regulation. In short, we support consumers, we support financial regulatory reform, we support protection, and we oppose the agency. Second, systemic risk regulator and the so-called Tier 1 financial holding companies: An essential part of regulatory reform legislation is the creation of a systemic risk regulator. Today, no single agency has the specific mandate or surveillance purview or the accountability to detect and mitigate the risks of financial stress in future financial crises. We strongly support the designation of the Federal Reserve Board as a systemic risk oversight authority. However, the Board should not be added as an additional super-regulator. Rather, it should work with and through the powers of prudential supervisors in nonemergency situations to achieve their goals. We support a national resolution authority. The recent financial crisis demonstrated the urgent need for that authority. The Roundtable supports and has advocated for the establishment of a resolution regime for insolvent nonbank financial institutions. We recommend that the Treasury Department have the authority to appoint the appropriate prudential regulator for an institution upon determination that authority is necessary. However, we strongly believe that the FDIC and other agencies that are set up for those sectors should be segregated and held off just for the sectors that those funds have been designated for. Insurance: The Administration's proposal recognizes ``our current insurance regulatory system remains highly fragmented, inconsistent and inefficient,'' and ``has led to a lack of uniformity and reduced competition across State and international boundaries, resulting in inefficiency.'' Well, you get the picture. That is from the Administration's statement. So at the Roundtable, we think a logical extension of that should strongly support the adoption of a Federal insurance charter as part of this regulatory reform for national insurers, reinsurers, and producers under the supervision of a single national regulator. We urge the committee to consider H.R. 1880, the National Insurance Consumer Protection Act offered by Congresswoman Bean and Congressman Royce as part of this regulatory structure. Mr. Chairman, the Roundtable supports comprehensive reform now. We recommend a number of practical and important improvements to this legislation to achieve that reform. I yield back. [The prepared statement of Mr. Bartlett can be found on page 56 of the appendix.] The Chairman. We will now recess. We will vote. It looks like there is one adjournment vote. So we will be able to come back fairly quickly, and we will get to the rest of the witnesses. The committee is in recess. [recess] The Chairman. The hearing will reconvene. I have been told by the staff that the timer is broken, so I will be looking at the clock and going by the clock. That doesn't mean you won't get much time. I will try to give people--I will try. That is not hard, except I may forget. That will mean you have a minute to go, so people will have a chance to wind up what they are saying or, to use the terminology of the industry, they will have a chance to resolve their statements; which means put you out of business, as we know. That is a nice way to say that. So we will now go to John Courson, who is president and chief executive officer of the Mortgage Bankers Association, and my very able colleague here has a timer of 5 minutes, very good. So we have a 5-minute timer from Mr. Neugebauer. Thank you. Mr. Courson, please go ahead. STATEMENT OF JOHN A. COURSON, PRESIDENT AND CHIEF EXECUTIVE OFFICER, MORTGAGE BANKERS ASSOCIATION Mr. Courson. Thank you, Mr. Chairman. Let me say from the outset that MBA supports regulatory modernization and strengthening our consumer protections. Our country's economic crisis gives us a once-in-a-generation opportunity to really improve the regulation of our mortgage markets. These improvements to the financial regulatory structure will have a profound effect on the availability and affordability of mortgage financing. We believe they must be judiciously considered so reform is done right. Today's financial regulatory system is a patchwork of State and Federal laws. While MBA strongly supports the Congress' and the Administration's efforts to improve this system, having reviewed these proposals through the prism of our regulatory modernization principles, we do have some concerns. MBA's principles include that all parts of financial services regulation must be addressed comprehensively and regulatory changes should focus on substance, not form. Uniformity and oversight and interpretation of standards should also be promoted whenever possible. Collaboration among regulators and transparency should be required. Appropriate borrower protections must be balanced with the opportunities for the industry to compete and to innovate. Finally, attention must be given to ensure the continued availability and affordability of sustainable mortgage options. With these points to guide our analysis, MBA has the following concerns about the creation of a consumer financial protection agency. Establishing a new consumer protection regulator, while also maintaining the authority at existing regulators, may actually weaken consumer protections by disbursing regulatory power and removing consumer protection from the mainstream of the regulators' focus. In addition, CFPA may result in a worse patchwork of Federal and State laws as well as uneven protection and increased costs for consumers. To truly protect consumers, we need greater uniformity. Additionally, while the proposal suggests that HUD and the Federal Reserve work together to achieve a single combined RESPA/TILA of disclosure or have it become the responsibility of CFPA, the bill does not require such collaboration as this committee directed in the mortgage reform bill, which passed this House in May. And borrower protections offered in H.R. 3126 could stem competition and innovation. If saddled with responsibilities across the spectrum of financial products, CFPA could fail to give proper attention to the biggest asset most families purchase: a home. Because the new regulator would not be solely focused on mortgage regulation, there is a danger that mortgage products may not receive sufficient priority. To respond to these issues, MBA believes there are better alternatives for improving consumer protections. With our expertise in the mortgage markets, MBA has developed a groundbreaking proposal to protect consumers and improve the system that regulates mortgage finance. We call it the Mortgage Improvement and Regulation Act. It would provide uniform standards, consistent regulation for all mortgage lending. MIRA would improve the regulatory process to include more rigorous standards for lenders and investors and equally clear protections for consumers. Instead of adding duplicative regulation at the Federal level, it would fill gaps in regulation of nondepository lenders and mortgage brokers, providing them with a Federal regulator, streamline regulation, and would enhance enforcement. MIRA could easily be part of a more comprehensive regulatory modernization effort. More importantly, it would ensure that consumers are provided mortgage financing and protection from abuse. We hope the committee will consider our MIRA proposal as part of its regulatory modernization efforts. Mr. Chairman, MBA looks forward to working with the committee on new consumer protection and regulatory modernization legislation as these proposals develop. These are extremely complex and important issues, and we hope the committee will take all of the time it needs to do the right thing. Thank you for this opportunity to testify. [The prepared statement of Mr. Courson can be found on page 111 of the appendix.] The Chairman. Thank you, Mr. Courson. Next, we will hear from Chris Stinebert, president and chief executive officer of the American Financial Services Association. STATEMENT OF CHRIS STINEBERT, PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE AMERICAN FINANCIAL SERVICES ASSOCIATION Mr. Stinebert. Thank you, Mr. Chairman, and thank you for your assurances about no contradictory orders out there. That is very helpful. And, also, I heard from everyone in their opening statements about the desire of everyone to move cautiously and carefully as we move forward, and that is appreciated as well. Today I am going to focus most of my remarks on the new formation of the Consumer Financial Protection Agency. Let me say from the outset that AFSA fully supports strong consumer protection. What is troubling, however, is the notion that improved consumer protection depends entirely on the creation of a new Federal agency empowered to make product choices for consumers. We believe the country does not need a vast new bureaucracy, and that the goals of the Administration and Congress can be achieved through other means that are quicker, more efficient, and certainly less costly. If signed into law today, the CFPA's earliest action could be taken perhaps 2 to 3 years from now. Why then would Congress rush to launch a new agency before taking the time to carefully evaluate the potential consequences on the availability of credit and certainly the overall economy? We believe that a thorough assessment is needed to determine if the benefits will outweigh the risk and certainly the costs. In essence, the proposal would impose a new tax on consumers at a time when they are least able to afford it. Congress should think carefully about setting up a new government agency that would cost taxpayers more money at a time when they are already struggling to stay afloat financially. Given the vast scope of the new agency, it is certainly acceptable that these costs could be staggering. Any assessment or fees charged to lenders undoubtedly will be passed on to consumers. The result will be an increase in costs and hurt the availability of credit. AFSA believes consumers will be better served by a regulatory structure where the prudential and consumer production oversight is housed within a single regulator. Congress tried to separate these two functions with the GSEs. Director James Lockhart recently cited this separation of functions was one of the primary reasons for failure at Fannie Mae and Freddie Mac. We urge Congress to support a regulatory structure that continues to have that balance, that necessary balance between safety and soundness and the viability of the companies that offer them. We also believe that the proposed agency has the potential to roll back the clock 30 years, back to when consumers only had a choice of standard and plain vanilla products. In the last 30 years, in adjusted inflation dollars, consumer credit has increased from $882 billion to $2.6 trillion; household mortgages, from $2 trillion to $10.4 trillion. For the last 30 years, financial innovation has been the fuel of this economy. We are not here today to claim that financial innovation did not play some role in the subprime mortgage crisis, but regressing to a bygone era is not progress. Financial services reform should take us forward, not back to plain vanilla. Most AFSA members are regulated primarily at the State level subject to a patchwork of inconsistent requirements. Under this new proposal, you could wind up with 50 different State requirements as far as trying to meet those regulations in different forms and different disclosures, and certainly that is not a formula for simplification. We have six different suggestions: Allow time to evaluate the effects of other government initiatives, such as the Cardholders' Bill of Rights recently signed into law and the new changes to HOEPA. Make current and future consumer protection rules apply to all financial service providers. Pursue a regulatory structure that does not separate financial services and products from the viability of the companies that offer them. Leave enforcement of rules of existing regulators, but give backup authority to the Fed for these areas, and step up enforcement. Step up enforcement, make stronger enforcement of existing consumer protection laws, and make sure that the necessary resources are provided. Last but not least, I would like to mention, preserve the industrial bank charter. The Administration's proposal calls for eliminating the industrial bank charter. Industrial banks provide a safe, sound, and appropriate means for delivering financial services to many in the public. These institutions have not been part of the problem. As a matter of fact, there have been no instances of any problem within the ILC structure, and we think they should be part of the solution moving forward. I am happy to answer any questions that you might have. [The prepared statement of Mr. Stinebert can be found on page 176 of the appendix.] The Chairman. Next, we have Mr. Steven Zeisel who is vice president and senior counsel of the Consumer Bankers Association. STATEMENT OF STEVEN I. ZEISEL, VICE PRESIDENT AND SENIOR COUNSEL, THE CONSUMER BANKERS ASSOCIATION Mr. Zeisel. Good morning, Mr. Chairman, members of the committee. My name is Steve Zeisel, and I am senior counsel at the Consumers Bankers Association. I am very pleased to be given this opportunity to present the views of CBA to the committee. CBA is a trade association focusing on retail banking issues, and we are therefore limiting our testimony today to the proposed Consumer Financial Protection Agency. CBA supports strengthening consumer protections as part of the regulatory reform initiative, and we support several of the goals outlined in the CFPA proposal, including improving transparency, simplicity, fairness, accountability, and access for consumers. Our concern is with the approach being proposed. We believe these objectives can best be achieved within the existing regulatory framework rather than dismantling the current system and creating a separate new regulatory agency. Safety and soundness and consumer protection are intimately related, and cannot be separated without doing harm to both. Furthermore, putting consumer protection in a separate agency will create a host of problems, including how the agencies will coordinate their activities--as the chairman mentioned--who will resolve inevitable disputes, and many more, none of which are necessary to achieve improved consumer protection. We also believe there needs to be stronger supervision of nonbank lenders so they receive a consistent and comparable level of oversight and enforcement as experienced by banks. Although we have many other issues, many other concerns, there are two issues I particularly want to highlight today. First, we are concerned that the proposal would subject retail banks to the consumer laws of 50 States. I ask you to consider the practical impact of such a policy. It could result in dozens, perhaps scores of differing requirements pertaining to minimum payments, fee limits, underwriting prescriptions and the like, making nationwide lending into a complex and costly undertaking. Not only will this limit the range of products available, but some banks may have to make the unwelcome decision not to do business in States they otherwise would, due to the complexity and cost associated with the compliance burdens. That could mean fewer and more expensive choices for consumers as a result of the decreasing competition. Further, due to the elimination of uniform consumer laws for federally chartered institutions, even a simple uniform disclosure, which is one of the goals of this initiative, would have to be supplemented by State disclosure requirements in every State in which the bank does business. The best intentions of the bank or the CFPA to provide simple disclosures would be frustrated, as a uniform loan agreement would become a voluminous document cluttered with State-specific information. We believe the better approach is to maintain a uniform national standard as it relates to retail banking. Second, under the proposal, the CFPA will require retail banks and other financial service providers to offer products that are designed entirely by the Federal Government. This so- called plain vanilla requirement will remove product development from banks and transfer it to the new agency. Banks will offer vanilla products, but it is less clear whether they will be able to offer the variety of products they offer today or may develop tomorrow. This is because the proposal strongly discourages the offering of other products consumers may find useful by creating regulatory uncertainty regarding how these nonvanilla products must be described, how they can be advertised, and the disclosures that must accompany them. It is also unclear whether an institution would be required to make available the same plain vanilla products and features to everyone, regardless of whether they quality. It is unclear what hurdles a consumer would have to jump to obtain any other products, and it is unclear what risks the institution would be taking when it allows a consumer to have any other products. The list of questions is long. In the final analysis, we believe retail banks are in a better position than the government to know which products serve their clients' needs. In conclusion, we believe the proposed changes, though well intentioned, may stifle innovation, raise costs to consumers, reduce access to credit, and result in more confusion rather than less. Thank you for the opportunity. I will be happy to answer any questions you may have. [The prepared statement of Mr. Zeisel can be found on page 206 of the appendix.] The Chairman. Next is Professor Todd Zywicki, from George Mason University. STATEMENT OF PROFESSOR TODD J. ZYWICKI, GEORGE MASON UNIVERSITY FOUNDATION PROFESSOR OF LAW AND MERCATUS CENTER SENIOR SCHOLAR, GEORGE MASON UNIVERSITY SCHOOL OF LAW Mr. Zywicki. Thank you, and let me make clear that even though this hearing estopped banking industry perspectives, I appear only as myself. My affiliation with the banking industry is as a consumer. I am going to address the Consumer Financial Protection Agency today, and I think there are three fatal problems with the CFPA that I think are irremediable and really can't be overcome or approved. The first is that it is based on misguided paternalism. The second is that because it misdiagnoses the underlying problems, it will create unintended consequences that will probably exacerbate rather than improve the situation we have seen in the past few years. And, third, it creates a new apparatus of bureaucratic planning that is simply unfeasible and, at a minimum, unworkable. First, it is based on an idea of misguided paternalism. The causes of the foreclosure crisis, if we focus on that particular issue, really have very little to do with consumer protection. What the causes of foreclosure crises erode from were a set of misaligned incentives that consumers rationally responded to. When consumers rationally respond to incentives, that is not a consumer protection problem. Take an example. Say there is a fellow in California who got a no-doc nothing-down loan. California has an antideficiency law that means that if you walk away from your house, the bank is limited in taking back the house and they can't sue you for any deficiency. Say the guy was going to buy the house, live in it for a couple of years, and then flip it for a profit. Instead, the house goes down in value. He crunches the numbers and says well, it is worth it for me to walk away from the house and give it back to the bank. The bank can't sue me for any deficiency. There is no consumer protection issue in that hypothetical. There is a very, very, very serious safety and soundness issue. That was a very foolish loan by the bank, and it really created a lot of problems for safety and soundness. But that is not a consumer protection issue. And if we consider it a consumer protection issue, rather than consumers rationally responding to incentives, we are going to have problems. Similarly, the other factor that caused a lot of foreclosures was adjustable rate mortgages. Adjustable rate mortgages are not inherently dangerous. There have been many times in the past, over the past 30 years, where adjustable rate mortgages have been 50 or 60 or 70 percent of the new mortgages that were written. Adjustable rate mortgages are a problem when the Federal Reserve engages in the kind of crazy monetary policy it engaged in from 2001 to 2004. When the Federal Reserve engages in crazy monetary policy, that is not a consumer protection issue. And I don't think there is anything in the CFPA that will make the Federal Reserve engage in better monetary policy in the future. So that basing it on the misguided idea that the crisis was spawned by hapless consumers being victimized by ruthless lenders is not going to be a basis for good policy. Second, that leads to a second problem which is a problem of unintended consequences. Consider two issues identified in the Obama Administration's White Paper, prepayment penalties and mortgage brokers and yield spread premiums. Prepayment penalties are an especially good example. They talk about how they are going to get rid of prepayment penalties in subprime mortgages. Well, what we know about prepayment penalties from all the empirical evidence is that there is no empirical evidence that prepayment penalties increase foreclosures. Why is that? Because consumers pay a premium in order to have the right to prepay their mortgage, because that shifts the risk of interest rate fluctuations to the bank. Consumers pay about 20 to 50 basis points more for a mortgage that has a right to prepay, and that is even higher for subprime borrowers for reasons we can talk about. The effect is that by allowing borrowers to pay less for a mortgage, they are less likely to get into financial trouble and less likely to end up in foreclosure. So getting rid of prepayment penalties would increase the price of mortgages and have no discernible impact on foreclosures. In fact, it could end up having the unintended consequence of worsening things. Why? Because the United States is virtually unique in the Western world in having the right generally to prepay your mortgage, which is basically to refinance when your interest rates go down. What a lot of Americans did was when equity ramped up in their house, they exercised that right to prepay and refinance their mortgage and sucked out all the equity in their house. As a result, when their house went down in value, they decided to walk away from the house. In Europe, they have had very big property value decreases as well, but Europe has not had a foreclosure crisis. And one reason is because in Europe nobody can prepay their mortgage. You have a 10- or 15-year mortgage with a balloon payment and an adjustable rate mortgage and no right to prepay. No right to prepay means you can't suck out the mortgage when your house goes up in value. When you can't suck out the mortgage, then you have a better equity if the house goes down in value. So that banning prepayment penalties would likely have the impact of increasing foreclosures by giving more people an opportunity to suck out equity in their homes going forward. With respect to mortgage brokers, the evidence is clear that competition is what matters. If we reduce the number of mortgage brokers, people are going to pay more for mortgages. Finally, let me say the third point, which is the problem of bureaucrat central planning. The CFPA essentially requires an impossibility. It requires identifying certain terms and mortgages as being unsafe. What we know is there are no individual terms and mortgages that are unsafe. Terms in combination may be unsafe. Terms designed with State antideficiency laws may be unsafe. But the idea you can identify certain terms as unsafe is just folly and will stifle innovation and create other problems. Thank you. [The prepared statement of Professor Zywicki can be found on page 211 of the appendix.] The Chairman. Next is Denise Leonard who is vice president for government affairs at the National Association of Mortgage Bankers. STATEMENT OF DENISE M. LEONARD, VICE PRESIDENT, GOVERNMENT AFFAIRS, NATIONAL ASSOCIATION OF MORTGAGE BROKERS Ms. Leonard. Good morning, Chairman Frank, distinguished members of the committee. I am Denise Leonard, vice president of government affairs for the National Association of Mortgage Brokers. In addition to being vice president, I am also a mortgage broker in Massachusetts and have been for the past 19-plus years. I would like to thank you for the opportunity to testify before you here today. We applaud this committee's response to the current problems in our financial markets and we share a resolute commitment to a simpler, clearer, more uniform and valid approach relative to financial products, most specifically with regard to obtaining mortgages and to protecting consumers throughout the process. As such, NAMB is generally supportive of the tenet behind the plan and conceptually agrees with the establishment of an independent agency that focuses on consumer financial products protection, but believes some changes are necessary. Before I address some specific areas of concern, I must first extinguish the false allegations targeted at mortgage brokers for years. We do not put consumers into loan products. We provide mortgage options to consumers and work with them throughout the process. We don't create loan products. We don't assess the risk on those products or approve the borrower. We don't fund the loan, and we are regulated. Our testimony will focus on the Consumer Financial Protection Agency and how it affects us, as well as H.R. 3126. In order for the CFPA to be effective, the structure must adequately protect consumers and account for the complexity of the modern mortgage market, and it must be in disparate treatment of any market participants. Any agency, whether new or existing, must act prudently when promulgating and enforcing rules to ensure real protections are afforded to consumers, and not provide merely the illusion of protection that comes from incomplete or unequal regulation of similar products, services, or providers. To the extent that the CFPA will enhance uniformity in the application of those rules, regulations, disclosures, and laws that provide for consumer protection, NAMB supports such an objective, although we do believe that there should be added limitations on the CFPA's powers. Whereas the purpose of the agency is to promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products and to ensure the markets operate fairly and efficiently, it is imperative that the creation of new disclosures or the revision of antiquated disclosures be achieved through an effective and even-handed approach and consumer testing. It is not the ``who'' but the ``what'' that must be addressed in order to ensure true consumer protection and success with this type of initiative. To ensure that all consumers are protected under the CFPA, there should be no exemption from its regulatory purview or limited exemptions that pick winners and losers in the industry. We are very supportive of H.R. 3126's requirement that the CFPA propose a single integrated model disclosure for mortgage transactions that combine those currently under TILA and RESPA. Consumers would greatly benefit from a uniform disclosure that clearly and simply explains critical loan terms and costs. Therefore, NAMB strongly encourages this committee to consider imposing a moratorium on the implementation of any new regulations or disclosures issued by HUD and the Federal Reserve Board for at least a year after the designated transfer date. This would help to avoid consumer confusion and minimize the increased costs and unnecessary burden borne by industry participants to manage and administer multiple significant changes to mandatory disclosures over a very short period of time. We strongly support empowering the CFPA to take a comprehensive review of new and existing regulations, including the new Home Valuation Code of Conduct. Too often, in the wake of our current financial crisis, we have seen new rules promulgated through the use of existing regulations that run afoul of the purpose and objectives of the Administration that do not reflect measured, balanced, and effective solutions to the problems facing our markets and consumers. The HVCC provides the most notable recent example of that flawed method and, as such, should be revealed during the CFPA's review of existing rules. We also believe that the SAFE Act should be amended to ensure that the CFPA possesses complete and exclusive authority to implement it in its entirety. In addition, we support a Federal standard of care based on good faith and fair dealing for all originators as defined under the SAFE Act. We believe such a standard would greatly enhance consumer protections. Finally, with regard to the board makeup as it is proposed, the committee would be anything but independent, and we recommend that its makeup be expanded and consistent with other agencies such as the FTC with regard to political affiliation. There should be no more than three members of the same party as the President who appoints them. We appreciate this opportunity to appear before you, and we look forward to continuing to work with you, and I am available for any questions. [The prepared statement of Ms. Leonard can be found on page 145 of the appendix.] The Chairman. Next, Mr. Edward Yingling, president and chief executive officer of the American Bankers Association. STATEMENT OF EDWARD L. YINGLING, PRESIDENT AND CHIEF EXECUTIVE OFFICER, AMERICAN BANKERS ASSOCIATION Mr. Yingling. Thank you, Mr. Chairman. ABA believes there are three areas that should be the primary focus of reform: the creation of a systemic regulator; the creation of a mechanism for resolving institutions; and filling the gaps in regulation of the shadow-banking industry. The reforms need to be grounded in a real understanding of what caused the crisis. For that reason, my written testimony discusses continuing misunderstandings of the place of traditional banking in this mess. ABA appreciates the fact that the bipartisan leadership of this committee has often commented that the crisis in large part developed outside the traditional banking industry. The Treasury's plan noted that 94 percent of high-cost mortgages were made outside traditional banking. The ABA strongly supports the creation of an agency to oversee systemic risk. The role of the systemic risk oversight regulator should be one of identifying potential systemic problems and then putting forth solutions. This process is not about regulating specific institutions, which should be left primarily to the prudential regulators. It is about looking at information on trends in the economy and different sectors within the economy. Such problematic trends from the recent past would have included the rapid appreciation of home prices, proliferation of mortgages that ignored the long-term ability to repay, excess leverage in some Wall Street firms, the rapid growth and complexity of mortgage- backed securities and how they were rated, and the rapid growth of the credit default swap market. This agency should be focused and nimble. In fact, involving it in a day-to-day regulation would be a distraction. While much of the early focus was on giving this authority directly to the Fed, now most of the focus is on creating a separate council of some type. This would make sense, but it should not be a committee. The council should have its own dedicated staff, but it should not be a large bureaucracy. The council should primarily use information gathered from institutions through their primary regulators. However, the systemic agency should have some carefully calibrated backup authority when systemic issues are not being addressed. There is currently a debate about the governance of such council. A board consisting of the primary regulators, plus Treasury, would seem logical. As to the Chair of the agency, there would seem to be three choices: Treasury; the Fed; or an independent person appointed by the President. A systemic regulator could not possibly do its job if it cannot have oversight authority over accounting rulemaking. A recent hearing before your Capital Markets Subcommittee clearly demonstrated the disastrous procyclical impact of recent accounting policies, and I appreciate the chairman's reference to that at the beginning of this hearing. Thus a new system for oversight of accounting rules needs to be created in recognition of the critical importance of accounting rules to systemic risk. H.R. 1349, introduced by Representatives Perlmutter and Lucas, would be in a position to accomplish this. ABA has strongly supported this legislation in previous testimony. As the systemic oversight agency is developed, Congress could consider making that agency the appropriate body to which the FASB reports under the approach of H.R. 1349. Let me turn to the resolution issue. We have a successful mechanism for resolving banks. Of course, there is no mechanism for resolution of systemically important nonbank firms. Our regulatory bodies should never again be in the position of making up a solution on the fly to a Bear Stearns or an AIG or not being able to resolve a Lehman Brothers. A critical issue in this regard is ``too-big-to-fail,'' and again I appreciate the chairman's reference to a separate hearing on that critical issue. Whatever is done on the resolution system will set the parameters for too-big-to-fail. We are concerned that the too-big-to-fail concept is not adequately addressed in the Administration's proposal. The goal should be to eliminate, as much as possible, moral hazard and unfairness. When an institution goes into the resolution process, its top management, board, and major stakeholders should be subject to clearly set out rules of accountability, change, and financial loss. No one should want to be considered too-big-to- fail. Finally, the ABA strongly supports maintaining the Federal thrift charter. Mr. Chairman, ABA appreciates your public statements in support of maintaining the thrift charter. There are 800-plus thrift institutions and another 125 mutual holding companies. Forcing these institutions to change their charter and business plan would be disruptive, costly, and wholly unnecessary. Thank you, Mr. Chairman. [The prepared statement of Mr. Yingling can be found on page 187 of the appendix.] The Chairman. Finally, Michael Menzies, who is the president and chief executive officer of the Easton Bank and Trust Company, and he is here on behalf of the Independent Community Bankers of America. STATEMENT OF R. MICHAEL S. MENZIES, SR., PRESIDENT AND CHIEF EXECUTIVE OFFICER, EASTON BANK AND TRUST COMPANY, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA) Mr. Menzies. Thank you, Mr. Chairman, and members of the committee. As you mentioned, I am president and CEO of Easton Bank and Trust, just 42 miles east of here. We are a $150 million community bank, and I am honored to be the volunteer chairman of the Independent Community Bankers of America, who represent 5,000 community-bank-only members at this important hearing. Less than a year ago, due to the failure of our Nation's largest institutions to adequately manage their highly risky activities, key elements of the Nation's financial system nearly collapsed. Even though our system of locally owned and controlled community banks were not in similar danger, the resulting recession and credit crunch has now impacted the cornerstone of our local economies: community banks. This was, as you know, a crisis driven by a few unmanageable financial entities that nearly destroyed our equity markets, our real estate markets, our consumer loan markets and the global finance markets, and cost American consumers over $7 trillion in net worth. ICBA commends you and President Obama for taking the next step to reduce the chances that taking risky and irresponsible behavior by large or unregulated institutions will ever again lead us into economic calamity. ICBA supports identifying specific institutions that may pose systemic risk and systemic danger and subjecting them to stronger supervision, capital, and liquidity requirements. Our economy needs more than just an early warning system. It needs a real cop on the beat. The President's plan could be enhanced by assessing fees on systemically dangerous holding companies for their supervisory costs and to fund, in advance, not after the fact, a new systemic risk fund. ICBA also strongly supports H.R. 2897, introduced by Representative Gutierrez. This bill would impose an additional fee on banks affiliated with systemically dangerous holding companies and better account for the risk these banks pose, while strengthening the deposit insurance fund. These strong measures are not meant to punish those institutions for being large, but to guard against the risk they do create. These large institutions would be held accountable and discouraged from becoming too-big-to-fail. But to truly prevent the kind of financial meltdown we faced last fall and to truly protect consumers, the plan must go further. It should direct systemic-risk authorities to develop procedures to downsize the too-big-to-fail institutions in an orderly way. This will enhance the diversity and flexibility of our Nation's financial system, which has proven extremely valuable in the current crisis. In that regard, ICBA is pleased the Administration plan maintains the State bank system and believes that any bill should retain the thrift charter. Both charters enable community banks to follow business plans that are best adapted to their local markets and pose no systemic risk. Unregulated individuals and companies perpetrated serious abuses on millions of American consumers. Community banks already do their utmost to serve consumers and comply with consumer protections. Consumers should be protected. Any new legislation must ensure that unregulated or unsupervised people in institutions are subject to examinations just like community banks. My written testimony outlines serious challenges with the proposed Consumer Protection Agency, which we oppose in its current form. For example, we strongly believe that rural writing and supervision for community banks should remain with agencies that also must take safety and soundness into account. Clearly a financial institution that does not adhere to consumer protection rules also has safety and soundness problems. And we, too, are grateful, Mr. Chairman, with your statement that you are committed to preventing conflict between safety and soundness and consumer protection. If we truly want to protect consumers, Congress must enact legislation that effectively ends the too-big-to-fail system, because these institutions are too-big-to-manage and too-big- to-supervise. And we are grateful for your hearings on Monday, Mr. Chairman. ICBA urges Congress to add an Assistant Secretary for Community Financial Institutions at the Treasury Department to provide an internal voice for Main Street concerns. H.R. 2676, introduced by Representative Dennis Cardoza, will provide that important balance between Wall Street and Main Street within the Treasury. Mr. Chairman, community banks are the very fabric of our Nation. We fund growth, we drive new business. Over half of all the small business loans under $100,000 in America are made by community banks. We help families buy homes and finance educations. We, too, are victims of the current financial situation, but we are committed to help the people and businesses of our communities, and we will be a significant force in the economic recovery. Thank you, sir. [The prepared statement of Mr. Menzies can be found on page 158 of the appendix.] The Chairman. We have another hearing at 2 o'clock, so we will go as long as we can stay, until about 1:45. I have to correct myself. That hearing on ``too-big-to- fail'' will be Tuesday. We will have the Chairman of the Federal Reserve in the morning, and we will have the too-big- to-fail hearing in the afternoon. It is a serious pace, but we need to deal with this. My question has to do with a question many of you raised, and that is your objection to the extent where we would recognize State authority in this area. Now, I understand that the Comptroller of the Currency a few years ago did preempt, very substantially, State banking laws. There was a good deal of concern about that. It was actually right at about the time a Republican Member of the House, our colleague Sue Kelly from New York, who was Chair of the Oversight Committee, she was particularly troubled by that, and I want to focus on that. I gather it is a position of many of you here that we should continue to preempt any State consumer laws regarding national financial institutions. Tell me that, Mr. Bartlett. Mr. Bartlett. We support uniform national standards. As an essential ingredient to get to that, you have to preempt State laws. The goal is strong, high uniform national standards. The Chairman. Well, I understand that. But the goal is also a Federal system, which people in various parties at various times seem to find convenient depending on the issue at hand. Are there any others who would agree that all consumer State protection laws should be preempted here? Let me go down the list. Mr. Courson? Mr. Courson. Mr. Chairman, I can--obviously the Mortgage Bankers Association can only speak about mortgages, but we have certainly been consistent in asking for a uniform national standard. But I would also say that in working with the State regulators, we think they still play a very important role. We are not going to get-- The Chairman. All right. But I need to have you tell me, would you have us--should the law at the end of this process preempt all State laws on mortgages? Mr. Courson. Yes, that would be our position. The Chairman. Okay. Next, Mr. Stinebert. Mr. Stinebert. Mr. Chairman, what we believe is that the way the proposal is currently structured right now in the area of consumer protection, you would have basically a meet-or- exceed standard that would be created by the new agency. But you would give the authorities to the States to-- The Chairman. All right. Well, what would you propose? Mr. Stinebert. So I think if you had a national Federal standard that was developed for--or standards that were developed for consumer protection, that should apply to all 50 States equally. The Chairman. So you would preempt. I mean, I know sometimes people don't like to say it, but sometimes you would have to. Mr. Stinebert. Yes, we would preempt. The Chairman. You are preempting for all State consumer protection areas in the areas that-- Mr. Stinebert. Yes, promote consistency across the CFPA. The Chairman. All right. Let me ask Mr. Zeisel. Mr. Ziesel. Yes. The CBA's position is that uniformity is important, that it is a consumer protection and that strong uniform Federal laws ought to be a ceiling, not a floor. The Chairman. But you think the consumers are better off if we preempt all State consumer laws? Mr. Ziesel. If they are all strong, good, clear Federal laws, yes. The Chairman. Well, we will get to that in a minute. Professor Zywicki. Mr. Zywicki. Yes, you should preempt them for the same reasons that you can anticipate the possible conflict between a consumer protection regulator and a safety and soundness regulator, and you can anticipate consumer protection State law conflicting with safety and soundness regulators and Federal State ways preempt-- The Chairman. Wait, we do have the supremacy clause of the Federal Constitution. It does not arbitrate between the FDIC and this, but it does arbitrate between States and Federal. So there is no competition. Federal Government wins. Supremacy clause. Ms. Leonard. Ms. Leonard. No, because we are currently regulated under those State laws. The Chairman. So you are not for preempting them. Ms. Leonard. No. The Chairman. You find this impossible. Are you torn in 50 different directions? Are you besieged by conflicting and inconsistent standards? Ms. Leonard. No. The Chairman. Good. Mr. Yingling? Mr. Yingling. We would generally be in favor of preemption. However, we would urge that the kind of conversations that you had been urging for the last couple years between the Comptroller and the States continue and that there be some mechanism for coordination. The Chairman. But you would preempt the laws. It would be at the grace of the Comptroller? Mr. Yingling. Well, I don't know that it has to be at the grace of the Comptroller. I think you could work in some mechanism that encourages this kind of coordination. The Chairman. But as we all know, you can encourage; but having the law say it is qualitative in its difference. Mr. Yingling. Maybe you could do a little more than encourage. The Chairman. Mr. Menzies. Mr. Menzies. Well, basically a States' rights organization, if preemption means that we neuter CSBS, then we probably would be opposed to it. But we do like the notion of uniformity, and we think CSBS has done a great job and isn't the reason we have the financial problems for that. The Chairman. You are talking about the Conference of State Banking Supervisors? Mr. Menzies. Yes, sir. The State regulators. The Chairman. The question is whether nationally chartered institutions would be exempt from any State law and covered only by Federal law. That is the issue. Mr. Menzies. Well, if you put national chartered institutions in a position where they are exempt and State institutions are not, as we are subject to our State regulations, then you create exactly what you don't want to create. The Chairman. An unfair or uneven competition. Mr. Menzies. Yes, sir. The Chairman. All right. I am appreciative of that mix. I have to say that the description of chaos that comes if you have the State laws does not seem to be an accurate portrayal of what the situation was before the Comptroller did all that preemption. But my time has expired. The gentleman from Texas. Mr. Neugebauer. Thank you, Mr. Chairman. One of the things that I heard, a common theme was coordination, innovation, and the fact that with two different regulators there could be conflicts. And one of the things that I think about from my lending days is many times when people came in to borrow money, sometimes we had to tailor financial products to meet the consumer's need. And I think this hearing today is about the consumers to a great degree. And everybody here, I believe, believes that they ought to be treated fairly and appropriately and with integrity. But what I am concerned about under the proposal that the Administration and the chairman have laid out is that this is really not a consumer protection bill but a products regulation bill. And there is a difference between product regulation and consumer protection. And I think I would just kind of like to go down the line there and get your perspective of--you know, one is about a behavior, and when people try to defraud or misrepresent something to someone, that is a behavioral issue and not a product issue--but get your reflections on the implications of the Federal Government being very prescriptive about the products that you would be providing and how that might impact the people that we are talking about here, and that is the consumer. Mr. Bartlett? Mr. Bartlett. Congressman, you have hit the nail on the head. These agencies should regulate for safety and soundness and for consumer protection, but not to determine products. The products themselves, leave them in the competitive marketplace, but then protect the consumers by disclosure by anti-fraud protection, by unfair and deceptive acts, by coordinating the decentralized complaint systems and, otherwise, by sales practices, but don't set the products. As for the products, consumers are far better off with choice and with innovation. Mr. Courson. I certainly agree. And I think the key is--and there been those also who say that this might not even be prescriptive. You have a plain vanilla, and you can still then, once you have your plain vanilla, offer other products. But I think if you have a regulator out there that has the ability to call a product down the line out of bounds, that you clearly are going to move--lenders are going to move very reluctantly and with great trepidation of innovating products that may later be deemed to be ``out of bounds.'' And the other piece of that is, if the secondary market authority exists, consumers are going to pay more because the market is going to demand a premium for a product that they may buy, put on their balance sheet or secure, as it may not exist going down in the future. Mr. Neugebauer. Mr. Stinebert. Mr. Stinebert. I think the flexibility moving forward is very important. As long as you look at specific products, I think it was mentioned on the panel earlier about adjustable rate mortgages, or ARM products--for many, many years and in other parts of the world are considered very good products. We talked about some types of balloon payments. Everything should be customized to fitting what the consumer needs in that specific circumstance, that best meets what they need. If you try a plain vanilla, if everything is just standard, you eliminate all innovation and you are really making choices of those people who don't necessarily need money, can get options, can have products that are available to them. Others that might have a more blemished credit record, might be lower income, would have less options, less choice. And I think that it is best left to the industry and the lenders to make those decisions of what products are available to them--to their customers. Mr. Neugebauer. Mr. Zeisel. Mr. Zeisel. Yes, I think that the financial institutions deal every day with their customers, and they know what their customers' needs are and they understand those needs in a way that a Federal Government agency is not going to. And as a government agency defines what is an acceptable product, they are also defining what is not an acceptable product. And when they take a product off the shelf, it is one less option available for the consumer. The product may or may not be acceptable for some consumers and not others. That is the determination that has to be made; not whether the product itself is always acceptable or always not acceptable, for the most part. Mr. Neugebauer. Mr. Zywicki. Mr. Zywicki. A plain vanilla loan would be perfect for a plain vanilla consumer. I have never met that person, unfortunately. Every consumer seems to be completely different to me. And every consumer seems to have different needs and wants and different sorts of things. To think about plain vanilla products is being like credit cards 30 years ago. They were very simple. They were plain vanilla, and they were really lousy products. They had a $40 annual fee, a high fixed-interest rate, no benefits, nothing else that came along with it. Competition has intervened and credit cards have certainly gotten much more complex, but they have gotten much, much better for consumers. And if you think about the way in which consumers use credit cards to cash advances, to travel, to small businesses, all those sorts of things, there is no plain vanilla consumer. There is a plain vanilla loan. The Chairman. Time has expired. I don't mean to imply that--Mr. Zywicki was certainly not the one who began this. I would say for this committee in particular, we would like the basic option to be either plain vanilla or basic black. We are not an entirely plain vanilla committee even in our legislative approach. The gentleman from Pennsylvania. Mr. Kanjorski. Thank you, Mr. Chairman. I am not sure, in my decision to come to this hearing, I am not more confused leaving the hearing after hearing all of your statements than before I got here. If you could help me think this through, were any of the eight witnesses here consistent in their beliefs as to what we should do? Mr. Stinebert. I think everybody certainly recommended a cautious, careful approach to addressing this issue. Mr. Kanjorski. And I understand that. You know, I really want to get to a more fundamental problem of why I worry about where we are going and how we are going to get there. Did anybody who is on the panel, the eight witnesses, did you see this coming, and what actions did you take in terms to warn us of this eventuality? I remember very distinctly Alan Greenspan testifying here, a direct question as early as 2005, I think. I asked him a question: ``Is there any foreseeable problem in the real estate bubble?'' And he clearly said, ``No, we have it all under control. There is nothing to worry about.'' Now, you all do not handle all real estate, although the mortgage people sort of cover the unbanked portion of it. Who did see it and did not take action--or of you who did not see it? And is that not what we want to get to, what is the next calamity and how is it going to be handled? And God knows, there is going to be another calamity. All we are arguing is whether we are going to get a rather comprehensive regulatory reform that will last 75 years, as the last set of regulations lasted, or whether we are going to get a financial crisis every 25 years as the history of the Republic reflected for its first 200 years or first 150 years of existence. But if you could give me that fundamental question, because I am hearing from that side of the aisle that this all occurred from CRAs. How many of you believe that? Was that a major contributor to our problem? How many of you believe that, except for Fannie Mae or Freddie Mac, this disaster would not have occurred? Well, there go your two propositions, Randy. Ms. Leonard. One of the things that we saw was the fact that there was a need for licensing, there was a need for increased professional standards, and we advocated for that and with the SAFE Act that has now come into play. That is one of the things that we believe will help long term with some of the problems that did exist. Mr. Courson. Congressman, may I? I would respond differently. We didn't see it coming. But I think it points up, and someone had asked me, what could have prevented this? And I think if we would have had a strong, uniform national standard and a consistent strong regulation, particularly in our industry, we have--we are examples of being subject to 50 different State regulators, very uneven regulation. Some States, granted, are very good, some States are not. That is why we are asking ourselves for a strong Federal regulator for nondepository mortgage brokers and lenders. Mr. Bartlett. Mr. Chairman, as I said in my opening statement, we saw it coming, beginning--and I did and my officers, in about the summer of 2006 as it began to--and as we began to unravel the pieces and try to figure it out, we spent 6 months trying to avoid it, setting up new standards, advocating some new regulations, advocating some new legislation. By January of 2007, we were pretty much--we were full on board by that--by that time the horses were out of the barn and running around in the pastures about 10 miles away. It is one of the regrets of my professional life that I didn't see it earlier. But I don't think anyone did, and we saw it beginning in the summer of 2006. Mr. Yingling. Congressman, I would just say that I think what your question points out is the need for some kind of systemic oversight body. Did anybody see it coming? Some did. Should we have seen? Absolutely. It is a terrible failure of ours. It is a terrible failure of our regulatory system. We had a previous discussion in a previous hearing. I had a previous discussion with the Chairman, that the Fed had the numbers; and we really should have done something about it, and that is true. But the weakness in our regulatory structure is there is really nobody at this point who is charged with looking for these kinds of disasters coming down the pike, ringing the alarm bell, and making sure something is done about it. And I think it points out the need for some type of oversight regulator that doesn't regulate, but says there is a disaster coming. The Chairman. The gentleman from California, Mr. Royce. Mr. Royce. Well, yes, as a matter of fact we did have the Fed telling us there was a disaster coming. They said it was a systemic risk to the entire financial system unless there was deleveraging, some kind of regulation for safety and soundness over Fannie and Freddie. Not to get off the point, but I remember those lectures ad nauseam out of the Fed. And as a matter of fact, the Treasury chimed in as well. But on the issue of bifurcating consumer protection and prudential regulation, Sheila Bair, the head of the FDIC, had this to say, and I am going to ask Mr. Courson to respond to this, if you would. She said, ``I have always felt that consumer protection and safe and sound lending are two sides of the same coin. And if you have an abusive product that doesn't serve your customers' long-term interest it will come back to bite you.'' Now as I mentioned in my opening statement, this idea of separating the two has been around for some time. In fact, we saw that very structure over the GSEs, a weak prudential regulator, in this case OFHEA, was competing with HUD, and HUD strong-armed OFHEA and Fannie and Freddie into ratcheting up the affordable housing goals. We know how this ended. As Ms. Bair alluded to, the affordable housing goals of Fannie and Freddie enforced by HUD were at odds with the long- term viability of the regulated entities, in this case Fannie and Freddie, and ultimately led to their demise. And I was going to ask you, do you see the potential for future conflicts between a Consumer Financial Products Agency and their prudential regulator in this case? Mr. Courson. Well, clearly--I mean obviously there is opportunity for the conflict. Not to be simplistic, but for 12 years we have been trying to get the Fed and HUD to work together on one simple upfront disclosure, and we can't get this done. In addition, to the fact that what we have said, and, in our case with a Federal regulator, we want a combined prudential, safety and soundness and mission consumer protection, all under one umbrella for mortgage banking. Mr. Royce. Well, certainly the housing goals were created and enforced with an altruistic belief. It was misguided, but it was an altruistic belief that the highest possible stretch for homeownership was to the benefit of consumers. And I think it would be very difficult to create a separate regulatory entity, charge it with consumer protection oversight, and then not expect it to come up, you know, with a similar politically driven mandate further down the road. It seems to me logical that would be the course of action here. In large part, these politically driven mandates caused the financial collapse, and allowing for a similar structure will likely encourage similar mandates down the road. So I would like you to comment on the likelihood that a CFPA will be used for politically driven mandates in the future. Mr. Courson. Well, Congressman, obviously that is a concern in any regulatory venue, particularly when you are creating a new one. The issue is in this respect, there is trepidation that we are trying something, sort of a laboratory experiment, to try something with the consumers; and, frankly, safety and soundness being at risk. So I think there are those concerns. Mr. Royce. Yes. I just don't see how it is not something that we have already tried with pretty clear results. But I will ask Mr. Zywicki for any observations he has on this front. Mr. Zywicki. Sure. I think you point out more generally the fundamental problem here is that there are all kinds of tradeoffs. There are tradeoffs between the particular terms and the price of loans, between--as I talked about--prepayment penalties. Consumers pay an extra 100 to 150 basis points to get a fixed-rate mortgage. All these sorts of tradeoffs to think about price versus terms, accessibility versus risk, all the different sorts of things you are talking about are invariably and inevitably going to turn into political questions where there is no obvious answer. And it is precisely these sorts of tradeoffs between risk and price, for instance, why we have eschewed government central planning and dictating of credit terms in the past, because there is no right answer to these questions and they run the risk of being politicized. Mr. Royce. Thank you, Mr. Chairman. The Chairman. The gentlewoman from California, Ms. Waters. And we will break after this. I must say, it is not entirely clear if we will be able to reconvene this panel. We have five votes, I am informed, leading with a 15-minute vote. I am told that Members are advised that additional Republican procedural votes are possible during this next series of votes. So if we have not been able to conclude by about 1:30--if we are not back by 1:30, goodbye. Ms. Waters. Mr. Chairman and members, I almost hesitate to ask you any questions. I am just dumbfounded that we have before us representatives of the overall industry here today who do not appear to understand we have a crisis. We have rising foreclosures. There is no end. And the tale keeps going on and on and on. And you come here today and say, don't try to stop us from having any kind of product we can come up with that we can put on the market, no matter what you say about some kind of standard product. We have products for any and everybody, whatever you can think of. Someone just said to me, maybe I should design my own product for you. Well, let me just say that, in addition to no support, no real support for a consumer finance agency to protect consumers from these exotic products that worry us so much, we are confronted with our constituents who are trying to get loan modifications. You can't even do that right. You can't set up systems where you can train enough people, that you can have telephone responses, that you can work out modifications and we can do something about keeping people in their homes. You don't come here with any real instructions, advice, or plans that you can share with us to deal with the crisis that we are having. All you can do is come here and talk about preemption, knowing full well that you will work your magic with your influence in the Congress of the United States to keep any real strong legislation from coming out of here; and you want to prevent the States from coming up with anything that would cause you any kind of concerns at all. What do I have to ask you? I don't know what I have to ask you. Would somebody answer me whether or not you think there is a crisis? Anybody? Is there a crisis? Mr. Bartlett. Congresswoman, there is a crisis, the crisis of delinquencies. There are some 3 million mortgage delinquencies today. We--as an industry, we are providing modifications for about 250,000 a month. That is woefully inadequate. We are doing everything we can to increase that number by as much as double, and we are seeking to do that. I believe we will do that. There are real barriers to keep us from it, but that is no excuse. We are going to increase those modifications because it has to be done for the economy to recover. There is a crisis. Ms. Waters. You are right. You have done a terrible job of modifications. How many of you own or are connected with service agencies in addition to your banking interests? Financial Services Roundtable? Mr. Bartlett. You mean lenders? Ms. Waters. Yes, servicers. You own servicing, also. You do servicing, also. Is that right? Mr. Bartlett. Our members do. And we are one of the sponsors-- Ms. Waters. That is what I mean. Your members, yes. Mr. Bartlett. Yes. Ms. Waters. Why can't you get it right? Why can't we get the modifications right? Mr. Bartlett. Congresswoman, we are doing 250,000 a month. That is not enough. Let me stay that when we started this in July of 2007, we didn't measure the number, but we think that, historically, that mortgage modifications were in the range of 1,000 to 2,500 a month, and now we have moved it up to 250,000. Is that enough? No, it is not enough. But we increase it every month, and we increase it every day. The new Obama mods, as they are called, are beginning to take hold and are beginning to get some real numbers. They are not there yet, but it is a big improvement. I met with the Secretary yesterday--Under Secretary yesterday to seek--and we have a checklist of 10 additional steps that we can take to improve those numbers. We are painfully aware we have to improve the number of modifications, and we set about to do it every day. Ms. Waters. Mr. Bartlett, you have publicly said that the new agency would end up increasing the cost of financial products. Do you really mean that? Mr. Bartlett. I believe it will increase the cost of financial products. But, worse than that, it will increase the cost of credit, deny credit to consumers, and it will decrease safety and soundness, and it will deny consumers with financial products that they want and need and deserve. Ms. Waters. As I understand, the President's plan is to transfer existing staff and use a portion of those existing fees that you pay for enforcement of existing laws. Why would your members have to increase the cost of financial products? The President's plan proposes no additional costs to your members, yet you are here claiming that consumers will have to pay more. Why do you say that? Mr. Bartlett. Consumers will have to pay more under the plan as is before us with a separate agency than there would be separate regulation of products. Product regulation is not the answer. The answer is-- The Chairman. We will have to get the rest in writing. And, before closing, the gentleman from Oklahoma, Mr. Lucas, whom I should note is also the ranking Republican on the Agriculture Committee, with which we are working closely in our approach to the regulation of derivatives. The gentleman from Oklahoma. Mr. Lucas. That is very true, Mr. Chairman. I recently met with a group of bankers from small community banks and financial institutions in my district, and they have serious concerns, as do I, about the impact of the proposed Consumer Financial Protection Agency and what it will do to them. Our community banks are small financial institutions that have had little to do with the cause of the current financial crisis and continue to serve their communities as safe and reliable sources of credit. Their very success depends on the success of their communities. However, under this new regulatory agency, they could, I fear, be disproportionately burdened with additional regulations and fees. In addition, there has been a lot of discussion here today in regard to the threat that too-big-to-fail institutions pose to the stability of our financial institutions as a whole, and how best to address this threat. When considering how best to approach reform, we must not sacrifice the health of our small institutions that did not cause this situation. Now, I address my question in particular to Mr. Yingling and Mr. Menzies. I do not represent a capital-intensive district. I do not have any money market facilities, institutions in my district. I have consumers of products, and I have small businesses. Your two organizations represent the backbone of the financial institutions in my district. Expand for a moment what the effect of this piece of legislation, as now drafted, will be on those institutions. Because, after all, we all know rules have many effects. And they can limit opportunities and they can kill, too. That is the nature of the Federal process. Explain to me what this bill will do to your folks in my district. Mr. Yingling. Congressman, first, I want to thank you for your leadership on the accounting issue. And I do think that since you introduced your bill the report of the G-20 and the Group of 30 and others have shown that your approach was correct. The concept that is in the Administration proposal that we are particularly concerned about is that products should be designed. And, as was pointed out earlier, particularly in community banks, loans to your constituents are not cookie- cutter. They are individually designed. And lest people think we are being paranoid here, I would like to read from the paper that the Administration handed out in the White House when they announced this; and it says, the CFPA should be authorized to define standards for products and require firms to offer them. So let's suppose it is a loan, a cookie-cutter loan that is a standard loan; and it says to your banks, you must offer these. Then they deviate from it. So they want to deviate one off like they do all the time and say, all right, I will let your father guarantee it. Or I will change this one provision. Or I will change the repayment terms so you can qualify for this loan. Here is what the President's proposal says: ``The CFPA could impose a strong warning label on all alternative products, require providers to have applicants fill out an experience questionnaire, require providers to obtain the applicant's written opt in to such products.'' ``Originators of alternative products''--that is your bank--``should be subject to significantly higher penalties for violations.'' You are not going to make that loan. You are not going to make those one-off deals. And I am reading from the Administration because I have to take what they say seriously. Mr. Lucas. Mr. Menzies. Mr. Menzies. Congressman, the $7 trillion of loss to this Nation was not the product of community banks. It was the product of mega banks and Wall Street creating shadow corporations and SIVs that stuffed toxic assets based on products that they created into those entities, and community banks are truly the victim of the product regulation that is contemplated today because of that activity. Don't take away my right to take care of a widow whom I loaned a year ago, who had 25 percent borrowed against her house, interest only for a year, at a market rate, no payments required, while she could care for her husband, who was dying, understanding that after he died she could go back and get a job and then we could amortize that loan. That is a nonconforming product in every possible manner, but it provides me with the flexibility to be creative and take care of the needs of our customers. That is essential to retain the role that community banks do for this Nation. Mr. Lucas. Thank you for those real-world insights. Thank you, Mr. Chairman, for your tolerance on the time. The Chairman. The hearing is recessed. And, as I said, we may not be back in time. If we can be back here by 1:30, we will have a couple more rounds of questions, but it may not be possible. I apologize, but that is the way it is. [recess] The Chairman. The hearing will reconvene. The gentleman from North Carolina is recognized for 5 minutes. Mr. Watt. Thank you, Mr. Chairman. I was hoping Mr. Bartlett would be here, but I can deal with the ones who are here. I perhaps have deluded myself into thinking that I am one of the members who deals with members of this panel on a regular basis and tries to understand and listen to what they really have to say about these issues. I guess I am a little bit perplexed about some of the things I am hearing today. I think Mr. Garrett raised a valid question in his opening comments today. If you put part of the authority for consumer protection with the regulators and part of it with a new regulatory agency, there is the conflict potential because people are working on the same turf and you are going to have that conflict. I am not sure that I see quite the conflict between consumer protection, which is one responsibility, and safety and soundness, which is another responsibility. I acknowledge that there are occasionally circumstances where the two overlap. So I did hear Mr. Courson say that to the extent you leave part of the responsibilities one place and put part of them in the new agency that there is that potential. I am actually of a mind to agree with that and think that more of the responsibilities, most of the responsibilities for consumer protection, if not all of the responsibilities for consumer protection, ought be given to the new agency, taking the people, some of the people who are doing it in the existing agencies and putting them over there into the new agency, using the experience that they already have and building a new entity. So I am troubled by this notion that somehow keeping consumer protection and safety and soundness in the same entity is an imperative, and if you don't do that there is going to be some kind of conflict. There are multiple agencies doing safety and soundness now. And when--I guess the systemic regulator will be the ultimate authority on that, ultimately, but I don't hear anybody suggesting that there are irreconcilable conflicts now between the various agencies that are doing safety and soundness. So my question is, is this real or is it--I understand that there is a resistance to change, but this didn't work in the old framework. And it seems to me to be more of an excuse for saying we want consumer protection subordinate to the other objective, rather than we think that there is the potential for conflict. So that is one question that I hope you all will address for me, and I won't ask you to do it in this context. The other thing I have trouble with, Mr. Bartlett in particular, is your position that we should set up a brand new Federal agency to deal with insurance. The cost I suppose would be fairly high, yet we should not spend the money to set up an agency that deals with consumer protection so that the people who come to work every day have as their primary, sole responsibility looking at consumer protection. I am having trouble reconciling those two positions. So if you can reconcile them for me, I would love to have you maybe address that little piece of-- The Chairman. In light of the unusual circumstances, we will do an extra couple of minutes--I don't think there would be objection--so that we can get a response to that. Mr. Bartlett. Mr. Chairman, I can understand how you could reach that conclusion. Let me say it forcefully. We are not advocating the status quo. Consumer protections are not adequately provided in current Federal law for the safety and soundness regulators. That is the primary reason why they didn't get the job done. The unfair, deceptive trade practices does not apply to the OCC, just as one example. TILA and RESPA are with two different agencies that are mandated to cooperate, but they are not cooperating, and they have not done their job. So in issue after issue, these consumer protection practices are not in the hands of the safety and soundness regulators, and they should be. I think you heard unanimously that it would be an unmitigated disaster to separate safety and soundness from consumer protection because-- Mr. Watt. I heard it. I just don't understand it. I really do not understand that, and I will talk to you separately on that. Mr. Bartlett. We will submit for the record if you like, also. Mr. Watt. I really don't care to hear from Mr. Zywicki on this. I don't even know how you got on this panel, to be honest. Excuse me. I yield back. The Chairman. He was, as is the practice, as the gentleman knows, the witness suggested by the Republicans, which is I think an important part of our trying to get through this all. Next is Mrs. Biggert. Mrs. Biggert. Thank you, Mr. Chairman. I wanted to follow up a little on Mr. Kanjorski's question. We have 50 States, 50 State regulators, plus the territories, and then we have the OCC, the OTS, the NCUA, the FDIC, and the Fed, and now we have a new bill that creates the credit rationing and pricing agency, to add another layer. And I understand that the Administration says it is interested in consistent regulation of similar products. Yet its proposal would gut the doctrine of preemption under which the national banks and thrifts have long operated. How would the Federal standard work which allows the States to pile on on top? How would the Federal standard then promote consistent regulation of similar products? I will start with whomever wants to answer. Mr. Courson. Congresswoman, being president of an association that is subject to 50-State regulation, we can tell you; and I would say that we think that is one of the things that, had we had a uniform national standard, we could have avoided. Some of this could have been avoided. It is really a disservice to consumers in the different States. I will tell you we deal in all of the States; and some States, as I have said before, have very good regulations, very solid laws on the books. And, frankly, there are others that don't. And we have a map that we put in the back of our testimony that shows this patchwork. We have to have a uniform national standard. State regulation, particularly if this is--if the national standard is a floor, just merely adds more complexity, additional disclosures, which we are trying to go the other way with our HUD and Fed initiative, and really doesn't well serve, assuming that the uniform national standard has to be strong and at the proper ceiling. Mrs. Biggert. Do you think that the new agency weakens the regulations or the standard even further? Mr. Courson. Well, it just puts a floor in to continue on with this patchwork of State laws we have. And, in some respects, I must say that every time we see a Federal law it is almost a stimulant for the States to go in and do something else. Mr. Stinebert. We also have a good example of where that has happened with the implementation of the SAFE Act. You have basically a mandate on the States that they have a certain period of time in order to implement conforming laws, and we are finding in all 50 States we have basically no uniformity. We are going to have 50 different laws. Mrs. Biggert. Okay. Thank you. I yield back, Mr. Chairman. The Chairman. The gentleman from New York, Mr. Meeks. Mr. Meeks. Thank you, Mr. Chairman. I think that part of what--some of what we are looking at is credibility issues, etc. I would have liked to have heard-- and what I think a lot of the members have heard, at least on this side, is that if people are diametrically opposed to a CFPA, I would have liked to have heard and would like to hear in the future how we can make it work, what we can do to make sure that it works. Because, obviously, consumers do need protection. Someone--I don't know whether it was the professor or not, but somebody talked about how there are no foreclosures in Europe. And I don't think you really want to go where they are. Because if you look at Europe in particular, there are generally huge consumer protection programs, and banks primarily offer only vanilla products. And, you know, I am not so sure that I want to go all the way there, because I think that there is some good utilization of some diversity in products. But there has to be a buy in, some kind of way that we need to talk. And I, for one, want to again sit down, as I have with many of you, to talk and to try to figure out so that we can get this thing right. Because I am hoping that we will put a piece of legislation in place that is going to survive the test of time and try to minimize any unintended consequences but make sure that individuals who are in my district, for example, number one in New York City, which is small compared to some of my colleagues in other States, in home foreclosures, and how we can figure out how to make them. Because that is what--people are coming to me. They are saying, how do we fix this thing? I am going to change the area that I am going to, because the question that I really wanted to ask to get your opinion has to deal with the subcommittee of which I am the Chair, and that is dealing with international monetary policy. And I know that many industry organizations and individual financial firms, and from what I am hearing here, agree that we must have some kind of a change and a resolution authority so that there would be a systemic risk manager. The FDIC has typically put forward a successful example of how we can bring this kind of stability to the industry. But several of the key bank failures that brought the global financial system to the brink of collapse were international bank holding companies, with operations in multiple sovereign jurisdictions; and I was wondering if you had any thoughts on whether and how an FDIC-type model could work to manage these type of global banks so that, you know, people get out here, go to another jurisdiction and cause a systemic risk in Europe or other places where we don't have the direct jurisdiction. I was wondering if there were any thoughts on how we could manage that. Mr. Bartlett. Mr. Chairman, yes, we have some. And we have prepared some work--we actually would be preparing some suggestions for the record for the committee on global harmonization. We think that the President's draft said the right words as the goal for global harmonization. We would put our emphasis on the G-20, by the way; and we are going to offer some suggestions for how to beef that up to actually create an institutional framework for global harmonization through the G- 20. We think that is essential to happen. The markets are porous across international borders, and to just leave it to the sense of goodwill on an informal basis that the nations will try we think is expecting too much. So we will offer your subcommittee as well as this full committee some suggestions on how to structure global harmonization. I don't see it in the context of the FDIC, by the way, but we will take your request and suggestion and think that through for you. Mr. Meeks. Thank you. One other question I want to ask really quickly. I was wondering, you know, because I am concerned about like the failure of Lehman Brothers. Many individuals in the United States have some--they thought they were investing in Lehman United States. They now found out they were investing in Lehman U.K. Their money is caught up in a bankruptcy proceeding in the U.K. They can't get it out, foundations, universities, etc. I was wondering if any of your banks or institutions fell into that problem, where you are stuck with the U.K. And how you think we need to deal with bankruptcy proceedings in a foreign land or how do you think we can resolve those issues to protect those United States investors, citizen investors who invested here thinking they were investing safely in the United States, but actually the money was in the U.K. proceedings. Mr. Bartlett. We think that the new systemic regulator will look at that. So far, we haven't seen the adverse effects, but we may well. We think it is still an open question. That is a real problem. Obviously--and you are not implying this--you don't want to solve that problem by denying Americans the right to invest across markets. So we think it is a problem, but as of this point it hasn't led to a crisis. It hasn't added to the crisis. But we think it ought to be something that ought to be looked at, and we will get you some thoughts on that on the record. Mr. Meeks. Thank you. I look forward to working with you. The Chairman. The gentleman from California. Mr. Miller of California. Thank you, Mr. Chairman. I want to thank all of you for your testimony today. I appreciate you being candid. And, Professor Zywicki, I enjoyed your presentation. I am trying to look at this not as a Republican or a Democrat. I am trying to look at the economy which I think is in far worse condition than I think some of us will acknowledge, and I think we need to look how do we get it back where it should be. And even with some of my good friends on the Republican side, we disagree on some things. I heard some comments that some believe that the GSEs, Freddie and Fannie, should be phased out. I don't agree with that concept. I think they need a very strong regulator, and I think in recent years they were encouraged to forego basic underwriting standards that they should have implemented. And I think they should be strongly regulated, but I think there is a very sound place for them in the economy and especially in the housing industry. So even on my side we can disagree, but we can disagree with a smile. But I think we have very tough times ahead of us; and I think you all need to be very honest, regardless who on this committee, my side or the other side, gets offended, because we are dealing with the future. And I saw some grain of similarity throughout this testimony. You are concerned about winners and losers. More government could be more confusion, perhaps. You want uniformity. You are concerned about the board makeup. You want it to be more independent. Systemic risk and oversight was a big concern. But the national standard was talked about a lot. But standard enforcement seemed to be something that I heard ring throughout your testimony. You are concerned with that, and I think that is something that didn't occur in recent years, and that things weren't enforced. But there are many Federal banking statutes out there that already exist. And if the bank regulators had enforced those, do they have the authority basically with everything on the books now to pretty much do what we are talking about doing today, in your opinion? Mr. Zeisel. Congressman, there are a lot of tools out there that are available, Federal and State certainly, to address a lot of these problems. In addition, there are now regulations, such as HOEPA, that deal with a lot of the mortgage products that may have been behind a lot of the problems we have experienced. Mr. Miller of California. And regulators could enforce that? Mr. Zeisel. Regulators can enforce that, and the FTC can enforce that, and the States can enforce that as well. Mr. Miller of California. The trouble I have with the SEC testimony--and I asked specifically a question--is she is modifying mark-to-market, the Board is, to some degree. And yet I said, are you really working closely with regulators on enforcement? Because you are going to have quite a change from the history. They have always mandated on banks and regulators and what mark-to-market modifications might be. And the response was, we have talked to a few regulators. But I think there is going to be more than talking to a few. You are going to have to get two organizations together to understand things have to be modified, and we have to also deal with each other on that modification. The adoption of CFPA would result, some said, in serious reductions in credit to consumers; and, Professor Zywicki, you had talked about that. Could you kind of expand on your opinion on that? Mr. Zywicki. Sure. There is a variety of different ways in which that would happen. Obviously, the idea of an exalted plain vanilla product that might fit some consumers but wouldn't fit a huge number won't add much. But it will make it much more difficult to tailor-make products for other consumers, because they will have to get permission in order to do this and all those sorts of things. It will--they are contemplating outright bans on certain useful terms like prepayment penalties. They are contemplating a crackdown on mortgage brokers, which the empirical evidence is pretty clear that mortgage brokers--if there is competition, that mortgage brokers generate lower prices for consumers. And so the final point is that, you know, I worked at the Federal Trade Commission. I know about the antitrust policy and that sort of thing. And the plain vanilla notion here is a very dangerous notion from a competition perspective, which is that we know, for instance, by studying usury ceilings on consumer credit is they tend over time to turn into collusive focal points and tend to dampen competition. So the idea that everybody would be offering the same product has a lot of antitrust and anti sort of competition concerns embedded in it, because it makes it easier for parties to collude, more difficult for them to compete on different sorts of terms. That, too, would certainly not lead to lower prices and could lead to higher prices. Mr. Miller of California. We talked about something similar with GSEs. We talked about the programs that a GSE might adopt and within that program various products they would come up with daily that modified what was the demand in the marketplace. And my concern was we overly restricted them in some fashion, or we could have, to not allow them to do the function based upon market needs and market demands and market trends. And I thank you all for your testimony. I appreciate it. The Chairman. The gentleman from Colorado--the gentleman from Kansas. I am sorry. Mr. Moore of Kansas. Thank you, Mr. Chairman. How should this committee consider and balance the costs of creating the Consumer Financial Protection Agency? I think we need tougher consumer protection enforcement to prevent another costly financial meltdown in the future. So some additional resources may be needed up front so we don't have to spend more money later in rescuing the financial system or the economy in the event of another meltdown. But, Mr. Bartlett or anybody else on the panel, do you have any thoughts about what this committee should consider as we think about new costs? Mr. Bartlett. Mr. Chairman, I think there will be some additional costs with additional consumer protections, whether it is by the safety and soundness or a new agency. But the cost of a new agency itself would be a factor of tenfold of what it would cost to embed it into existing agencies. I do think the existing agencies have the advantage of being able to see the whole of the organization, of the bank or the company that they are regulating and tie it all together and then relate it back to consumer protections. In response to that as well as an earlier question, I will say that the laws granting consumer protection to the existing agencies are woefully inadequate. I think this committee and this Congress and we didn't realize how inadequate they were. But they are spotty. Some have UDAP, some have HOEPA, some have other things, but they are spotty and inconsistent across agencies. And the agencies, as a result, without a statutory mandate, had not acted very much at all on consumer protections. We think it is the job of this Congress and this committee to provide those additional mandates and those additional consumer protections, but do it with an agency that can do something about it by coordinating with safety and soundness. That is not only less costly; it is also far more effective for consumer protection. Mr. Moore of Kansas. Thank you, Mr. Bartlett. Yes, sir. Mr. Stinebert. One of the areas that I think there was agreement among all the panel here was the additional resources that are needed among the current agencies so they can step up their consumer protections. Mr. Moore of Kansas. Very good. Any other comments? Mr. Courson. I would just--I am sorry, go ahead. Mr. Yingling. I would comment about the budget of this new agency. Nobody has any idea what it is. And I think the conundrum is if it is not large enough to do what it says it is going to do, it is going to end up having regulations, examining banks, but it is not as it says it is going to do-- examine and enforce these rules on the thousands of nonbanks. And that is where the great majority of the problem has been. But, to do that, it is going to take a significant budget. And so, in a weird way, we kind of want the budget to be bigger. It sounds unusual. But then the question is, how are you going to pay for it? And if it is done on the cheap, it cannot do what it says it is going to do, because it will end up discriminating in enforcement against banks. Mr. Moore of Kansas. Did somebody else have a comment? Mr. Courson. Congressman, in following up on that, as I have said, the mortgage bankers, we are one, ironically, that are here asking for Federal regulation, safety and soundness, prudential regulations, which we have not had from a Federal level. And in our proposal, this MIRA proposal that we have talked about, we envision that, as in the other agencies, those that are regulated would have to share in the cost of that regulation. We know there is going to be another cost, whether it is tucked inside an existing regulator or someplace else; and we are prepared, our members are prepared to pay their share of that cost. Mr. Moore of Kansas. Thank you. I yield back, Mr. Chairman. The Chairman. The gentleman from Texas. Mr. Hensarling. Thank you, Mr. Chairman. I have a number of concerns about this legislation and particularly the aspect of it that would regulate products, since I view it as abrogating consumer rights. I am concerned about the safety and soundness issues. I am sorry that the gentleman from North Carolina is no longer here. When I think about the separation of essentially product supervision and safety and soundness, Fannie and Freddie come to mind. That was a model that we had up until roughly a year ago, and so I see parallels here. I don't know if anybody else on the panel does, and would care to comment. I see a few heads nodding in the vertical. Mr. Bartlett? Mr. Bartlett. Congressman, I think that is one of several examples from the past of the bad things that happen when you separate consumer protection with safety and soundness. HUD had the approval over activities. So far as I know, so far as I know, HUD never disapproved an activity so far as I know. And that is a--zero is a very small number. At the same time, OFHEO had their safety and soundness regulations disapproved, rejected, turned down, put on hold for decades and in part because it was separated and in part because they were not an independent authority. So we think that is an example that proves that that is not the right model. Mr. Hensarling. Let me change subjects here, if I could. And this is a fairly long bill, I say, by congressional standards, weighing in at 200-some odd pages. Maybe it isn't all that long. I am not sure I found the language where it expressly says there will be product pre-approval. But as I read various sections of the underlying Act that was introduced by the chairman, subtitle C, section 131, it talks about the rulemaking authority of this new agency: ``The agency may prescribe regulations identifying as unlawful unfair acts, abusive acts or practices in connection with any transaction with a consumer financial product. Regulations prescribed under this section may include requirements for the purpose of preventing such acts and practices.'' So if we give the agency the ability to declare unlawful unfair practices--I assume each of your associations or organizations has legal counsel who has probably, hopefully, had a chance to review this. Have your organizations concluded whether a prepayment penalty in a 30-year fixed mortgage is fair under this statute? Mr. Yingling? Mr. Yingling. Congressman, one, if you are looking for where they are authorized to have standard products, it is section 1036, right in plain language. Mr. Hensarling. Thank you. I hadn't quite memorized it all. Mr. Yingling. You are raising an important issue, and that is this legislation changes everything. There is no law on the books that this Congress has authorized in the consumer area, no regulation that isn't trumped by this. You read a very broad statute where they have changed the definition under UDAP. So we don't know what it means. But let me just very briefly read you another section which trumps everything: ``The agency shall prescribe rules imposing duties on a covered person''--that is anybody engaged in consumer financial services--``as the agency deems appropriate or necessary to ensure fair dealing with consumers.'' I am a banking lawyer of 35 years. I have no idea what that means, other than they can do anything they want. It is the broadest standard I think any of us could imagine, which means--and it gets back to the preemption argument--we are not going to know what the rules are for years. Mr. Hensarling. Is it your interpretation then that functionally Congress will cede to this five-person unelected body essentially the right of pre-approval of all consumer financial service products? Has anybody come to a different conclusion? Mr. Yingling. They could do that. Mr. Hensarling. With the exception, I believe, I don't believe they can impose usury limits. Mr. Yingling. They can't do that. They also can limit compensation in any way they want, except they can't limit total compensation. So they can regulate compensation, but not in total. Mr. Hensarling. I see my time is running out. I am going to try to slip this in quickly. I know the statute appears to be aimed at consumer products, but, according to the Federal Reserve, 77 percent of all small businesses use credit cards. I am led to believe a number of those are under an individual name. Might this have a deleterious impact on small businesses and job creation? Mr. Stinebert. Absolutely. Mr. Zeisel. Yes, Congressman, small businesses often use consumer products and services, mom and pop shops and other small operations, and certainly would be affected by this. Mr. Hensarling. Thank you. The Chairman. The gentleman from Colorado. Mr. Perlmutter. Thanks, Mr. Chairman. And, Professor, I would just say that ordinarily I don't agree very often with George Mason because my economic philosophy is a little different than yours. But I do agree with you I think with respect to the subprime piece and whether it was really a consumer protection issue or whether it was just a deregulation or refusal to do appropriate underwriting that affected financial institutions and people who invested in financial institutions and people who bought big portfolios. That I agree with. I think you are off base on the credit card piece. That really is a consumer issue. And all the bells and whistles that come along with credit cards are probably one of the top five things discussed if you were to go door-to-door, walk in a precinct or having a town hall. People didn't expect ``X,'' ``Y,'' or ``Z'' with respect to their credit cards. So--which brings me to sort of the general question of who is best, who best can assist consumers with a credit card that has, you know, this fee and that fee and, you know, this surcharge and that penalty charge? Is it a new agency? Is it the FTC? Is it the FDIC? The OCC? The Federal Reserve? And so my question, if we don't go with what has been proposed and create a new agency, how do we--do we set up ombudsmen or new departments in every one of the regulators? If anybody has an answer to that, I would like to hear it. Or do we just beef up the FTC? Mr. Zeisel. Congressman, every one of the bank regulatory agencies has consumer departments. They do the examination of the consumer issues. Some of them have merged them with the safety and soundness teams. Some of them have separate ones. Each one probably has advantages. But if the consumer portion of their oversight doesn't get the amount of attention it deserves at the agency, that can probably be addressed through that agency and the agency charter and the agency structure more easily than stripping it out of each of the agencies and creating a new agency to do the same basic function. Mr. Zywicki. I would just add I think the FTC could probably do a lot of this. A lot of it is simply unworkable for anybody, I think. But the FTC could do a lot of it. And I think it is also worth exploring the proposal that I think the Republicans have suggested of creating a new agency that sort of takes the safety and soundness functions away from the Fed and combine--you sort of have a stand-alone safety and soundness/consumer protection agency separate from the Fed. But I think keeping those two together really is an important issue, and I think the Federal Trade Commission does have this sort of expertise and experience and understanding of consumer decision-making and that sort of thing--that it could also be more authority at the FTC would probably be--could be a useful thing as well. Mr. Perlmutter. Okay. Thank you. And just for me and listening to the bankers, Mr. Yingling and the gentleman from Easton Bank--I am sorry. I forgot your name. Mr. Menzies. That is all right. Mr. Perlmutter. You know, for me, having been on this committee and what we went through in September and all of last year, you know, it really is a too-big-to-fail. I mean, for me that is the big issue here, and I have sort of become radicalized on the whole issue. That and derivatives, you know, regulating derivatives, the hedge funds and credit rating agencies. I mean, those are where I think I would like to see-- and I know a lot of our attention is focused on that. I do think that some consumer practices caused some issues. But really the focus I would like the reform to be really on, the too-big-to-fail. And anybody can comment on that if they like. Mr. Menzies. Congressman, I am itching to make a point. And this hearing, this legislation needs to focus on those who created the train wreck, not those who didn't, not those who played by the rules and did not abuse the consumer. And the small finance, small banking players in this arena had skin in the game, and they played by the rules. And it is as simple as that. It is so important to make certain that it is recognized that community banks are really not in the product business. We are in the solutions business. And we create solutions with an array of products, some of which are on the shelf and some of which we need to create. And if our right to create solutions for individuals and small businesses are packaged into a bunch of pre-approved products, it will destroy our capacity to participate in this recovery. Mr. Perlmutter. Thank you, and I yield back. The Chairman. The gentlewoman from Minnesota. Mrs. Bachmann. Mr. Chairman, thank you very much, and I would like to ask unanimous consent to insert into the record-- The Chairman. We have general leave for anybody to insert anything into the record. We got that already today. Mrs. Bachmann. Okay. I would like to insert into the record today the editorial from the Wall Street Journal, ``A Tale of Two Bailouts.'' I had read this editorial this morning as I was preparing for this hearing today, and the question that I would ask of the panel is, is the discipline of the marketplace now a thing of the past? I am really wondering, as I look at what has transpired just since last fall and the actions that Congress is taking. You take a look at risk, and risk in the American system has been a really good thing. We saw risk hurt a lot of people, but the question is, did risk hurt people because the Federal Government provided the backstop through a GSE like Freddie and Fannie? Was that the problem? It was no longer really risky, because what happened is we spread--losses occurred. The only thing is the shareholders didn't have to bear the brunt of the losses. The net was spread wider so that now all of the American taxpayers are on the hook for those losses. So it isn't that the losses went away. It is who is responsible for the losses. There were private contracts made between individuals who contracted for money and those who were lending money. But those people who were part of a private contract aren't the ones that are on the hook for risk. Now people who had no part of that contract, the American taxpayer, they are all made involuntarily a part of that contract. They have to subsume a risk they never wanted, they never asked for, and now it is their problem. And so that is what I am asking you, a very simple question: Is the discipline of the marketplace now a thing of the past? Professor Zywicki, and then I think Mr. Yingling, also would like to respond. Mr. Zywicki. I agree with you completely. Mrs. Bachmann. Thank you. That doesn't happen very often. Really. Mr. Zywicki. Like I said, I am on this panel, but I don't speak for the banking industry, and so I am not sure I would get uniform agreement with this, but I think that is a very, very serious problem. I think that, you know, risk and the risk of failure, if you get to keep the profits and socialize the losses, you are going to have a train wreck. If we continue to do that going forward, it is going to be an even bigger train wreck. And I think that coming up with some way of making sure that those who fail feel the pain of their failure and they actually fail is an important part of capitalism and risk. And it applies even to consumers as well that, you know, that consumers have to have the opportunity to be able to take chances, and we can't put a safety net under every consumer as well for every decision that they make. Mrs. Bachmann. And I wonder as well about growth in our economy. How will we have continued growth in our economy without risk? We need to have a certain element of risk taking, risking capital on the gamble that somehow you are going to profit down the road. If we have just plain vanilla products, it seems to me we are going to be limiting consumer choices, especially for those at the bottom echelon of the economic lifestyle. And just like we saw in the article this morning in the Wall Street Journal, they termed it, is Goldman Sachs GoldiMac? Because now they are too-big-to-fail. The American taxpayer is always going to be bailing out Goldman. I have nothing against Goldman. It is a great American company. But if you take a look at CIT and look at the fact that we did give them bailout money, now it looks like we might be predisposed to giving them bailout money again, is this really systemic risk? You know, supposedly this panic has passed now. It is like the article says, we vitiated the definition of systemic risk. Mr. Yingling. Mr. Yingling. Well, you are raising excellent points, and it really comes down to too-big-to-fail. And I think Mr. Perlmutter was raising the same question. You left out accounting from your list, Congressman Perlmutter. Mr. Perlmutter. I know. Yes, and accounting. Mr. Yingling. And that is why this issue of the systemic risk resolution is so important. Because that is the mechanism through which you all will determine too-big-to-fail in the future. And I think the Administration's proposal was, frankly, too weak and too vague in this area. The systemic risk process will look--the marketplace will look to that and it will say, what will happen to an institution when it goes through systemic risk? And when it goes through that process, say a future Lehman Brothers or a future AIG, it should pay very, very heavy penalties so that you don't want to be there, so that the stakeholders you are talking about, the people who take risks through it, are basically wiped out. And that is why that part of this proposal is so critical and should be getting I think more attention than the Administration gave to it. The Chairman. The gentleman from Connecticut. Mr. Himes. Thank you, Mr. Chairman. I would like to direct a couple of questions to Professor Zywicki. Professor Zywicki, I appreciate your testimony and some of the facts here, but I would like you to defend some of the things that I have read and heard in your testimony. Stories have power. And you tell a story that you call not unrealistic here about a California borrower in northern California who can pay his mortgage but chooses not to and consults with his lawyers, your conclusion is that this does not present a consumer protection issue. I have never been to this part of northern California. I represent Connecticut, which includes Bridgeport, which is the densest concentration of foreclosures in Connecticut. We have seen over a thousand. And while you call this not unrealistic, what I see when I go to Bridgeport is often minority families out of their house, on the curb, with crying children, surrounded by their belongings. They didn't consult their lawyer, because they don't have a lawyer. They didn't have a choice. And I don't ordinarily deviate from the sort of rationale here, but your story just sort of strikes me as a cartoon of where the American people find themselves today, and the conclusion is what really concerns me. Foreclosure is certainly, in my district, a terrible consumer protection issue. It is a community protection issue. Because, as you know, as an economist, when you have a neighborhood with foreclosures, you see a decline in property values with all that that implies. So I guess I would like to know whether you really believe--and this is a question being asked by somebody who worked for 12 years in the financial services industry who sometimes has trouble understanding his own mortgage and credit card contracts. Do you really believe that the foreclosure situation was really more about incentives and that in fact all of our individual actors here were rational economic actors who had that fundamental quality that capitalism requires, which is information and knowledge of what they got into? Mr. Zywicki. Thanks. That is an excellent question. So let me clarify my thoughts, which is, first, yes, there are serious problems in a lot of inner cities where people got in bad mortgages and ended up in foreclosures. I don't doubt that. That is definitely a problem. Those are--things should be done about that. What I am focusing on-- Mr. Himes. My question is really very narrow, which is do you believe that we have done an adequate job as regulators, as government, as private industry to creating that fundamental unit of capitalism, which is a fully informed, smart consumer? Mr. Zywicki. Right. With respect to the story that I told, I get one or two e-mails a week from borrowers in California and Arizona who say, ``Professor Zywicki, I bought a house 2 years ago. I am $100,000 underwater. I saw an article that said I can walk away from my mortgage. Should I do it?'' Right. People are out there. So it is not a cartoon. People are making that decision. Do people understand their mortgages? No, nobody does. I mean, that is one of the problems with this, is it sets up this aspirational standard where every person can understand every mortgage. And according to a study done by the Federal Trade Commission 2 years ago, what they found was that nobody understands their mortgages, whether they are prime or subprime borrowers. It is not a subprime versus prime sort of issue. What they also recommended, which I think--to go to what else we should do--is they went through and they gave very clear instructions on how we could construct better disclosures so that people could shop in a better sort of way. That would solve a lot of the problems if we solved the disclosure problem. The disclosures are not good. Mr. Himes. The reason I am going down this path is, look, this is a complicated topic, and we have to get it right. There is merit on both sides and many different sides, and we have to get it right. But to me it is a no-brainer, and as people with some economic training here, it is a no-brainer that you need a fully informed consumer. And you repeat here there is no evidence that the financial crisis was spawned by a systematic lack of understanding. No evidence that consumer ignorance was a substantial cause. Nobody is saying that it was spawned by consumer ignorance. Was not a substantial contributing factor to this crisis the lack of education, the lack of knowledge, the lack of information that consumers had? Mr. Zywicki. No. Mr. Himes. It was not a contributing factor? Mr. Zywicki. Not a substantial contributing factor. I have not seen that it is a minor contributing factor, but-- Mr. Himes. But you did just say that we agree that there was substantial misunderstanding and misinformation out there. So you are saying that exists, despite no evidence that it was causal, you are saying that it didn't cause it. Mr. Zywicki. Sure. That has been around for 10, 20, 30-- that has been around forever, those sorts of problems. But the problems that were caused here were caused, as you read my testimony, as you see, I think caused by incentives. It was interest rates, Federal Reserve monetary policy, and incentives when house prices fell. That is what caused the problem. There were other things that exacerbated it that were around the margins. Mr. Himes. Thank you. Thank you, Mr. Chairman. The Chairman. The gentleman from Florida, I think, was next. Mr. Putnam. Thank you, Mr. Chairman. I apologize for being late. So if we are going over previously plowed ground, my apologies. The Chairman. Well, given the next job the gentleman looks for, that is probably a good practice. Mr. Putnam. I appreciate the chairman's faith and optimism. If you accept that the credit, liquidity, economic contraction crisis is substantially behind us, is it far enough behind us for us to make the type of sweeping regulatory reforms that are being contemplated with the immediate aftermath being such recent history? Do we understand enough about the events of last summer and fall to accomplish the type of sweeping reforms that are being discussed here today? It is a simple question, so let's start at one end and work down to the other. Mr. Menzies? Mr. Menzies. I guess your question presumes that we have some knowledge on whether this is all behind us or not; and that depends upon whether you are from Florida, California, Arizona, Nevada, Ohio, Michigan, or Atlanta, or when you are from the Eastern Shore of Maryland. You can bet I don't know the answer to that question. It also presumes that there is a need to create some regulation to deal with the problem, to deal with the collapse, if you will. And again I would repeat that it is so important to focus on what caused the problem. What caused the $7 trillion of economic loss to the American consumer? We can have all the product legislation in the world and do everything possible to protect the consumer, but the greatest damage to the consumer was the failure of a system because of concentrations and excesses across the board, of a Wall Street vehicle that gathered together substandard, subprime, weird mortgages that community banks didn't make, created a warehouse to slice and dice those entities, make huge profits selling off those items, and have very little skin in the game, very little capital at risk, and to be leveraged, leveraged in some cases, according to the Harvard Business Review this week, 70 to 1. That deserves attention. The too-big-to-fail, systemic-risk, too-big-to-manage, too-big-to-regulate issue must be dealt with. And from the perspective of the community banks, that is the crisis of the day. That is what has destroyed the free market system. Mr. Putnam. Mr. Yingling, do we know enough? Mr. Yingling. I think we need to be extremely careful, because what the Congress does with this legislation will not just determine the regulatory structure, it will determine the financial structure for decades to come. It will change all the incentives. So I think we need to be very careful. And I would just add another point that I touched on earlier. There is great uncertainty already in the markets, and it is affecting the markets. It is affecting the cost of credit. And I do worry, particularly in terms of this consumer agency, as I mentioned earlier, that all the rules will be changed, and we won't know what the rules are for years to come. So I think an additional point to the one you are raising and related is, is there going to be so much uncertainty in the market that people will not know what the rules of the road are? And that can affect economic recovery. Ms. Leonard. I think we, too, need to be extremely cautious, because the market has changed. The market has adjusted based on going so far in the opposite direction in terms of being risk tolerant that there could be extreme unintended consequences for future credit if we don't really take the time to know where the problems took place all the way down the line and how to stop them from happening again. Mr. Zywicki. This proposal made credit more costly and less available to consumers. That would be bad in itself. Secondly, it will probably push consumers to even less attractive forms of credit such as pawn shops, payday lenders, a lot of these sorts of organizations, because it will make regular credit less available. That is a bad idea anytime. It seems like an especially bad idea at this time. The Chairman. The gentleman from California. Mr. Sherman. Thank you, Mr. Chairman. The gentlelady from Minnesota mentioned Goldman. The one issue that I need to bring up is we own warrants in Goldman. They are worth between a quarter and a half billion dollars. And there are negotiations now in process that I fear will lead to us cashing in those warrants for far less than they are worth. We took a huge risk. Goldman is doing well. We are going to have to profit on this deal, because I know we are going to lose money on a bunch of the other deals. As to consumer ignorance being the cause of all this, I would say to my way of thinking it is investor ignorance. They treated Alt-A as triple A. They loaned $500,000 to people to buy a three-bedroom bungalow in my district, and then we counted that as increase in our worth. It increased property values, didn't exactly increase the value of that home. And I don't think the borrowers were all that dumb, even if they signed a loan that they ultimately couldn't pay. Because if they sold in 2006, they made more money on their home than they ever made working, or at least for many years of working. The people who took ridiculous risks were the investors, the lenders. They thought they were creating wealth. All they were doing is creating a bubble. The three issues that I think are going to be most contentious on regulatory reform are: first, the enhanced powers of the Fed. We are going to have to deal with Fed governance. It is absolutely absurd to put huge governmental powers in an entity that is selected, whose leadership is selected--not always one man, one vote--they will have to appoint Fed board members. But in some cases, the regional side and various other entities, the governance of the Fed is one bank, one vote; one big bank, one big vote. And last I checked the Constitution, governmental powers should be in the hands of those who are elected one man, one vote; one woman, one vote. Also a big discussion on whether the Fed should be audited like every other government agency. The more governmental power you give it, the more reason there is to audit. And, finally, the chairman has discussed Section 13.3 of the Federal Reserve Act. Mr. Bernanke was here and I facetiously questioned him about whether he would accept a $12 trillion limit on the power of the Fed to go lend money to whomever he thought ought to get it. He thought a $12 trillion limit on that power would be acceptable. The power of the purse is supposed to be in Article 1 of the Constitution, not Article 2. And the proposal of the Administration is to say, well, you need two entities in Article 2 of the Constitution, both the Fed and the Treasury Department, to go out and take--and to risk trillions of dollars. I would think that we would want a dollar limit imposed by Congress. Derivatives are often a casino. We are told that they are used as hedges, and that is the justification for them. But for every $10 billion that an airline hedges on the future fuel of costs, there seems to be $10 trillion in casino gambling. Which would be more or less fine, except, unlike Las Vegas, we have the Secretary of the Treasury, when he came before us a couple of days ago, making it plain that he reserves the right to use whatever governmental powers he might have to bail out the counterparties on derivatives being written today. So we do have an interest in minimizing the over-the- counter derivatives and minimizing what could be a risk that ultimately falls on the taxpayer. I would think at a minimum, we would limit over-the-counter derivatives to those cases where somebody has a genuine insurable risk and is unable to hedge it in the exchange-traded derivatives. For us to say we are going to have a taxpayer-insured casino involving trillions of dollars a day, just so that one or two airlines could hedge fuel costs, fails to recognize the size of this, of the casino part of the over-the-counter market. Finally, Professor, I will be introducing a bill that would deprive the issuer of a debt security from selecting the credit-rating agency. To me, that is like having the umpire selected by the home team. Which is fine if it is a beer league; not so fine if you are in the major leagues. And instead, we would select at random from a panel of SEC- qualified credit-rating agencies. Another way to go would be to make the credit-rating agencies liable for negligence. I don't know if I am allowed a response. The Chairman. No, you can't get-- Mr. Sherman. I will ask you to respond for the record. The Chairman. The gentleman's time has expired. The gentleman from Illinois. Mr. Manzullo. Mr. Chairman, you know it is amazing, if I had asked each of you guys--that of course includes the gentlelady--what caused everything, the answer is pretty simple: too easy credit. The Federal Reserve had the authority to stop the 2/28 and the 3/27 mortgages, and the Federal Reserve also had the authority to require, goodness gracious, written proof of a person's income before that person was eligible to get the mortgage. You know something? No one starts with the problem. The problem is not in the derivatives, the problem is in the stinky piece of financial garbage that was generated because of the bad subprime loans. So if we already have a government agency that had the powers to stop this, and didn't do so for any number of reasons, why create another agency given the authority to come in and mess up? I mean, I don't know if you guys have taken a look at this Consumer Financial Protection Agency Act of 2009, the proposal on it. You know what that does? That says that this new organization gets to work with HUD, and perhaps FHSA, on a Truth-in-Lending and RESPA financial disclosure form. And how long did we fight those people at HUD on RESPA? When I chaired the Small Business Committee, that went on for 6 years. They finally came up with something they thought would work. And now FHA says well, we are going to take care of the appraisers. It allows banks to own an appraisal management company so that the appraisal management company can be wholly owned by the bank. But if you separate the men's bathroom from the women's bathroom, they can go out there and do an independent appraisal. And if a person gets an appraisal that he doesn't like--you know, we were told by the head of the FHFA what his resolution is: to contact them or the CC. You know, the more power and the more agencies we set up, it just screws everything up. I mean, Mr. Menzies, you know, you are a community banker. In your opinion--I like to pick on you--this is the third time since you have been here. In your opinion, if we did not have those exotic mortgages, if they were not allowed, and people had to show proof of their income, don't you agree that this crisis probably never would have occurred? Mr. Menzies. You do pick on me all the time. Mr. Manzullo. Yes, that is because I like your answers. Mr. Menzies. Thank you, sir. You know, as a community banker, knowing that my personal capital is at risk, knowing that I have personal skin in the game, introduces a great deal of morality in the business decision-making; because we own, individually and personally, the consequences of our own loan decisions, whether we put it in the secondary market through Fannie and Freddie, whether we keep it, we own the consequences of those decisions personally. So my perspective would be that the lack of capital, the lack of ownership, the extraordinary leverage, the lack of skin in the game, created an environment that allowed those who were feeding off of the system to create products that they would not have created if their personal skin were in the game, if their personal capital were at risk, if they were truly at risk of owning their own decisions. Mr. Manzullo. Now, Ms. Leonard, do you agree with my assessment that had the Fed had some reasonable--I mean, the Fed finally has put these into effect, will take effect in October of this year-- wouldn't that have stopped a lot of the subprime? Ms. Leonard. Yes. If the lenders were not allowed to create those products, those, you know, riskier guidelines, yes. Mr. Manzullo. Well, then isn't that the answer? You know, I just can't see setting up a whole new--I mean, this consumer financial protection-- The Chairman. The gentleman's time has expired. I am going to give myself 10 seconds. Mr. Menzies, I take what you have said, if I am correct, as a strong argument in favor of some requirement of risk retention throughout the system. Mr. Menzies. Yes, sir. We believe that risk retention is an important part of the whole system. And at the same time, we hope those transactions that are clearly underwriting, like a conforming mortgage loan, don't get buried or weighted down in that process. But we think risk retention is an important part of the whole system. The Chairman. Right. And it seems to me it takes the place of some other restrictions that may come. I thank the panel very much, and it is dismissed. [Whereupon, at 2:07 p.m., the hearing was adjourned.] A P P E N D I X July 15, 2009 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]