[House Hearing, 114 Congress] [From the U.S. Government Publishing Office] SETTLING THE QUESTION: DID BANK SETTLEMENT AGREEMENTS SUBVERT CONGRESSIONAL APPROPRIATIONS POWERS? ======================================================================= HEARING BEFORE THE SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED FOURTEENTH CONGRESS SECOND SESSION __________ MAY 19, 2016 __________ Printed for the use of the Committee on Financial Services Serial No. 114-90 [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] U.S. GOVERNMENT PUBLISHING OFFICE 24-136 PDF WASHINGTON : 2017 ---------------------------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Publishing Office, http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free). E-mail, [email protected]. HOUSE COMMITTEE ON FINANCIAL SERVICES JEB HENSARLING, Texas, Chairman PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking Vice Chairman Member PETER T. KING, New York CAROLYN B. MALONEY, New York EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas BILL POSEY, Florida WM. LACY CLAY, Missouri MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts Pennsylvania DAVID SCOTT, Georgia LYNN A. WESTMORELAND, Georgia AL GREEN, Texas BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota ROBERT HURT, Virginia ED PERLMUTTER, Colorado STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama MICK MULVANEY, South Carolina BILL FOSTER, Illinois RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan DENNIS A. ROSS, Florida PATRICK MURPHY, Florida ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona ANDY BARR, Kentucky JOYCE BEATTY, Ohio KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington LUKE MESSER, Indiana JUAN VARGAS, California DAVID SCHWEIKERT, Arizona FRANK GUINTA, New Hampshire SCOTT TIPTON, Colorado ROGER WILLIAMS, Texas BRUCE POLIQUIN, Maine MIA LOVE, Utah FRENCH HILL, Arkansas TOM EMMER, Minnesota Shannon McGahn, Staff Director James H. Clinger, Chief Counsel Subcommittee on Oversight and Investigations SEAN P. DUFFY, Wisconsin, Chairman MICHAEL G. FITZPATRICK, AL GREEN, Texas, Ranking Member Pennsylvania, Vice Chairman MICHAEL E. CAPUANO, Massachusetts PETER T. KING, New York EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina KEITH ELLISON, Minnesota ROBERT HURT, Virginia JOHN K. DELANEY, Maryland STEPHEN LEE FINCHER, Tennessee JOYCE BEATTY, Ohio MICK MULVANEY, South Carolina DENNY HECK, Washington RANDY HULTGREN, Illinois KYRSTEN SINEMA, Arizona ANN WAGNER, Missouri JUAN VARGAS, California SCOTT TIPTON, Colorado BRUCE POLIQUIN, Maine FRENCH HILL, Arkansas C O N T E N T S ---------- Page Hearing held on: May 19, 2016................................................. 1 Appendix: May 19, 2016................................................. 29 WITNESSES Thursday, May 19, 2016 Gray, Ambassador C. Boyden, Partner, Boyden Gray & Associates.... 5 Larkin, Paul J., Jr., Senior Legal Research Fellow, the Heritage Foundation..................................................... 8 Min, David K., Assistant Professor of Law, the University of California Irvine School of Law................................ 9 Rosenkranz, Nicholas Quinn, Professor of Law, the Georgetown University Law Center.......................................... 6 APPENDIX Prepared statements: Gray, Ambassador C. Boyden................................... 30 Larkin, Paul J., Jr.......................................... 53 Min, David K................................................. 72 Rosenkranz, Nicholas Quinn................................... 83 Additional Material Submitted for the Record Hensarling, Hon. Jeb: Letter from Richard A. Epstein, dated May 21, 2016........... 90 SETTLING THE QUESTION: DID BANK SETTLEMENT AGREEMENTS SUBVERT CONGRESSIONAL APPROPRIATIONS POWERS? ---------- Thursday, May 19, 2016 U.S. House of Representatives, Subcommittee on Oversight and Investigations, Committee on Financial Services, Washington, D.C. The subcommittee met, pursuant to notice, at 9:16 a.m., in room 2128, Rayburn House Office Building, Hon. Sean P. Duffy [chairman of the subcommittee] presiding. Members present: Representatives Duffy, Fitzpatrick, Mulvaney, Hultgren, Tipton, Hill; Green, Cleaver, Ellison, Beatty, and Sinema. Ex officio present: Representatives Hensarling and Waters. Chairman Duffy. The Subcommittee on Oversight and Investigations will come to order. Without objection, the Chair is authorized to declare a recess of the subcommittee at any time. Also, without objection, members of the full Financial Services Committee who are not members of the subcommittee may participate in today's hearing for the purposes of making an opening statement and questioning the witnesses. Today's hearing is entitled, ``Settling the Question: Did Bank Settlement Agreements Subvert Congressional Appropriations Powers?'' The Chair now recognizes himself for 5 minutes for an opening statement. Since last year, this committee has been investigating the Obama Administration's use of bank settlement agreements as a slush fund to support liberal activists' groups. Today's hearing examines this practice and its impact on Congress' constitutional power of the purse. In the wake of the 2008 financial crisis, the Department of Justice was charged with investigating the pulling and sale of residential mortgage-backed securities which played a leading role in the housing meltdown and contributed to a global recession. Millions of Americans' mortgages went underwater and countless families faced foreclosure. In 2013, the DOJ announced a record breaking $13 billion settlement with JPMorgan Chase which included $4 billion in consumer relief to come largely in the form of loan modifications. Importantly, although it contained a provision giving credit for donations to certain community redevelopment organizations, it did not make any donation mandatory and offered only dollar-for-dollar credit to the bank to fulfill them. Several other high-profile settlements with other large financial institutions followed. In July 2014, DOJ announced a $7 billion mortgage lending settlement with Citigroup that included $2.5 billion in consumer relief. DOJ, which touted these consumer relief provisions as innovative, required a minimum $10 million in donations to HUD- approved housing counseling agencies including, for example, the National Council of La Raza and NeighborWorks. For every dollar donated, Citigroup could earn $2 worth of credit against its $2.5 billion consumer relief commitment. In effect, the Bank was actually incented to donate to these third-party groups. By contrast, for direct forms of consumer relief like principal forgiveness for homeowners in the hardest-hit areas, the base credit is merely dollar-for-dollar. One month later, DOJ reached a settlement with Bank of America providing for $7 billion in consumer relief which included nearly identical terms. Earlier this year DOJ entered into settlements with Morgan Stanley and Goldman Sachs, settling for amounts of $2.6 billion and $5 billion respectively, allowing for much more than dollar-for-dollar credit. These terms appeared unprecedented, and as a result liberal activist groups have or are scheduled to receive over half a billion dollars outside of the normal appropriations process, setting up-front, mandatory, minimum donations to non-victim third parties, and in some instances, liberal activists' groups. It marks a substantial and disturbing departure from past practices. This subcommittee has two questions before it today. First, is what the Obama Administration did consistent with the law, and more importantly, Congress' Article 1 appropriations powers? And second, should we continue to allow the Executive Branch, regardless of party, Republican or Democrat, to structure settlements in such a way as to allow third parties, who are not harmed, to get funding otherwise owed to victims or to the government and taxpayers. To answer the first question, we have invited four legal scholars. At the very least, I would hope that we can agree that these settlements subverted or undermined Congress' appropriations power. And if not a clear violation of the Constitution, these settlements may very well have violated the Miscellaneous Receipts Act, which directs that money received by the government from any source must be deposited in the Treasury. Furthermore, the Department of Justice's own U.S. attorney's manual says this practice is restricted because it can create actual or perceived conflicts of interest and/or other ethical issues. As a policymaker, the answer to the second question is abundantly clear to me. Regardless of who is in power at the Department of Justice or any other agency with a role in structuring settlements on behalf of the U.S. Government, no settlement should compensate anyone other than a victim. Period. Based on everything the committee has learned it is clear that, in fact, these settlements created the very conflicts of interest that the U.S. attorney's manual warned against, with certain conservative groups being deliberately excluded from receiving settlement funds. This kind of practice should not take place under a Democrat or Republican Administration. The Department of Justice, and indeed the justice system itself, is supposed to be blind to this kind of behavior. It will not be tolerated. For the millions of Americans affected by the housing crisis, many may not be aware that their bank had a choice to provide them with direct relief or funnel money to a liberal activists' group. I think it is important for our committee to try to determine why, which is the reason I intend for this subcommittee to continue to investigate the agencies involved and prohibit this from happening in the future. I now recognize the ranking member of the subcommittee, the gentleman from Texas, Mr. Green, for 5 minutes. Mr. Green. Thank you, Mr. Chairman. I thank you for the time. I do not agree with the hearing. I do not agree with the hearing because I think that there are a good many other things that we could be doing today that the American people expect us to do. The American people are pretty fed up with what we have been doing. Not one person lately, and very few at all, have gone to jail as a result of this crisis that was created in 2008. A good many people are still concerned about our having hearings that will prevent people from acquiring the necessary aid that they need to prevent foreclosures while not having hearings that would help us bring to closure some of the atrocities that have occurred. Now some would say that is what the Justice Department ought to do. We can have hearings to find out what happened and encourage the Justice Department to go after people. Some would say, well, this is within the purview of what we are doing. Yes, it is. But this bill that is going to be mentioned is one that emanates from the Judiciary Committee. And if we can take up issues emanating from the Judiciary Committee with reference to legislation, we can take up these issues that relate to people going to jail. This is why people are so upset with us. That is why you see this election going in all directions. People are fed up. So let us just talk about what we have here today. I think a more appropriate title for this hearing would be, ``No Good Deed Goes Unpunished.'' The Justice Department lawfully settled these cases and the amounts that have been called to our attention. I would think that these banks would be a little bit concerned about the way their names are going to be thrown around today because they settled these cases for good reason. They took advantage of consumers, and now they are having to pay. And if there is something unlawful about this, these banks have batteries of lawyers who are capable, competent, qualified, and prepared to take these issues before the judiciary in this country. Judges that we put in place. So, it is not some alien country that is going to have to deal with these issues. If there are unlawful acts going on, they would take them to court. No court has declared any of these settlements unconstitutional. We are doing what is within the law, and the Justice Department really ought to be commended for the outstanding job that it has done. I would also add this, at the very heart of this is the question, are we going to allow monies from settlements, less than 1 percent by some accounts by the way, less than 1 percent of the money from these settlements is what we are talking about today. Are we going to allow the money from settlements to go to organizations and entities that can help people stay in their homes? That is what this is about. Are we going to allow money to go to counselors who can help people stay out of foreclosure? Go to lawyers who can help them? And all of these entities and organizations that people are all upset about have been vetted by HUD. They are on an approved HUD list. You can't get on the list without being vetted. Do some get through that we might not want? Or someone might not want? Possibly, but they have still been vetted. And by the way, if the money could go to just any organization, the complaint would be, you are letting the money just go to anybody. None of these people are vetted. So, either way there is going to be a complaint. I don't approve of this hearing. I think this hearing should be called the means by which we will continue a crisis that started in 2008 with the debacle associated with banks that took advantage of people. Yes, JPMorgan Chase has a $13 billion settlement. Yes, Bank of America has a $7 billion settlement. And then, of course, there is Goldman Sachs at $5 billion. I would think that they would get sick of their names being drawn through the records of Congress and all of these things being mentioned about them. At some point they ought to say, look guys we have had enough, we settled that. We are not complaining. Or maybe they are complaining but they are not bringing it to our attention. I don't see one banker here today complaining about what is going on. If I am wrong someone will tell me. But it seems to me that if you are a banker, or a surrogate of a banker, you ought to speak up. The point I would like to make, finally, is this: At some point, we have to get about the business the American people expect us to take care of. They are sick of conservatives and liberals doing nothing. They want to see us deal with this crisis the way they would be dealt with if they were the culprits. Somebody ought to go to jail. We ought to be having hearings to determine who is going to jail. I yield back. Chairman Duffy. The gentleman yields back. We now recognize and welcome our witnesses here today. First, we have Ambassador Boyden Gray. Ambassador Gray is the founding partner of Boyden Gray and Associates, a law and strategy firm in Washington which is focused on constitutional and regulatory issues. Second, we have Professor Nicholas Rosenkranz who teaches constitutional law and Federal jurisdiction at Georgetown University Law School. Third, Mr. Paul Larkin is a senior legal research fellow at the Heritage Foundation where he directs the Foundation's project to counter abuse of criminal law. And finally, Professor Min is an assistant professor of law at the University of California Irvine School of Law. Welcome, all of you. The witnesses, in a moment, will be recognized for 5 minutes to give an oral presentation of their testimony. And without objection, the witnesses' written statements will be made a part of the record. Once the witnesses have finished presenting their testimony, each member of the subcommittee will have 5 minutes within which to ask each of you questions. On your table, there are three lights: green means go; yellow means you have 1 minute left; and red means your time is up. And with that, Ambassador Gray, you are recognized for 5 minutes. STATEMENT OF AMBASSADOR C. BOYDEN GRAY, PARTNER, BOYDEN GRAY & ASSOCIATES Mr. Gray. Thank you very much, Chairman Duffy and Ranking Member Green, for inviting me to speak here about the importance of congressional control over the Nation's purse and how that control has eroded over the past several years. This erosion threatens the separation of powers that lies at the core of our constitutional structure. An Executive with access to the Treasury could very well free itself from popular oversight putting the entire idea of representative self-government at risk. I have been involved with this set of issues for a long time. I was counselor to the President and you can well imagine how often this issue came up in deliberations in the White House, especially in the Antideficiency Act, which I will mention in a minute. And later, in private practice, I was deeply involved representing Congressman Bliley and Senator Hatch in the American trucking case which addressed questions about the extent of Congress' ability to delegate authority to the Executive Branch. Today, I am challenging the constitutionality of the Consumer Financial Protection Bureau (CFPB), which is familiar, I think, to all of you on grounds, among others, of the power of the purse and on delegation. As my prepared text makes clear, the Appropriations Clause is a bulwark of the Constitution's separation of powers and it goes way back into English history, which is the background for our constitutional set up. In the end every constitutional power runs into the appropriations power. All exercises of constitutional power are limited by the congressional control over funds in the Treasury. In fact, the command of the purse is what gives effect to Congress with the authority to prescribe the rules by which the duties and rights of every citizen are to be regulated. Historically, Congress has protected its powers of the purse. The Miscellaneous Receipts Act, which is the principal topic of today's hearing, is very relevant and central. It ties the Executive Branch to Congress by requiring appropriations for any money received for the Government is spent. And we will go into this in a little more detail in the time I have. But let me first say, to put it all in context, there are three general categories of Appropriations Clause violations. The first is establishment of agencies that don't have congressional funding, it is self-fund, and thus escapes oversight by you, and one example is the CFTB, with which I think this subcommittee is familiar. The second is violations of the Antideficiency Act, which prohibits the Executive from committing funds not, spending funds not appropriated by Congress. ObamaCare is an example of that. And then there is the Miscellaneous Receipts Act, which prohibits the kind of discretionary control over funds received; and enforcement cases, the ones you are concerned about, give the banking settlements involved extraordinary sums of money which escape congressional oversight of the purse. This committee is familiar with the CFPB, which has no obligation to answer or respond to anything you do. So, when asked by a member of this committee who is in charge of the lavish renovation expenditures of CFPB, which cost more than the building of the Bellagio Hotel in Las Vegas, the Director of the CFPB answered, ``Why does that matter to you?'' That is an insolent response which stuns me, and I would think you would want to clasp him in handcuffs for saying something like that. The Affordable Care Act, sort of second bucket, involves the Antideficiency Act, and there are various payments which Congress has appropriated and various payments which Congress has authorized but not appropriated. So-called cost-sharing reduction payments have never been appropriated by Congress. The President requested $5.4 billion. He got $4 billion. When the answer was no, he took the $4 billion anyway. So I think that it is important to watch that very, very carefully. You have covered, Mr. Chairman, the sins of the bank settlements. I don't know that there is much I can really add, except to say that the amounts are extraordinary in comparison to the other disbursements. The CFPB, for example, at $600 million a year, which pales in comparison to the billions that have been dispensed under the bank settlement. So, I commend you for this hearing, and I hope you have more success with it and stop this practice. And as far as what the ranking member said, as a Republican I am quite sympathetic to almost everything you touched on. Thank you. [The prepared statement of Ambassador Gray can be found on page 30 of the appendix.] Chairman Duffy. Thank you, Ambassador Gray. Professor Rosenkranz, you are now recognized for 5 minutes. STATEMENT OF NICHOLAS QUINN ROSENKRANZ, PROFESSOR OF LAW, THE GEORGETOWN UNIVERSITY LAW CENTER Mr. Rosenkranz. Thank you, Chairman Duffy, Ranking Member Green, and members of the subcommittee. Thank you for the opportunity to express my views on this important topic. The Constitution provides: ``No money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.'' This is not a mere technical provision. This is a fundamental element of constitutional structure. It sounds, first, in democracy, reflecting this deep constitutional principle that the power of the purse should be vested in the most representative branch. Every dollar appropriated from the Treasury may represent a dollar in taxes, so this principle applies equally to taxes and spending. Taxing and spending are the twin powers of the purse, and the legislature commands the purse. Moreover, the House of Representatives is vested with a special role over revenues, as you know: ``All bills for raising revenue shall originate in the House.'' The reason is clear: House Members are more immediately representatives of the people. But this structural role of the Appropriations Clause sounds not only in democracy but also in separation of powers. Short of impeachment, the power of the purse is Congress' most potent check on Executive overreach. If the President can draw money from the Treasury without an appropriation or otherwise evade the Appropriations Clause, power would shift decisively from Congress to the Executive. It is in this context that this Appropriations Clause question arises. A willful President can evade many of the constitutional checks on his power, but Congress' appropriations power is the ultimate backstop. Everything the Government does costs money, so the power of the purse should successfully constrain the Executive Branch if all else fails. Moreover, all negotiations between the President and Congress, even those that have nothing to do with appropriations, happen in the shadow of this fundamental power. Alas, though, a determined President may flout this provision too. Just last week, District Judge Rosemary Collyer of the U.S. District Court for the District of Columbia found that the Administration has paid billions of dollars to insurance companies under ObamaCare without an appropriation from Congress. She held, in no uncertain terms, that making these payments ``without an appropriation...violates the Constitution.'' Under these circumstances, then, it is fair to view these provisions, these bank settlements, with a skeptical eye. The provisions provide for payments from the banks to these third-party organizations that are neither parties nor victims of the alleged wrongdoing. It is certainly fair to say that these payments circumvent the clause at issue. If the banks had paid this money to the United States-- which, after all, was the plaintiff in the case--then the money would have gone into the Treasury. And if, subsequently, the President or the Attorney General favored using this money to subsidize various community development organizations or what have you, they would have had to request an appropriation from Congress. By providing for direct payment from the banks to the organizations, these settlements evade the Appropriations Clause and cut Congress out of the loop. Another way to put the point is that these settlement provisions embody two implicit decisions. The first is the value of the Government's claims--that is, what we would have predicted it would have won from a jury, discounted by the odds of a successful trial. And that is within the core competence of the Department of Justice. That is what they are supposed to be doing. But the second decision is the best possible use of these funds--whether to subsidize insurance companies under ObamaCare, or subsidize various community development organizations, or pay down the $19 trillion national debt, or do any number of other things. This second decision is paradigmatically legislative. It is exactly the sort of decision the Appropriations Clause was designed to reserve to Congress. If these funds were first paid into the Treasury and then appropriated out again, these two decisions would be distinct. The Attorney General would make the first. Congress would make the second. But by providing for direct payment, the Administration effectively arrogates both these decisions to himself. Finally, I will just note that at least one of these provisions is problematic in another way. One of them is contingent, actually, on the extension of the Mortgage Forgiveness Debt Relief Act of 2007. This is doubly problematic because it is contingent on a future act of Congress. Quite apart from the evasion of the Appropriations Clause, it is arguably a violation of separation of powers for the Executive Branch to attach either a tax or a bonus to a legislative act in this way. To see the point, imagine a settlement provision that required the Bank of America to pay an additional $100 million if the Senate fails to confirm Merrick Garland to the Supreme Court. Surely, the Executive Branch can't add a tax to a Senate prerogative in that way. In short, these clauses clearly circumvent the text and subvert the function of the Appropriations Clause, and I applaud you for holding this hearing. I would certainly support legislation along the lines that have been proposed. [The prepared statement of Professor Rosenkranz can be found on page 83 of the appendix.] Chairman Duffy. Thank you, Professor. Dr. Larkin, you are now recognized for 5 minutes. STATEMENT OF PAUL J. LARKIN, JR., SENIOR LEGAL RESEARCH FELLOW, THE HERITAGE FOUNDATION Mr. Larkin. Thank you, Chairman Duffy, Ranking Member Green, and members of the subcommittee. I appreciate the opportunity to come and help you address this problem. The views I state will be my own and not those of the Heritage Foundation. And today, I would like to make just two brief points. First, no private lawyer in settling a case, could enter into an agreement that has these conditions. No private lawyer could tell opposing counsel, I know you are willing to pay my client $100 to settle this case, but he doesn't need it all. Give some of that money to whomever you want. Pick a charity and hand it out. Any lawyer who did that would be disbarred for engaging in unethical conduct. Now, granted, government lawyers have some different responsibilities than private lawyers. But the McDade Amendment subjects government lawyers to the same ethical rules that apply to lawyers in whatever State where that government lawyer appears. The result is the Justice Department cannot escape the ethical responsibilities imposed on any individual lawyer by pointing to the fact that they are settling government cases, rather than private contract cases. Second, not only do you have the problem here that the Executive is acting improperly, but you have a practice that denies voters information they are entitled to receive in deciding whether to re-elect you and re-elect Senators to Congress. What happens when Congress lets the Executive Branch take over the appropriations process is it delegates that authority beyond what any reasonable person would think Congress should do. What you have, in essence, is the government deciding how money should come in to the Federal Treasury and by whom it should be received. That clearly is the sort of sham transaction that the Justice Department would prosecute as fraud, if private parties engaged in this. But it does create other problems. I agree with the ranking member that there should have been more investigations into the question of whether there was fraud on Wall Street. But third-party conditions like this take money that could be used to hire more FBI agents, and to hire more SEC investigators to look into that problem, and instead gives it out in a way that doesn't guarantee that victims will get it, and doesn't guarantee that the funds will be used only for lawful reasons. What you have then is essentially handing out money without any audit after the fact. And you have the additional problem that the public is generally unaware of what is happening and, particularly, who gets this money, and therefore, is deprived of information that it needs when deciding whether to reelect the members who voted for any such program, or to throw the bums out, as they used to say in Brooklyn. For those reasons, I think these practices that the government has engaged into, violate the Appropriations Clause as well as the Miscellaneous Receipts and Antideficiency Acts and that Congress should recognize that this is a terrible public policy. I yield back the rest of my time. [The prepared statement of Dr. Larkin can be found on page 53 of the appendix.] Chairman Duffy. Thank you, Dr. Larkin. Professor Min, you are now recognized for 5 minutes. STATEMENT OF DAVID K. MIN, ASSISTANT PROFESSOR OF LAW, THE UNIVERSITY OF CALIFORNIA IRVINE SCHOOL OF LAW Mr. Min. Chairman Duffy, Ranking Member Green, and distinguished members of the subcommittee, thank you for inviting me here to testify on the topic of the RMBS settlements negotiated by the DOJ. Today's hearing focuses specifically on provisions contained in three of the five RMBS settlements, which allowed the settling bank to fulfill some of its obligations by donating money to third-party charitable efforts, such as foreclosure prevention, and neighborhood anti-blight provisions. And it asks whether government settlements containing these types of charitable payment provisions subverted Congress' appropriations power. The legal answer to this question is fairly easy to answer. Under established law, the answer is no. This is, in fact, a quite common and ubiquitous practice. While some observers, including several of my fellow witnesses, have claimed that these charitable payment provisions violate Federal law by circumventing Congress' exclusive authority over appropriations, this claim is not well-grounded in current law. The Miscellaneous Receipts Act was passed by Congress in 1849 to set the parameters of what was acceptable versus unacceptable encroachment by the Executive Branch over Congress' appropriation authority. Prior to the Miscellaneous Receipts Act, an official or agent of the government receiving money for the government shall deposit the money in the Treasury. The key point to note here is that the government must receive that money before it is required to send it to Treasury. The receipt of the money may not be actual receipt but can be construed as constructive receipt of that money by the courts. Thus, the long-standing legal standard for whether the government had received this money in legal settlements has revolved around two factors. First, is their admission of finding, for finding of liability. Second, does the government retain post-settlement control over the disposition or management of funds or projects carried out under the settlement? If the answer to both of these questions is no, then the government relationship with the money in question is said to be so attenuated that it could not possibly be construed as having received it and thus, the settlement funds would not be subject to the appropriations process. Importantly, the Comptroller General, which represents Congress, has endorsed this general legal framework, as have several courts. Based on this legal framework, and on the Attorney General's broad authorities to litigate and settle claims involving government, the Federal Government has crafted a wide variety of settlements with terms providing for payments to private charitable groups. It is fair to say that these types of provisions contained in the RMBS settlements are ubiquitous and certainly not unprecedented as several of you have said today. Indeed, the House Judiciary Committee, which is chaired by Congressman Goodlatte, one of the more outspoken critics of these types of provisions, has basically conceded this point by passing H.R 5063 out of committee. H.R. 5063 would prohibit the DOJ from negotiating settlements with these types of charitable payment clauses. Obviously, the Goodlatte bill would not be necessary if charitable payment terms were already impermissible under existing law. The RMBS settlement at issue should clearly fall within the criteria fall that I described. They do not include a finding of liability on the part of banks, and the Federal Government does not maintain post-settlement control over them. Indeed, the banks themselves maintain full control over how they can disburse the funds under the Consumer Relief Provisions, and there is no requirement that they don't donate any funds to any particular third parties under the terms of these agreements. Thus, they are plainly permissible under the law. Having dispensed with this first question, let us move onto the second question, which is implied by today's hearing. Should Congress take action to prohibit these types of settlement provisions? I think the answer here is clearly no. It is undeniable that these types of provisions can serve a valuable purpose. Indeed, even Dr. Larkin, whom I would describe as the leading critic of these types of provisions, has acknowledged this point. As Dr. Larkin has noted, these provisions can be mutually beneficial for both government and the private defendant. From the government's perspective, they can effectively increase the total amount of the settlement, sometimes by a large amount. And they can also benefit third-parties. From a defendant's perspective, charitable payment provisions can provide significant public relations and community outreach benefits. Moreover, to the extent that the Federal Government may, but is not required to negotiate these types of provisions as part of its settlement, this provides it with additional flexibility to help negotiate as one of our current Presidential candidates likes to say, the best deal. For example, DOJ has negotiated only three of these settlements, RMBS settlements, with these types of provisions, but did not include them in settlements with Goldman Sachs and Morgan Stanley. Presumably, DOJ made the determination that, due to the specific facts and negotiating posture on that settlement, it was in the best interests of the Federal Government to seek these charitable payment provisions in some, but not all of its settlements. So, why would anyone oppose these types of provisions from a policy perspective? One objection that you have just heard from Dr. Larkin is that they redirect money away from the Treasury. But, in fact, I would point out that that is not entirely true. Dr. Larkin gives the example of a private attorney settling a $100 claim and giving that $100 to charitable interests instead. But, in fact, the Federal Government is often limited by statutory limitations on the amount of civil penalties that they can seek. Thus, it is incorrect to assume that each dollar of charitable payment secured in a settlement, is a dollar that otherwise would have been part of the civil settlement. In fact, the RMBS settlements provide a good example of this very point. The DOJ's primary Federal claims in each of these settlements were claims based on FIRREA violations. Penalties for FIRREA violations are capped at $1 million. Thus, it is not clear that DOJ could have put much more, if any, instilled penalties than it already did, even if it had litigated these cases and won them. Thus, the charitable payment provisions adhere to allowed DOJ to procure much more than it would have been able to get if it had been limited to civil penalties. And this, I argue in my written testimony, serves both a deterrent purpose, as well as a general compensation purpose, which is, in fact, motivating principles behind civil penalties as it has been addressed by many legal scholars. With that, I see my time has ended, so I thank you for your time. [The prepared statement of Professor Min can be found on page 72 of the appendix.] Chairman Duffy. Thank you, Professor Min. The Chair now recognizes himself for 5 minutes. Looking at the 2008 financial crisis, the panel, I think, would agree that there were a lot of families who were hurt, a lot of families who lost their homes. I don't think anyone disagrees with that on the panel, correct? And to the panel, was every family who was hurt in the 2008 crisis made whole? Did everyone get reimbursed for their losses in the 2008 crisis, Professor Min? Mr. Min. The answer is no, but I would argue-- Chairman Duffy. No, you are right. Good answer. They were not made whole. And so, is it fair to say that instead of directing settlement money to victims of the 2009 crisis, the DOJ decided to take it away from victims and send it to third-party non- victim groups. Do you agree with that, Professor Min? Mr. Min. No, I do not. Chairman Duffy. So, the money that went to third-party non- victim groups wasn't taken away from victims? Mr. Min. I am not sure how you would craft a settlement that helps out the aggrieved homeowners other than through community groups that directly interface with them. Chairman Duffy. There are people who have lost homes; they have been foreclosed upon. I hear the ranking member talk about that all the time. Mr. Min. Sure. Chairman Duffy. We know who they are in our communities. Why couldn't that money be directed to actual victims of the 2008 crisis? Mr. Min. Sure. And I believe that's what the money is intended to do. Chairman Duffy. No, it is not. It is going to third-party groups. Mr. Min. For foreclosure preventions. Chairman Duffy. Let me ask you this: Do you think it is appropriate, as you craft this settlement, that you craft it behind closed doors in a way to make sure that the money goes to left-leaning community activist groups instead of conservative groups? Do you think that would be a good public policy? Mr. Min. I think that is actually a flawed premise because there were a number of different groups that were allowed to be given money under this. Chairman Duffy. Would that be a good public policy? Mr. Min. No, but there were conservative groups-- Chairman Duffy. Okay. Mr. Min. --that were part of that list as well. Chairman Duffy. So would you be surprised that if later on you learned that there were emails from HUD and the DOJ that actually lay out the fact that they were structuring this deal to make sure that liberals got the money and not conservatives? And if you heard that, you would be offended, wouldn't you? Mr. Min. I would be. I don't think that is what happened. Chairman Duffy. And so, if there is a deal that is structured like this, do you think there should be transparency to the panel? Do we think that the American people should be able to see the correspondence between the DOJ and HUD and how they determine what third-party activist group got the money? Should that be disclosed to the American people, Professor Rosenkranz? Mr. Rosenkranz. Yes, Mr. Chairman. Chairman Duffy. Dr. Larkin, do you think that the American people should be able to see through their Congress the documents surrounding this settlement? Mr. Larkin. Yes. Chairman Duffy. Mr. Gray? Mr. Gray. Yes, and how the money is to be ultimately dispersed is really up to you, not to a prosecutor. Chairman Duffy. We are going to come back to that in a second. I agree with you. Professor Min, do you think that we should be able to see that? Mr. Min. Of course. And I think-- Chairman Duffy. Okay. So would the-- Mr. Min. --the fact that we are discussing this means that it was released. Chairman Duffy. Yes. Would the panel, by chance, be surprised that we have actually asked on this committee and this subcommittee, for the documents from the Department of Justice and HUD? And do you think that they have actually provided those documents to Congress? Take a guess. Mr. Larkin. I would not be surprised by the fact that they refused to turn them over. Chairman Duffy. They refused to turn them over. So, not only do you have a settlement that was done behind closed doors, that sends money instead of to victims and/or the Treasury, sends it to third-party activist groups, and Congress can't see the documentation surrounding that settlement. Does that offend anybody's sensibilities on the panel? Mr. Gray. It offends mine, but I think it--more importantly than what I think, the Comptroller General is taking the view that all settlements must relate to the underlying violation, which principle was totally ignored in this series of settlements. Chairman Duffy. Professor Rosenkranz, I think you heard Professor Min's commentary and legal analysis on the DOJ settlements. Do you agree with his analysis? Mr. Rosenkranz. I don't agree with his analysis. I would just make one point. He points out that arguably both sides win. The banks are happy and the Department of Justice is happy, but that's not the separation of powers standard. That is often true in separation of powers problems. It is really Congress--and thus the American people--who are the aggrieved party. The fact that the bank is not here complaining doesn't actually prove the point. Chairman Duffy. They pay one way or the other, right? And so, instead of appropriating money-making decisions to the Congress, we have the Department of Justice, lawyers, and HUD. And I would just make one note. My time is almost up, but one of the organizations that received money was NeighborWorks. Board member Helen Kanovsky is General Counsel of the U.S. Department of Housing and Urban Development. So, she is a board member of NeighborWorks but also General Counsel at HUD, and they got money. Does that offend your sensibilities, Professor Min? Mr. Min. I am not sure what the question is, what the offending sensibility point is. Chairman Duffy. My time has expired. The Chair now recognizes the gentlelady from Ohio, Mrs. Beatty, for 5 minutes. Mrs. Beatty. Thank you, Chairman Duffy, Ranking Member Green, and the witnesses. First, I thought I was in the Judiciary Committee when I walked in because it seems like recently, they had some of the same witnesses, on the same topic, and for the record, that seemed very appropriate to me where this would be. I was also surprised when I reviewed the hearing memo circulated by the Majority because it stated that this hearing would examine whether the Obama Administration encroached on Congress' appropriation powers, and if it overstepped his legal authority when crafting the settlement. But what surprised me most about the statement was the first part is a constitutional question, which, I assume, falls under the Judiciary Committee's jurisdiction, and the second part focuses on oversight of the Department of Justice, which is also the Judiciary Committee. Mr. Larkin, can you tell me, did you testify in the Judiciary Committee? Mr. Larkin. Yes. I testified at a subcommittee of the whole committee. Mrs. Beatty. Thank you. Okay. Just like this is a subcommittee. Mr. Larkin. That is right. Mrs. Beatty. And did you think it was appropriate for you to be there? Mr. Larkin. I was-- Mrs. Beatty. Did you think this topic was appropriate in that committee, that it was the best place for it to be? Mr. Larkin. I think it was appropriate for that committee to look into it, but whether it was the best place is a matter for you all to decide. Mrs. Beatty. But you thought that this is where this issue belonged? Mr. Larkin. I thought that they had jurisdiction over it, no question, because it involved constitutional issues. But that doesn't mean they have exclusive jurisdiction-- Mrs. Beatty. I didn't ask you that. I simply asked you the question, did you think it was the appropriate place for you to go and testify. That is a yes or no. Mr. Larkin. Oh yes, no, no, I said yes to that and I, that is, that was an appropriate place. Mrs. Beatty. Okay. So clearly, a renowned witness with all the things I have read about, Mr. Chairman, agrees with me, that Judiciary would be an appropriate place for it to be. Thank you for that, Mr. Larkin. I also find this to be ironic, this whole issue of us having this hearing here. It makes no sense to me. I think that Judiciary is where it belongs, and I have listened to the arguments by my colleagues on the other side of the aisle, how oftentimes it has been said by them that President Obama oversteps his authority as President. He encroaches on congressional powers. And this hearing seems to be the exact same thing that we have accused him of doing, that we are having congressional overreach by bringing this here. Mr. Chairman and Mr. Ranking Member, let me just say for the record that I take great offense to the claims that the Department of Justice is somehow diverting funds to radical, liberal, non-profit and affordable housing groups and I say that, because the National Urban League was one of those groups. And I was so proud yesterday to get the National I am Empowered Award from them for housing, named after Shirley Chisholm, and this morning, late to this committee because I was with the Vice President of these United States at their conference The National Urban League has probably done more than any of the other groups as it relates to housing, and minorities, and non-minorities and so for legislation by one of my Republican colleagues to claim that it is some radical, and I think La Raza was also named in that, so I just wanted to say that this morning, clearly to the witnesses, you can see that this is something that is important to me. Mr. Min, do you believe that any part of these bank settlements agreements were politically motivated? Mr. Min. I don't have any basis to make that assessment. I will say that as far as the left versus right groups, the banks that agreed to this settlement provision were given a list of hundreds of different nonprofits they could donate to. They were able to control which ones they gave to and in what amounts. And so, there were some conservative groups, as I mentioned to Chairman Duffy earlier that were part of this list as well. I don't see an ideological bent here just by the virtue of having La Raza and the National Urban League and NeighborWorks and other groups like that involved. Those were the groups that you would need to get involved to try to reach out to the homeowners who were most distressed by the housing crisis, that is, low and moderate income and often unrepresented minority households, and so I don't know how you would craft a settlement that tries to reach those bars with involving those. Mrs. Beatty. And lastly, do you believe these settlements were constitutional? Mr. Min. Oh absolutely, under current constitutional understanding, absolutely, as I made clear in my written statement. Mrs. Beatty. Thank you very much. Thank you, Mr. Min. Chairman Duffy. The gentlelady yields back. Congratulations on your National Urban League award, Mrs. Beatty. I wasn't aware that you had received that. The Chair recognizes the gentleman from Arkansas, Mr. Hill, for 5 minutes. Mr. Hill. Mr. Chairman, thanks for this hearing. This separation of powers and the power of the purse has been such a recurring issue for the Congress, and while I think that I understand the distinguished gentlelady's comments about the Judiciary Committee, I think that since these are so pervasively used in the financial services industry, I am glad to see that this hearing is being held in this committee too, just to expose the members of the Financial Services Committee to this level of detail. The first thing that I want to ask Ambassador Gray is, does the worthiness of an organization receiving a mandatory donation cure the underlying problem of whether the congressional appropriations process has been circumvented? Because of this good that Professor Min talks about, is that a legitimate reason? Mr. Gray. If I understand your question, it doesn't matter to the principle involved and the application of the Miscellaneous Receipts Act, whether any money actually touched the hands of any man or woman in the Justice Department. It is money due and owing the United States and should be deposited in the Treasury, and there is no excuse that the money went to worthy causes. Whether the causes are worthy is for you to decide, not for the Department to decide, and the money belongs to Congress, once it has been agreed to by the defendant in the case. Mr. Hill. Thank you, Ambassador. Dr. Larkin, isn't it true that some of these activist groups that we have referred to this morning, like ACORN and La Raza, pressured banks in the past to make certain kinds of loans and that even possibly contributed to the crisis, if you look back over the past 15 years or so? Mr. Larkin. I don't have any personal knowledge to that effect. I know there have been claims to that effect that have been reported in the media, and you would have to ask those journalists. But I couldn't give you any details about any such claims, because I just don't have personal knowledge in that regard. Oh, can I just follow up on the first question you asked? Mr. Hill. Yes. Sure. Mr. Larkin. Giving money to Guide Dogs for the Blind is also going to wind up tremendously benefiting a lot of people but if Congress hasn't authorized that money to be paid out, you can't cure the antecedent illegality by virtue of the fact that the recipient is going to make good use of it. Because you also are going to have instances where there will be misuses of it. Mr. Hill. I yield back the balance of my time, Mr. Chairman. Chairman Duffy. The gentleman yields back. The Chair now recognizes the gentleman from Missouri, Mr. Cleaver, for 5 minutes. Mr. Cleaver. Thank you, Mr. Chairman, and Mr. Ranking Member for--well, I am not thankful that you are holding this hearing, but nevertheless, it is good to be here. Thank you for being here. I did the commencement on Saturday for the University of Missouri Law School, so I am very qualified to talk about legal matters, even though my degree is in theology. And I am always frustrated when we travel in parallel universes on this field. I don't know what is going on. Some of us were here and so we can speak experientially about what is going on. First of all, I don't know how in the world ACORN got into this conversation. I just think that is one of the most amazing things that happened, but that is just a weird on my part, I guess Let me ask Professor Min, are any of you attorneys like me? Okay. Dr. Larkin, isn't it true that all of these legal settlements were subject to a court review? Dr. Larkin, is that-- Mr. Larkin. If there were-- Mr. Cleaver. Go ahead. I'm sorry. Mr. Larkin. If there was a claim filed in court to start with, then yes. But, the review is very limited, but I don't think there were all these types of settlements. There is always a claim first filed in court. Oftentimes, you see agreements between the government and private parties to dispose of a matter without anything being filed. Mr. Cleaver. Yes, yes, sir. But I am talking about these settlements. Mr. Larkin. No, no, and I am trying to remember if they first filed anything in this case, and I can't remember if there was a complaint filed or if they settled without filing a complaint. Mr. Cleaver. Yes. Mr. Larkin. It was? Mr. Cleaver. There were three of them-- Mr. Larkin. Okay. My colleagues said there was and so I will take that, yes. But the analysis is the same either way. Mr. Cleaver. It is? Mr. Larkin. Yes. The reason is, when it is filed in front of a District Court Judge, essentially the only thing a District Court Judge can do in approving a settlement is to look to see, for example, whether or not it was agreed to for an impermissible purpose. For example, in a plea agreement, the District Court is entitled to review the plea agreement to make sure that it wasn't, for example, a product of a bribe. And I am not saying anyone was bribed here. But I am just saying the review is very limited. Mr. Cleaver. Yes. Professor Min? Mr. Min. I would argue that the court review is implicitly endorse the idea that these types of provisions are in fact constitutional, and permissible under the Miscellaneous Receipts Act. A number of my colleagues have given maybe persuasive theoretical constitutional arguments as to why these types of provisions might not be constitutional. But the fact is that as a matter of settled law, these types of provisions have been found to be permissible under current law. Mr. Cleaver. Some of us were here during all of this, from day one until today, and so we went through it, experientially, and so we know that there was a judicial involvement, and there are settlements with the Federal Government, through the Justice Department, no matter who is in the White House, almost every day. Isn't that right Ambassador Gray? Mr. Gray. If I understand, the--if you back up a little bit, the question of what is current practice, seems to revolve around the fact that the Miscellaneous Receipts Act was enacted a century ago, whatever, but there have been recent Office of Legal Counsel Opinions coming out of the Department of Justice which are very, very clear, about what can and what cannot happen with these settlements. And the fact that there is a court approval does not, I think, when no one is there arguing either side of it, which is not going to happen when you have two parties who are settling a case, there is never going to be any defense of your authority and your constitutional obligation to oversee how these funds are spent and decide how these funds are spent. Mr. Cleaver. So, a judge is just going to ignore anything going on around a particular case and just deal with the settlement? Just forget everything else surrounding that particular case? Mr. Gray. There is no one arguing and the issues aren't raised in the settlement. The settlement agreements are usually reached in private and presented to the judge of the consent decree and the judge, as my colleague here has said, is not being asked to rule on the validity of the settlement under Miscellaneous Receipts Act, the Antideficiency Act or the Appropriations Clause of the Constitution. Chairman Duffy. The gentleman yields back. The Chair now recognizes the gentleman from Colorado, Mr. Tipton, for 5 minutes. Mr. Tipton. Thank you, Mr. Chairman. I do appreciate your holding this hearing today. It is interesting to be able to hear it. I would like to start with Professor Min. Do you believe, in your estimation, that people, through some of the alleged actions of the banks, did suffer personal damage? Mr. Min. If you are talking about homeowners and average Americans, sure. Absolutely. Mr. Tipton. They did. So, we have had abundant testimony across a variety of our whole committee, subcommittees, going through that the important thing is standing up for the individuals to make sure that they have their concerns addressed, that they are going to actually be helped. So, if we are taking money to rebuild a bridge, maybe to be able to rebuild an equestrian center to go through, is that going to be helping people in those personal instances? Mr. Min. I think that, as Ambassador Gray said, there is a requirement that there is a nexus between the proposed settlement terms and the alleged misconduct. So, that is one answer. I think also that I would point out that private parties are a little different than the government. The Federal Government is not suing on behalf of individuals. We have private causes of action for that. The Federal Government's duty is to try to maintain civil penalties on behalf of the Federal Government as a whole, and the country as a whole and that includes, primarily, the deterrence affects and general compensation for Americans, rather than to any particular interdictums. Mr. Tipton. And general compensation for Americans needs to be focused actually on what the injury was. Mr. Min. With a nexus, exactly. Mr. Tipton. Right. So, it probably disturbs you that there was a report in The Wall Street Journal in terms of disbursement of those funds where they were being directed for just exactly what I spoke to. New York Governor Cuomo was rebuilding an equestrian center, and rebuilding a bridge. How is that beneficial to people in that general class to be able to redress those grievances? Mr. Min. Right. So I think Governor Cuomo was probably using New York funds, rather than the provisions, the charitable payment provisions that issued here. Mr. Tipton. According to The Wall Street Journal, these were resources that were coming in off of the-- Mr. Min. Bank settlements. Mr. Tipton. They were coming in. Mr. Min. Right, but they would have come in from, a portion allotted specifically to the State of New York, right? Mr. Tipton. So, effectively, with fungibility of money, this-- Mr. Min. I am not an expert in New York law, so I don't know what New York law allows or does not allow Governor Cuomo to do. I do find that problematic but I think it is outside the scope of the particular provisions of that issue. Mr. Tipton. Dr. Larkin, would you like to maybe comment on this? Mr. Larkin. Yes, money is fungible. So, when you give money to a particular organization, what you are doing is freeing up other funds for other purposes. So, even if you give somebody $10 and they use it for the purpose that you have specified, that means they can use dollars they get from elsewhere for a different purpose. And that is why Congress needs to examine critically who gets money, because it is fungible. The Justice Department would take the position, under Title VI and Title IX, that if you get any money, you are now governed entirely by what Title VI and Title IX provide, because they know that money is fungible. And if money is fungible, then you have to be concerned about supplementing the income of people who may use it in ways that are improper. You can give money to the Red Cross, but that frees up money they could otherwise spend. If they use it for an improper purpose, in essence you have enabled them to do that. That is why Congress needs to look into this matter, decide who gets money, and then have audits done after the fact. Mr. Tipton. Would you tend to share the opinion, I think there are a number of us who want to be able to reinforce Article I, to make sure that Congress is actually controlling those purse strings, no matter where those resources come from, be it a fine, a fee coming in, the only reason any of these entities exist is because of an act of Congress. So, it is very appropriate for Congress to be able to direct how every one of those dollars is spent. Would you agree with that? Mr. Larkin. Absolutely, and one of the ways it can be spent is to recompense the people who are actually hurt. In criminal law, there are several acts that are designed to address the needs of victims of crime. You could do the same thing here, whether it is a housing matter or generally for a non-criminal injury, but that is a program Congress can design. But that is a program Congress can manage and that is a program that will have to have some oversight by an Inspector General or someone else to make sure the funds are properly used. Yes, you can get money to victims. And yes, they should get money, but it should be done in the proper manner to make sure that the taxpayers' dollars are being wisely used. Mr. Tipton. Great. Thank you. Mr. Chairman, my time has about expired. Chairman Duffy. The gentleman yields back. The Chair now recognizes the ranking member of the full Financial Services Committee, Ms. Waters, for 5 minutes. Ms. Waters. Thank you very much. Professor Min, the Republicans have claimed that they don't oppose the settlements. Instead, they claim that they merely want the relief to go directly to homeowners. However, in February of this year the Republicans brought to the Floor H.R. 766 which would gut the Financial Institutions Reform, Recovery, and Enforcement Act, commonly referred to as FIRREA, a savings and loan error law that gave law enforcement the power to prosecute financial crime. As you know, the RMBS settlements were brought by the Department of Justice under FIRREA. H.R. 766 would change the Act to say that only crimes perpetrated against banks could be prosecuted under FIRREA, not crimes perpetrated by a bank. The bill likewise severely limits the discovery power under FIRREA requiring the attorney general or the deputy attorney general to directly sign off on subpoenas. This eliminates 98 percent of the individuals in law enforcement who currently have subpoena power. What does that suggest to you, Mr. Min, about this claim that they want the money to go directly to victims? Mr. Min. I think that if you were to eliminate the penalties in FIRREA against banks that were--that had engaged in wrongful conduct coupled with the Goodlatte amendment or bill you would end up with a situation in which no victims could be compensated. And that seems very problematic. Ms. Waters. Thank you. Does anyone on the panel today believe that there was fraud committed by financial institutions? I can't see your hands. Does anyone on the panel believe that predatory lending by financial institutions caused people to lose their homes and diminish their quality of life? Does anybody on the panel believe that they should be prosecuted or taken to task, or made to settle in some way for the acts they committed that caused that subprime meltdown in 2008? And does anyone believe that the groups that are organized and have the reputation for, and do the daily work of helping people to have a better quality of life because they are advocating for changes, they are advocating for justice, they are working on housing opportunities, they are working on making sure that they make government work for everybody? Do you believe that these people have any credibility at all? Any credibility? Mr. Gray. If I could respond, just make a--everything you say has merit. That is about the relevance of these potential recipients of the money. But that is a choice you should be making, not the prosecutor. And I just would add that, although it is not part of your jurisdiction, the Environmental Protection Agency, which everyone knows, I think, is no shrinking violet and makes active use of third-party settlements, does not include cash in any kind of third-party settlement because, and this is their words, use of cash could easily be construed as a diversion from the Treasury of penalties due and owing the government. What you say, they may very well be a better way. There is a better way to compensate victims of the original crisis, but that is not what happened. And that is for you-- Ms. Waters. Well, let me-- Mr. Gray. --to say. Ms. Waters. If I may-- Mr. Gray. That is for you to decide. Ms. Waters. Reclaiming my time. Let me just say this. I would believe some of my colleagues on the opposite side of the aisle if they have not demonstrated such a dislike for activist groups. They don't like these grassroots groups that tend to speak for and act on behalf of poor people, and people who don't have the resources to go to court. This is consistent. And, yes, ACORN was mentioned because they set ACORN up, the same people who say, ACORN came to my office and tried to set me up. And these are the people that they like because they want to prove in some--they want to put them out of business. That is what they want. But I want to tell you something. Some of us who have been advocating for poor people and for the least of these all of our lives because we see every day what happens to poor people without resources. We see every day how people are taken advantage of, whether it is the payday lenders or whether it is financial institutions with exotic products that literally encourage people to sign on the dotted line, knowing that they cannot afford the mortgage that they are getting them to sign. These were the people who didn't vet. These were the people who had no documentation loans, on, and on, and on. And they should be compensated. And we trust the attorney general to do this work. And if the courts have to sign off on it, fine. Sign off on it. That is what they did. And the system is working. And just because you don't like the activist groups does not mean that you come in here and talk about somehow we should change the system, and people who don't like these activist groups should be responsible for deciding what happens to the victims. Thank you. Chairman Duffy. Does the gentlelady-- Ms. Waters. I yield back the balance of my time if there is any left. Chairman Duffy. There is no time left to the ranking member. I trust you more than the DOJ, Ms. Waters. The Chair now recognizes the gentleman from Illinois, Mr. Hultgren, for 5 minutes. Mr. Hultgren. Thank you, Mr. Chairman. And thank you all for being here. I want to address my first questions to Dr. Larkin, if I could. In general, if the congressional appropriations process is being subverted, which I believe flies in the face of Article I of the Constitution, does it matter what groups the RMBS settlement money is going to? Isn't this a slippery slope? Mr. Larkin. None whatsoever. It is as big a problem whether the money goes out to a conservative or a liberal group, and whether the disbursement is made by a Republican or a Democratic appointee. It doesn't matter. The process is one that is being corrupted. Mr. Hultgren. I think that is the point that the previous questioner just completely missed, is it doesn't matter the groups that it is going to; this is a process that is broken and a violation really of responsibility. Ambassador Gray, I think you said it so well. This should be us. It is our responsibility to do this. And why are we abdicating our responsibility, giving it over, and whoever the group is, furthering really, I would say, a dis-justice and a failure to do our work. Following up, Dr. Larkin, do you have any concerns with political appointees at DOJ or HUD being the ones determining which groups should get the money? And I guess, following up, I assume I know the answer. But with what Ambassador Gray said, don't you think Congress should be the one that makes these decisions? Mr. Larkin. Absolutely. The Appropriations Clause is quite clear. And the Supreme Court has said that on several occasions. It is your responsibility. It is not the Justice Department's responsibility. Mr. Hultgren. Yes. And it doesn't matter, I would assume you would agree with this, that if this happened under a Republican Administration, you would still say the same thing, that if it is still a misuse of authority that should be Congress' authority. We are giving it to somebody else. Would you agree with that? It doesn't matter what the Administration is, it doesn't matter what the group is, this is a broken process. Mr. Larkin. Absolutely, and on either the last or the penultimate page of my written statement, I criticized a Republican U.S. attorney, the current Governor of New Jersey, for doing exactly that. Mr. Hultgren. Thank you. And I appreciate that fairness, and recognition that this is bigger than a couple of groups or one Administration. Ambassador Gray, if I could maybe address a couple of questions to you. First, thank you for your service. Thank you for being here. But I wonder, are the RMBS settlements structured to do the most benefit to victims of the alleged misconduct, do you believe? Mr. Gray. I do not believe that they are directed at the people who suffered the most, no. Mr. Hultgren. What provisions in the settlements detract from benefiting the victims, do you think? Mr. Gray. I haven't read every single word of every single settlement agreement, but I think they basically ignore the victims of this. I would agree with the terminology, ``predatory lending.'' There was a lot of predatory lending. Unfortunately, I think a lot of it was, or much of it was initiated by the government itself, not by the banks, but however you look at the cause, the victims have not been really attended to. Mr. Hultgren. Let me ask your opinion on this, Ambassador. Why do you think DOJ structured the settlements in a way that does not provide the most benefit for those who are harmed, in your opinion? Mr. Gray. I think--I don't know how politically incorrect to be in this, but it was easier that way. The government got multibillion dollar numbers in the front pages of the papers, or at least the business section. And so, it looked very good for the prosecution, but I don't think it looked very good for the process for two reasons. One, the victims aren't themselves really targeted for relief, and number two, and this goes back to the S&L crises of Bush 41, I would like to have seen, I mean, he insisted as a condition of any bailout that there be prosecutions that actually resulted in jail sentences for people who had really violated the criminal law. And we don't really see that now. And that is, I think, a failing. Although, I don't want to see anyone go to jail, I do think prosecutions were appropriate. Mr. Hultgren. Yes. Thanks, Ambassador. I just have a few seconds left. Professor Rosenkranz, are there provisions in these settlements that you would describe as unprecedented? Mr. Rosenkranz. Certainly, the scale of these third-party payments is unprecedented. There are scattered historical examples, but the sheer number of dollars is kind of startling in these cases. Mr. Hultgren. As far as you are concerned, that had never happened before? Mr. Rosenkranz. Certainly at this scale, I don't think so. Mr. Hultgren. Okay. Quickly, also Professor Rosenkranz, what should Congress do in response to the Administration usurping our appropriating authority? Mr. Rosenkranz. That is a great question. The President has always been tempted to try to evade the Appropriations Clause, and Congress has often had to defend its appropriations prerogative. So, these landmark statutes like the Antideficiency Act and the Miscellaneous Receipts Act are hugely important and appropriate. And if the Executive Branch finds a new novel way to evade this constitutional provision, you should certainly consider responding with another act of Congress to forbid this practice. Mr. Hultgren. Thank you all. My time has expired. I yield back. Chairman Duffy. The gentleman yields back. The Chair now recognizes the gentleman from Minnesota, Mr. Ellison, for 5 minutes. Mr. Ellison. Mr. Gray, could you define the term ``slush fund?'' Mr. Gray. You are asking me to define the term-- Mr. Ellison. The term slush fund. Mr. Gray. Slush fund. I don't think I use that term. Mr. Ellison. I just want to know if you can define that term. Mr. Gray. It is a fund that the dispensers of the money have complete discretion over how it is spent, under no controls or guidance from any other authority. Mr. Ellison. Is my bank account a slush fund to me? Mr. Gray. Excuse me? Mr. Ellison. Is my bank account a slush fund to me? Mr. Gray. No. Mr. Ellison. Because I have-- Mr. Gray. You own-- Mr. Ellison. --complete discretion over how it is spent. Mr. Gray. You own the money. Mr. Ellison. Right. Mr. Gray. But the trouble is these settlements-- Mr. Ellison. Well, let me tell you-- Mr. Gray. --who also own the money-- Mr. Ellison. I reclaim my time. A slush fund is defined as something used for illicit or corrupt political purposes. And I would just like to know, Professor Min, under the definition of the fund being used for illicit or corrupt purposes, I would just like somebody to help me understand how the funds in this case could be described as illicit or corrupt when the money is allocated to housing counseling groups like Catholic Charities USA, the United Way, the National Council of La Raza, and the Urban League, to help homeowners who were harmed during the financial crisis. How could that be a slush fund? Mr. Min. I have not heard any persuasive evidence that there is any illicit affect to this. In fact, I would argue that these particular settlements were crafted the opposite way. When we look at actual evidence as opposed to opinion or hyperbole what we see is that housing counseling, foreclosure prevention efforts of the types that these consumer provisions were designed to do, are the most effective way to help aggrieved and struggling homeowners. That is a fact, not an opinion. Mr. Ellison. And going back to you, Mr. Gray, I could have sworn I heard you say that predatory lending did occur, but it was done by the government, not the banks. I am not aware of the government engaging in retail mortgage lending. Are you? Mr. Gray. Maybe I don't understand anything, but I think Fannie Mae and Freddie Mac were at the forefront of making-- Mr. Ellison. Freddie Mac and Fannie Mae do not go to home mortgage buyers, and offer terms like, I don't know, you know, prepay penalty, 228, 327 balloon mortgages, yield spread premium. These are the hallmarks of a predatory loan. Professor Min, are you aware-- Mr. Gray. Can I-- Mr. Ellison. No. Excuse me. I reclaim my time. I gave you a chance to answer. But, Professor Min, are you aware of the government engaging in retail mortgage lending in the way that a commercial bank, or nonbank lender? Mr. Min. Absolutely not. In fact, that is, again, a myth, an opinion versus facts. The facts are the Fannie and Freddie did not originate, or seek to have originated any of those types of loans. Those are originated for Wall Street securitization, which is why all of these particular fraudulent aspects were attributable to Wall Street RMBS, and these settlements with private institutions. Mr. Ellison. Okay. I have another question, Mr. Gray. Could you explain to me, sir, now you just said that there were victims of predatory lending, I believe that was your testimony today, and if there were settlements why did the banks settle if they had done nothing wrong, or if all the predatory lending was by the government? Why did they settle? They have lawyers. They have a lot of lawyers. They have well-paid lawyers. Why did they settle at all? Why didn't they just say, we are going to court, and fight it out, and we are not paying a thing? Why did they settle? I don't know. Mr. Min, Professor Min, do you have an opinion? Because it seems like Mr. Gray doesn't have an opinion. Mr. Min. Clearly, I think they were misrepresentations and warranties that were not satisfied with the products that they sold and marketed. Mr. Ellison. So, they settled a case because they had liability exposure? Mr. Min. Almost certainly. Mr. Ellison. Yes. That is why people settle. In 16 years of me practicing law, I don't know people who settle cases if they don't think they are going to lose at trial, or at least there is some chance of it. So let me just ask you this. Could you talk, Professor Min, about how housing counseling is actually something that helps consumers, and that the settlements that help fund this activity actually makes for clearer better markets and restores some honesty to this mortgage market? Mr. Min. Right. When you think about the abundance of information out there, the average homeowner, particularly the one who is struggling, doesn't necessarily have a good idea of their options, how to navigate through the foreclosure prevention process, how to get a loan refinanced, maybe how to get a principal reduction, or a qualification for one of the government programs or other programs available to them. All of these factors can help them along with some legal guidance navigate that very, very complex, difficult process. I am sure those of us who have bought homes know how complex that mortgage agreement is, how that home purchase agreement, title insurance, all of that is very, very complex. And you can imagine that for folks who are really struggling with a lot of things that is a very, very difficult terrain to navigate. Mr. Ellison. I am out of time. Thank you. I yield back, and I thank all the witnesses today. Chairman Duffy. The gentleman yields back. The Chair now recognizes the ranking member of the subcommittee, the gentleman from Texas, Mr. Green, for 5 minutes. Mr. Green. Thank you, Mr. Chairman. Let me start with where Mr. Ellison somewhat left off. I want to just highlight, emphasize, underline the notion that JPMorgan Chase settled for $13 billion, $13 billion. JPMorgan Chase has a battery of lawyers. If there were questions with reference to constitutionality, JPMorgan Chase has lawyers who can litigate those questions. They were not litigated. And no court has concluded that any one of these settlements is invalid, unconstitutional, illegal, unethical, not one court. Bank of America, $17 billion. Citigroup, $7 billion. Goldman Sachs, $5 billion. You would think that at some point, these business folks would say, hey, guys, quit dragging us into this. Don't keep bringing our names before the American public with reference to these things. You would think that at some point they would want to see this behind them, unless they are behind this. Who knows? Let us go now to a claim that was made with reference to some of this being unethical. All lawyers are aware that if there is a grievance with reference to ethics, you can take it to an ethics commission. They are across the length and breadth of this country. Every State has an ethics commission. If there were unethical questions, they could be addressed to an ethics commission, but we now bring them to Congress. We are going to litigate the ethics of it when there are commissions established to investigate, acquire evidence, and make decisions. Next point. Homeowners need help. That is what these settlements do. They accord homeowners help. And they need help. If you have never dealt with one of these circumstances, you don't understand that a homeowner walks in with just a box of paperwork. They don't know what they have in the box. All they know is that they need help. And when they go into these legal aid societies, to these NGOs, they have to sort through and sift through. The homeowner doesn't know that there is a HAMP program, a HARP program. They don't understand that there is a deed in lieu that they might engage with and acquire. They don't understand that there are short sales. They don't understand these things. That is why these programs are so beneficial to prevent foreclosure. So the money is going to help homeowners, to help them keep their homes, and stay in their homes. This really is an effort, it seems to me, to legitimize a process that would prevent homeowners from getting the opportunity to stay in their homes. And I regret that. Now, finally, on a couple more points quickly, I am concerned about the notion that the banks aren't here. If we really want records from the banks, why don't we call the banks in? Let them testify. Maybe the banks are here and I don't know it. Is anybody here representing a bank today? If so, raise your hand. You are? Which bank are you representing, sir? Mr. Gray. I think you are familiar with it. It is a gigantic bank of $270 million in Big Springs, Texas. Mr. Green. Okay. Well, kindly give us the name today if you would. Mr. Gray. Give-- Mr. Green. The name of the bank. Mr. Gray. The National Bank of Big Springs, Texas. Mr. Green. The National Bank of Big Springs, Texas. Mr. Gray. Jim Purcell, I think we met when he testified-- Mr. Green. Okay. Mr. Gray. --before this committee-- Mr. Green. All right. Mr. Gray. --a year or 2 ago. Mr. Green. Well, your honor, I appreciate you sharing that with me. But we have the opportunity to require JPMorgan Chase, Bank of America, Citigroup, and Goldman Sachs to come before the committee and bring the records related to the settlement. You don't have to require the Justice Department to do it. If you say they won't do it, then I believe they have given you what they can. But you can bring the banks in. Why are we harping on the Justice Department when the banks are available to be brought in and they can give it to us? Why not? There is something about this that the American public doesn't like. And I am telling you right now, the American public is fed up with this. They want to see people prosecuted. Here we are finding clever ways to keep homeowners from staying in their homes when we ought to be finding ways to put people in jail who participated in this fraud, that have never been properly addressed, and, yes, we could appropriate money to do it if we wanted to, and we could investigate it if we wanted to. It is time to satiate the desires of the American public. I yield back. Chairman Duffy. The gentleman yields back. I want to thank our witnesses for their testimony today and a great conversation about what the appropriate role is through Congress or through bank settlements, where we get information whether it is from banks or from the government itself. As the panel might realize, the voting bells have just rung. We have 10 minutes to get to votes. I was hoping to go to a second round with the panel, but you can see the room has cleared because everyone has gone to the Floor to vote. The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. I ask the witnesses to please respond as promptly as possible. I, again, want to thank you for your insight and testimony today. And with that, this hearing is now adjourned. Thank you. [Whereupon, at 10:39 a.m., the hearing was adjourned.] A P P E N D I X May 19, 2016 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]