[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
EXAMINATION OF THE FEDERAL
FINANCIAL REGULATORY SYSTEM
AND OPPORTUNITIES FOR REFORM
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
APRIL 6, 2017
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-16
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Kirsten Sutton Mork, Staff Director
Subcommittee on Financial Institutions and Consumer Credit
BLAINE LUETKEMEYER, Missouri, Chairman
KEITH J. ROTHFUS, Pennsylvania, WM. LACY CLAY, Missouri, Ranking
Vice Chairman Member
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
BILL POSEY, Florida DAVID SCOTT, Georgia
DENNIS A. ROSS, Florida NYDIA M. VELAZQUEZ, New York
ROBERT PITTENGER, North Carolina AL GREEN, Texas
ANDY BARR, Kentucky KEITH ELLISON, Minnesota
SCOTT TIPTON, Colorado MICHAEL E. CAPUANO, Massachusetts
ROGER WILLIAMS, Texas DENNY HECK, Washington
MIA LOVE, Utah GWEN MOORE, Wisconsin
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
C O N T E N T S
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Page
Hearing held on:
April 6, 2017................................................ 1
Appendix:
April 6, 2017................................................ 43
WITNESSES
Thursday, April 6, 2017
Baer, Greg, President, the Clearing House Association............ 4
Gerety, Amias Moore, former Acting Assistant Secretary for
Financial Institutions, U.S. Department of the Treasury........ 8
Himpler, Bill, Executive Vice President, American Financial
Services Association........................................... 9
Michel, Norbert J., Senior Research Fellow, Financial
Regulations, the Heritage Foundation........................... 6
APPENDIX
Prepared statements:
Baer, Greg................................................... 44
Gerety, Amias Moore.......................................... 66
Himpler, Bill................................................ 76
Michel, Norbert J............................................ 91
Additional Material Submitted for the Record
Luetkemeyer, Hon. Blaine:
Written statement of the Conference of State Bank Supervisors 104
Written statement of the Consumer Mortgage Coalition......... 106
Written statement of the Credit Union National Association... 118
Written statement of the National Association of Federally-
Insured Credit Unions...................................... 124
Written statement of the Property Casualty Insurers
Association of America..................................... 126
EXAMINATION OF THE FEDERAL
FINANCIAL REGULATORY SYSTEM
AND OPPORTUNITIES FOR REFORM
----------
Thursday, April 6, 2017
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 9:15 a.m., in
room 2128, Rayburn House Office Building, Hon. Blaine
Luetkemeyer [chairman of the subcommittee] presiding.
Members present: Representatives Luetkemeyer, Rothfus,
Royce, Lucas, Posey, Pittenger, Barr, Tipton, Williams, Trott,
Loudermilk, Kustoff, Tenney; Clay, Maloney, Scott, and Green.
Chairman Luetkemeyer. The Subcommittee on Financial
Institutions and Consumer Credit will come to order. Without
objection, the Chair is authorized to declare a recess of the
subcommittee at any time.
Today's hearing is entitled, ``Examination of the Federal
Financial Regulatory System and Opportunities for Reform.''
Before we begin, I would like to thank the witnesses for
appearing today. We appreciate your participation and look
forward to a robust conversation.
We do apologize that we have votes scheduled this morning
sometime between 10 and 10:30, so we will recess for a period
of time. If the witnesses want to step out and get some
refreshments, grab breakfast, whatever, we will be back
probably shortly thereafter, but we will have to stop for a
little while and go vote.
With that, I recognize myself for 5 minutes for an opening
statement.
Financial companies are standing on regulatory quicksand,
having to constantly shift in an effort to stay afloat. There
are unending attempts to decipher a regulator's wants and
needs, allowing little to no foundation on which to run a
business. Ultimately, this world of ambiguous guidance,
contradictory rules, and aggressive enforcement has led to
confusion for financial companies seeking to comply with the
Dodd-Frank Act and other Obama-era rules. But the greatest
impact is on the customers of those financial companies, who in
many cases have been left clamoring for access to financial
services and paying more for the ones they are able to retain.
Take a look at the boxes sitting on the dais over here.
These boxes represent the 20,000 to 30,000 pieces of paper that
the average bank submits to the Federal Reserve for the annual
CCAR review process. And, in fact, I was talking to one of the
larger banks last night and I found out that tt can go up to
100,000 pages. That is 20,000 to 30,000 pages per bank per year
just for CCAR.
Despite the amount of information contained in these boxes,
feedback from the Federal Reserve is limited, leaving some
institutions to wonder who, if anyone, actually reads the
material before issuing what has been described as an arbitrary
qualitative decision.
To have a picture of what overregulation looks like, allow
me to provide you with a real-life example. The Mid America
Bank & Trust was originally founded in 1920 and serves
communities in my area of the world in central Missouri. For
nearly 5 years, the Federal Reserve has blocked acquisition of
the bank. Despite years of document production, there has been
little communication between the Board of Governors and bank
leadership, and there is no indication of when a decision might
be made as to whether or not an acquisition will be approved.
Mid America Bank & Trust has already lost several
interested buyers, not because of questions surrounding the
business, but, instead, because of the delays from the Fed. So
for 5 years, the Federal Reserve has left this bank, its
customers, and the communities it serves sitting in purgatory.
This is all in spite of the fact that, as I understand it, the
FDIC has given the institution and its products a clean bill of
health.
The Consumer Financial Protection Bureau (CFPB) hasn't
exactly been a poster child for reasonable rulemaking and
enforcement either. Just yesterday, members of this committee
heard from Director Cordray directly. The Director continues to
state that the Bureau has never and would never regulate
through enforcement. But, as I pointed out to the Director
several years ago, failure to issue guidance while
simultaneously subjecting institutions to enforcement actions
is, in fact, regulation through enforcement. Now, because of
the Bureau, people need a crystal ball to run their businesses.
The CFPB rules and policies are a perfect example of,
``Washington knows best.'' The Federal Government knows what
types of financial products should be offered and to whom.
Rules and enforcement actions leave little to no room for
innovation, despite the fact that American consumers and small
businesses continue to struggle to get the financial services
they need to pursue growth and economic freedom. Once again,
the consumer suffers. Eventually, one must wonder what the
Federal financial agencies really want: a stable economy; or
just more control.
Today's hearing will serve to examine the state of the
Federal financial regulatory system and to determine what can
be done to increase transparency and build a strong, steady,
financial system and U.S. economy. It is long past time to take
the power out of Washington and return it to the American
people. It is past time to demand a reasonable regulatory
structure that fosters innovation and economic opportunity
while simultaneously allowing for robust consumer protection.
We have a distinguished panel with us today. We look
forward to your testimony and your ideas for reform.
The Chair now recognizes the distinguished gentleman from
Georgia, Mr. Scott, who is sitting in today for Ranking Member
Clay. Mr. Scott is recognized for 5 minutes for an opening
statement.
Mr. Scott. Thank you very much, Mr. Chairman. I really
appreciate this.
First, I want to thank Chairman Luetkemeyer for convening
this very, very important hearing. Nothing could be more
important right now than making sure we have a healthy
financial system, and not just to have the financial system,
but the most healthy financial system in the world. And I look
forward to our distinguished witnesses and their testimony.
But I don't think it would be difficult to say that any
member on our committee, Democrat or Republican, would disagree
that our striking the right balance between consumer protection
and regulatory burden is an important priority for this
committee. We should certainly and constantly reexamine whether
we are achieving this goal, and hopefully we can come to some
conclusions today on that in hearing from our distinguished
panel.
But without any reexamination, we must always start looking
at the lay of the land before us, the data we have in front of
us. So why don't we take a moment to do just that.
First, we are, indeed, experiencing record month-over-month
job growth. For the past 77 consecutive months, we have seen
positive gains in employment, but I hasten to add, not enough
gain, and in some ways we are backtracking when it comes to
many of our urban centers. This is something we need to devote
more attention to.
Second, small business lending is trending upward. And
since the financial crisis, we have seen nearly a 75 percent
jump in business lending.
And lastly, we are seeing our housing debt, an enormous
part of our financial crisis, finally dipping back below the
previous peak we saw in 2008. So things seem great, but we can
make them better. But even with all these positive signs, we
also are seeing some areas in the financial services world that
still need improvement. For example, I previously expressed
concerns that some regulations might hamstring the unbanked and
the underbanked famililes' ability to gain access to important
financial services.
Many of your committee, you have followed our progress with
indirect auto lending. That is a prime example where some
regulations certainly hamstring the unbanked family. We have 70
million unbanked and underbanked Americans in our financial
system.
But I really want to challenge both sides of the aisle,
Democrats and Republicans, and our panelists, to begin this
conversation by reexamining the whole regulatory system, not
just Dodd-Frank. Dodd-Frank is an important part, but we have
to look at and examine all sides of our regulatory system.
I would welcome a constructive bipartisan conversation
about Dodd-Frank, but let's not forget all the ways that Dodd-
Frank has improved the banking system and health of our
economy, and how it helped us to come out of the worst
financial depression we have had since the 1930s.
So throwing it out completely, as our distinguished
Financial Services Committee Chairman, Mr. Hensarling, is
proposing in his CHOICE Act, ignores these positive
developments and is, therefore, a nonstarter for Democrats. But
we Democrats equally look forward to working with our
Republican colleagues to both strengthen our financial
regulatory system while simultaneously also looking and making
sure our regulations do not hamper our financial system.
So, again, I want to thank Chairman Luetkemeyer for calling
this hearing, and I am looking forward to hearing what the
witnesses have to say. Thank you, Mr. Chairman.
Chairman Luetkemeyer. Thank you, Mr. Scott.
Today, we welcome the testimony of Mr. Greg Baer,
president, The Clearing House Association; Mr. Norbert J.
Michel, senior research fellow for financial regulations at The
Heritage Foundation; Mr. Amias Moore Gerety, former Acting
Assistant Secretary for Financial Institutions at the U.S.
Department of the Treasury; and Mr. Bill Himpler, executive
vice president of the American Financial Services Association.
Each of you will be recognized for 5 minutes to give an
oral presentation of your testimony.
And without objection, each of your written statements will
be made a part of the record.
Just a quick tutorial on the lighting system: green means
go; yellow means you have 1 minute to wrap up; and red means it
is time to pass on the baton.
So with that, Mr. Baer, you are recognized for 5 minutes.
STATEMENT OF GREG BAER, PRESIDENT, THE CLEARING HOUSE
ASSOCIATION
Mr. Baer. Thank you, Chairman Luetkemeyer, Ranking Member
Scott, and members of the subcommittee.
I am pleased to appear before the subcommittee today to
discuss regulatory process. Public input and a transparent
process tend to produce better regulation, but the current
trend is clearly away from both. My testimony will highlight
areas where the administrative process has broken down, harming
the quality of regulation and the ability of banks to serve
their customers.
The first area is the Federal Reserve CCAR stress test. To
be clear, The Clearing House believes that stress testing is
the smartest way to evaluate the resiliency of a bank, but the
CCAR process contains significant procedural and substantive
deficiencies.
Under CCAR, banks use models to forecast losses and
revenues under a severely adverse stress. These models are
reviewed and approved by the Federal Reserve and are regularly
back-tested to ensure accuracy. Nonetheless, in determining the
bank's stress law and, therefore, its effective capital
requirement, the Federal Reserve discards these results and,
instead, runs a variety of its own models. Neither the formulas
for those models nor their combined results have ever been
subject to notice and public comment or any type of peer
review. This matters, because banks tend to shift lending away
from sectors with higher implicit capital requirements under
CCAR.
For example, our research shows that the Federal Reserve's
model has imposed dramatically higher capital requirements on
small business loans and residential mortgages. Given the
stakes involved, it is remarkable how little we know not only
about the contents of these models, but also about their
performance. This too is a black box.
We urge that the Federal Reserve continue to engage in
modeling as part of CCAR, but only as a check on the bank's own
projections. If a given bank's models are deemed insufficient,
the Federal Reserve's models can be offered as evidence in
issuing a capital directive or an order to improve them.
Although highly unlikely, if the Federal Reserve's models
ever prove more accurate over time for a given bank, they could
be adopted instead. Notably, this approach would alleviate any
concerns that making the Federal Reserve's models public would
cause banks to cluster into assets that those models favor,
causing an unhealthy concentration of risk. Once generally
nonbinding, the Federal Reserve's models could benefit from
peer review by the academic community in a way that bank
models, which are necessarily proprietary, cannot.
A secondary is the CAMELS rating system, which was adopted
in 1979 when there was no capital regulation, no liquidity
regulation, and no stress testing. In other words, at a time
when bank regulation was necessarily subjective. Remarkably, it
has not been materially updated since. Over that time, CAMELS
ratings have become progressively more arbitrary and
compliance-focused, likely because capital and liquidity
regulation have supplanted them as the best indicators of
financial condition.
All of this is significant, because a low CAMELS rating, as
I believe as the chairman alluded to, is now generally treated
by regulators as a bar on bank growth. A wholesale review of
the CAMELS system is required. In the interim, its ratings
should be made more objective and modernized. For example, the
bank that is well-capitalized under the 35-plus capital
standards currently applicable to large banks should be
presumed to be rated a one for capital.
Next, living wills. Title I of Dodd-Frank requires large
banks to construct a prepackaged bankruptcy plan and requires
regulators to review the credibility of that plan. This
requirement is important and altogether appropriate. The
required review, however, has been translated into a shadow
regulatory regime with real economic consequences. For example,
the most recent living will process has effectively ring-fenced
some major bank holding company subsidiaries through capital
and liquidity prepositioning. The costs of doing so are
significant, but have never been debated.
Another area where process appears to have broken down is
supervision of bank corporate governance. Examiner oversight is
increasingly subjective and arbitrary, more akin to
conservatorship than traditional examination, and in almost all
cases without basis in law or regulation. In some cases,
examiners attend Board of Directors or Board committee
meetings, which both chills candid discussion and inevitably
shifts the agenda away from corporate strategy and real
economic risk and towards regulatory topics.
Even when examiners do not attend meetings, they insist on
detailed minutes so as to judge the participants' performance.
Examiners are dictating reporting lines within management and
to the Boards of Directors as well as the proper jurisdiction
of committees and their agendas.
Consequently, we now frequently hear from bank management
that more than half of Board of Directors' time is devoted to
regulation and compliance as opposed to innovation, strategy
risk, and other crucial topics. We actually did a catalog for
our members of all the requirements by regulation or guidance
that are imposed on bank Boards of Directors. It runs to 144
pages.
In all these areas, more transparency and the ability of
the public to evaluate the wisdom of these policies would, we
believe, produce better outcomes. And I hope today's hearing
marks the beginning of a change in that direction.
Thank you again for this opportunity to testify.
[The prepared statement of Mr. Baer can be found on page 44
of the appendix.]
Chairman Luetkemeyer. We thank Mr. Baer for his testimony.
Mr. Michel, you are recognized for 5 minutes.
STATEMENT OF NORBERT J. MICHEL, SENIOR RESEARCH FELLOW,
FINANCIAL REGULATIONS, THE HERITAGE FOUNDATION
Mr. Michel. Chairman Luetkemeyer, Congressman Scott, and
members of the subcommittee, thank you for the opportunity to
testify today. The views that I express in this testimony are
my own and they should not be construed as any official
position of The Heritage Foundation.
My testimony argues that there are countless opportunities
to reform the Federal financial regulatory system. It is full
of counterproductive overlapping authorities and duplicative
efforts. There are three main issues that I would like to
address in my oral testimony.
First, the U.S. has too many financial regulators. Banks,
just for instance, could be forced to comply with regulations
from any combination of the following: the FDIC; the OCC; the
Federal Reserve; the CFPB; the SEC; the CFTC; the FHA; and the
FHFA; all on top of State regulators, just to name a few.
While there is good reason to limit consolidation so that
the U.S. does not have a single super financial regulator, the
system is so cumbersome that some consolidation clearly makes
sense, and the trick would be to consolidate while guarding
against efforts to apply bank-like regulation outside of the
banking industry. A reasonable approach would be to reorganize
so that the U.S. has only one banking regulator and one capital
markets regulator; and the obvious place to start would be
merging the CFTC and the SEC.
These agencies regulate markets that have increasingly
blurred into one another over the years and that are closely
tied through common participants and common purposes.
Indeed, the U.S. is unusual for having separate regulators
for these markets. On the banking side, Congress could shift
the Federal Reserve's regulatory and supervisory powers to
either the OCC or the FDIC, and then merge those two agencies.
The most important part of that type of reorganization, I
think, is to get the Fed out of the regulation business. The
Fed should be conducting monetary policy, nothing else.
Regrettably, Dodd-Frank took us in the opposite direction
and expanded the Fed's regulatory role, even though this move
is counter to the trend found in most developed nations. More
than a dozen developed countries, among them the U.K. and
Sweden, have already removed regulatory functions from their
own central banks.
My second point would be that the U.S. did not need and
does not need the Consumer Financial Protection Bureau. The
CFPB is unaccountable to the public in any meaningful way and
raises serious due process and separation-of-powers concerns.
But most importantly, there was no shortage of consumer
protection from fraudulent companies prior to the Dodd-Frank
Act.
Title X of Dodd-Frank created the CFPB, in part, by
transferring enforcement authority for 22 specific consumer
financial protection statutes to the new agency. These Federal
statutes were administered by seven different Federal agencies
and layered on top of State laws and local ordinances. So it is
reasonable to say that some consolidation may have been
warranted.
Regardless, for decades this framework outlawed deceptive
and unfair practices in financial products and services. And,
in fact, if Congress eliminated the CFPB right now, Americans
would be just as protected against unfair and deceptive
fraudulent practices as they are with the CFPB. Financial firms
do not need another Federal supervisor, and Americans do not
need protection from themselves through the ill-defined
protection regime against abusive practices.
My final point is that given the political difficulty in
making these types of changes, Congress should take a careful
look at using the reorganization authority under 5 U.S. Code
Section 901. Granting the President this authority, which has
been used by Presidents in the past of both parties, is a
flexible way to enable the Executive Branch to propose viable
Government reorganization plans.
These plans could be narrowly targeted to improve the
efficiency and effectiveness of specific areas of financial
market regulation, and they can be enacted by Congress more
easily than if the Legislative Branch had to develop these
plans from scratch. This route seems like a particularly good
idea now, because the Trump Administration has started its
formal review of financial regulation, and specifically
expressed a desire to improve its effectiveness and efficiency.
Thank you for your consideration, and I am happy to answer
any questions that you may have.
[The prepared statement of Mr. Michel can be found on page
91 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Michel, for your
testimony.
Mr. Gerety, you are now recognized for 5 minutes.
STATEMENT OF AMIAS MOORE GERETY, FORMER ACTING ASSISTANT
SECRETARY FOR FINANCIAL INSTITUTIONS, U.S. DEPARTMENT OF THE
TREASURY
Mr. Gerety. Thank you, Chairman Luetkemeyer, Ranking Member
Scott, and members of the subcommittee, for the opportunity to
be here today and to offer my perspective on the ongoing need
for effective regulation and supervision of the financial
system.
It is important to start in the fall of 2008. A financial
crisis of tremendous scale and severity left millions of
Americans unemployed and resulted in trillions of dollars in
lost wealth. Our financial system had evolved dramatically over
decades and the regulatory approach had moved in the wrong
direction. For instance, derivatives were statutorily protected
from oversight, and subprime lending and securitizations grew
with little to no oversight.
When the crisis exposed these massive inadequacies, we were
faced with the unpalatable choice of either intervening to
prevent certain institutions from failing, or letting them
fail, at the risk of imperiling the entire financial system and
plunging the country into a second Great Depression. Americans
nonetheless paid a high price and lost wealth, jobs, homes,
delayed retirements, and college educations.
We all learned that in the end, our financial system only
works, and our market is only free, when there are clear rules
and basic safeguards that prevent abuse, check excesses, and
ensure that it is more profitable to play by the rules than to
game the system.
Dodd-Frank enacted a number of provisions that curb
excessive risk-taking and hold financial firms accountable.
However, the policymakers that drafted Dodd-Frank recognized
that our financial system is dynamic and risks cannot be
adequately addressed by a one-size-fits-all approach.
Today, I would like to share with the committee two key
points. First, the post-crisis Wall Street reforms have
strengthened our financial system and supported our economic
recovery. As financial reform was being implemented, the
private sector added 15 million net new jobs, and household
wealth grew by $30 trillion. At the same time, real GDP growth
continued steadily since Dodd-Frank passed and remained
positive, even as Europe weathered a sovereign debt crisis and
the U.K. suffered a double-dip recession.
Within the banking sector, recovery has been strong and
widespread. The banking system is currently delivering on its
promise to provide credit to the economy. In the past 2 years,
community bank lending and earnings growth has outpaced the
industry as a whole, with more than 10 percent income growth in
2016 and lending up nearly 9 percent year over year, both
vaster than the industry.
Second, Dodd-Frank provides a clear and coherent framework
to deliver regulation that is appropriate to the risk of
individual institutions and the system as a whole. Dodd-Frank
uses clear exemptions, statutory requirements for tailoring,
and market-based rules to help ensure that regulators are
focused on a tiered and tailored approach. Regulators have
responded to the statutory direction and used their discretion
to consistently respond to legitimate concerns about regulatory
burden and to create a tiered and tailored regime.
Let us start with a simple but central point. A $200
billion bank is not the same as a $2 trillion bank, nor is it
the same as a $20 billion bank, a $2 billion bank, or a $200
million bank. The U.S. banking system is far less concentrated
than our peer developed nations, and this diversity is a
strength.
In order to deliver a regulatory system that is appropriate
to the risk, we must be clear-eyed about the risks we face.
This means acknowledging that tough standards must apply to the
largest, most complex institutions, and that we must have the
tools to handle their failure. It is only by having a clear
plan and clear legal authority that we can avoid the awful
choices that we faced in the fall of 2008 between the panic-
inducing failure of Lehman Brothers and the bailout of AIG.
Removing the authority to liquidate large, complex financial
institutions the way we have done for banks of all sizes would
be a return to the policy of too-big-to-fail.
In closing, it is important to note that the goal of bank
regulators must not be to satisfy the banking industry, but,
rather, to satisfy the public interest. For that reason, the
best test of how regulators are progressing through their work
is whether financial markets are stable, loans are extended on
clear and fair terms, and agencies demonstrate consistent
openness to new approaches and an ability to flexibly apply
their rules over time.
Thank you, members of the subcommittee, and I look forward
to observing my perspective in today's hearing.
[The prepared statement of Mr. Gerety can be found on page
66 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Gerety, for your
testimony.
Mr. Himpler, you have a very high bar to--every one of the
previous folks who have testified have come in under 5 minutes.
So we will test you here.
Mr. Himpler. Mr. Chairman, I noted that as well, and I
fully expect to use all 5 minutes.
Chairman Luetkemeyer. You are recognized for your time plus
theirs, I guess, huh?
STATEMENT OF BILL HIMPLER, EXECUTIVE VICE PRESIDENT, AMERICAN
FINANCIAL SERVICES ASSOCIATION
Mr. Himpler. I like the sound of that.
Good morning, Mr. Chairman, Ranking Member Scott, and
members of the subcommittee. I am the executive vice president
of the American Financial Services Association (AFSA).
AFSA was founded in 1916 as the only national trade
association solely focused on consumer credit issues. As such,
let me state at the outset that we stand shoulder to shoulder
with members of this subcommittee on both sides of the aisle as
well as with the CFPB in wanting to see bad actors eliminated
from the marketplace. However, it is equally important to
ensure access to affordable credit for all Americans.
As the Federal Reserve notes, consumer credit balances,
exclusive of mortgage, stand at roughly $2.5 trillion. Banks
account for about 60 percent of this credit, but finance
companies account for almost one-third. Yet, banks and finance
companies represent very different business models.
Federal regulators have a long history of effectively
supervising banks. Finance companies, though, are creatures of
State law and have been supervised and examined at the State
level for close to 100 years. Trying to supervise banks and
finance companies as if they are the same could be disastrous
for consumers and the economy as a whole.
To that point, then-Representative Barney Frank, one of the
authors of the Dodd-Frank Act, wrote to the CFPB in 2011,
stating that: ``I urge staff to pay close attention to the
differences in products offered by nonbank institutions and to
be mindful of Congress's intent in financial reform that State
consumer protection laws be preserved to the extent possible.''
He went on: ``For example, there are key differences in
product characteristics between payday, car title, and other
high-cost secured loans and more traditional closed-end
unsecured lending and related products, and the products are
often regulated differently in various States.''
He concluded: ``To the extent that State regulation has
worked to protect consumers with regard to financial products
offered by nonbank institutions, I encourage the Bureau to
coordinate and work with States to preserve these
protections.''
AFSA believes in the CFPB's mission to help consumer
finance markets work effectively by putting in place clear
rules that are consistently enforced. But all too often, it
feels as if the CFPB is following a ``gotcha'' mentality that
is more interested in grabbing flashy headlines and punishing
the industry. Furthermore, despite the CFPB's vast authority,
it often manages to exceed the limits placed on it by Congress.
Here are a few examples of what I mean. The CFPB issued a
short bulletin that attempts to hold indirect lenders liable
for discrimination resulting from dealer compensation policies.
This is contrary to Dodd-Frank, which prohibits the CFPB from
regulating dealers. It is also an example of guidance designed
to function as rulemaking without due process of law.
In this instance, the CFPB has pursued disparate impact
cases against financial services companies without a valid
legal basis, employing a proxy methodology it knows to be
flawed, refused to consider nondiscriminatory factors that
could explain alleged pricing disparities, and employed a
remuneration process that was designed to achieve a political
end. As a solution, Congress should work quickly to preclude
the CFPB explicitly from using disparate impact theory under
ECOA.
The second example of the CFPB's overreach can be found in
its attempt to impose interest rate caps, which Dodd-Frank,
again, prohibits the CFPB from doing. But that is exactly what
the Bureau is attempting to do with its small dollar loan rule.
The proposed small dollar rule imposes substantial and
burdensome underwriting requirements on loans with a total cost
of credit that exceeds 36 percent. Because these additional
requirements are so costly, many lenders will choose not to
make such loans to needy consumers. Keep in mind, these are
institutions that had played no part in the financial crisis in
2008.
This proposed rule imposes a de facto usury limit by making
it uneconomical for many lenders to comply with these new
requirements. In fact, in a hearing last year before this
committee, the members of the committee pressed Acting Deputy
Director David Silberman to specify what deficiencies in State
law the CFPB was trying to address; and the acting Deputy
Director could not answer the Members of this body. We ask
Congress to encourage the CFPB to go back to the drawing Board
on this rule.
My third example is the CFPB's use of regulation by
enforcement. Despite the CFPB's authority to write rules, the
CFPB chooses to govern industry by enforcement orders. But
these orders are not consistent. For example, in the area of
dealer compensation that I mentioned earlier, does the CFPB
expect vehicle finance companies to comply with the enforcement
order against American Honda Finance Company or the enforcement
order against Ally? These are two very different orders, and it
is unclear.
The CFPB also tries to utilize the unfair prong in UDAAP
regulation. For example, debt collection practices employed by
EZCORP were consistent with both Federal and State law, and the
CFPB did not like them so they labeled them as unfair. The
CFPB's UDAAP authority should be removed and returned to the
Federal Trade Commission.
I see I have exceeded my time. I look forward to the
questions of the members of this subcommittee.
[The prepared statement of Mr. Himpler can be found on page
76 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Himpler, for your
testimony.
With that, the Chair recognizes himself for 5 minutes for
questions.
And, Mr. Baer, I want to begin with you. We brought a
visual this morning with regards to the CCAR process that
represents 20,000 to 30,000 pages. That is the norm for midsize
regional banks to comply with stress tests. I was discussing
last night with one of the larger banks, it can go up to
100,000 pages for some of those folks. And they get back a
three- or four-page letter saying that you don't comply and you
didn't hit the model that we had intended for you to do,
without any guidance as to how to hit that model.
Would you like to elaborate a little bit on this? I know
you talked a little bit about it in your testimony, about how--
and quite frankly, it would appear to me, from having an
examiner background, that examiners are in these banks on a
full-time basis, the larger banks, and they see this
information every day, and yet for the banks to have to compile
this in these voluminous reports seems superfluous to me. Would
you like to comment?
Mr. Baer. Sure. Mr. Chairman, yes, if you think about CCAR,
there are actually really two components: one is the
quantitative assessment that I referenced in my oral remarks;
and the other is the qualitative, which has uniquely, of all
the types of regulations supervised by the regulators, become
an annual binary public, life-or-death decision that you pass
or you fail and has not had a lot of standards around it such
that banks can know whether they are going to pass or fail.
To the Federal Reserve's credit, I think they have
eliminated that or proposed to eliminate that for almost all
banks. We obviously urge them to go ahead do that for all of
them. There is no reason that capital planning cannot be
evaluated through the traditional examination process that you
are aware of, just as any other credit underwriting or
cybersecurity. So we think that should be subject to the same
process.
With respect to the quantitative test, yes, clearly, there
is an extraordinary amount of data that is submitted. The
number of people at the banks working on this ranges from the
dozens to the hundreds, full-time year round. I think there are
clearly ways that process could be streamlined and the burdens
of that reduced.
That said, I do think that one of the great frustrations of
the banks is that they go to all this trouble. They do all this
work. They produce projections of losses and revenue under the
stress, but then those results are discarded and the Federal
Reserve runs its own models, which they do not see, and
actually, I think, they don't have confidence that those models
are better than their own with respect to a particular bank.
So I think the burdens of this process would be more
tolerable and more sensible to the extent the results actually
mattered and weren't discarded.
Chairman Luetkemeyer. Thank you.
During your testimony, you also made the comment that a lot
of examiners attend regular meetings, and sitting there has a
chilling effect. And I assume they don't participate in the
meeting unless called upon, but it would seem to me that would
be an example of them trying to micromanage the bank, which
they are not supposed to be in the middle of this as a
regulator. They are supposed to be on the outside trying to
enforce the law.
If the bank wants to make decisions based on a business
model, they should be allowed to do that and not have an
examiner sitting there to try and have a chilling effect on
their ability to actually perform what they need to do in order
to be able to fulfill their mission.
Mr. Himpler, given the number of comments here with regard
to the CFPB, the rulemaking process, some of it they do without
due process when they enforce things and regulation by
enforcement, would you like to elaborate on the regulation by
enforcement a little bit? I know, to me, this is really
problematic from the standpoint that this is an agency that
promulgates a rule, and then they go out and enforce the rule
through fines and what have you, and basically, there is no--to
me, that is a law. And there is only one group around here that
can make law and that is us, and yet that is what they are
doing.
Would you like to elaborate on that?
Mr. Himpler. I would. First, I would like to see things
return to regular order, where Congress is making law, as
opposed to unelected folks in agencies such as the CFPB. I
think it does go back to the founding author of the CFPB,
Senator Warren, who expressed at the outset in creating this
that rules are like fence posts on the prairie; they are
useless. Lawyers try and get around them. So there is a new
sheriff in town, and we have to crack a few heads.
That mentality has continued to reverberate through the
Bureau. We have had civil investigative demands (CIDs) that
have been hanging out over companies for years without any
feedback from the Bureau as to whether or not somebody has been
cleared.
We have had different orders with respect to the vehicle
finance industry, in terms of which order a company should
follow. And I guess most importantly, the Bureau put out a blog
last year saying that they had backed off from pursuing this
type of activity, but that activity still continues in
examinations.
Companies come forward with plans to actually try and work
with the CFPB and get very little credit for it. Discover was
one of the first enforcement actions that the CFPB took. They
self-reported and got no credit for it. You would have thought
the CFPB had identified that and rooted out a bad actor.
Chairman Luetkemeyer. Thank you. My time has expired.
With that, we recognize the ranking member, Mr. Scott, for
5 minutes.
Mr. Scott. Thank you, Mr. Chairman.
Let me continue that line of questioning, if I may, with
you, Mr. Himpler. I listened very intently to your comments
about the CFPB, but here's the rub: We need to protect our
consumers from the bad actors out there.
And I think that my situation is somewhat similar to yours,
because, as you recall, during the auto indirect lending fight,
I more or less tried to lead the way in examining. In my own
estimation, there were errors made, but they were errors made
basically in the methodology that was applied to determine who
was being discriminated against, not the function of the CFPB
going after and trying to do its major function of protecting
the consumer.
And, as I mentioned in my testimony yesterday, ours is a
very complex, complicated financial system. Again, we have 70
million unbanked/underbanked citizens out there, the most
vulnerable being many who are low-income African Americans and
others.
So the question I want to ask you is--I am not sure you
agree--don't we need to make sure that all of our consumers,
especially the most vulnerable, deserve financial protection?
Mr. Himpler. Thank you, Mr. Scott. I couldn't agree with
you more. Everyone needs to be protected. But in the area of
vehicle finance in particular, it is a very fragmented market.
You have thousands of players who are competing for market
share. But the lion's share of the folks who are being
regulated are finance companies, that are creatures of State
law, that are putting their own capital at risk. It is a
different business model than banks, that are putting deposits
on the line for lending activity.
I think that what we are looking for, and Mr. Gerety got to
it a little bit in terms of the bank sizes that he mentioned,
but where he stopped was a $200 million bank. What I am talking
about is institutions that are below $200 million, in terms of
activity. They are providing a meaningful service and just want
clear rules for the road. It is kind of like a sheriff pulling
over somebody where there is no speed limit posted.
Mr. Scott. All right. Mr. Himpler, thank you very much for
that.
I want to go to you, Mr. Michel, because you outline
somewhat thorough your recommendations, which were basically
mergers, and you recommend merging, for example, the CFTC and
the SEC. Do you not feel that kind of merger with two distinct
entities would bring more confusion and less order to our
financial system, given the fact of their jurisdictions? The
CFTC strictly deals with this area, the commodities futures
trading, and more or less handles this growing derivatives
market, swaps, all of that business, cross-border, and dealing
with a very growing and complex $800 trillion piece of the
world's economy. So I don't see how that fits together.
Mr. Michel. I don't think there would be any more confusion
than there is confusion between what is a swap and a
securities-based swap. I think that an artificial distinction
was made in Dodd-Frank Title VII. And those markets are--
although commodities are not the same as securities or
derivatives necessarily, they are essentially all financial
instruments that are I would call cousins. And the distinction
that we have been making legally over time has grown to the
point where it is almost pointless.
Whether you are trading futures, whether you are trading
derivatives, whether you are trading indexes, whether you are
trading stocks, you are trading some sort of financial asset in
the market and these things are very similar.
Mr. Scott. The other point you mentioned, which I have some
experience with, was the overlap and the confusion that takes
place with our Federal regulators and our State regulators. And
I spent 28 years in the Georgia Legislature, 14 now in
Congress, and I can speak to that.
One case in mind was we had to deal with Fleet Finance and
their predatory lending. They were allowed to come into the
State and use our usury laws for paying down second mortgages.
But the point is that it was because we were able to get a
better working relationship between what the Feds were doing
and what the State was doing, and this was a new frontier we
had to create.
But I see my time is up. Thank you, sir.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we go to the vice chairman of the subcommittee,
the gentleman from Pennsylvania, Mr. Rothfus, who is recognized
for 5 minutes.
Mr. Rothfus. Thank you, Mr. Chairman.
Mr. Baer, I would like to ask you a couple of questions. I
have concerns about whether the current regulatory framework
properly recognizes the various business models and risk
profiles of banking organizations. Custody banks, for example,
are very different from investment banks. The one-size-fits-all
regulations are pushing banks to a one-size-fits-all business
model and balance sheet. This homogeneity cannot be good for
the financial system or financial stability.
Do you have any opinion as to whether more tailoring is
needed to preserve this diversity in business models?
Mr. Baer. Thank you, Congressman. I think custody banks are
a terrific example of that, in the sense that, clearly, their
primary purpose is to safe-keep assets, but that also involves
holding very large amounts of deposits. If you think about how
the regulations affect a custody bank, the liquidity rules
assume that those deposits, counterfactually, will all run in a
crisis.
Now, certainly, deposits are at risk of a run in a crisis,
but I think we saw in the last crisis that custody banks did
not see large runs. But even if you assume that that is a fair
assumption and that lots of those deposits will run and,
therefore, that you need to hold a Treasury security against
that deposit to be able to fund that run, you then for a
custody bank also have the leverage ratio, which requires you
to hold the same amount of capital against that Treasury
security as you would against a junk bond or an illiquid loan.
So they are put in a very difficult position, even though
they are in an extremely low-risk business, of having to hold
very large amounts of liquidity and capital on the liquidity.
The same liquidity that is being held for a safety and
soundness purpose, they are holding 6 percent capital against
that, and that really doesn't make a lot of sense.
Mr. Rothfus. I plan on introducing legislation shortly that
would exclude custody bank funds held at a central bank from
supplementary leverage ratio calculations. How would this
measure impact the viability of custody banks?
Mr. Baer. I think it would assist not only custody banks,
but to potentially applying that to dealers, it would assist
them in meeting liquidity requirements. It is interesting--
actually, I just came back from Europe--that the Bank of
England recently took just that step and deducted deposits on
reserve at the central bank from the leverage ratio in the
United Kingdom. So clearly, it is something they have thought
about and makes a lot of sense.
One of the ideas behind the leverage ratio is that in a
crisis you don't really know what any asset is going to be
worth, and you go to that sort of ratio because you may have
the risk weights wrong. But in no crisis has anybody ever
gotten the value of cash wrong, or specifically cash on reserve
at the Federal Reserve.
Mr. Rothfus. Dr. Michel, in your testimony, you wrote,
``Leading up to 2008, financial firms funded too much
unsustainable activity, largely because of the rules and
regulations they faced, including the widespread expectation
that Federal rules had guaranteed safety and soundness and that
the Federal Government would provide assistance to mitigate
losses.'' I find this interesting, because one of the main
narratives that we hear from the left is that the financial
crisis was caused by banks that got out of control because of
deregulation.
Can you elaborate a bit more on which rules and regulations
had the greatest impact in the lead-up to the crisis?
Mr. Michel. Sure. And first of all, I will reiterate that I
think it is absolutely insane for people to say that there was
deregulation and that there was no oversight of this activity.
All of this activity took place under the direct supervision of
the Federal Reserve, the FDIC, and the OCC, at the very least.
I think if I were to sort of prioritize the rules that were
screwed up and that contributed to this, I would start with
capital requirements and then bankruptcy preferences. On the
capital requirement side, you had a risk weight system that
incentivized banks to load up on mortgage-backed securities, to
not hold mortgages, and to lower their capital charge for just
doing the mortgage-backed securities, which were guaranteed,
everybody knew, by the Federal Government, for the most part.
On the other side of that, with the bankruptcy laws, a lot
of the funding for these vehicles, through swaps and repos,
were given exemptions from the bankruptcy safe harbors. So all
the counterparties in those markets had very little reason to
care how much of it they were writing and who they were writing
it with, because they knew that they would be in the front of
the line and be the first ones out the door with their money.
Those would be my two main categories of those rules.
Mr. Rothfus. Are there similar rules, regulations, and
practices today that are setting the stage for financial
instability down the road?
Mr. Michel. Well, we have changed the risk-weighting a
little bit, but we haven't really fixed it, in the sense that
we are still depending on this crazy idea that the Federal
regulators or any group of any particular persons can get
together and know exactly what those risks are going to be,
what those financial assets are going to be worth going
forward.
And that is just not true. We have proven that already. And
we have not fixed that part. And we are going through all the
CCAR exercises as if we know exactly how a bank is going to
operate in a crisis and exactly what is going to happen in a
crisis and exactly how much money is going to be there to
protect it. History shows that that is not a good idea. That is
what we have been doing, though.
Mr. Rothfus. Thank you. I yield back.
Chairman Luetkemeyer. The gentleman's time has expired.
I now recognize the ranking member of the subcommittee, Mr.
Clay from Missouri, for 5 minutes.
Mr. Clay. Thank you, Mr. Chairman.
And I would like to ask unanimous consent to place in the
record a letter I have here from Public Citizen on the
importance of Dodd-Frank and financial regulation.
Chairman Luetkemeyer. Without objection, it is so ordered.
Mr. Clay. Thank you.
Thank you, Mr. Chairman.
Earlier this year, the President issued an executive order
directing the Treasury to consult with all members of the
Financial Stability Oversight Council and produce a report on
whether the current financial regulatory system meets several
high-level noncontroversial principles. If the Administration
produces a report that resembles Chairman Hensarling's radical
rollback of Dodd-Frank, known as the wrong CHOICE Act, it would
be very controversial and poorly received.
Mr. Gerety, as a former Treasury official, what would your
advice to the Treasury be as it conducts its review? Should
they be focused on trying to dismantle the CFPB, repeal the
Orderly Liquidation Authority of the Dodd-Frank rollbacks?
Mr. Gerety. Thank you, Ranking Member Clay.
I am glad to offer my perspective. I will note, just as a
factual matter, the consistent review and regular engagement
with agencies on how rules are working is a standard practice
of the Treasury Department. We conducted such an engagement in
the spring of 2009, and we regularly engaged, at the behest of
the President and the Treasury Secretary, over the years in
lots of discussions.
So I think that the fact of doing a review, as the Chair of
this subcommittee said earlier, is a natural part of the
responsibility of any Federal regulator or policymaker in
Congress or in the administrative branch.
In terms of the recommendations, I think the central
question is how we articulate the regulations, the statutes,
and the guidance in ways that are appropriate to the risk, and
how do we build on the progress we have made, to make our
financial system stronger, to make our financial system more
fair, and also make it more effective.
In particular, I would highlight areas like small business
lending, where we have spent a lot of effort to try and promote
small business lending among community banks. We did
investments in community banks to help them support small
business lending. And I think also along the theme of
simplification, especially for the smallest banks in our
system.
Mr. Clay. Thank you for that response.
Mr. Gerety, it seems that despite evidence to the contrary,
Republicans and industry lobbyists think that the financial
protection for consumers and community banks in Dodd-Frank are
harming them and the broader economy. However, I know that
Democrats work with representatives of trade associations, such
as the Independent Community Bankers of America, to craft
wholesale exemptions for small financial institutions.
For example, community banks and credit unions under $10
billion are not supervised nor subject to enforcement actions
brought by the CFPB. And while they are subject to consumer
protection rules, they were subject to these rules even before
Dodd-Frank was passed.
Indeed, all of CFPB's $12 billion worth of enforcement
actions, providing relief for 29 million consumers, have been
against large banks and nonbanks, direct competition to the
community banks and credit unions.
Mr. Gerety, would you please comment on how the Dodd-Frank
Act promoted community banking and shifted the regulatory focus
to more risky large banks and nonbanks that can compete with
small banks and credit unions?
Mr. Gerety. Thank you. I think this is a really important
point about the structure of Dodd-Frank. It is not just that
there are affirmative exemptions, such as the one that you
mentioned with the CFPB supervision; but also, there is an
affirmative targeting of making sure that the toughest rules
apply to the largest and most complex institutions.
This happens in specific directions. For instance, under
Title I of Dodd-Frank, there are specific enhanced prudential
standards that only apply to the largest banks in the system.
And those standards are further tailored by statutory mandate.
So that the so-called G-SIBs, the globally systemic, the money
center banks with trillions of dollars on their balance sheet,
are subject to different rules. It is also true that with
issues like derivatives or securitization, which community
banks and smaller regional banks simply do not participate in,
the weight of those rules do not fall there.
So, in terms of both its affirmative exemptions and its
direction in terms of creating tough standards, Dodd-Frank
explicitly and implicitly carves out community banks. I think
there is still work to do to make sure that the rules--already,
the banking agencies have talked about simplifying the Basel
III rules, making sure that those issues are easier for
community banks to comply with. And I think that is a very
fruitful direction and should be taken further.
Mr. Clay. Thank you for your response.
My time is up.
Chairman Luetkemeyer. The gentleman's time has expired.
The gentleman from Florida, Mr. Posey, is recognized for 5
minutes.
Just a minute, Mr. Posey--votes have been called, so we are
going to try and get in hopefully two more people, two more
questioners here.
So go ahead, Mr. Posey. Thank you.
Mr. Posey. Thank you, Mr. Chairman.
Mr. Himpler, yesterday, Director Cordray appeared before
the committee. And, as you know, the Consumer Financial
Protection Bureau has a mission, and let me just state it
precisely here: ``To make consumer financial markets work for
consumers, arm people with information, steps, and tools they
need to make smart financial decisions.''
I am interested to hear your opinion about whether or not
you believe the CFPB is, in fact, adhering to their mission?
Mr. Himpler. Thank you, Mr. Posey.
And I guess my first response would be to kind of follow on
the discussion that Mr. Gerety and Mr. Clay had just a second
ago about independent community banks.
That exemption is afforded to the community banks because
of the high burden of having a Federal regulator adding to the
regulations that you are already facing at the State level.
Representing finance companies that are providing both small
dollar credit as well as vehicle finance, we would love to work
with Mr. Clay and the members of this subcommittee and of the
full Financial Services Committee to get that exemption so that
there is a level playing field for all financial institutions.
We are willing to play by the same rules as everybody else,
but what we are talking about is a difference between
profitability, sustainability, and the ability to provide
affordable credit or being out of business and having to
shutter your doors.
One example of where I think the CFPB has missed its
mission is in the area of its consumer complaint database. I
don't think it really provides any information to consumers.
Information that is gathered in that database, namely through a
narrative field that customers are able to utilize, is not
verified; and, most importantly, consumer information is not
safeguarded.
So, from my perspective, that is something that really
needs to be addressed, in terms of meeting its mission, in
terms of providing helpful information and protecting the
consumer.
Mr. Posey. Again, offhand, can you think of any other steps
you think should be taken to get back on course with the
mission?
Mr. Himpler. I would say also, in the area of enforcement,
our concern is that the Bureau is regulating by enforcement. It
is not providing clear guidelines in the vehicle finance space,
in terms of utilizing not so much its abusive authority under
unfair, deceptive, and abusive practices, but the unfair prong.
That has really never been used by regulators before. The
reason it hasn't been used is it is very hard to create any
sort of objective standard.
Like I said at the outset in answering your question, our
members are willing to play by the same rules as everybody
else, and we do. What we don't think is in the best interests
of the consumer is creating a ``gotcha'' environment where you
don't know what the rules of the road are.
Mr. Posey. Yes. I think that the CFPB indicated at one time
they might be required or requested to issue something like
50,000 opinions on interpretations of their rules. And they
kind of committed to doing at least one to three a year, and to
date they haven't done any. Do you see that as problematic?
Mr. Himpler. Again, in the vehicle finance space, they
issued a four-page bulletin to provide guidance to lenders in
the vehicle finance space. They have at least three public
enforcements. They have other private enforcements. None of
them look like each other. And the Director has said it is
regulatory malpractice for financial services players not to
follow these orders. Which one do we follow?
Mr. Posey. We get statistics that we are now losing
something like a community bank a day or something. It is just
unbelievable. Do you think this is a root cause of that?
Mr. Himpler. I do think that is a root cause. We don't
represent the community banks, but they are great players.
Everybody has a part to play in this. But another proposed rule
by the CFPB is its arbitration rule. The Director's own
economics team said that arbitration is better than litigation
for the consumer, in terms of time, convenience, and monetary
awards. And yet, his own statement when he rolled out this rule
totally contradicted that.
I will stand here and tell you today that a significant
number of financial players that are small and community-based,
if that rule goes into effect, those businesses will go out of
business, because they can't afford the risk associated with a
class action lawsuit.
Mr. Posey. Thank you, sir.
Thank you, Mr. Chairman.
Mr. Himpler. Thank you.
Chairman Luetkemeyer. The gentleman's time has expired.
We are going to get one more questioner in here before we
recess.
The gentleman from North Carolina, Mr. Pittenger, is
recognized for 5 minutes.
Mr. Pittenger. Thank you, Mr. Chairman.
Mr. Himpler, I would like to ask you, do you think that
there has been an uptick in the enforcement actions by the
Bureau since the November elections? Is that your sense?
Mr. Himpler. I do think that it has been sustained. But a
lot of the enforcements are now through the supervisory
process. And so what we have happening, as opposed to the more
public orders that we have seen, is a lot of the enforcement
orders are in the supervisory process, and they are not a
matter of public disclosure. So it is very hard for our members
to actually articulate what is happening to them.
But I will tell you that, again, in the vehicle finance
space, the CFPB said last December that they were moving on
from this. I can tell you clearly they have not moved on from
this and they have, in fact, probably doubled down on this.
Mr. Pittenger. Do you feel like, in a sense, the CFPB has
moved the goalpost?
Mr. Himpler. I'm sorry, I missed your--
Mr. Pittenger. Do you feel that, in a sense, the CFPB has
moved the goalpost? Do you have any examples of that?
Mr. Himpler. I do think that it is interesting with respect
to the bulletin that they put out. They put out a clear
standard that was not achievable by industry. The vehicle
finance industry is very fragmented, and nobody was willing to
step forward. It said that all compensation to dealers had to
be flat. Nobody was willing to go there.
The first public settlement that they came out with dealt
with monitoring. Two subsequent ones dealt with capping the
compensation. And I can tell you another one actually came
forward and offered to cap compensation and were still
penalized for doing so.
Mr. Pittenger. Thank you.
Mr. Michel, how was consumer protection handled before the
creation of the CFPB?
Mr. Michel. It was fragmented. It was spread around several
different agencies. If you go through Title X, I believe
subtitle (h), of Dodd-Frank, you can see part of what was done,
which is it literally shifted enforcement authority for 22
Federal statutes into the Bureau. So, unfair and deceptive
practices, primarily enforced by the Federal Trade Commission
(FTC), are all under all of those authorities. And banking
regulators also had the authority, although not the explicit
statute requirement, the authority to enforce laws under those
rules as well on top of State regulatory agencies, all policing
fraud. So the fact that there is deceptive and unfair
practices, fraud--you cannot, as a business, lie about what you
have sold me; you cannot mislead me; you cannot trick me--all
of this was done prior to Dodd-Frank.
As Congressman Clay alluded to a moment ago himself,
smaller banks were subject to consumer protection laws prior to
Dodd-Frank. That is the body of that framework that you see
there in Dodd-Frank.
Mr. Pittenger. Do you think that process provided more
protection to consumers or do you think the CFPB provides more
protection?
Mr. Michel. The CFPB, the only argument you can possibly
make is that we have consolidated that authority in one agency,
and that is fine. But it didn't have to be the CFPB. It could
have been the FTC. In fact, I think it made a lot more sense to
be the FTC. They have a Bureau of Consumer Protection. That is
their mission.
Mr. Pittenger. Was there any benefit in consolidation?
Mr. Michel. I would say, yes, there would be benefit in
consolidating, and it was quite fragmented. So, yes, but not
with the CFPB because the CFPB goes much further than that, and
it is not really designed primarily to enforce those statutes.
It is not an enforcement agency per se, like the FTC. And what
you have--the agency is primarily designed to go much further
than that, particularly with abuse of authority, which is ill-
defined and will not be defined under the Bureau and is not
defined under the statutes.
And it is really designed, if you look at the intellectual
architects Gill and Warren, the idea is that you have to
protect consumers against themselves or from themselves. That
is a very different concept than what was in consumer
protection law prior to Dodd-Frank.
Mr. Pittenger. Many members of the Financial Services
Committee have spoken to Fed Chair Yellen about the need to
tailor regulations to specific institutions. Do you think the
prudential regulators do enough to tailor these regulations to
an institution or to smaller groups of institutions?
Mr. Baer?
Mr. Baer. Sure. I would agree, Congressman. Certainly, more
can be done. I think we already talked about the custody bank
example. There are certainly other examples, for example, the
living will process, which is a large resource drain on firms
that are actually quite easy to resolve and don't need that
level of planning.
I will also just say--and there has been a lot of talk
about the CFPB in terms of tailoring. I think, as Mr. Michel
notes, at least in theory, the statute transferred consumer
enforcement authority away from the banking agencies and to the
CFPB. I think what has happened, though, in reality is that the
banking agencies have re-christened every consumer compliance
violation as a safety-and-soundness issue using the amorphous
concept of reputational risk, meaning, ``If you do something I
don't like, somebody else might not like it; that will hurt
your reputation, and, therefore, you have a safety-and-
soundness problem.''
So that is another example. Maybe it is a different kind of
tailoring, but that jurisdiction wasn't really transferred. It
was more duplicated.
Mr. Pittenger. Thank you.
My time has expired.
Mr. Luetkemeyer. The gentleman's time has expired.
And, with that, we apologize to the witnesses. We do have
to go vote. Votes have been called. We will take a recess here
and probably reconvene around 10:45 roughly.
[recess]
Mr. Luetkemeyer. Let's reconvene the hearing. I again
apologize for the interruption, but we do have to go do our job
from time to time.
So, with that, we want to again thank the witnesses for
their indulgence, and we will continue the questioning.
Mr. Williams, the gentleman from Texas, is recognized for 5
minutes.
Mr. Williams. Thank you, Mr. Chairman.
Mr. Himpler, as you know, yesterday our committee had the
opportunity to hear testimony from CFPB Director Cordray. From
his testimony, you would have thought that community financial
institutions, which facilitate a significant amount of lending
in my district in Texas, are doing great. But perhaps the
Director hasn't been to rural Texas, where many credit unions
and community banks have simply closed.
So, last year, 329 Members of Congress and many of the
members of this subcommittee sent a letter to Director Cordray
calling on him to invoke his authority to exempt community
financial institutions from CFPB regulations. Yet, instead, he
went ahead and released a 1,300-page rule on small-dollar
lending, which applies to community banks and credit unions. I
am not quite sure he got the message, but in your opinion, why
does a small bank or a credit union need a 1,300-page rule to
tell them how to make a $500 loan to their local customer or
member?
Mr. Himpler. Thank you, Mr. Williams. It is good to see you
this morning.
I don't know why any community financial institution needs
a 1,300-page regulation. Most of the small-dollar products are
fairly clear on their face. We do not represent payday, but it
is a very clear disclosure. Most small-dollar extensions of
credit are only a couple of pages in length, if that. There are
clear disclosures of APRs. And the rule that the Bureau has
come forward with will cripple access to credit, particularly
in the communities that you are talking about.
The whole rule, I must admit, I find personally offensive.
No one would dare ask members who have premium or gold credit
cards to have a cooling-off period after they paid off their
monthly statement for March or April, but that is exactly what
we are doing to working- class and lower-income folks. And to
me, that is unfair.
Mr. Williams. And staying with that line of questioning,
Mr. Himpler, I want to talk about an issue that, unfortunately,
I did not have time to discuss at yesterday's hearing. In March
2013, the CFPB issued a bulletin that allegedly provided
guidance for indirect auto finance companies. We now know this
was the Bureau's way to get around Section 1029 of the Dodd-
Frank Act, which explicitly excluded them from the CFPB
oversight and rightfully left the duty to the FTC.
As the story goes, the CFPB used a now debunked study
citing disparate impact to hold the indirect auto finance
companies liable for discrimination resulting from dealer
compensation or markup. So why is the Bureau continuing to
utilize this methodology in enforcement actions against banks
and indirect auto finance companies?
Mr. Himpler. That is probably a question best suited to the
Bureau. I can tell you that, having worked with the CFPB and
represented indirect auto for 13 years now, the staff has this
kind of stuck in their craw that dealers are exempt under Dodd-
Frank, and the only way to address that shortcoming that they
see is to do it through vehicle finance companies, like the
ones that I represent. And despite the fact that they have
issued a bulletin--or actually a blog--last December calling a
truce, that may be the case for public enforcement orders, but
it is not the case in supervision and enforcement that stems
from that. That continues to go forward. And even in instances
where finance companies are trying to do the right thing and
meet the Bureau halfway, I am afraid that all too often the
Bureau is still looking for the flashy headline.
Mr. Williams. I agree with you. In their semiannual report,
the Bureau has dropped ECOA auto lending enforcement from its
fair lending priorities just this past year. The Director
himself has said that the CFPB has abandoned work in this
space. You have touched on that. Yet, in my opinion, the damage
has already been done. So, by my count, the CFPB has already
extorted hundreds of millions of dollars from these auto
lending companies. In your opinion, why do you think the Bureau
has abandoned work in this space?
Mr. Himpler. I think the curtain has been pulled back on
their flawed methodology, the fact that they were unwilling to
account for nondiscriminatory factors that we presented to them
to explain any disparities that they found, and the fact that
you had bipartisan pressure trying to get the Bureau to come
forward with some sort of regular order. Even in just trying to
figure out how they did the methodology, in terms of trying to
duplicate their efforts, it took industry a year-and-a-half for
them to even turn over the computer code. That is just silly,
Congressman, and uncalled for.
Mr. Williams. Thank you for your testimony.
I yield back.
Mr. Luetkemeyer. The gentleman yields back his time.
The gentleman from Georgia, Mr. Loudermilk, is recognized
for 5 minutes.
Mr. Loudermilk. Thank you, Mr. Chairman.
And, Mr. Himpler, welcome, and thank you for being here
today.
Mr. Himpler. Thank you for having me.
Mr. Loudermilk. Yes, well, maybe we will have a little more
productive meeting today than what may have happened yesterday
when it comes to actually getting some questions answered.
To follow on kind of the direction that Mr. Williams was
heading in, some of the questions I asked yesterday were not
adequately answered. There were a lot of things said but I
don't think Director Cordray actually addressed the question at
hand. A lot of it has to do with the CFPB and their database.
And let me kind of just pose a question I did to Mr.
Cordray yesterday and see if you can help me get to some of the
answers, at least what you believe the truth would be there.
In their annual report, which came out Monday, their
numbers showed that in 2016, the CFPB handled 291,000 consumer
complaints, and about 17,000 of them were resolved with
monetary relief for the customer. Now that equates to only 6
percent of the complaints being resolved with monetary relief,
and 94 percent had no monetary relief.
So my question was, does this low number show that the vast
majority of their claims really have no merit? Or is it just
incompetence in the agency? Or is it a priority issue in your
opinion? From your knowledge, could you help me with that?
Mr. Himpler. I would actually like to give the Bureau a
little bit of credit here. I think the fact that you have such
a low numerical value associated with monetary rewards means
that the lion's share of complaints that come into the Bureau
may not warrant a monetary award. We have had complaints come
in regarding one of the captive auto finance companies under a
particular brand, and they didn't actually finance the car; it
was financed by one of their competitors. And it took them a
while to sort it out and make sure the complaint got to the
right consumer, and it was resolved. That is just one instance.
But I do have other problems with the database.
This is reputational risk at its finest. No one in our
industry can afford to take on their Federal regulators, let
alone a Federal regulator that has ``consumer protection'' in
the title. What is the upside to that? Okay? Then you have
numerous mistakes. They have now put in place a narrative field
that allows consumers to put something online that is totally
unverified. Well, how do you correct that? Once the damage is
done to a company, it is hard to get your reputation back.
Mr. Loudermilk. I agree.
Mr. Himpler. And probably most importantly is the fact that
they don't protect the consumer's private information on this
database. If the whole goal of the CFPB is to protect the
consumer, protecting their private information should be at the
forefront.
Mr. Loudermilk. I appreciate you going in that direction
because that is really where I was going. Without the 96
percent, there has to be a large number that are--let me use
the term ``frivolous.'' In his testimony yesterday, Director
Cordray said that, once the company has an opportunity to
respond--this is when a customer posts something on their
website, a complaint--that they confirm that there was a
commercial relationship with the customer. That is the extent
of any confirmation. Why will they not go and at least try to
validate the complaint? Because, as you say, once that
reputation has been damaged by a consumer protection agency, it
is irreparable; it is very difficult.
Mr. Himpler. That is correct. I think, at the end of the
day, although it is listed as a consumer complaint database,
there is no real interest in terms of looking at both sides of
the equation. As I said at the outset of my statement, we share
the CFPB's mission to protect consumers, but that has to be
balanced with ensuring the availability of credit. And all too
often, I am concerned that the Bureau does not have that
balance in mind.
Mr. Loudermilk. So is the purpose of the database just to
name and shame companies, or should they have a disclaimer on
there that says it is a fact-free zone, or ``This is fake
news?'' It is really what I see is happening.
Mr. Himpler. As entertaining as that is, yes, something
needs to be done, particularly in this space in terms of
protecting reputational risk because that comes at a cost. It
will drive companies out of business.
Mr. Loudermilk. Thank you.
I yield back.
Mr. Luetkemeyer. The gentleman's time has expired.
The gentleman from Tennessee, Mr. Kustoff, is recognized
for 5 minutes.
Mr. Kustoff. Thank you, Mr. Chairman.
Mr. Baer, good morning to you. I recently had the privilege
of talking with a good community banker in my district in
Fayette County in west Tennessee who talked about the Community
Reinvestment Act. He said, while the intent of the CRA was to
create fair lending practices, current test criteria are often
so stringent, so tough, that it makes it impossible for smaller
institutions to provide credit to those who want to reinvest in
the communities that they live in.
We know that the CRA was designed to ensure that financial
institutions were providing capital and meeting the financial
needs of the communities in which they operate. Regulators have
ensured that these institutions meet the requirements of the
Act through tests that look at the bank's lending, investments,
and services. Until recently, these tests provided a clear
benchmark for a bank to meet its CRA responsibilities. However,
lately, regulators have been increasingly including in their
CRA examination criteria, unrelated to the CRA, including
compliance with other financial laws or consumer regulations
that have their own standards and penalties for violations. I
bring all this up because, in your testimony, of course, you
mentioned that one institution was graded by the OCC as
``outstanding'' but yet then was later downgraded to--I think
you said--``needs to improve''--because of issues related to
the bank's account management. Does that seem like a reasonable
process to you?
Mr. Baer. No, Congressman. I think the important point is
that that process or that kind of behavior actually undercuts
the value of the Community Reinvestment Act. As you note, the
legislative history and clear statutory purpose of the
Community Reinvestment Act was to ensure that banks were
meeting the credit needs of all the people in the communities
they operate in. And the grade is outstanding; it is
outstanding for meeting credit needs. That is the focus of the
statute. And it is a good example of how the examination regime
around this has actually worked pretty well in the sense that
the standards, the three tests you mentioned, are applied
rather objectively. Banks know what they need to do to get a
satisfactory rating, what they need to do to get an outstanding
rating, and they can benchmark that and know where they are.
That is all somewhat ancient history now but certainly not true
now.
What has happened is that any consumer compliance violation
now can result and likely does result in a downgrade of the CRA
rating. There are plenty of other consumer laws to punish that
kind of behavior, whether it is informal supervisory or formal
enforcement action or State action or Justice Department
action. So it is not like this sort of behavior would go
unpunished but for the CRA. But the unfortunate consequence of
adding the CRA to the list of punishments for that kind of
behavior is it diminishes the transparency of how it is applied
to banks, and it really gives them less of incentive to stretch
to make the extra loans to become either satisfactory or
outstanding.
Firms used to actually like, even aside from the compliance
aspect, sort of the marketing of being an outstanding CRA
institution. But if you tell them going into the exam, ``Well,
you have an unrelated consumer compliance violation; you are
going to have a `needs to improve' no matter what you do,''
that really undercuts for everybody--the banks and then also
the communities who want the lending--the value of the CRA.
Mr. Kustoff. Thank you very much, Mr. Baer.
Mr. Michel, if I could, your testimony about the CFPB, I
heard that; I think we all heard that in your testimony and
your opening statements.
Yesterday, when Director Cordray appeared, I had a line of
questioning involving the unfair, deceptive, or abusive acts or
practices, the UDAAP authority that was granted to the CFPB. As
we look at the statute as written, it appears that there is
little guidance as to what actually constitutes an abusive act
or practice. Without clear and consistent guidance to make sure
what that determination is, the Bureau now apparently has the
discretion to make unilateral decisions that ultimately result
in the elimination of a useful practice and service for the
consumer.
If I could ask you, in your opinion, has the CFPB
adequately defined what constitutes an ``abusive practice?''
And is more clear, concise guidance needed for the CFPB to
demonstrate further transparency in the process?
Mr. Michel. They haven't clearly defined it, and Mr.
Cordray has said that they don't want to define it and
shouldn't define it. And that is not the rule of law. That is,
``We are going to figure out what you did wrong after you did
it, and we will tell you.'' It is absolutely 100 percent
counter to the rule of law and the type of governmental system
that we have in the United States.
And then the next part of your question, as to whether they
should clarify that, the only thing that we know is that it is
not unfair or deceptive. So it has to be something else. Well,
the question should be, what is wrong with unfair and
deceptive? In other words, if unfair and deceptive is not okay,
is not enough protection, then let's talk about something else.
But that debate was never really had. So I don't think that we
should waste any time trying to force them to come up with a
better guidance for abusive. I think that should be thrown out.
It is, in my opinion, superfluous.
Mr. Kustoff. My time has expired. I yield back.
Mr. Luetkemeyer. The gentleman's time has expired.
The gentlelady from New York, Mrs. Maloney, is recognized
for 5 minutes.
Mrs. Maloney. Thank you so much, Mr. Chairman, for calling
this hearing. And it is very good to see Mr. Baer and some
other constituents here and all the panelists for being here
today.
We have a busy day on the Floor. We have one important
Financial Services bill that came out of this committee that we
were debating and it just passed unanimously. That doesn't
happen often in this Congress--unanimous support.
So, Mr. Gerety, I would like to ask you a question about
the orderly liquidation authority. One of the main changes, as
you know, that we made in Dodd-Frank was to give the regulators
the authority to wind down large nonbank financial institutions
when they fail. The FDIC has long had the authority to wind
down commercial banks, but they did not have the authority to
wind down large noncommercial banks like Lehman Brothers and
AIG.
And I distinctly remember one weekend, the beginning of the
weekend with 11 investment banks in my district; at the end of
it, every single one of them had failed. Yet, I give strong
support to the FDIC. They very, very expertly worked with the
private sector to save the commercial banks, to wind them down,
to merge them, to keep them moving. So we were really forced
with two decisions: we could either bail it out, like we did
with AIG; or we could let it fail, which we did with Lehman.
Neither was a good option, as we all know, and, if anything,
contributed to more confusion and pain in the financial crisis.
Dodd-Frank gave the regulators a third option: an orderly
wind down that prevents a government bailout but does not harm
the broader markets so that they would have another tool, God
forbid, that we have another financial crisis, but that we
could better manage it.
So, Mr. Gerety, I would like to ask you to talk about the
structural change and why it is important and what would happen
if--some of my Republican colleagues are very intent on
repealing the orderly liquidation authority, although it says
expressly in the statute that no taxpayer money should ever be
used or can be used. So it is really prevention of using
taxpayer money and gives them another tool to really react to
the crisis as the FDIC was able to do with the powers that were
given to them.
So your thoughts on that, and any other panelist who would
like to add or comment on it, we would like to hear what you
have to say.
Mr. Gerety?
Mr. Gerety. Thank you, Congresswoman Maloney. I think this
is such an important issue, and you have laid out the facts, as
we saw them in 2008, so eloquently.
I think there are a couple of principles at stake that are
really important to highlight any debate about how we handle
the failure of a large complex financial institution. The first
principle, which you have outlined, is the fact that this
authority did not exist in 2008. The choices were limited and
the fact that those choices were limited was a massive problem
for the American people.
The second is that market discipline works when firms have
the ability to fail. Market discipline does not work if firms
are--if the market does not believe that the firms have the
ability to suffer from their own mistakes. And so I think we
have seen already--in the implementation, the development of
the capital rules to go along with orderly liquidation, the
strategies of the single point of entry that give that
credibility--we have seen the markets react positively. And
when I say ``positively,'' what that means is they have taken
away the assumption that the government will step in. The
ratings agencies have noticed this as well. So I think moving
in the opposite direction would be a move away from market
discipline and move toward too-big-to-fail.
I think the second thing is that there is often a
discussion about bankruptcy versus orderly liquidation. I think
it is important to not see those as substitutes. Certainly,
this House has worked on a bankruptcy bill focused on Financial
Services. That should be seen as a compliment. It cannot be a
substitute for the approaches that we know have worked and the
approaches that we know need to be differentiated for financial
services companies because of their extreme size and their
different structure than regular corporations in America.
Mrs. Maloney. I would like to ask Mr. Greg Baer if he would
like to comment.
Mr. Baer. Sure, thank you, Congresswoman.
I think it is important to note, as I think Amias did, that
under the statute, and quite sensibly, the first option is
bankruptcy. That is why banks are submitting living wills and
either all now have or probably soon will have credible living
wills under the Bankruptcy Code. So, at that point, it is
really a cost-benefit analysis: What is the cost of retaining
Title II? What is the benefit?
Given--you can argue the benefit is low in the sense that
banks are now extremely resilient at extremely high capital
liquidity levels. There is a credible bankruptcy process using
the single-point-of-entry strategy that Amias mentioned. And
there is even liquidity available because their prepositioning
liquidity or the trigger for bankruptcy is now sufficiently
high that there will be liquidity available through the living
wills.
On the other hand, there doesn't really seem to be much of
a cost at this point of retaining Title II as a backup plan in
the sense that, as noted, markets are pricing the debt as if
there will be no government support. So there is not a moral
hazard being created or an unfair subsidy. That has been
validated by the GAO, by two other recent studies, and by the
rating agencies now as well as.
So it is a backup plan. I think it is an unlikely-to-be-
used backup plan, but it appears to be a backup plan for which
there aren't a lot of costs to retaining.
Mrs. Maloney. And it would have been a backup plan that
would have been helpful in the 2008 crisis, and we don't know
what the next financial crisis is going to be. As you said,
banks are very well-capitalized now. So it won't be like the
last one; it will be something different. So having tools to
respond might be helpful.
Thank you all for your testimony.
Thank you, Mr. Chairman.
Mr. Luetkemeyer. The gentlelady's time has expired.
With that, the gentleman from Michigan, Mr. Trott, is
recognized for 5 minutes.
Mr. Trott. I thank you, Mr. Chairman, for calling this
hearing. And I want to thank the panel for spending time with
us this morning. And as has been mentioned, we spent about 5
hours yesterday with Mr. Cordray. And I am not sure how
productive of a discussion it was. But I want to share with you
a couple of the statements he made and get your thoughts.
Mr. Michel, at one point, Mr. Cordray said, ``Certainly no
one can claim that their voices are not heard at the CFPB.''
And when I had occasion to ask him a few questions, I told him
I was astonished at that statement because I go home every
weekend, and I talk to REALTORS and title agencies, and
mortgage brokers, and debt collectors, and attorneys, and
small-business owners, and they are all terrified of the CFPB.
In fact, one constituent recently said that the CFPB is like
the Mafia. They show up, and they say: ``This is a nice
business you have here; I hope nothing happens to it.''
So I want to get your thoughts on whether you feel there is
an adequate framework for people to bring questions, honest
business people to bring questions to the CFPB; if not, maybe
give me a few examples of their failure in that regard; and
then, finally, what the consequences for our economy are of an
operation that runs itself providing guidance through
enforcement.
Mr. Michel. I have heard firsthand--and Bill probably has a
thousand times more firsthand accounts than I do--of people who
say that this is not true, that the CFPB does not listen to
them, in the mortgage industry and outside of the mortgage
industry. So I don't think--no, I don't believe that that is
accurate. I don't believe they do listen. That is not why they
are there.
We had Dennis Shaul, who is an ex-Barney Frank staffer,
talk to us about how different the Bureau became versus what it
was pitched as it was going to be. So, no, I don't agree with
him at all.
Mr. Trott. Great.
Mr. Himpler, let's go to another statement he made. I
questioned him on his press releases, particularly a press
release that was issued August 26, 2016, regarding First
National Bank of Omaha. The press release made it sound like
the First National Bank of Omaha had basically admitted guilty
to egregious transgressions and where they were just a terrible
organization. But then, when you look at the settlement
agreement, section 2, there is no admission of guilt of any
kind.
So you mentioned a few minutes ago they are prone to flashy
headlines, and I am just wondering if you think some of the
press releases issued by the CFPB in connection with their
settlements of enforcement actions are accurate and largely
whether you believe there is really a due process issue when
you consider the fact that fighting the government really is a
tough row to hoe for many companies given the reputational risk
and, again, what the consequences of that method of operation
is.
Mr. Himpler. Thank you, Mr. Trott.
And if you will indulge me, I would like to comment on your
question that you asked Mr. Norbert just to start off.
Don't take our word for it. The Small Business
Administration, under the previous Administration, actually
opined on this because a lot of the rules that the CFPB have
put forward have to go through a small business review panel to
anticipate the impact on small businesses if they were to go
forward. The SBA said that the CFPB was not listening to folks.
That is--and Norbert is correct: I do have plenty of other
examples. I would love to talk to you about them offline.
A lot of the discussion, even Mrs. Maloney's previously,
was about big institutions, too-big-to-fail. We are talking
about institutions that are too-small-to-succeed. If you guys
don't get it right, with all due respect, you can have serious
consequences and take a lot of folks that have institutions and
access to credit in rural areas right out of the equation.
With respect to the press releases, more often than not we
see press releases that don't reflect the orders that the
Bureau puts forward. More importantly, sometimes the parties
that are subject to those orders don't even see the order until
it has actually been issued by the Bureau. That is being
convicted before you even see the indictment, sir, and there is
nothing more unfair than that.
Mr. Trott. When I asked the Director about his press
releases, his response was, ``I know the facts.'' And it
sounded--and I don't know that he particularly appreciated this
analogy--like the line from, ``A Few Good Men,'' when Jack
Nicholson was on the stand and he said, ``You can't handle the
truth,'' and he is acting as judge and jury. So how would he
feel if I drafted a press release saying, ``Director Cordray
admitted responsibility for sex and racial discrimination at
the CFPB and retaliatory actions against his employees,
apologized, said it would never happen again, but no one there
is going to be fired as a result of their bad behavior.'' I
know the facts. I read the National Review articles. How can
you dispute that?
Mr. Himpler. Sir, as far as I know, all of the public
orders in the vehicle finance space, none of the companies
admitted to guilt. That was part of an agreed-to consent order,
and the press releases all, from top to bottom, say that they
are guilty and then, in the fine print, say, ``Nothing in here
accurately reflects the order.''
Mr. Trott. Thank you for your time.
I yield back.
Mr. Luetkemeyer. The gentleman's time has expired.
The gentleman from Kentucky, Mr. Barr, is recognized for 5
minutes.
Mr. Barr. Thank you, Mr. Chairman.
And I appreciate the testimony from our witnesses.
Dr. Michel, I was particularly interested in your proposal
to remove the supervisory responsibilities from the Fed and
transfer them to other regulators, and proposals to consolidate
regulatory activities. As chairman of the Monetary Policy
Subcommittee, I have raised that proposal with Fed Governors
and regional bank presidents. And as you might imagine, I got a
little push back on that idea.
What they have said to me is that their supervision informs
their monetary policy. Can you speak to that argument?
Mr. Michel. I am not surprised. And I think that is scary.
That is not the way this is supposed to work. Monetary policy
in a fiat money system--the central bank is supposed to provide
liquidity to the system. It is not supposed to be making bank
determinations or bank safety-and-soundness determinations and
picking and choosing who to lend to. That is the problem,
literally.
So the way to stop that is to let the Federal regulators do
the regulating on the safety and soundness and let the central
bank provide liquidity to the system. It can do that in a very
open and transparent process without emergency lending
authority, without regulatory authority. It is all it has to
do.
Mr. Barr. To the extent that the CHOICE Act, or other
reform efforts here in Congress, maintains this concept of a
stability oversight council, even if Congress were to remove
its designation authorities, should the Fed participate in an
FSOC?
Mr. Michel. In the unfortunate event that you retain the
FSOC, no.
Mr. Barr. To your point about overlap, duplication, and
inconsistency in the excessive number of these regulators,
could you address the argument that multiple regulators can in
fact lead to greater accountability and talk about that in the
context of this argument of the race to the bottom?
Mr. Michel. The research on this is pretty muddled. There
are arguments for regulatory competition and that you get
better outcomes that way. There is very little support for the
race-to-the-bottom hypothesis, and there is also some support
for the idea that regulatory competition turns out to largely
end up being a myth. If you look at bank failure rates--and
this just one example, admittedly muddled research--but one
example is that bank failure rates across the different Federal
regulators were pretty much the same. So it is pretty hard to
say that there was sort of like a charter shopping thing going
on and that some regulators were being tougher or easier on
others. That is--
Mr. Barr. One final quick question, if I could, and then I
want to move on to Mr. Baer. Talk about your proposal of
regulatory consolidation in the context of the dual banking
system, and specifically, what do you propose with respect to
State-chartered Fed members? Who would be regulating them
besides the State financial institutions regulator?
Mr. Michel. I think you would just have to go to the FDIC.
That would be my preference.
Mr. Barr. Mr. Baer, I was interested in your testimony,
particularly about the CCAR qualitative assessments over bank
capital planning processes. Talk about the arbitrariness of
that and why you think we should get rid of that qualitative
assessment.
Mr. Baer. I think the place to start is the regulators and
the examiners, including the Federal Reserve, routinely assess
the quality of bank's processes and their compliance with law
across a whole wide range of activities, whether it is credit
underwriting, cybersecurity, trading, anything.
In none of those cases do they feel the need to announce
publicly at the end of the year, pass or fail. They work
diligently with the institution throughout the course of the
year. Their findings are reflected in an examination rating,
and that system works.
Especially in an area like capital planning, you already
have the quantitative assessment, which is--and I think will
continue to be--public. But the real question is, what is the
value added by having that final assessment be public and
binary? There has also been, I think, a real sense--and I think
some public reports--around this function has been transferred
largely from the exam teams to Washington. I think the
standards are not particularly clear. There isn't a lot of very
good feedback such that we routinely hear that firms simply do
not know going into that week whether they are going to pass or
fail, which is not the way the exam system--
Mr. Barr. Sorry to cut you off.
But in my remaining time, Mr. Himpler, can you address the
unique challenges associated with the regulation of finance
companies as opposed to banks, credit unions, and other
lenders?
Mr. Himpler. Sure. This is not a problem with the CFPB. It
is a problem in D.C. Washington, D.C., is a bank-regulated
town. Finance companies and a lot of community banks are
creatures of State law. They have been effectively regulated at
the State level for close to 100 years. And trying to put
community institutions through the same pace as some of the
bigger institutions and the tens to hundreds of billions just
doesn't work.
Mr. Barr. Thank you.
I yield back.
Mr. Luetkemeyer. The gentleman's time has expired.
With that, we recognize the gentlelady from New York, Ms.
Tenney.
Ms. Tenney. Thank you, Mr. Chairman.
Thank you to the panel for being here.
I like what I am hearing from Mr. Himpler, as a Member from
rural suburban central New York, where we have a number of
small businesses and some of the largest out-migration of
people, businesses in the Nation and--I just found out today--
in my district some of the highest property tax rates based on
per 1,000.
I want to focus a little bit on Operation Choke Point and
just the nature of Operation Choke Point and how it focuses on
small-dollar lenders, payment processors, and companies that
are believed to be reputational or moral risks. And I am
concerned about what could happen in my district, particularly
because we do have a number of small businesses that would
probably fit that definition, one being Remington Arms, the
oldest continuously running manufacturing firm, which happens
to be large. But there are other smaller offshoots, such
Oriskany Arms, that could be targeted by an Operation Choke
Point--a small startup that is making firearms right now for
hunting and personal protection. But Remington also provides
for our military. But other smaller businesses, whether it is
payday lenders, check cashers, coin dealers, some people who
provide some kind of services for people who are largely
unbanked because of the massive regulation of so many of the
big banks.
As we regulate the big banks, we end up hurting the small
banks even more. And as a small-business owner, it is sort of a
parallel; we know we have a hard time complying with New York's
regulatory burden as a small business, but we can't afford to
hire compliance agents just like in a smaller bank.
And I was just struck by your comment about too-small-to-
succeed. I would like to say they are too small to be cared
about by a lot of politicians and bureaucrats. Small
businesses, small lenders, and people who are in these persona
non grata categories.
I am just concerned that some of these tactics that the DOJ
and the FDIC are using are almost like threats to increase the
scrutiny on these types of lenders. I know we have written a
number of letters, and I know I am getting--we have written a
number of letters to the FDIC and the OCC about Operation Choke
Point and how it is affecting our industry.
I just want to know--and I guess I would single out Mr.
Himpler, since you have the great quote of the day with ``too
small to succeed''--can you wager a guess--and I think you
could probably give me a more educated answer--as to why the
government agencies believe that these licensed legal
businesses that I have described should not have access to the
banking system and why we put them into the underground? And
maybe you could answer why they are so targeted, it appears,
from the regulators.
Mr. Himpler. Thank you, Ms. Tenney. In full disclosure, I
wish I had come up with that quote, but I heard it from someone
else.
I think your point is dead on. And whether we are talking
about Choke Point or whether we are talking about using the
unfair prong of UDAAP, you have folks in the regulatory
community, be it at the CFPB, the FDIC, or others, who feel a
need to stand in judgment of hardworking Americans and how they
utilize the credit system. And whether we like it or not, the
FDIC can say that they are no longer deploying Choke Point.
That message has not gotten down to the rank and file. Our
members are still being subjected to the questions that call
into question whether or not they are a moral provider of
credit.
Our association is 100 years old. We were formed with
consumer groups in order to provide access to credit for
hardworking Americans at the turn of the last century, folks in
steel mills, folks in factories and the like, that banks
couldn't provide credit to. And we take great pride in the fact
that we are able to work directly with the consumers that we
serve, but the CFPB and the FDIC and others have made it
increasingly difficult by not following a rule of law, not
providing clear guidelines and coming up with squishy
standards, such as unfair because somebody doesn't think it is
appropriate. All we are looking for is to be treated fairly.
Ms. Tenney. Do you think that some of these are targeted or
calculated attempts to eliminate an industry that might not be
or someone that is involved in a banking institution or
financial institution of this nature that is just not desirable
in their world?
Mr. Himpler. I do think that is the case, and I don't want
to cast aspersions, but I think what we are dealing with,
especially at the Bureau, is a lot of very young examiners
right out of college, very idealistic, who think that they know
better than the folks that they serve.
Ms. Tenney. Thank you very much.
Thank you, Mr. Chairman.
Mr. Luetkemeyer. The gentleman from California, Mr. Royce,
the chairman of the House Foreign Affairs Committee, is
recognized for 5 minutes.
Mr. Royce. Thank you, Mr. Chairman.
Mr. Baer, I appreciate your expertise on the issue of
combatting money laundering and the financing of terrorism. We
had a hearing last week, and I shared my concern at that time
that we are misaligning our resources and hindering legitimate
consumers and businesses from accessing capital. And I
specifically referenced the Clearing House's research on the
subject, which concluded that the billions in bank resources
spent on AML/CFT compliance have limited law enforcement or
national security benefit. Now that was the conclusion.
Now, to be clear on this, I know you agree that banks
should be spending ample resources on AML/CFT compliance, as do
I. But we have missed the mark on creating a framework that
emphasizes identifying and catching the bad actors. So
examiners seem, at this point, to be more concerned with
quantitative metrics. So the metrics are, you know, how many
compliance officers have been hired or suspicious activity
reports have been filed? But I am looking here for your
direction in terms of what legislative steps would you have
this committee take to better align our regulations with the
goal of protecting the financial system from illicit financing,
which was the original intent.
Mr. Baer. Thank you, Congressman. And thank you very much
for your leadership on this issue, which has been continuing
and important.
I think what we see--and it wasn't just the Clearing House.
We worked on this report with experts in law enforcement,
national security, global development, diplomacy, and everyone
really came to pretty much the same conclusions, both about the
problems with the system and the ways to fix them. The
fundamental problem is not a resource problem; it is a
management and leadership problem.
The analogy I use is you have one person teaching the
course and another person drafting the exam and grading the
test. And law enforcement and national security and development
folks and others are not engaged in the enterprise of telling
banks how to spend that money. They don't give them direction,
goals, priorities.
Instead, as you note, they are graded by bank examiners who
do what bank examiners do, which is look for policies and
procedures and rigid adherence to those policies. So what law
enforcement and national security want are financial
intelligence units that think very cleverly about how to find a
human trafficker or terrorist financier. And what the examiners
have to in practice do--because they are actually excluded from
that process. They really don't know what happens after these
CCARs are filed. Law enforcement doesn't talk to them. National
security doesn't talk to them. They check boxes. And that is
not a really very smart system.
A lot of this could actually be reformed by Treasury, TFI,
and FinCEN working with the regulators. Congress can certainly
help in certain areas, I think, expanding information-sharing
under 314(b) of the PATRIOT Act. And then, really importantly,
and I know this Congress, this committee has in front of it
legislation from Representative King and Representative Maloney
on so-called beneficial ownership or eliminating the use of
anonymous companies to cloak who owns--
Mr. Royce. Right, right. That probably would be a huge step
if we could do that.
I have to turn to Mr. Michel. We have already seen the
failure of a model that separates consumer protection
regulation from safety-and-soundness regulation with respect to
the GSEs. As the former Fed Chair Alan Greenspan noted after
the financial crisis, ``Fannie and Freddie paid whatever price
was necessary to reach the affordable housing goals put in
place by Congress in 1992.'' Now the result of that was that
the GSEs purchased more than $1 trillion in junk loans. When we
rang the alarm bell, when we tried to pass legislation--I had a
measure on the House Floor to rein in the GSEs--our efforts
were blocked as a tax on affordable housing. We had two
agencies tasked with entirely different, often conflicting,
objectives at the time.
So my question is, are you concerned that we have gone down
this road with the CFPB? For example, I look at the plan to
overhaul overdraft rules. If the CFPB gives borrowers 21 days
to repay an overdraft rather than requiring it to come out of
the next deposit, does it not morph into a line of credit that
the bank will need to hold capital against? In other words,
where do safety-and-soundness concerns come into play here?
Where does the prudential regulator have that responsibility to
take a look at that issue, if you can respond? Do you have that
same concern?
Mr. Himpler. I'm sorry. I didn't hear the last part.
Mr. Royce. Do you have that same concern?
Mr. Michel. Oh, well, yes. And I don't think adding another
regulator on top of the process does anything to fix this. And
I think the whole premise is wrong in that the idea that
finance companies, community banks, or big banks don't want to
succeed and want to lend to people that cannot pay them back--
the whole thing is twisted. So you have to start by uprooting
that. That is my opinion.
Mr. Royce. Thank you very much.
Mr. Chairman, thanks.
Mr. Luetkemeyer. The gentleman's time has expired.
I would like to go to a second round. I have a couple of
follow-up questions myself, and Mr. Barr has a couple.
So, with that, we will recognize the gentleman from
Kentucky, Mr. Barr, for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman, for giving us a second
round here.
And as you all know, Mr. Michel and Mr. Himpler, Director
Cordray was in front of our committee yesterday, and I raised a
concern with him about the Bureau's regulation on international
remittances, and I shared with him a concern that was raised
with me from a constituent about the Fort Knox Federal Credit
Union. And as you can imagine, the Fort Knox Federal Credit
Union serves many servicemembers who are deployed overseas, and
they simply want to be able to send some of their paycheck back
home to their spouses while they are deployed.
And because of the Bureau's overly burdensome regulations
and the implementation of those rules, the credit union had to
basically get out of the business, and that obviously was a
huge inconvenience for those servicemembers and their families.
Director Cordray's excuse was that Congress made him do it
and that it was our fault that this was happening. And, while,
Mr. Himpler, you don't represent credit unions per se, but you
all are observers of the Bureau. I just took a look at the
statute, the Dodd-Frank law, Section 1022, which actually
requires the Bureau to look at cost-benefit analysis and to
mitigate costs such as this.
Does the Bureau have the discretion? Does Director Cordray
have the discretion to ease the regulatory burden on regulated
parties so that these kinds of consequences do not occur? And
by the way, I asked him--the credit union in question called
him thinking that this was an unintended consequence, and they
reported to me that Director Cordray himself told them, no,
this was an intended consequence. Can you comment on that?
Mr. Michel. Sure. He absolutely has the discretion to go
the other way. It is one of the bizarre things, from my point
of view. I understand what was going on in that environment
when they passed Dodd-Frank. But from my perspective, you don't
want--either side of the aisle--you don't want to create an
agency like this because you might find yourself in a situation
where you are on the opposite end of what you just created.
Even if the Trump Administration doesn't fire Director Cordray,
there will be a new Director. If that is somebody like, just
say, I don't know, Todd Zywicki from George Mason, he will have
the discretion to reverse a lot of this stuff, just outright
authority to do it, and then not do anything else that he
doesn't want to do.
Mr. Barr. Mr. Himpler, can you comment on Director
Cordray's pointing the finger at Congress instead of looking at
what the Bureau can do itself to ease the burden on regulated
entities like this Fort Knox Credit Union that no longer can
serve its deployed servicemembers?
Mr. Himpler. Thank you, Congressman. Yes, I can.
I think one of the basic problems here when it comes to,
not only remittance, but also other consumer products is that
very few people--especially at the CFPB, but I would say just
as equally at some of the other Federal regulators--have no
experience in extending credit to consumers, have no experience
in some of these products, be they remittance products, be they
an installment loan, be they a subprime vehicle finance loan
because you are trying to extend credit to a college grad that
needs to finance his car to get to his first job.
Mr. Barr. I would just note that the Bureau seems to be
able to have the discretion to ban financial services and
products. I don't know why it doesn't have the discretion to
help servicemembers deployed overseas send some of their
paycheck back to their spouses back home. I think that is
absurd.
Mr. Baer, one final question. This idea of gold plating of
U.S. standards, we believe, as the financial CHOICE Act
reflects, we believe that large systemically important
institutions should be required to maintain or at least be
incentivized to maintain healthy levels of capital. But can you
speak to the apparent need for the government to impose
requirements that go well beyond anything that we impose on
banks around the world and the effect that this gold-plating
idea may have on the competitiveness of American banks as they
compete in a global economy?
Mr. Baer. Sure. Yes, gold plating is generally referred to
as where U.S. regulators go off to the Basel Committee or the
FSB and negotiate an international standard and then come back
and dramatically increase the stringency of that requirement
for U.S. banks and U.S. banks alone.
The competitiveness aspect is difficult to tease out,
certainly at a time when European banks particularly are in
difficulties and U.S. banks are doing well. We may see that
over time. I can't tell you I have seen research to demonstrate
that right now.
I think the bigger concern is simply the effect on economic
growth and, in particular, certain types of lending as a result
of higher standards than at least an international body thought
was necessary. And that is true not only with respect to the
ones that have been officially gold-plated, like the leverage
ratio or the LCR, but if you think about the Federal Reserve
CCAR stress test, there is a European stress test which bears
no relation to it. So that is actually a whole construct that
has no international parallel in any meaningful way except
perhaps in the United Kingdom.
So there are certainly benefits to U.S. banks that have
accrued from being the best capitalized and the most rapidly
recapitalized postcrisis, and I don't think anyone would
dispute that. And it has helped them competitively in a lot of
ways.
But there are certainly areas where you see overlaps
between these gold-plated rules. We talked about one earlier
with respect to custody banks. And you also see with the way
that they have imposed ring-fencing on foreign banks operating
in the United States.
They are having, if not competitive effects, real effects
on the ability of those firms to serve U.S. customers, whether
they be corporate or individual.
Mr. Barr. Thank you.
I yield back.
Chairman Luetkemeyer. The gentleman yields back.
I have just a few follow-ups to kind of clarify a few
points very quickly here.
Mr. Baer, you talked at length about the Community
Reinvestment Act. And one of the things that I have seen--you
did a good job of explaining the Act and some of the concerns,
probably some reforms that need to be done.
One of the things that I have seen is that the examiners
now use this as sort of a punitive way to sort of--a carrot-
and-stick approach where we will hold the exam open until you
do something, or we will keep you from being able to merge a
bank until you put a facility over here.
Is this something that you see yourself other places, how
they are misusing some of these laws and leveraging against for
other activities, trying to micromanage the bank?
Mr. Baer. Absolutely, Mr. Chairman. It is not just the
Community Reinvestment Act. It is why I focused so much of my
testimony around the CAMELS requirements and those standards,
and a whole host of unwritten rules now that say, for example,
if you have a consent order pending for any reason, even
something unrelated to the kind of expansion you want to do,
that effectively puts you in what the regulators now call the
penalty box.
And if you look at why there hasn't been more growth, be it
branching, mergers, acquisition, among, for example, midsize
banks that everyone expected would be growing, it is because
many of them have been in the penalty box for years. Because
there is another unwritten rule that if you get a consent
order, you can't get out of it for generally at least 2 years
and often more; and during that whole time, you are in the
penalty box, whether you are making good progress or not.
So, again, Congress never enacted any of these obstacles to
expansion. In fact, if you look at the Bank Merger Act, or the
National Bank Act or the Bank Holding Company Act, there are
explicit standards for when you should be allowed to expand.
And yet, there are new invented rules that have come along over
the past few years that have really stopped this in their
tracks.
Chairman Luetkemeyer. And the arbitrariness of their
actions really is breathtaking sometimes. The bank that I
referenced in my opening testimony is someone from my area, and
they have a very unique product at the bank. It is not illegal,
they had it approved by the banking regulators, but it is a
unique product. And as a result of that uniqueness, now that
they want to sell the bank, the regulators are trying to get
them to divest themselves of this product. Well, that is one of
the reasons that the other banks want to purchase them is
because it is a money-generating activity that can help pay for
the purchase of the bank.
And yet, they have been holding this open now for 5 years
to try and keep them from doing this. This is the kind of
nonsense that is going on, and that is why this hearing is here
today, to see how these rules are being used and abused. So
thank you for your comment.
With regards to the CAMELS rating, I would like for you to
just explain a little bit more what your concerns are with that
and your suggestions for reworking it, because I think this is
very important.
Mr. Baer. Sure. The CAMELS rating, again, this was started
in 1979 by the FFIEC, which is sort of the umbrella group for
the regulators when they examine, and it rates you according to
capital asset, asset quality management, earnings, liquidity,
and then the S for sensitivity to interest rate, particularly
market risk, was added probably a decade or so later.
The oddity is that when they adopted it, they had a series
of subjective standards that examiners should look at in
deciding whether you have good capital. Now, almost 40 years
later, we have dozens of capital requirements that banks have
to meet, and including the stress test for the larger
institutions. And to the extent that you meet all of those,
there really doesn't seem to be a very good argument that your
rating should be anything other than one.
The same with liquidity, if you comply with the liquidity
coverage ratio, which the regulators have explicitly designed
to be a comprehensive look at the quality of your liquidity
position. And, in fact, examiners--and they frequently do not
give you a one or even a two for those things--they don't
engage in a robust discussion or analysis of why,
notwithstanding the fact that you have met all the requirements
that their agencies themselves have created, you can't get a
good rating.
And there is also another unofficial unwritten rule that if
you have a three for management, you can't have better than a 3
for composite. And, of course, there are legal consequences in
terms of your ability to expand if you have a three for either.
We look at what has happened over time as the CAMELS rating
has sort of been divorced from financial condition, because
that is being taken care of by capital and liquidity
requirements. It has really become a compliance rating system.
And that is what drives your management rating, that is what
drives your overall composite rating, and that is what really,
if you think about what has made the examination process so
much more draconian, subjective, and really in a lot of areas
arbitrary, it has been that move away from CAMELS as a
wholesale look at your financial condition to really a focus on
your willingness to engage in compliance activities that the
examiners want you to engage in.
Chairman Luetkemeyer. Thank you, Mr. Baer.
Mr. Michel, you talked a lot about the reorganization of
these financial regulators. And one of the things in my
discussions with a couple of the Fed presidents has been that
they would like to see all of the Fed presidents be on the Fed
Board instead of a rotating situation.
For instance, if a Fed president is not on the Board, that
area of the country is not represented, per se, as other areas
are on and off, when the New York Fed has their permanent
position there. To me, there is a fairness issue there. Would
you like to comment on that?
Mr. Michel. Sure. And the way that it is set up is
definitely a relic of the founding of the Fed in early 1900s,
and there are a lot of issues like that. But this is one where
it really doesn't make any sense anymore not to have everybody
rotate on and to give the New York Fed a special sort of place
there for various reasons.
I think you could even make the argument that the West
Coast district is overly large now, based on obviously the way
the population was when we started it.
The Federal Open Market Committee conducts open market
operations through a system that was created for the technology
at that time, and we have outstripped that. So these are all
issues that could easily be addressed. I think the New York Fed
one seems to be, although the New York Fed won't like it, a
slam dunk, in that it really doesn't make any sense anymore not
to have everybody rotate on.
Chairman Luetkemeyer. Thank you.
With that, we want to conclude the hearing here.
The title of the hearing today was, ``Examination of the
Federal Financial Regulatory System and Opportunities for
Reform.'' I have a whole list of the different bills or laws
and actions that you all have discussed today, and we are going
to use this hearing as a predicate to go out and have some more
hearings and do some bills and some things, and we certainly
appreciate your testimony along that line.
As a followup here, we didn't get a lot of testimony from
the other side over here today and some of our members had to
leave early.
So I would like to allow a minute or so--no 5-minute
testimony now. I have a plane to catch, too. But if each of you
would like to take just a minute to either summarize something
that you thought was important that you didn't get a chance to
discuss or respond to somebody else or present a new idea that
we didn't have here, I would certainly entertain that
opportunity. I will give you that opportunity.
So, Mr. Baer, if you would like to start first, why, we
would certainly--
Mr. Baer. Mr. Chairman, I think the hearing has actually
been quite good in doing a good survey of the procedural issues
that we are now facing in banking. I think your anecdotes and
some others were quite powerful in demonstrating how a
breakdown in process actually makes a real difference to the
way that banks are able to serve the community.
And I also think it is an area that is really ripe for
Congressional oversight, because, again, we are talking about
unwritten rules that have no basis in law and have no basis in
regulation. Sometimes, they have basis in guidance, but often
they don't even have basis in guidance.
And so I think it is--I guess maybe that is the one thing
that we haven't focused a lot on, though--and I think someone
alluded to it--is that we really now have regulation by
guidance, regulation by enforcement.
And I think all of that is why Congress needs to keep an
eye on this and make sure that the regulators actually are
running a transparent process, not just because it is fun to
run a transparent process and it is fair, but because that
actually makes for better regulation.
Chairman Luetkemeyer. Very good. Thank you.
Mr. Michel?
Mr. Michel. I would just sort of dovetail on that. I think
we focus a lot on the CFPB and their discretion to do these
things, and in some sense you see that in other banking
regulators. Not just in some sense, but you often see that.
Everybody knows that the bank examiners come in and say
something about too many loans in one area or another, and you
have to stop doing it. And so this is a discretionary sort of
process that has evolved that I think you have a really good
case to make for simplifying and fixing that problem by doing
something like what you had in the CHOICE Act. It is an
election. You can choose to go into a simpler regime. I think
there is a lot of room to expand that. I know we didn't get to
talk about that here, but I like where that is going.
Chairman Luetkemeyer. Very good. Thank you, Mr. Michel.
Mr. Gerety?
Mr. Gerety. Thank you, Mr. Chairman, and thank you again
for the opportunity to be here today.
I think the most important theme that I would pick up in
the testimony today is just the great diversity of our banking
system. We talked earlier today about rural banks. I was
looking at data yesterday. The average rural bank with $50
million to $100 million in deposits earns about $1 million a
year. At $10 billion, the average bank earns more like $100
million, $120 million a year. So even within the community bank
space, there is just tremendous diversity.
And I think one of the major themes that needs to be
focused on in any conversation about how to improve our
financial regulatory system is about how do you simplify the
burdens for the smallest banks in the system and not use those
as a reason to roll back really important reforms for the
largest and most complex institutions.
Chairman Luetkemeyer. Great observation. Thank you, Mr.
Gerety.
Mr. Himpler?
Mr. Himpler. Thank you, Mr. Chairman. I also want to thank
you for holding this important hearing today.
I think I would reiterate what some of my colleagues have
already said, in terms of the rural bank at $50 billion in
deposits making a million dollars. We have small finance
companies that are struggling with the same compliance burden
as JPMorgan Chase. We are talking about the difference between
keeping the doors open and affordable access to credit and
closing those doors, because you just can't live under the
burden as a small business.
For example, in its supervisory process in the auto space,
the CFPB issued a larger participant rule. They captured in
their net 90 percent of the overall market. That goes well
beyond the largest of the large, even the large. Anybody that
qualifies as large, they captured those folks. And what it
means is that some of the small finance companies are not going
to be able to extend access to credit to that single mom who
needs a car to get to work.
Chairman Luetkemeyer. Thank you, Mr. Himpler.
And, again, thank all of you for being here today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And, with that, this hearing is adjourned.
[Whereupon, at 11:43 a.m., the hearing was adjourned.]
A P P E N D I X
April 6, 2017
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