WHO’S IN YOUR WALLET: EXAMINING 

HOW WASHINGTON RED TAPE IMPAIRS 

ECONOMIC FREEDOM 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

APRIL 8, 2014 

Printed for the use of the Committee on Financial Services 

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WHO’S IN YOUR WALLET: EXAMINING HOW WASHINGTON RED TAPE IMPAIRS 

ECONOMIC FREEDOM 

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WHO’S IN YOUR WALLET: EXAMINING 

HOW WASHINGTON RED TAPE IMPAIRS 

ECONOMIC FREEDOM 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

APRIL 8, 2014 

Printed for the use of the Committee on Financial Services 

Serial No. 113–73 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

STEVEN HORSFORD, Nevada 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

April 8, 2014 ..................................................................................................... 1 

Appendix: 

April 8, 2014 ..................................................................................................... 67 

WITNESSES 

TUESDAY, APRIL 8, 2014 

Alvarez, Scott G., General Counsel, Board of Governors of the Federal Reserve System ......................................................................................................... 14 

Friend, Amy S., Senior Deputy Comptroller and Chief Counsel, Office of 

the Comptroller of the Currency (OCC) ............................................................. 17 

Fuchs, Meredith, General Counsel, Consumer Financial Protection Bureau 

(CFPB) ................................................................................................................... 11 

McKenna, Michael J., General Counsel, National Credit Union Administration (NCUA) .......................................................................................................... 16 

Osterman, Richard J., Jr., Acting General Counsel, Federal Deposit Insurance 

Corporation (FDIC) .............................................................................................. 12 

APPENDIX 

Prepared statements: 

Maloney, Hon. Carolyn .................................................................................... 68 

Alvarez, Scott G. ............................................................................................... 69 

Friend, Amy S. .................................................................................................. 81 

Fuchs, Meredith ................................................................................................ 101 

McKenna, Michael J. ........................................................................................ 107 

Osterman, Richard J., Jr. ................................................................................ 120 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Hensarling, Hon. Jeb: 

Written statement of the American Bankers Association ............................. 135 

Written statement of ACA International ........................................................ 150 

Written statement of the American Financial Services Association ............ 178 

Written statement of the American Land Title Association ......................... 184 

Written statement of The Clearing House Association L.L.C. ..................... 188 

Written statement of the Consumer Bankers Association ............................ 194 

Written statement of the Consumer Bankers Association, the Credit 

Union National Association, the Electronic Funds Transfer Association, 

the Electronic Transactions Association, the Independent Community 

Bankers of America, the National Association of Federal Credit Unions, 

and the Third Party Payments Processors Association ............................. 198 

Written statement of the Community Financial Services Association of 

America .......................................................................................................... 204 

Written statement of Community Choice Financial ...................................... 216 

Written statement of the Credit Union National Association ...................... 220 

Written statement of the Electronic Transactions Association .................... 224 

Written statement of the Financial Service Centers of America .................. 232 

Written statement of the Independent Community Bankers of America .... 271 

Written statement of the Mortgage Bankers Association ............................. 289 

Written statement of the National Automobile Dealers Association ........... 296 

Written statement of the National Association of Federal Credit Unions .. 308 

Written statement of the National Association of Home Builders ............... 336 

Page

IV 

Hensarling, Hon. Jeb—Continued 

Written statement of the National Association of Retail Collection Attorneys ................................................................................................................ 344 

Written statement of the U.S. Chamber of Commerce .................................. 348 

Ellison, Hon. Keith: 

‘‘Treasury Notes Blog: The Importance of Remittances through Legal 

Channels to Somalia,’’ dated December 23, 2011 ....................................... 396 

Letter from the U.S. Department of the Treasury, dated July 8, 2013 ....... 398 

Horsford, Hon. Steven: 

GAO Report entitled, ‘‘Financial Regulatory Reform, Financial Crisis 

Losses and Potential Impacts of the Dodd-Frank Act,’’ dated January 

2013 ................................................................................................................ 400 

Luetkemeyer, Hon. Blaine: 

Bank Discontinuation Timeline ....................................................................... 499 

Bank Discontinuation Letters ......................................................................... 501 

FDIC Financial Institution Letter dated September 27, 2013 ..................... 506 

Written statement of the Financial Services Roundtable ............................. 508 

Letter to the U.S. Department of Justice, dated August 22, 2013 ............... 512 

Letter from the U.S. Department of Justice, dated January 28, 2014 ........ 516 

Letter to the Federal Reserve and the Comptroller of the Currency, 

dated March 27, 2014 ................................................................................... 520 

‘‘United States of America v. Payment Processing Center’’ ............................ 524 

American Banker article entitled, ‘‘DOJ’s ‘Operation Choke Point’: An 

Attack on Market Economy,’’ dated March 21, 2014 ................................. 549 

Sherman, Hon. Brad: 

Additional information provided for the record by the National Credit 

Union Administration in response to a question posed by Representative Sherman during the hearing ................................................................ 552 

Alvarez, Scott G.: 

Written responses to questions submitted by Representative Garrett ........ 554 

Written responses to questions submitted by Representative King ............. 560 

Written responses to questions submitted by Representative Maloney ...... 562 

Written responses to questions submitted by Representative Moore .......... 565 

Friend, Amy S.: 

Written responses to questions submitted by Representatives King, Murphy, Moore, Sinema, and Garrett ................................................................ 568 

Fuchs, Meredith: 

Written responses to questions submitted by Representatives Barr, Ellison, Garrett, Huizenga, Murphy, Pittenger, and Sinema ......................... 578 

McKenna, Michael J.: 

Written responses to questions submitted by Representatives King, 

Royce, Pittenger, Mulvaney, Garrett, and Fitzpatrick .............................. 592 

Osterman, Richard J., Jr.: 

Written responses to questions submitted by Representatives Garrett, 

King, Maloney, Murphy, Moore, and Sinema ............................................. 612 

(1) 

WHO’S IN YOUR WALLET: EXAMINING 

HOW WASHINGTON RED TAPE IMPAIRS 

ECONOMIC FREEDOM 

Tuesday, April 8, 2014 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:04 a.m., in room 

2128, Rayburn House Office Building, Hon. Jeb Hensarling [chairman of the committee] presiding. 

Members present: Representatives Hensarling, King, Royce, Capito, Garrett, Neugebauer, McHenry, Pearce, Posey, Fitzpatrick, 

Westmoreland, Luetkemeyer, Huizenga, Duffy, Hurt, Grimm, Stivers, Stutzman, Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr, 

Cotton, Rothfus; Waters, Maloney, Sherman, Meeks, Clay, Scott, 

Green, Ellison, Himes, Peters, Sewell, Foster, Kildee, Murphy, 

Delaney, Sinema, Beatty, Heck, and Horsford. 

Chairman HENSARLING. The committee will come to order. Without objection, the Chair is authorized to declare a recess of the 

committee at any time. 

Before we begin our proceedings, I would like to take a moment 

and recognize the newest member of the House Financial Services 

Committee, Congressman Steven Horsford, the freshman Representative from Nevada’s newly created 4th District. 

I was informed that before running for office, Mr. Horsford was 

the CEO of the Culinary Academy of Las Vegas. So I wish to inform my colleague that it is a longstanding tradition of this committee that the newest member bring culinary delights for the rest 

of the members’ enjoyment. We look forward to what you will bring 

to our next hearing. 

We assume you will bring great policy and intellectual offerings 

as well as your culinary offerings to the committee. Our colleague 

served in the Nevada legislature from 2004 to 2012, where he became Nevada’s youngest and first African-American State Senate 

Majority Leader. 

I, on behalf of all of the committee, welcome him to the committee, and I would now like to recognize the ranking member out 

of order for 1 minute to welcome our new colleague, as well. 

Ms. WATERS. Thank you very much, Mr. Chairman. And of 

course, you have said much of what I was going to say. 

However, I am very happy to welcome Mr. Steven Horsford as 

the newest member of the House Financial Services Committee. 

Mr. Horsford represents Nevada’s newly created 4th Congressional 

2 

District. And again, I think it is important to note that he is the 

first African-American to serve in Nevada’s Federal delegation. 

Before his election to Congress, Congressman Horsford served in 

the Nevada State Senate, where he became Nevada’s youngest and 

first African-American State Senate Majority Leader. He also 

served as Chair of the Senate Committee on Finance. During his 

time at the Nevada legislature, Mr. Horsford built a reputation as 

a bipartisan legislator and a strong advocate for middle-class and 

working families. 

Then-Senator Horsford worked on legislation that slowed down 

the rate of foreclosures in Nevada, increased transparency and due 

diligence in the foreclosure filing process and helped reform unfair 

lending practices. He comes to us with demonstrated leadership capabilities, real-world knowledge of today’s labor market, and a 

heart for serving middle-class and working-class families. He will 

be a valuable addition to this committee and I look forward to 

working with him. 

I yield back the balance of my time. 

Chairman HENSARLING. The gentlelady yields back. 

I am now happy to yield, out of order, 1 minute to the gentleman 

from Nevada to tell us what he is cooking for lunch. The gentleman 

is recognized for 1 minute. 

Mr. HORSFORD. Thank you, Mr. Chairman, and Ranking Member 

Waters, for your kind welcome and your introduction. It is my 

honor to join the Committee on Financial Services and I am proud 

to represent the people of Nevada’s 4th Congressional District. 

Nevada, as many of you know, was hit particularly hard during 

our economic downturn, and although we have made great strides 

in rebounding, and our home values are continuing to increase, we 

still have a long way to go. Southern Nevada remains the most unstable housing market in the country, and the root of many problems facing Nevada families is that, unfortunately, many of them 

no longer feel secure in their homes. 

So I am grateful for the opportunity to serve on this committee 

and I look forward to working with my colleagues on both sides of 

the aisle to pass meaningful legislation that addresses some of the 

hardest-hit communities in our Nation, and while my previous career was in culinary arts and helping train and employ people in 

careers in the hospitality industry, Mr. Chairman, I was not a 

culinarian. 

I cannot cook. So I will have to cater out. But if we can pass 

some meaningful legislation, I would be happy to make sure that 

contribution is made. 

Thank you. I yield back my time. 

Chairman HENSARLING. We will make sure the Member is informed of all relevant ethics rules. The gentleman yields back. 

Perhaps we can all make him feel welcome. 

[applause] 

Chairman HENSARLING. Our hearing today is entitled, ‘‘Who’s in 

Your Wallet: Examining How Washington Red Tape Impairs Economic Freedom.’’ 

I now recognize myself for 4 minutes to give an opening statement. 

3 

Last Friday, the House debated a rather simple, common-sense 

bill requiring the Congressional Budget Office to produce long-term 

macroeconomic analysis of proposed legislation. It was strongly opposed by House Democrats. 

If this bill had been law just a few years ago, Members would 

not have had to pass Obamacare to find out what is in it. They and 

the public would have known before the fact instead of after that, 

according to the Congressional Budget Office, Obamacare will result in 2.5 million fewer jobs. Information like this should not be 

swept under the rug. 

Regrettably, something similar happened in this committee just 

last week. The Oversight and Investigations Subcommittee received 

testimony from a high-ranking CFPB whistleblower concerning serious allegations of discrimination and retaliation at the Bureau. 

Her testimony was corroborated by the CFPB’s own independent 

investigator, and both testified as to many other CFPB employees 

who have lodged these same allegations. 

What was the response from the Democratic leadership on the 

committee? They demanded the hearing be cancelled. In other 

words, the matter would regrettably be swept under the rug, hidden from public view, ignored. 

Likewise, many Democrats have harshly criticized cost-benefit 

analysis, looking at the pluses and minuses of the rule, the impact 

on jobs, asking the question of whether a rule on balance helps or 

harms hardworking, struggling American families. 

The ranking member, for example, declared that legislation requiring cost-benefit analysis is dangerous. I believe what is dangerous is sweeping under the rug the mounting evidence that many 

rules promulgated under Dodd-Frank and its ideological precursor, 

the CARD Act, are harming consumers. 

The Federal Reserve now reports that one-third of Black and 

Hispanic borrowers would be hurt by the qualified mortgage (QM) 

rule. In the American Bankers Association’s most recent lending 

survey of banks, one-third of respondents said they plan to reduce 

their mortgage lending only to QM loans. Perhaps that is why QM 

is rapidly becoming known as the ‘‘quitting mortgages’’ rule. 

The FDIC has reported that it has become more difficult for 

lower-income Americans to access banking services because checking and savings account fees have gone up. Almost one-half of 

banks that previously offered free checking no longer do so. 

In a recent survey of banks regarding CFPB’s remittance rule, 

the ABA reported that 42 percent will now increase fees, and 18 

percent plan to stop offering the services altogether. Forty percent 

of lower-income families have reported that their credit cards have 

been cancelled, not renewed, or their limits reduced since the passage of the CARD Act. 

Clearly, the evidence continues to mount and cannot be conveniently swept under the rug. It is time for everyone to take off partisan blinders and acknowledge the truth that Washington regulators aren’t always right and more red tape is not always the solution to every problem. It is time to hold Washington accountable. 

Frequently, I receive letters or correspondence like the following 

from a banker in Central Texas, who I think sums up the challenges well. He wrote, ‘‘We have provided fair, honest, and competiVerDate Nov 24 2008 12:59 Dec 05, 2014 Jkt 088535 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\HBA098.000 TERRI
4 

tively priced loans and home mortgages in our market for as long 

as I have been with the bank. And for the record, we have not had 

a home foreclosure in over 25 years. 

‘‘Currently, our ability to cope with the regulatory burden is at 

a critical stage. We are spending an unprecedented amount of time 

and resources trying to understand this process as the various 

agencies continue to draft new rules and guidance at will. Just a 

new regulation here and there and now consumer lending has become a compliance nightmare. 

‘‘There is no time left to take care of our customers or develop 

new relationships because all of our team is busy working on compliance issues. The spirit of the law no longer exists as the regulatory environment has changed from a helpful and supervisory approach to the gotcha attitude where only the slightest issue can 

bring instant criticism to your bank. 

‘‘Reluctantly, we are working to downsize our consumer lending 

program, especially in the small loan area. Also, due to the massive 

new regulatory focus on mortgage loans, we have suspended our 

home lending activities as of this month. This is not good news for 

our community, but we can no longer comply with the massive burden.’’ 

I think the letter speaks for itself. Regrettably, I receive many 

such letters, thus the subject of our hearing today. 

I now yield 5 minutes to the ranking member for an opening 

statement. 

Ms. WATERS. Thank you very much. Mr. Chairman, before I proceed with my remarks I must set the record straight and I must 

share with this committee that the Democrats did not ask for a 

cancellation of the hearing. 

We asked that the hearing be cancelled because, in fact, you had 

set out to hold the hearing based on a report that was aired in the 

American Banker. You changed the makeup of that hearing and 

you went in another direction with one individual. 

So when the CFPB decided they would not come because you had 

changed the hearing, we agreed with that, but we made the young 

lady, the lawyer, Angela Martin, very welcome, and I yielded my 

time to her so she could tell us more about the discrimination in 

the CFPB that she was claiming was being perpetrated by White 

males against African-Americans and others. 

We welcome that information and we welcome your newfound interest in doing something about discrimination. We think that this 

is a healthy direction for your side of the aisle and we are looking 

forward to a hearing that will be organized in regular order to deal 

with these issues. 

Furthermore, let me also mention that your concern about African-Americans and others being able to access mortgages under the 

QM rules, you need to know that one-third of banks have said they 

are satisfied with what has happened with QM in the way that the 

Consumer Financial Protection Bureau has helped to work out 

some of the problems, and one-third of the banks will now be making loans. 

With that, I will proceed with my statement. 

Just before Congress is set to leave town for a 2-week congressional recess, here we are again attacking regulators for their efVerDate Nov 24 2008 12:59 Dec 05, 2014 Jkt 088535 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\HBA098.000 TERRI
5 

forts to repair the damage caused by the worst financial crisis since 

the Great Depression. This hearing, in my estimation, is nothing 

more than the latest chance for the Majority to air its ideologicallydriven deregulatory agenda. 

And it is a continuation of the Republican quest for extreme and 

unreasonable cost-benefit requirements, which do nothing more 

than undercut the ability of our regulators to do their jobs. How 

quickly my colleagues on the other side of the aisle have forgotten 

the loss of millions of American jobs and trillions of dollars of 

household wealth caused by inadequate regulation. 

Mr. Chairman, the simple fact is that the Majority’s cost-benefit 

requirements would impose additional costs on our regulators and 

expand government bureaucracy. 

I find it ironic that we are participating in a hearing to examine 

so-called government red tape while many of my Republican colleagues are pushing measures that would only serve to increase it. 

It is unfortunate that this committee continues to consider these 

measures, which are becoming a not-so-veiled effort to roll back the 

significant accomplishments of the Dodd-Frank Wall Street Reform 

Act while ignoring a number of important policy matters that need 

our attention now. 

We know the crisis was caused by dramatic failures of corporate 

governance and risk management at large, globally interconnected 

financial firms. We also know that excessive borrowing, risky investments, and a lack of transparency throughout the financial system put us on the path to crisis. 

Although Washington had a role to play, it certainly was not because regulators erred on the side of overregulation. Despite their 

collective failure to see the crisis coming before it was too late, the 

financial regulatory agencies represented before us today should be 

commended for their effort that has already put our financial system on more stable footing. Regulators have made important 

progress by enhancing risk-monitoring and heightening capital 

standards at the largest and most complex banks and nonbank financial companies. 

They have also increased cooperation and information-sharing 

among regulators of banks and nonbank financial companies, and 

they have enhanced the transparency and protections afforded to 

consumers and investors. Our regulators have also taken action to 

ease the regulatory burden for small banks and financial institutions by providing targeted relief. 

I am looking forward to what the witnesses will say about actions to continue helping these small and community-based entities. As the number of legislative days continue to dwindle, I certainly hope that we can come together on important issues that 

merit our serious attention. Rather than accusing Washington of 

restricting economic freedom, we should be taking up bills that 

grow our economy and create good jobs for U.S. workers. 

Mr. Chairman, this includes reauthorizing the export-import 

bank and extending the terrorism risk insurance program. Acting 

on these important measures now is imperative to ensure businesses have the certainty they need to invest in the economy. They 

both create and sustain American jobs and have widespread biparVerDate Nov 24 2008 12:59 Dec 05, 2014 Jkt 088535 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\HBA098.000 TERRI
6 

tisan support, including a number of Republican members of this 

committee. 

These issues desperately need our attention, and while we know 

they need to be addressed very soon, this committee has thus far 

simply refused to do so. 

I thank you, and I yield back the balance of my time. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentlelady from West Virginia, 

Mrs. Capito, the chairwoman of our Financial Institutions and Consumer Credit Subcommittee, for 2 minutes. 

Mrs. CAPITO. Thank you, Mr. Chairman. 

I would like to thank the witnesses for being here today. 

The topic for our hearing today is how regulations emanating 

from Washington are affecting Main Street. This has been a common theme in the Financial Institutions and Consumer Credit Subcommittee over the past year. 

In past hearings, we have heard significant concerns from community bankers and credit unions about how new regulations are 

removing a significant amount of discretion from underwriting consumer credit. One of the main issues we focused on are the mortgage rules that the CFPB issued last January, that went into effect 

this year. 

These rules will have a tremendous impact on the Nation’s mortgage market, and I feel the consumers who are most impacted by 

them and stand to lose are the low- to moderate-income borrowers. 

The hearings we have had on these mortgage rules have highlighted the importance of allowing lenders to have a tremendous 

amount of flexibility in determining a borrower’s ability to repay. 

We have learned about several programs that have allowed lowincome borrowers, who otherwise would not be able to realize the 

dream of home ownership, to purchase their own home. In my 

home State of West Virginia, I have talked extensively with bankers who work with low-income borrowers to structure tailored products that would help them purchase the home. And in many, lenders have longstanding relationships with the clients that they 

serve. 

They use these relationships and their local knowledge to extend 

credit to borrowers who might otherwise not qualify. Thanks to 

their efforts, many low-income borrowers in my State now own 

homes and are working towards greater financial flexibility. Unfortunately, the CFPB rules are bringing many of these programs to 

an end. 

Many of the institutions that shared the success of these programs targeted to low- or moderate-income borrowers also shared 

significant concerns about the one-size-fits-all nature of the CFPB 

mortgage rules. This could be a huge problem for rural communities like those I represent in West Virginia. I have already heard 

concerns from bankers and individuals in my State that low-income 

borrowers simply will not be able to get a mortgage if they do not 

fit this qualified mortgage criteria. 

Unfortunately, this Washington-knows-best approach is not limited to the mortgage market. The agencies before this committee 

have also taken action to limit the availability of consumer choice 

7 

in other ways. Many of the financial institutions that offer shortterm loan products have now exited the business. 

I yield back to the Chair. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentlelady from New York, Mrs. 

Maloney, for 2 minutes. 

Mrs. MALONEY. Thank you. I have a great respect for the chairman, but I must take issue with his statement that the CARD Act, 

the Credit Card Reform Act, hurts consumers. There have been two 

celebrated independent reports: one from the Pew Foundation that 

said this bill alone saved consumers a whopping $10 billion a year; 

and more recently, a report from three major universities, one of 

which was New York University in my district, which said that this 

bill saved consumers $20 billion a year. I fail to understand how 

keeping money in consumers’ pockets hurts them. 

What the bill basically did is that it stopped unfair, deceptive, 

and anticompetitive practices. The regulators themselves have endorsed it. The Fed came out with a rule that was practically totally 

similar to it, thereby showing that it did not hurt the industry or 

the overall economy, and the regulators tell me that the number 

of complaints on credit cards is now practically nonexistent. 

The industry itself tells me that the number of complaints that 

they have to deal with are practically nonexistent. So I would say 

a bill that helps consumers is certainly not one that hurts them. 

And with all due respect, you are entitled, certainly, to your own 

impressions, but not your own facts. 

And if there is a disagreement on these issues I would really 

hope that the chairman would have a hearing on it. Let’s call in 

the Pew Foundation and the academics. Many consumer groups 

have given numerous awards to the bill for what it has done for 

the overall economy and in helping. It is a relief program, a stimulus program for consumers, keeping their money in their own 

pockets by stopping unfair and abusive practices. 

I would call that a success. My time has expired. 

I ask unanimous consent to put my opening statement that I prepared into the record. 

Chairman HENSARLING. Without objection, it is so ordered. 

The Chair now recognizes the gentleman from New Jersey, Mr. 

Garrett, the chairman of our Capital Markets and GSEs Subcommittee, for 1 minute. 

Mr. GARRETT. I thank the chairman for holding this very important and timely hearing today. These oversight hearings with the 

banking agencies are really much needed, and it is my hope that 

they will happen more frequently. 

Having these hearings and requiring the regulators to come here 

and take and then answer some of the tough questions may be the 

only way we can ensure that they retain any level of accountability 

to Congress. Dodd-Frank bestowed almost limitless powers to the 

banking regulators, and especially to the Fed. 

Unfortunately, all of these agencies continue to operate with little, if any, accountability. So instead of technocrats simply implementing the directives given them by Congress, these banking 

agencies now operate as policymakers on steroids, carrying out 

8 

their own regulatory ambitions and even blatantly, in many cases, 

clearly defying congressional directives. 

Mr. Chairman, I believe this is totally unacceptable. And given 

this lack of accountability to this Congress, I believe this Congress 

should seriously examine the appropriateness of merging and reforming some of these agencies to ensure a greater level of accountability to the American public and to this Congress. 

I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from California, Mr. Sherman, for 2 minutes. 

Mr. SHERMAN. I want to associate myself with the gentlelady 

from New York and her comments on the CARD Act. 

Mr. Chairman, you will find the rest of my opening statement to 

be bipartisan and depressing at the same time. 

Perhaps coincident with my arrival here in Congress, Congress 

has descended into a dysfunction so severe that even when we 

think we are affecting public policy and passing landmark legislation, the legislation does little more than add additional power to 

the Executive Branch agencies. 

Our most obvious method of affecting public policy is to pass legislation through this committee, which far more often than not is 

simply ignored by the other body, or passing legislation that does 

little more than extend existing programs without change. But I 

think perhaps our most important method of affecting public policy 

is by lobbying and beseeching the Executive Branch agencies and 

urging them to use their enhanced authority with wisdom. 

So I ask our witnesses to listen carefully to the advice you are 

about to hear, even if that advice is disguised in the form of a question. Listen carefully. 

Perhaps our advice will contain a shred of wisdom. And in any 

case, our ability to influence your decisions is perhaps the largest 

remaining shred of the once preeminent Article 1 of the United 

States Constitution. 

I yield back. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes gentleman from Georgia, Mr. Westmoreland, for 1 minute. 

Mr. WESTMORELAND. Thank you, Mr. Chairman, and I appreciate 

you having this hearing. 

First of all, let me just recognize all the panelists and thank you 

all for being here. I have read your bios and I have noticed that 

you are all attorneys, it seems like you are all bureaucrats, and 

none of you are bankers. 

And in fact, from reading your bios, I would say that none of you 

have sat across the table from anybody wishing to borrow money. 

And I don’t understand exactly how that works that you can, in 

your professional opinion, understand what makes a good loan and 

what makes a bad loan, what makes somebody more at risk than 

somebody else that is not at risk, what makes somebody’s company 

better than somebody else’s company? 

And if you look at all the different things, the rules and regulations that you have put in place, you are not accountable to anybody. 

9 

And so I hope, Mr. Chairman, that this committee will look at 

trying to put these agencies under the Appropriations Committee 

and the appropriations process so we can at least have some sayso over exactly what rules and regs they make. 

I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Missouri, Mr. Luetkemeyer, for 1 minute. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

I am incredibly concerned about the complete abuse of power by 

the regulators as they have been forcing legally operating, fully licensed financial companies out of business. Regulators have admitted this is happening, and even have a name for this coordinated 

effort. It is called ‘‘Operation Choke Point.’’ 

Regulators have admitted this is happening and do nothing 

about it. There is no denying it. I want to read an e-mail sent by 

a banker to a longstanding client in the nondepository lending 

space. 

‘‘Based on your performance, there is no way we shouldn’t be a 

credit provider. Our only issue is and has always been the space 

in which you operate. It has never been the service that you provided or the way you operate. You have obviously done a brilliant 

job. It is the scrutiny that you, and now we, are under.’’ 

What we are seeing through Operation Choke Point and from 

these other regulators, as well as DOJ, should be a wakeup call to 

the entire Nation. I hope our witnesses can provide this committee 

with an explanation for the blanket targeting of an entire financial 

services sector. 

I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Wisconsin, Mr. Duffy, for 1 minute. 

Mr. DUFFY. Thank you, Mr. Chairman. 

Congress enacted the Federal Advisory Committee Act in 1972, 

over 40 years ago, and it was to ensure that Congress and the public understood what was going on in these meetings, what was 

being discussed, the cost to taxpayers, to provide basic transparency. Only the CIA and the Federal Reserve, for the purposes 

of the Open Market Committee, were exempt. 

What I would like to hear is what the CFPB is doing in these 

meetings that is on par with the CIA, and why these meetings 

aren’t open to Congress and to the public. On February 26th and 

27th, I made a request to the CFPB to attend a Consumer Advisory 

Committee meeting. My staff was sent an e-mail that they—the 

CFPB—could not accommodate the Congressman’s request, meaning I couldn’t attend. 

These meetings should be open. They should be transparent. The 

public and Congress should know what is going on and I would like 

to hear more testimony on this topic. 

I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from Ohio, Mrs. Beatty, for 1 minute. 

Mrs. BEATTY. Thank you, Mr. Chairman, Ranking Member 

Waters, and witnesses. 

Today’s hearing has a tricky title, but I think it is misplaced. Instead of having a one-panel hearing with only General Counsels 

10 

from the financial regulators here to testify, we could expand the 

testimony to include the various private sector participants whose 

business models have in the past put them in the wallets of the 

American public. 

Market manipulation and predatory lending practices do not 

grow the size of the economic pie; they simply shift the pie from 

the victims to the takers. But today we are in a new day. No longer 

can credit card companies take advantage of consumers by charging fees for services that have no value or were never received. 

Access to capital and credit from deep and liquid markets are the 

hallmarks of the American financial system, all of which were jeopardized during the financial crisis. Economic freedom, unlike these 

one-sided hearings, is about both the freedom we choose for what 

is best for our family’s finances, and the freedom to do so without 

being subject to unlawful and unfair financial practices. 

Thank you. 

Chairman HENSARLING. We now welcome our witnesses. 

Ms. Meredith Fuchs is the General Counsel of the CFPB. Ms. 

Fuchs joined the Bureau in 2011, where she has also served as 

Principal Deputy General Counsel and as Chief of Staff to Director 

Cordray. 

She previously served as a staffer on the House Energy and 

Commerce Committee, and in a variety of legal positions in the private sector. She earned her law degree at NYU. 

Mr. Richard Osterman is the Acting General Counsel of the 

FDIC. Before joining the FDIC, Mr. Osterman represented the Federal Home Loan Bank Board on regulatory matters, and supervised 

complex commercial litigation. He holds a law degree from the University of Baltimore School of Law. 

Mr. Scott Alvarez is the General Counsel of the Board of Governors of the Federal Reserve System, a position he has held for 

almost a decade. His tenure at the Fed started in 1989, when he 

joined as Assistant General Counsel. He earned his law degree 

from Georgetown. 

Mr. Michael McKenna is the General Counsel of the National 

Credit Union Administration, where he has served since 1989. In 

that role, Mr. McKenna serves as the primary legal advisor to the 

NCUA board, and supervises the provision of legal advice throughout the agency. 

Prior to joining NCUA, Mr. McKenna served as Staff Judge Advocate for the U.S. Army at Fort Hood. He holds a law degree from 

American University. 

Last but not least, Ms. Amy Friend is the Senior Deputy Comptroller and Chief Counsel of the OCC. Ms. Friend oversees all of 

the agency’s legal activities, including legal advisory services to 

banks and examiners in enforcement and compliance activities, litigation, and legislative activities. 

Prior to her service at OCC, Ms. Friend spent time in the private 

sector, and also served as a House staffer on this committee, so we 

welcome her back. She holds a law degree from Georgetown University. 

Without objection, each of your written statements will be made 

a part of the record. I believe each of you is familiar with our 

green, yellow, and red lighting system at the witness table. I would 

11 

remind you, when it is your turn, to actually turn your microphone 

on and pull it very close to you so that all may hear your testimony. 

I respectfully ask that each of you observe the 5-minute time allocation. 

Ms. Fuchs, you are now recognized for 5 minutes. 

STATEMENT OF MEREDITH FUCHS, GENERAL COUNSEL, 

CONSUMER FINANCIAL PROTECTION BUREAU (CFPB) 

Ms. FUCHS. Thank you. Chairman Hensarling, Ranking Member 

Waters, and members of the committee, thank you for the invitation to testify today on the impact of regulation on financial markets and on consumers. My name is Meredith Fuchs and it is my 

privilege to serve as the General Counsel of the Consumer Financial Protection Bureau. As you know, the Bureau was created as 

part of the Dodd-Frank Wall Street Reform and Consumer Protection Act in response to the recent financial crisis. The crisis resulted in part from failures of a Federal regulatory system, including the fragmented responsibility for consumer financial protection. 

To address this problem, Congress created the Bureau. We are 

hard at work fulfilling the objectives that Congress set out for us, 

including ensuring that consumers have better information to 

make financial decisions, reducing unwarranted regulatory burdens, leveling the playing field for different kinds of entities offering the same kinds of products and services, and promoting transparent and efficient markets. 

As the Dodd-Frank Act requires, the Bureau has issued regulations to strengthen the mortgage markets, to make Federal mortgage disclosures easier for consumers to understand and less burdensome for firms to make, and to establish standards for mortgage servicing. We also have issued rules to allow us to examine 

a range of larger nonbank participants in the consumer finance 

markets. 

As we do this work, we employ a number of strategies to ensure 

that our rules are effective at protecting consumers and making 

consumer financial markets work. First, we consider the input of 

stakeholders. For example, our Office of Financial Institutions and 

Business Liaison connects the Bureau with bank and nonbank 

trade associations, financial institutions, and businesses to enhance 

collaboration and communication. 

In addition, the Bureau is the only banking regulator, and one 

of only three Federal agencies that the Small Business Regulatory 

Enforcement Fairness Act requires to convene small-business review panels. Pursuant to the Act, before we propose a rule that 

would have significant economic impact on a substantial number of 

entities, we seek input directly from small entities on the potential 

cost and potentially less burdensome alternatives. 

A second strategy that we use when considering regulation is, as 

required by the Dodd-Frank Act, to consciously consider potential 

benefits and costs and impacts of our rules to consumers and to financial service providers. 

Where proposed regulation would have a significant economic impact on a substantial number of small entities, our analyses under 

the Regulatory Flexibility Act consider the compliance burdens of 

12 

the proposal, as compared to less burdensome alternatives. Moreover, where a proposed rule would impose disclosure, record-keeping, or information-collection requirements, the Bureau also considers the potential burden, and ways to minimize that burden, 

pursuant to the Paperwork Reduction Act. 

Third, we act deliberately to reduce existing regulatory burdens. 

For example, as part of the Bureau’s project to streamline the regulations that the agency inherited from seven different Federal 

agencies, we are working on a proposal that, if adopted, would reduce the requirements and the burden of providing annual privacy 

notices in certain circumstances. 

Other examples are in my written testimony. 

Currently, we are developing a comprehensive plan to assess the 

effectiveness of the significant rules that we have adopted under 

Federal consumer financial law within 5 years of their issuance, as 

Section 1022 of the Dodd-Frank Act requires. 

Fourth, we are working to make it easier to comply with our regulations. To that end, we have implemented a comprehensive regulatory implementation program to help industry. For example, after 

we issued our new mortgage rules last January, we published 

plain-language compliance guides for small businesses and we published video presentations to give an overview of the rules, as well 

as a readiness guide and other implementation materials. 

In close coordination with the other regulators, we developed and 

issued exam procedures as early as practicable. In addition, we provide oral guidance to industry participants who contact us. And 

where warranted, we have responded to stakeholder concerns by 

proposing and issuing amendments and clarifications to facilitate 

compliance with our rules and better protect consumers. There are 

examples in my written testimony. 

Of course, despite our best efforts, not everyone complies with 

the law all the time, which brings me to our fifth strategy: holding 

parties who violate the law accountable through an effective supervision and enforcement program. Together, our supervision and enforcement programs have returned hundreds of millions of dollars 

to injured consumers, have halted violations of the law, and have 

led companies to strengthen their compliance systems. 

Sixth and finally, the Bureau supports innovation in the marketplace through our Project Catalyst program and our Trial Disclosure program, under which companies can provide innovative disclosures or ways of delivering disclosures that are not currently 

permissible under existing regulations. 

Thank you for the opportunity to discuss the Bureau’s work with 

the committee. 

[The prepared statement of Ms. Fuchs can be found on page 101 

of the appendix.] 

Chairman HENSARLING. Mr. Osterman, you are now recognized 

for 5 minutes. 

STATEMENT OF RICHARD J. OSTERMAN, JR., ACTING GENERAL COUNSEL, FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) 

Mr. OSTERMAN. Good morning, Chairman Hensarling, Ranking 

Member Waters, and members of the committee. I appreciate the 

13 

opportunity to testify today on recent regulatory activity of the 

Federal Deposit Insurance Corporation. 

Despite continuing challenges for the banking industry, our regulatory activity is taking place in a gradually improving environment for banks of all sizes. Annual earnings in the industry have 

increased for the past 4 years; balance sheets have also improved. 

As the industry has recovered, the Deposit Insurance Fund (DIF) has moved into a stronger financial position, from negative $20.9 

billion at the end of 2009, to $47.2 billion at the end of 2013. And 

we remain on track to reach our statutorily required reserve ratio 

by 2020. 

The number of problem banks has shrunk from a high of 888 in 

March of 2011 to 467 as of December 2013. 

The number of bank failures also has been declining steadily. In 

2013, there were only 24 bank failures, compared to the peak of 

157 in 2010. 

As the condition of the banking industry has improved, the total 

number of FDIC enforcement actions, both formal and informal, 

has decreased. Last year, enforcement actions decreased by 27 percent, and for the first time since 2008, the total number of enforcement actions terminated outpaced the number initiated. 

With the industry recovering, the FDIC continues to work on regulatory improvements designed to address the causes of the financial crisis. Last year, the FDIC joined with the Federal Reserve and 

the OCC in issuing rules that significantly revise and strengthen 

risk-based capital regulations through implementation of the Basel 

III international accord. 

The agencies are currently finalizing an enhanced supplementary 

leverage ratio regulation that will significantly revise and strengthen the leverage capital requirements for the eight largest bank 

holding companies and their insured banks. The FDIC Board has 

scheduled a vote on a final rule later today. These higher capital 

requirements will help offset systemic risk and provide an additional private capital buffer before the DIF is put at risk. 

In response to the significant liquidity problems experienced during the crisis, in October 2013 the banking agencies issued an NPR 

to implement a quantitative liquidity requirement consistent with 

the liquidity standards developed by the Basel Committee. The 

agencies are in the process of reviewing more than 100 comments 

received. 

The FDIC and five other agencies also issued a second notice of 

proposed rulemaking to implement Section 941 of Dodd-Frank, 

which requires the sponsor of any asset-backed security to retain 

an economic interest equal to at least 5 percent of the aggregate 

credit risk of the collateral. 

Before issuing the final rule, the agencies will give full consideration to all issues raised by stakeholders in their meetings with 

agency staff as well as 200 comment letters. Also, the FDIC and 

the Federal Reserve are currently reviewing the revised resolution 

plans required under Title I of Dodd-Frank Act for the largest, 

most systemically significant financial institutions under standards 

established under the statute. 

When proposing a new rule, the FDIC considers the least costly 

options for achieving the public purpose of the rule. The FDIC proVerDate Nov 24 2008 12:59 Dec 05, 2014 Jkt 088535 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\HBA098.000 TERRI
14 

vides the public with a notice of proposed rulemaking, an opportunity to submit comments, including comments on potential effects 

on financial institutions and consumers. The FDIC then carefully 

considers all comments submitted, weighs the impact of the proposed rule, and frequently makes changes in the final rule to address issues raised during the comment period. 

The regulatory approach followed by the FDIC is intended to implement the statutes enacted by Congress. Rather than prohibiting 

financial products or services, the FDIC seeks to ensure that they 

are offered to consumers consistent with safe and sound banking 

practices. 

As the primary Federal regulator for the majority of smaller institutions, the FDIC is keenly aware of the challenges facing community banks. In the rulemaking process, particular attention is focused on the impact that a regulation might have on small institutions and whether there are targeted alternatives that would minimize any burden. In both the final Volcker Rule and the Basel rulemaking, the banking agencies made several changes to the final 

regulations to address issues raised by community banks. 

To address community bank concerns about the examination 

process, the FDIC has implemented a number of improvements to 

our procedures, particularly the pre-exam process, to help make examinations less intrusive and more efficient. We are providing 

technical assistance to help institutions with their compliance. 

Mr. Chairman, this concludes my remarks. I would be glad to respond to your questions. Thank you. 

[The prepared statement of Mr. Osterman can be found on page 

120 of the appendix.] 

Chairman HENSARLING. Mr. Alvarez, you are now recognized for 

5 minutes. 

STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. ALVAREZ. Thank you, Chairman Hensarling, Ranking Member Waters, and members of the committee. I appreciate the opportunity to testify on recent rulemakings and other actions by the 

Federal Reserve. 

The Federal Reserve is committed to strengthening the safety 

and soundness of the financial institutions it supervises so that 

these companies have the ability to meet their financial obligations 

and continue to make a broad variety of financial products and 

services available to households and businesses even in times of 

economic difficulty. 

The Federal Reserve has made significant progress in implementing the Dodd-Frank Act reforms designed to improve the resiliency of financial firms and the system as a whole. At the same 

time, we recognize that regulatory compliance can impose a disproportionate burden on community banking organizations. 

Community banking organizations tend to lend in neighborhoods 

where the institution’s depositors live and work, making them important sources of credit in their local communities. The Federal 

Reserve has strived and will continue to strive to ensure that its 

regulations and supervisory framework are not unnecessarily burdensome for community banking organizations so they can continue 

15 

to perform their important functions in a safe and sound manner 

in local communities. 

To achieve the goal of strengthening the quality and quantity of 

bank capital without imposing unnecessary burden, the Federal 

Reserve, in several recent rulemakings, made changes to address 

concerns raised by public commenters, designed, in particular, to 

reduce burden on community banking organizations. Many of the 

Basel III requirements will not apply to smaller banking organizations. The Federal Reserve and the other banking regulators also 

issued a community bank guide to the new capital rules to help 

noncomplex banking organizations understand the applicability of 

the new rules to their operations. 

Similarly, last month the Federal Reserve published the results 

of its annual stress test, which demonstrated that the largest banking institutions in the United States are collectively much better 

positioned to continue to lend to households and businesses and to 

meet their financial commitments in a severe economic downturn 

than they were 5 years ago. 

Overall, this exercise has resulted in the 18 largest banking firms increasing their tier one common equity by more than $500 

billion since 2008. That means that the strongest form of loss-absorbing capital at the largest banking firms has more than doubled 

since the financial crisis. 

Since enactment of the Dodd-Frank Act, the Federal Reserve has 

also completed a number of supervisory rulemakings, including 

adopting final rules that establish enhanced prudential standards 

for large banking organizations and rules that require large banking organizations annually to file plans to facilitate their resolution 

in bankruptcy. 

Today, the Board will deliberate on whether to finalize a rulemaking regarding a proposed supplementary leverage ratio for 

large banking organizations. None of these rules apply to community banking organizations. 

To become informed about the benefits and costs of a regulatory 

proposal, the Federal Reserve often collects information directly 

from those that we expect would be affected prior to designing the 

proposal. We also specifically seek comment on the costs and benefits of our proposed approach, invite comment on alternative approaches, and provide the public a minimum of 60 days to comment 

on all significant rulemaking proposals. 

In adopting a final rule, we seek to adopt the approach that 

faithfully reflects the underlying statutory provisions while minimizing regulatory burden. We typically follow this same process of 

seeking and learning from public comment when issuing supervisory guidance even though we are not required to follow that 

process under the Administrative Procedures Act. 

The Federal Reserve has made significant progress in implementing the Dodd-Frank Act and other measures designed to improve the resiliency of banking organizations and the financial system. 

I thank you for the opportunity to be here, and I will do my best 

to answer your questions. 

[The prepared statement of Mr. Alvarez can be found on page 69 

of the appendix.] 

16 

Chairman HENSARLING. Mr. McKenna, you are now recognized 

for 5 minutes. 

STATEMENT OF MICHAEL J. MCKENNA, GENERAL COUNSEL, 

NATIONAL CREDIT UNION ADMINISTRATION (NCUA) 

Mr. MCKENNA. Thank you, Chairman Hensarling, Ranking Member Waters, and members of the committee. 

The National Credit Union Administration appreciates the invitation to testify about the agency’s recent regulatory and supervisory activities. As a starting point, I want to emphasize that 

NCUA understands the need to strike a proper balance between 

implementing the safety and soundness considerations required by 

the Federal Credit Union Act and minimizing the bottom-line impact for the credit unions we regulate and insure. 

NCUA has a tailored program designed to mitigate compliance 

costs and improve the examination process for all credit unions. 

Rather than adopting one-size-fits-all regulations, NCUA also targets agency’s rules to risks and asset size. NCUA strives to ensure 

that the agency’s rulemakings are reasonable and cost-effective. 

The benefits associated with NCUA’s rules primarily derive from 

addressing and mitigating safety and soundness risks in order to 

reduce the likelihood of credit union failures. By mitigating failures, NCUA protects the National Credit Union Share Insurance 

Fund, and in doing so, limits the financial burdens placed on the 

surviving credit unions that would bear the cost of failure. 

In looking at compliance issues, many of the complaints raised 

by credit unions stem from laws like the Bank Secrecy Act or other 

requirements of other regulators. In such cases, NCUA has no ability to provide regulatory relief. 

That said, NCUA does work to reduce regulatory burdens where 

possible for the rules it issues. However, as we learned from the 

recent financial crisis, sometimes the cost of regulatory inaction 

can be greater than the cost of action. 

Since 1987, NCUA has followed a deliberate process to continually review the agency’s rules on a rolling basis. This unique policy requires NCUA to review all of its rules every 3 years. It also 

ensures that NCUA’s rules are up to date and reflect current realities. 

Recognizing the changing financial services environment, NCUA 

Board Chairman Debbie Matz announced the agency’s Regulatory 

Modernization Initiative in 2011. Under this initiative, NCUA is 

working to streamline and update the agency’s regulatory framework. 

Additionally, NCUA is developing targeted standards that address high-risk activities. Through this initiative, the NCUA board 

has approved four targeted rules to mitigate risk and six rules to 

cut regulatory burdens. 

One rule that I want to highlight is NCUA’s final rule on the definition of a small credit union. At the start of 2013, the NCUA 

board raised the threshold for a small credit union from $10 million 

to $50 million in assets and under. As a result of this change, twothirds of federally-insured credit unions are exempted from regulatory requirements not suitable for small, noncomplex credit 

unions. 

17 

Additionally, 2,270 credit unions became eligible for assistance 

from NCUA’s Office of Small Credit Union Initiatives, including access to free training sessions and consulting services. 

NCUA is affirmatively reducing the regulatory burden of twothirds of the institutions we regulate and is proactively providing 

them assistance to help them grow and prosper. 

NCUA initiates rulemaking as a result of five factors. NCUA 

issues safety and soundness rules to address the lessons learned 

during the financial crisis or mitigate growing potential risks. 

NCUA also acts on rules when required by Congress, as was the 

case with the Dodd-Frank Act. 

Additionally, the agency adopts rules in response to recommendations of the U.S. Government Accountability Office and 

NCUA’s Inspector General, such as the proposed risk-based capital 

rule released earlier this year. 

Often, NCUA issues rules to cut regulatory burdens or increase 

powers. Finally, NCUA modifies rules to address technical issues 

and provide greater clarity. 

Since the start of 2013, the NCUA board has approved 17 final 

rules. Of these, one was required by the Dodd-Frank Act, five provided regulatory relief, four addressed safety and soundness matters, and the remaining seven rules were technical in nature. 

In other words, 70 percent of NCUA’s recent final rules have provided regulatory relief or greater clarity without imposing new 

compliance costs. 

In closing, NCUA remains committed to continuing its rolling 3- 

year review of the agency’s rules and finishing the Regulatory Modernization Initiative. We are also committed to working with Congress and other stakeholders to explore additional ways to address 

remaining concerns about NCUA’s rules and the examination process. 

I look forward to your questions. 

[The prepared statement of Mr. McKenna can be found on page 

107 of the appendix.] 

Chairman HENSARLING. And Ms. Friend, you are now recognized 

for 5 minutes. 

STATEMENT OF AMY S. FRIEND, SENIOR DEPUTY COMPTROLLER AND CHIEF COUNSEL, OFFICE OF THE COMPTROLLER OF THE CURRENCY (OCC) 

Ms. FRIEND. Thank you, Mr. Chairman. 

Chairman Hensarling, Ranking Member Waters, and members of 

the committee, thank you for the opportunity to appear before you 

today to discuss our bank supervision, enforcement, and regulatory 

program. 

The OCC supervises more than 1,700 national banks and Federal 

savings associations ranging in size from community banks with 

less than $100 million in assets, to large, complex financial institutions with more than a trillion dollars in assets. 

Since the financial crisis, the banks we supervise have made 

great strides in repairing their balance sheets through stronger 

capital, improved liquidity, and the timely recognition and resolution of problem loans. We have a robust process for developing regulations and guidance that serve our safety and soundness mission 

18 

and also seeks to minimize the compliance burdens on supervised 

institutions, particularly community national banks and Federal 

savings associations. 

We believe it is important to tailor all rules and guidance to the 

size of the institution and the complexity of its activities whenever 

possible. Community banks have different business models and 

more limited resources than larger banks. Therefore, we consider 

those differences as we write rules and guidance. 

For example, in a number of recent rulemakings, such as our 

lending limits rule and the interagency Volcker Rulemaking, we 

streamlined compliance requirements for community institutions. 

We now also specifically highlight the key aspects of each new 

rule or piece of guidance that applies to community banks and 

thrifts. This highlight, in the form of a text box in the bulletin that 

accompanies each new issuance, notifies community institutions 

whether they even need to read the issuance. 

And in the case of more complex rulemakings, we have provided 

summary materials. For the new domestic capital rule, for example, we provided a concise two-page summary that gave community 

banks and thrifts the information they needed in a manageable 

form. 

Since the financial crisis, along with strengthening the overall 

national banking and Federal thrift system, our priority has been 

to minimize burden to community banks so they can devote more 

of their time to serving their customers. 

We take seriously the effect of our issuances on the public and 

private sectors of the economy. Towards this end, the OCC assesses 

the economic impact of our proposed and final rules. 

When our analysis indicates that a rule will have an economically significant impact, we also prepare a more detailed economic 

assessment. That assessment includes a comparison to a baseline 

and consideration of one or more alternative approaches. 

In addition to these analyses, the OCC and other Federal banking agencies are currently engaged in a wide-scale review to identify outdated or otherwise unnecessary regulations. 

The Economic Growth and Regulatory Paperwork Reduction Act 

requires this review every 10 years. As Chair of the legal advisory 

group of the Federal Financial Institutions Examination Council 

(FFIEC), I have been tasked with coordinating this joint regulatory 

review. 

The review provides the FFIEC, the agencies, and the public 

with an opportunity to identify and target regulatory changes to reduce burden on community institutions. We expect to publish the 

first Economic Growth and Regulatory Paperwork Reduction Act 

(EGRPRA) notice in the very near future, and we will specifically 

ask the public to consider this issue. 

While we are mindful of the challenges facing banks today, we 

also recognize that businesses and consumers need access to credit 

through a variety of products. Although the OCC does not determine the specific types or terms of consumer products or services 

that banks offer, we expect the institutions we supervise to carefully evaluate the risks their products may pose both to the banks 

and to their customers. 

19 

From time to time, we have identified products that present substantial safety and soundness or consumer protection issues and we 

have issued guidance to address those concerns. On the other hand, 

we have seen a variety of properly structured products that provide 

consumers a safe and affordable means of meeting their financial 

objectives, and we support innovation by the industry to develop 

and make those products available. 

Thank you again for the opportunity to appear, and I will be 

happy to answer your questions. 

[The prepared statement of Ms. Friend can be found on page 81 

of the appendix.] 

Chairman HENSARLING. Thank you. 

The Chair now recognizes himself for 5 minutes. 

Ms. Fuchs, approximately a year ago the CFPB issued its enforcement bulletin entitled, ‘‘Indirect Auto Lending and Compliance 

with the Equal Credit Opportunity Act.’’ I assume you are well familiar with that bulletin? 

In the intervening year, I am aware of at least seven different 

letters that have gone to Director Cordray that I somewhat assume 

ended up on your desk, signed by almost 100 Members of Congress, 

both Senators and Congressmen, both Republicans and Democrats, 

all seeking the same information, and that is CFPB’s methodology 

in identifying different groups of consumers, the factors it is holding constant to ensure its findings of pricing differentials are attributable to the consumer’s background, and the numerical threshold with which the Bureau determines so-called disparate impact. 

In the intervening year, notwithstanding Director Cordray’s public pronouncements that the CFPB would be transparent, we have 

yet to receive this information. Clearly, you are using some standard, since there was an enforcement action with respect to Allied 

Bank, so when does the CFPB intend on making this information 

public in explaining its methodology in regression analysis? 

Ms. FUCHS. Mr. Chairman, thank you for your question. 

The CFPB has been engaged in a regular dialogue with committee staff about this information, and I know that about 2 weeks 

ago committee staff did meet with CFPB employees, CFPB staff, 

and go through the work that we had done with respect to the Allied matter, including— 

Chairman HENSARLING. But Ms. Fuchs, with respect to those 

who have to live under the standard, doesn’t this standard not only 

have to be—doesn’t this need to be made public? 

Ms. FUCHS. The CFPB has talked about the methodology that it 

is using in connection with these auto investigations. We are also 

engaged— 

Chairman HENSARLING. Have you specifically answered, though, 

the questions that have been posed by the Members of Congress? 

Ms. FUCHS. To some extent, in these matters, the methodology 

will vary depending on the business model of each individual institution that we are engaged in either supervision or investigation of. 

And so there is not a one-size-fits-all process— 

Chairman HENSARLING. Then, how is an indirect lender supposed 

to comply if all of this comes down to individual cases? Why isn’t 

it to be observed that you are engaged in a de facto rulemaking 

without actually following the rulemaking process? 

20 

So, if there is something—if there is some standard by which 

these people are being held, why is there a rulemaking to amend 

Reg B? 

Ms. FUCHS. The CFPB, when it is looking at indirect auto lending, is looking at it in much the same way as other regulators have 

looked at it. We do look at whether there are disparities that require any action, and then in the course of that—if we are in the 

middle of an investigation or an exam, we— 

Chairman HENSARLING. So is there a methodology? Is there a numerical threshold? How is a bank supposed to comply? 

Ms. FUCHS. As I mentioned, it varies somewhat from matter to 

matter because of the business model of each individual lender that 

we may be looking at. However, we have been engaged in a constant discussion with your staff about this, and we walked your 

staff through our methodology a week or so ago so they would have 

an opportunity to ask questions and review how we approached— 

Chairman HENSARLING. I have to tell you, Ms. Fuchs, and I know 

that you are not personally responsible here, but for an agency that 

is supposed to be policing abusive practices, to essentially engage 

in de facto rulemaking without engaging in de jure rulemaking, 

strikes me as an abusive practice, and I would hope that the agency would go back and reflect upon their actions, and answer the 

questions of Members of Congress on both sides of the Capitol, on 

both sides of the aisle. 

Now, in the time I have remaining, Ms. Fuchs, I guess you are 

also quite aware of the purpose of our hearing last week dealing 

with an American Banker article that revealed disparities in the 

ratings employees have received in the Bureau’s annual employee 

review process. Can I assume that you are familiar with the American Banker article? 

Ms. FUCHS. Yes, sir. 

Chairman HENSARLING. Does the CFPB take issue with the data 

that was presented in the American Banker article? Do you refute 

the statistics? 

Ms. FUCHS. Mr. Chairman, I see the time has expired. May I respond? 

Chairman HENSARLING. You may respond. 

Ms. FUCHS. The CFPB takes the data that was reported in the 

American Banker article very seriously. The CFPB itself has been 

evaluating its performance management system, and thus collected 

the data that was provided to the American Banker. 

When we saw that there were concerns, we addressed this 

proactively with the National Treasury Employees Union, which is 

the labor union that represents the single bargaining unit at the 

CFPB, because we are in a process of negotiating our first collective bargaining agreement. And as you can imagine, performance 

management is an issue of great concern to that collective bargaining agreement. 

So we are affirmatively trying to address the disparities that 

were talked about in the— 

Chairman HENSARLING. Ms. Fuchs, I am now well over my time. 

I just would say you certainly create the impression that you are 

trying to impose a standard upon others that you are incapable of 

living under yourself. 

21 

The ranking member is recognized for 5 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

Although the Dodd-Frank Act included an extensive number of 

provisions designed to reduce regulatory burdens for community 

banks and credit unions, I have continued to hear from a number 

of institutions over the past year that additional relief is needed. 

In fact, over the past year, Members on our side of the aisle have 

worked hard to solicit the concerns and understand the unique 

challenges faced by smaller financial institutions in order to see 

whether there was a way for the Congress and the regulators to 

provide some relief. 

Despite our best efforts to come up with legislation that would 

create relief in a responsible manner, these efforts would appear to 

have fallen on deaf ears here in the Financial Services Committee. 

Given this, I would like to know, what about the specific concerns you are hearing from the small institutions you regulate? 

How do you incorporate the unique concerns of community banks 

and financial institutions into your rulemaking? What types of resources are available to small institutions to ensure they are informed of their legal obligations as part of any rules that your 

agencies promulgate? 

Since you have already started, Ms. Fuchs, let’s start with Mr. 

Osterman. 

Mr. OSTERMAN. Thank you for your question. 

At the FDIC, we look at the impact of potential regulations and 

rules on community banks. First off, in terms of the examination 

process, while with the larger institutions there is continuous examination, with the smaller institutions, the time between examinations can run from 12 months to 18 months. 

And we actually did a community banking study last year, and 

in that we determined that the community banking model continues to be a very viable and important one in terms of making 

loans to communities. 

What we have done, as we mentioned in our opening remarks on 

the Basel rulemaking, is we actually exempted community banks 

from certain provisions. That also happened in Volcker. 

And in connection with financial institution letters, we actually 

put on the top of those whether they apply to institutions of a billion dollars or less so that community banks can easily find that 

information and avoid dealing with tons of paper. We also have created Webinars for community bankers to provide them technical 

assistance. 

So, there are many things that we have done and we are open 

to continuing to try to support the community banking model. 

Ms. WATERS. Mr. Alvarez? 

Mr. ALVAREZ. Yes, Congresswoman Waters. We do many of the 

same things that the FDIC and the OCC do in outreach to the community banks to make sure that we understand their concerns and 

we take them into account in our rulemaking processes. We also 

prepare small bank compliance guides with our major rulemakings 

to provide simple guidance about how to comply with the rules. 

We also have formed 12 community depository institution councils, one in each of our reserve bank districts. We consult with 

these councils about the rules that we put forward and the reguVerDate Nov 24 2008 12:59 Dec 05, 2014 Jkt 088535 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\HBA098.000 TERRI
22 

latory burden associated with our supervision. One representative 

from each of those 12 councils sits on a national council that meets 

with our Board of Governors on a regular basis to, again, raise 

issues about supervision of small institutions. 

So we try our best to, wherever possible under the statute, give 

room to small institutions. 

Ms. WATERS. Mr. McKenna? 

Mr. MCKENNA. Thank you, Congresswoman Waters. 

Our small credit union office assists credit unions with assets 

less than $50 million, and we have a rulemaking program that we 

always look for credit unions under $50 million to see if they can 

be exempt for our rulemaking or have less burdensome rules. In 

fact, when we did a final rule on emergency liquidity and interest 

rate risk policy, on those two rules, the standards and requirements for small credit unions were less. 

We have a proposed risk-based capital rule, and credit unions under $50 million would not be subject to that. So we are always 

looking to target our rules and to try to exempt small credit unions 

when we can. 

Ms. WATERS. Ms. Friend? 

Ms. FRIEND. Congresswoman, in addition to the capital rules and 

the Volcker Rules that my colleagues talked about, the OCC recently issued a lending limits rule under the Dodd-Frank Act that 

sought to take into account derivatives exposures, and they are in 

response to comments and meetings that we had with community 

banks. We gave them an easy lookup table, the methodology that 

was much more tailored to them, as well as exempting a number 

of transactions that they are usually involved in. 

So we also go the extra mile to try to accommodate the concerns 

we hear from community banks through our regulations and our 

issuances. 

Ms. WATERS. Thank you all so very much. You are doing a great 

job. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Texas, Mr. Neugebauer, chairman of our Housing and Insurance Subcommittee, for 5 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman, and thank you for 

having this important hearing. 

Ms. Fuchs, I am going to go back to some questioning that the 

chairman—and I want to go from a little bit different angle. Obviously, we are all very concerned about the lack of transparency, the 

lack of responsiveness to the agency on this issue of the car dealers 

that are brought up about this compliance issue, but here is what 

we need to think about that: I don’t think you want to be responsible for keeping that single mom with two kids who is working two 

jobs from being able to get a car loan so that she can get to and 

from work and to take her kids to school. You don’t want to be responsible for that, do you? 

Ms. FUCHS. No, sir. 

Mr. NEUGEBAUER. But you see, that is what is going on right 

now is that the uncertainty that your agency is creating—I have 

had an opportunity to sit down with a number of car dealers, and 

basically the way that works is that people come in their dealerships needing transportation, but what is going to happen right 

23 

now, with the fact that people don’t really know what the clear 

lines are, is that people who need a car, need transportation, may 

not go away with it because maybe she is just—that single mom 

is just recently divorced and she has a little bit of a blemish on her 

credit report. 

And so they need to put her—may possibly recommend that she 

go with a different financing option that lots of dealers, quite honestly, tell me that they are very concerned about steering people to 

where they can complete the transaction. 

And so what is going to happen is that only the people with really good credit and who are within the lines, whether it be a car or 

a mortgage or any other type of financial transaction, we are beginning to take away the choices that consumers have. And if that is 

the kind of consumer protection that you are providing to consumers, I think they don’t want any more of it. 

So I just—I think that you all need to come clean on how you 

are determining this so everybody knows what the lines look like, 

because the fact that the lines aren’t clear right now is, I think, 

damaging and creating an inability for some people to access some 

of our capital markets and get much-needed credit. 

I want to go to Mr. Alvarez. 

The Financial Stability Board (FSB) recently issued mandates to 

the International Association of Insurance Supervisors (IAIS) to develop global capital standards for insurers, something not supported by our own State regulators. What objective evidence was 

relied on to support this mandate, and what cost-benefit analysis 

was done by you or the FSB or any of the other people supporting 

this mandate? 

Mr. ALVAREZ. Congressman, as you pointed out, this is something being done by the FSB, which is not the Federal Reserve. 

Mr. NEUGEBAUER. I understand. 

Mr. ALVAREZ. And we were only recently granted a seat on the 

IAIS, which is the international insurance review body. So we have 

not begun—we are now beginning to participate in it; we have not 

yet been part of the meetings. 

So we will be learning about this process and participate in this 

process. We look forward to working—we have a very good working 

relationship with the State insurance commissioners and we will 

continue that relationship and work well with them on the international front. 

Mr. NEUGEBAUER. Is this something that the Fed supports, 

though? Do you support developing international standards to impose on domestic insurance companies? 

Mr. ALVAREZ. I think the effort is designed to make sure that 

global systemically important insurance companies, of which there 

will no more than a handful, are held to standards that ensure that 

they don’t create systemic risk and that there is a competitive sort 

of level playing field internationally for those largest of insurance 

companies. 

That is something that we think is worth exploring. We have no 

predetermined idea on how to do that, so— 

Mr. NEUGEBAUER. So what would be a way that the Fed would 

work with the State regulators and the domestic insurance companies to get their input on this issue? Because I think one of the 

24 

things I hear from a number of them is that they don’t feel like 

they really, in many cases, have a seat at the table and some of 

these discussions aren’t very transparent. 

Mr. ALVAREZ. Understood. And so we meet quite regularly with— 

the Federal Reserve has just gotten responsibility under the DoddFrank Act for supervising designated systemically important institutions, a couple of which include insurance companies and savings 

and loan holding companies, which include a number of insurance 

companies. 

So we have begun discussions with insurance companies directly 

to understand their business model, to understand the capital regime that they are under, the supervisory regime they are under. 

We also meet with the NAIC, and in particular certain lead insurance regulators, to understand the framework. We want to be educated there. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from New York, Mr. 

Meeks, the ranking member of our Financial Institutions Subcommittee. 

Mr. MEEKS. Thank you, Mr. Chairman. 

I didn’t get a chance to make an opening statement, but I want 

to thank all of you for what you do. I think it is tremendously important. 

After the crisis, we knew we had to do better, and that is what 

Dodd-Frank was all about. And I appreciate the work that you are 

doing. We should learn from those crises and try to make sure we 

do better. 

I have heard, and I am sure you have heard a lot about the detrimental impacts of one-size-fits-all regulations or banking supervision. And that has been particularly devastating for community 

banks and credit unions. And all of your structures, or all of you 

in your leadership structures, have an office or a council or a committee that is exclusively dedicated to community banking issues 

for small and mid-sized financial institutions. 

However, the U.S. Treasury, which plays a major role in setting 

economic policy and financial and banking policies, which often 

have to regulate, does not have such an office. And they have all 

sizes—this one-size-fits-all has been devastating, as you know, because of the number of community and financial institutions that 

keep failing due to regulatory burdens. 

I am working on a piece of legislation that would direct the U.S. 

Treasury to reassign one of its Assistant Secretaries to community 

financial institutions so that we have properly calibrated policies 

that are appropriate to their business model and environment. 

So my question is, do you agree with me that we need to make 

sure that we have appropriate banking policies and supervision 

that are properly calibrated to the needs and business models of 

community financial institutions? 

I guess I will first address that to Mr. Alvarez. 

Mr. ALVAREZ. We do believe that regulation should fit the activities and the complexity and the size of the organization. In fact, as 

I mentioned, we have set up several councils to try to make sure 

we understand and have input from community banks in particular 

about the rules that we design. And we seek public comment alVerDate Nov 24 2008 12:59 Dec 05, 2014 Jkt 088535 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\HBA098.000 TERRI
25 

ways on alternative approaches that reduce burdens, especially for 

community— 

Mr. MEEKS. And Treasury should follow that rule, don’t you 

think? 

Mr. ALVAREZ. Treasury doesn’t have a direct supervisory role, as 

we do, so I don’t know why they— 

Mr. MEEKS. I am just saying a role of having—making sure that 

we don’t have one-size-fits-all, that they should have someone who 

can focus on the rules and regulations on small and community 

banks and credit unions so that they are not mixed in with the 

super big. That would make sense. Doesn’t that make sense to you? 

Mr. ALVAREZ. It makes sense to me. 

Mr. MEEKS. Yes. 

You too, Ms. Friend? 

Ms. FRIEND. Congressman, I definitely agree that one-size-fits-all 

is not the way to go. And we have taken action to make sure that 

doesn’t happen wherever we can. 

Mr. MEEKS. Thank you. 

And I would assume—I don’t think anybody really disagrees with 

me on that point, right? Okay. Silence. Okay. 

Let me ask Mr. Osterman this question—and this might not be 

the case in other States, but I know it affects my State of New 

York. Number one, I, like you, want to make sure that we get rid 

of any—and eliminate any illegal payday lenders that are in New 

York and elsewhere. I want to make sure that those are illegal. We 

want to get rid of all of those folks, those that are hurting people 

in that regard. 

But I also want to make sure that we don’t throw the baby out 

with the bath water in that if you have someone that is legal and 

doing good work, that we eliminate them. That is starting to take 

place in New York with some of the check cashers. 

For example, I was recently told that Capital One Bank notified 

all of its check-cashing companies that it was terminating their 

bank accounts and that Cap One happens to be banking more than 

half of all the New York check-cashing companies. Now they are 

scrambling, they are trying to find some other banks, but if they 

don’t, they will go out of business. And that is particularly concerning to me because I know, for example, when I lived in public 

housing, my parents paid their rent through the check-cashing 

places. 

So my question to you is, how can you assure me that your efforts to make sure that we are cutting out the illegal businesses 

is not causing legal businesses to be denied banking services? And 

are these businesses—will they be able to find other accounts in 

the future, provided they can assure that they are legal and operating within compliance of the appropriate rules and regulations? 

Mr. OSTERMAN. Thank you for your question. The FDIC’s efforts 

are really focused on making sure that institutions are aware of 

the risks associated with working with third-party payment processors and high-risk merchants and making sure that they take appropriate action. We have actually put out a policy statement that 

indicates that as long as financial institutions properly manage 

these relationships and risks, they are neither prohibited nor discouraged from providing payment processing services. 

26 

And in fact, I noted that in the American Banker this morning, 

there was an article regarding the fact that the payments industry 

is looking at ways to try to address the concerns that have been 

raised, so they can work with the banks. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from New Jersey, Mr. 

Garrett, the chairman of our Capital Markets and GSEs Subcommittee, for 5 minutes. 

Mr. GARRETT. Thanks, Mr. Chairman. 

You know, 2 months ago this committee held a hearing with the 

principals of various agencies before us dealing with the CLO market and the consequences of the Volcker Rule as it is being implemented. Now, 2 months later and the night before our hearing 

today, we have seen come out somewhat of a half-baked proposal 

to try to solve this problem by the regulators. 

The issues dealing with the CLO are extremely important, and 

it is becoming clear to me that besides this particular issue, but the 

way that this issue and other issues are being handled, it has become clear to me that the banking regulators that are before us basically have a contempt for the American public and this Congress 

in the manner that they handle it. 

Let me begin with Ms. Friend. As a former top Senate Banking 

staffer, I would assume that you have a firm foundation on the notion that the financial regulatory community is acting under the 

auspices and the authority given to it by Congress. I know that you 

helped write much of Dodd-Frank. 

And let me then refer you to some of the statutory language and 

others in the Volcker Rule, under rules of constructions, that said, 

‘‘Nothing in this section shall be construed to limit or restrict the 

ability of a banking entity or a nonbank financial company by the 

board to sell or securitize loans in a manner otherwise permitted 

by law.’’ 

Also, a study was done in the FSOC study on the Volcker Rule. 

It said, ‘‘The creation and securitization of loans is a basic and critical mechanism of capital formation. Congress determined that 

none of the restrictions of the Volcker Rule or its backstops will 

apply to the sale or securitization of loans.’’ 

It seems amazingly clear to me what the intent of Congress was, 

but apparently, it was not amazingly clear to the regulators. 

I guess my question is, if the banking regulator is not up to it 

as far as following the clear rule of the law that Congress passes, 

and if they are not up to following their own studies and interpretation of that law, should the Congress rethink granting all the 

power to the regulators, or should we do something else to hold the 

regulators accountable when they cannot follow the rule of law? 

Ms. FRIEND. The CLOs that are at issue are loans, but they are 

also debt and equity, and so the way we issue the regulation, which 

we believe is consistent with the intent of Congress, it would catch 

these CLOs and— 

Mr. GARRETT. Obviously, you are not following the intent, when 

the intent of the statute I just read to you could not have been 

clearer. You were there when this was being created. The intent of 

the sponsors was clear. I am at a loss as to why the regulators are 

blind to this. 

27 

Turning now to the Fed, Mr. Alvarez, each year the Fed does 

what is called an operations review report—basically a yearly performance review of the Fed’s different teams of supervisory and examination staff. And I know you are familiar with it. I have here 

a copy of the 2009 report of the New York Fed. 

Now, there is much criticism of the Fed as far as its banking regulatory role, not to mention its monetary policy. But to help Congress out here, I think it would be helpful for members of this committee to see not just what has been provided, but unredacted copies of the operation review report from 2000 and 2003 of the time 

leading up to the financial crisis. 

Could you please provide members of this committee with an opportunity to review these reports? 

Mr. ALVAREZ. The operations review is an examination that we 

do of the reserve banks to make sure that they are implementing 

the policies and following the directions of the Board of Governors— 

Mr. GARRETT. Right. And the question is, can you provide us 

with an unredacted copy of that so we can have the information to 

know what you were doing up to the crisis so we can see whether 

it is justified as far as the criticism of the way that regulators handle the crisis leading up to it? That is a yes-or-no question. 

Mr. ALVAREZ. I think it would be something that we would be 

willing to discuss with you. 

Mr. GARRETT. Thank you. 

Mr. Alvarez, in my last minute, the G-20 created the FSB several 

years ago. It appears that the Fed is working closely with the FSB. 

However, the inner workings of the FSB are to the public and 

Congress basically a black box. I am wondering whether or not you 

can assure us that more information will be given to us as to the 

operations of them, and also tell us, inasmuch as the FSB has designated, secondly, MetLife as a global systemically important institution, does that mean FSOC is going to be forced to designate 

MetLife as an SIFI or any other entities that FSB designates as 

a globally systemic institution? 

And my time is out. I would look forward to the Chair letting 

them answer those questions? 

Chairman HENSARLING. The witness can have a brief moment to 

answer. 

Mr. ALVAREZ. The designation in the United States is up to the 

FSOC, not the FSB. The FSB designation doesn’t have the force of 

law in the United States. 

It would be a source of criticism of the operations of the regulations in the United States and the U.S. system if there wasn’t some 

kind of implementation of FSB rules. But the decision is a U.S. decision. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Clay, for 5 minutes. 

Mr. CLAY. Thank you, Mr. Chairman. 

And this first question is directed to Mr. Osterman. 

I support what you are doing to cut off illegal payday lenders 

who operate on the Internet. However, regulator pressure and Operation Choke Point has also caused many banks to stop banking 

28 

legal and licensed Missouri companies that provide essential financial services to many of my constituents. The ends do not justify 

the means, especially when consumers are hurt the most. 

My constituents need basic services. They are folks who have 

families. They need to cash their checks and pay their bills. 

They need to be able to get a loan so that they can get some cash 

when they need it. And they need to be able to do this every day 

where they live. These are folks who cannot get loans from banks 

either because banks are not in the community or simply can’t or 

won’t cash their checks or make small-dollar advances. 

Last week I sat down with a young constituent and executive, an 

Air Force vet, and a father who told me about needing an advance 

to pay his son’s college tuition on time. His son is on a partial basketball scholarship but the college wanted his money. 

His bank wouldn’t give him a loan. He was able to get a loan because a small, nonbank lender was there to give it to him. I asked 

him if it was expensive, and he said it was and that he understood 

both the annual percentage rate, the actual dollar cost, and made 

the decision to get the money, pay the college on time, and pay off 

the advance early. 

He said that he counts on the relationship he worked to build 

with the nonbank lender and has used it for several cash flow 

emergencies. 

Now, I am hearing that legitimate small lenders of the type that 

helped this young man are having their bank accounts closed, as 

Mr. Meeks mentioned earlier. And I am very concerned about the 

situation because it is going to hurt my constituents who need the 

services. 

Can you assure me that this was not what you intended when 

you went after illegal businesses? 

Mr. OSTERMAN. Congressman, I can assure you that FDIC was 

not—what we were trying to do, actually, with the Operation 

Choke Point—which actually was not our program; it was a DOJ 

program—was to help them to stop illegal activity. We have put 

out a financial institution letter making it clear to our examiners 

as well as to the industry that our supervisory efforts are focused 

on making sure institutions are acting in a safe and sound manner 

and that as long as the activities of these payment processors are 

done in a way that avoids risk, the institution should go ahead and 

work with these entities. And in fact, we have met with our regional offices and field office examiners and given that message to 

them, as well. 

So we issued an actual financial institutions letter back in September of last year to address the issue. 

Mr. CLAY. So have those closures of the bank accounts—has that 

ceased? 

Mr. OSTERMAN. I am hearing that there—that may be still going 

on to some degree. And I think to the extent that is happening, we 

would like to hear about it, because that is not the message that 

we are trying to send. 

Mr. CLAY. All right. I will certainly share that with you. 

Let me ask Ms. Fuchs, how did the CFPB get off—as the chairman mentioned—to such a poor start in regard to disparities in 

29 

evaluating employees, as well as giving out bonuses? What happened there? 

Ms. FUCHS. Mr. Clay, I understand your question to be about our 

performance management system and the American Banker article. 

The CFPB is right now conducting further evaluation of that data. 

We are also going to be engaging an outside resource to help us 

with that evaluation. The kind of institution we are trying to build 

is one which is fair and transparent for all employees. 

The performance management system is also something that we 

are currently negotiating with the National Treasury Employees 

Union, so we will have good representation of views during that 

discussion. And that is the work that we are trying to do to address 

what that data showed. 

Mr. CLAY. And you all have been up and running for about, 

what, 3 years? 

Ms. FUCHS. We have been up and running for 3 years. During 

a large part of that time we were doing the work that Congress 

asked us to do by writing rules to fix mortgage markets. 

Mr. CLAY. Thank you for your response. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. McHenry, chairman of our Oversight and Investigations Subcommittee, for 5 minutes. 

Mr. MCHENRY. I certainly appreciate my colleague from Missouri 

asking that question of the CFPB, because you did contract with 

an outside investigator to determine that there was retaliation 

against an employee, but 6 months later, the Bureau has done 

nothing. So simply contracting with outside groups does not address the deep problems the CFPB has. 

But to my colleague’s other point, which is Operation Choke 

Point, I do want to bring this up with Mr. Osterman. You want to 

stamp out illegal businesses, but in order to do that you need to 

give legal businesses proper guidelines so they can be banked. 

The Electronic Transactions Association has put forward a significant report that they worked on for the last 8 or 9 months. Are 

you familiar with this report? 

Mr. OSTERMAN. I am not. 

Mr. MCHENRY. You are not? Okay. They have indicated that they 

have been in contact with the FDIC to give their merchants and 

independent sales organization the underwriting and risk tools necessary to comply. Will you take a look at that? 

Mr. OSTERMAN. Absolutely. 

Mr. MCHENRY. Okay. Then, the additional question would be 

this: Is the FDIC coordinating with the CFPB to give guidelines to 

banks so that they can bank these institutions that are providing 

a legal service for a legal entity? 

Mr. OSTERMAN. Of course, the CFPB Director is on our Board, so 

to that extent— 

Mr. MCHENRY. I am familiar with the construct of it, but are you 

coordinating in terms of rule-writing? 

Mr. OSTERMAN. We are not doing the rule-writing on the— 

Mr. MCHENRY. That is part of the problem. The industry doesn’t 

have guidelines by which they can follow what they believe the 

FDIC’s intent is. 

30 

Mr. OSTERMAN. In that regard, as I mentioned, we do have a financial institutions letter that does lay out our guidelines in connection with these types of programs. And basically, what we are 

saying is these types of programs can involve high-risk activities 

that could create litigation risk and reputation risk for financial institutions. So, they need to do due diligence to ensure that the folks 

whom they are banking are acting in a safe and sound manner. 

Mr. MCHENRY. Sure. Okay. 

Mr. OSTERMAN. And so— 

Mr. MCHENRY. My time is brief, and I have another question for 

Ms. Friend. 

Mr. OSTERMAN. Yes. 

Mr. MCHENRY. I know others will have questions about this. 

I was notified about three OCC examinations, at three different 

financial institutions. I just want to tell you this story and get your 

response. 

At bank one—not a bank—Bank A, if you will—the problem 

began when examiners expressed concerns about the bank’s military accounts using an overdraft service. The examiner pulled data 

and was concerned about the frequent usage of overdraft with this 

account. 

When the examiner was informed that this account was 5 to 10 

years old, and that the user had regularly utilized overdraft, the 

examiner said it was proper that if the person kept using this overdraft protection and it became a behavior, they should close the account. 

Now, when indicated that the person requested overdraft protection and utilized it they said, ‘‘Well, it could pose a reputational 

risk.’’ 

At Bank B, an examiner required that the bank remove overdraft 

service if the account holder withdraws or uses overdraft protection 

more than 25 times a year. And after implementing what the bank 

was told to do by the examiner, the customer came back and demanded that overdraft protection be put back on. 

At Bank Three or C, the definition of frequent user was trying 

to—was—tried to be divined from the examiner and was told a 

very different story than the first two institutions were told. 

Is there a justification for having different rules for different institutions about overdraft protection? 

Ms. FRIEND. Congressman, there is a rule on overdrafts, and our 

examiners should be following the specific rule. We don’t have separate guidance to examiners on overdraft protection beyond the 

regulation. 

Mr. MCHENRY. Are examiners supposed to tell folks to close accounts if they are utilizing overdraft protection within the guidelines you have given? 

Ms. FRIEND. I don’t think that we have specific separate guidance that is independent of the regulations, so they would be expected to act in accordance with the regulations. 

Mr. MCHENRY. Okay. And would you believe that this inconsistency of regulation would lead to more underbanked, or those who 

are unbanked? 

Ms. FRIEND. I think we would be concerned if there is an inconsistent interpretation, and so it is difficult to respond with respect 

31 

to each individual institution without having all of the information 

available. But again, we look for consistency in examination based 

on the rules. 

Mr. MCHENRY. And this is highly inconsistent. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Scott, for 5 minutes. 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

Let me ask my first question to you, Ms. Fuchs, with the CFPB. 

I want to follow up on the Chairman Hensarling’s point. 

What we have here, the situation that the CFPB has placed our 

auto dealers in is no man’s land. We sort of got them in a situation 

where they are guilty if they do, guilty if they don’t, and when you 

put these two factors together, in your letter of—or your rulemaking and guidance of last March 13th, you arbitrarily issued a 

statement of discrimination within the auto lending’s indirect lending program. 

Now, when you make a charge of discrimination against AfricanAmericans or minorities anywhere, that is very explosive. Race is 

very explosive. You are dealing with a situation yourself with 

charges of discrimination within the ranks and the employment 

and promotion of the CFPB. 

I only raise that point to let you know that in your response to 

Mr. Clay you were very thoughtful, you went back, we are doing 

this, we are trying to get at the bottom of this. But you are not 

treating the auto industry with that same kind of sensitivity. 

And what you have done is—the CFPB has, I think, an unintended consequence here by making a blanket statement and then 

not giving guidance the background, the data, the methodology, all 

the things that you are looking at yourself in dealing with your 

own discrimination charges. 

So, it is important to me and to other members of this committee 

that we get this threat away from these auto dealers. On the one 

hand, they put forward a solution of offering a standard fee and 

then working with the consumer in a way in which they could have 

a discounting of the interest rate. You take that away from the 

dealers and some of these dealers might have to close up shop. 

Many of them, particularly in a district like mine—I represent 

the metro area; I represent six counties around Atlanta, where the 

auto dealers are, and smaller community towns where they anchor 

that community. They go out of business because of this. 

So I want to urge you and the CFPB to resolve this issue and 

get the auto dealers out of limbo and remove the threat to their 

ability to discount those interest rates for their customers. If there 

is discrimination, I don’t know where it is. All I am saying is treat 

them the way you are treating yourself in this. And if it is there, 

if there is a fire of discrimination there, we will put that fire out. 

But don’t throw the whole blanket on them and assume. 

There are many minority-owned dealerships. And if you throw 

that blanket on them, you are saying that African-American dealers are discriminating against African-American people? No. That 

is not the case here, but that is the situation you are in. 

But I wanted to say that. Will you do that? Would you get this 

threat away from the auto dealers? 

32 

Ms. FUCHS. Thank you so much for your comments, sir. 

I should say the question was asked earlier of whether we want 

a single parent to have access to a car, and we do. We want those 

people to have access to fair and transparent lending, as well. The 

CFPB does not have jurisdiction over auto dealers. We have authority with respect to indirect auto lenders. 

Mr. SCOTT. But you have made a claim there. Where is the proof? 

We have asked for that. Show us where that discrimination is? 

Ms. FUCHS. Thank you, sir. We are engaged in a constant dialogue with the industry about these issues. We held a forum at 

which various methods of compensating dealers were discussed. We 

have also had briefing calls with many, many stakeholders and 

spoken at auto dealers conferences. 

Mr. SCOTT. Okay. Okay, thank you. I didn’t mean to go on for 

so long, but I have to ask a question of the FDIC, please, thank 

you. But let’s help those dealers. 

On the operation—I have put it here someplace; what did I say. 

I got so carried away with that comment. 

Oh, the Operation Choke Point—FDIC—can you tell us what is 

going on there? 

Chairman HENSARLING. Regrettably— 

Mr. SCOTT. Thank you. I’m sorry. 

Chairman HENSARLING. My sense is that some other Member 

may be asking those questions before the day is over. 

The Chair now recognizes another gentleman from Georgia, Mr. 

Westmoreland, for 5 minutes. 

Mr. WESTMORELAND. Thank you Mr. Chairman, 

Ms. Fuchs, would you describe in one sentence maybe, what is 

the role of the CFPB? 

Ms. FUCHS. Congress set the purpose of the CFPB in the DoddFrank Act, and— 

Mr. WESTMORELAND. Not what Congress said. What do you say 

the role of it is? 

Ms. FUCHS. The role of the CFPB is to help make the markets 

for consumer finance more transparent and to enable consumers to 

have access to fair and transparent products and services. 

Mr. WESTMORELAND. Okay. And going back to what the gentleman from Missouri asked about, the gentleman who got a loan 

for his son’s tuition, if somebody, let’s say BNC credit, needed $500 

or $800 and called the CFPB and said, ‘‘Hey, you know, I have 

BNC credit,’’ where would you recommend that they go to borrow 

that money? 

Ms. FUCHS. It is hard in the abstract to recommend where a person should go to get short-term, small-dollar credit. It would depend on the circumstance of the person and what was available to 

them. 

Mr. WESTMORELAND. But what would you recommend? A big 

bank? Bank of America? What would you recommend to him? What 

would be your choices? 

Ms. FUCHS. There are many choices out there right now for consumers. There are opportunities to go to banks for credit, and there 

are opportunities to go to nonbank lenders for credit. It really will 

depend on the circumstances of the consumer, such as if they have 

33 

savings or if they don’t have savings—they may have different options available to them. 

Mr. WESTMORELAND. I don’t think there are as many out there 

as you think there are. And Operation Choke Point, as my colleague from Georgia has pointed out, is trying to put as many of 

these people out of business as you can. 

I want to read a statement from Bill Isaac, who is the former 

Chairman of the FDIC. He recently stated, ‘‘the same slippery slope 

that the DOJ uses today to choke off payday lenders from banking 

services could tomorrow be used on convenience stores selling 

large, sugary sodas, restaurants offering foods with high trans fat 

content, or family planning clinics performing abortions. 

‘‘Ironically, at the same time the government is making life miserable for businesses seeking to meet consumers’ needs for emergency funds, it is encouraging banks to offer services to marijuana 

dealers.’’ 

Now, how do you all right that? 

Mr. Osterman? 

Mr. OSTERMAN. In terms of—I am not quite sure I understand 

your question, sir. 

Mr. WESTMORELAND. The question is, when you are trying to 

keep people who have a lending service that they are doing to people who might not be able to walk in to a normal, traditional bank 

and do business, and you are trying to put out of business some 

of those people who do provide that service while at the same time 

trying to make it possible where banks can do business with people 

who sell federally illegal drugs? 

Mr. OSTERMAN. We are not trying to put legitimate businesses 

out of business. 

Mr. WESTMORELAND. You are not? 

Mr. OSTERMAN. No sir, we are not. 

Mr. WESTMORELAND. Okay. Have you ever put anybody out of 

business or kept anybody that was State-regulated, or federallyregulated from doing business with a bank? 

Mr. OSTERMAN. In terms of what we are looking at is the safety 

and soundness of our banks, and as we have said— 

Mr. WESTMORELAND. I know that. I know you are. But have you 

ever told somebody who had a legal business, as either regulated 

by the State or the Federal Government, that they could not—that 

a bank could not do business with them? 

Mr. OSTERMAN. Not that I am aware of. 

Mr. WESTMORELAND. Okay. So, Operation Choke Point has no reality to it? 

Mr. OSTERMAN. Operation Choke Point, as I have said before, sir, 

is a Department of Justice program that was going after illegal activity, and we were asked to provide more information and that is 

what we did to address illegal activity. We did put out a financial 

institution letter to make it clear— 

Mr. WESTMORELAND. How do you describe illegal activity when 

somebody is regulated by some State board— 

Mr. OSTERMAN. Well— 

Mr. WESTMORELAND. —that permits them to do business? How 

is that an illegal activity? 

34 

Mr. OSTERMAN. For example, for payday lenders—in several 

States, payday lending is illegal. And so, when banks are dealing 

with these lenders and they are in different States, the banks need 

to be assured that those lenders are, in fact, acting in a legal way. 

Because if they are not, it actually opens up the institution to risk, 

in terms of being sued by State attorneys general and others because they are not complying with the law. 

Mr. WESTMORELAND. Just typical, picking winners and losers. 

Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Green, 

the ranking member of our Oversight and Investigations Subcommittee. 

Mr. GREEN. Thank you, Mr. Chairman. 

Mr. Chairman, understanding that the rules do not allow us to 

yield a specific amount of time, I would like to at this time yield 

up to 1 minute, such time as he may consume up to 1 minute, to 

my friend from Georgia, Mr. Scott. 

Mr. SCOTT. Mr. Green, you are very kind. You are a good man. 

God bless you. Thank you. 

Because this is important to me, on the Operation Choke Point, 

the gentleman from the FDIC, you are basically working with the 

Justice Department on this, as I believe I understand, doing a fairly good job in terms of getting the scam artists and those. 

But without perfectly clear guidance and direction, it could go a 

little too far. For example, I am concerned about what you refer to 

in your guidance as a firm with a reputational risk. 

What does that mean, reputational risk? Because my fear is that 

it could have an unintended consequence. 

Mr. OSTERMAN. Typically, in terms of high-risk activities, these 

are things that the institutions themselves, the banks themselves, 

have to make a business determination on whether they are willing 

to enter into an arrangement with that entity. 

But for example, as I said before, if payday lending was illegal 

in a particular State, to actually provide that service, that creates 

reputational risk to the institution because it is then being seen as 

engaged in illegal activity. 

And so what we have said in our guidance is that banks should 

do due diligence to ensure that they are identifying potential risks. 

And as long as they properly manage the relationships and risks, 

then they are not going to be prohibited—we are not prohibiting 

them from entering— 

Mr. SCOTT. Are there other industries? Payday lending makes a 

good point in other States, but are there other industries where 

you categorize as reputational risk? 

Thank you, Mr. Chairman. Thank you, Mr. Green. 

Mr. GREEN. Thank you. I thank the gentleman for yielding back. 

Mr. Chairman, I would like to, if I may, just extend a welcome 

to Mr. Horsford to the committee. He has acquitted himself well 

since he has been in Congress, and I am confident that he will do 

a very good job, an exceedingly good job on this committee. 

I am one of the many persons interested in helping small banks, 

and we have endeavored, in doing this, to find out what a community bank is. We have allowed this term to become pervasive. 

35 

While I see it as a good term, it is rather nebulous. And I have 

not, to this day, been able to get a good definition of a community 

bank. So let me shy away from the term ‘‘community bank,’’ and 

let’s talk for just a bit about small banks. 

And my first question will go to the gentleman from the FDIC. 

I would like to know, is it true that most banks in this country are 

small banks and that as many as 90 percent of all banks are small 

if I use $1 billion or less as my benchmark? 

Mr. OSTERMAN. Yes, that is correct. 

Mr. GREEN. So we have 90 percent of the banks at a billion dollars or less. And is it true that this 90 percent of banks did not 

create the circumstance that we had to negotiate in 2008, what we 

call a collapse of the—an economic crisis or something of that nature? 

Mr. OSTERMAN. Right. The crisis in 2008 involved much larger 

issues than the community banks. 

Mr. GREEN. And given that the community banks, the term you 

are using now, I am using small banks, using my benchmark at a 

billion dollars—and I don’t begrudge you at all for saying community banks, because that term has become very pervasive. But I 

have now switched, and I am working now to see what I can do 

for small banks, given that 90 percent of the banks are under a billion dollars. 

And I want to work with legislation to help them, because I am 

also finding that most of the banks that are troubled now, possibly 

about to go out of business, are small banks. Is this a fair statement, more so than banks above a billion dollars? 

Mr. OSTERMAN. We certainly have seen a consolidation of the industry, and when you look at the banks that have failed during 

this crisis, the vast majority are the smaller institutions. 

Mr. GREEN. Do you find, as you are before Congress giving your 

testimony, that many of the questions that we ask, we should ask 

of ourselves? Because many times we ask you questions about regulations that we impose upon you that we seem to decry your enforcing? 

Mr. OSTERMAN. The— 

Chairman HENSARLING. Apparently, the gentleman will have to 

answer his question himself, because the time of the gentleman has 

expired. 

Mr. GREEN. Thank you, Mr. Chairman. 

Chairman HENSARLING. And the Chair now recognizes the gentleman from New York, Mr. King, for 5 minutes. 

Mr. KING. Thank you, Mr. Chairman. 

Mr. Alvarez, I would like to question you regarding the 

collateralized loan obligations (CLOs) and say at the start that I 

identify entirely with the remarks of Congressman Garrett. 

As you know, the Fed has just issued a 2-year extension for the 

conformance period for banks that hold CLO debt. This comes nearly 2 months to the day that Governor Tarullo told this committee 

that Volcker’s impact on the CLOs was the interagency working 

group’s number one priority. 

Given the time that has passed, I would have expected more. The 

conformance period extension may minimize the pain, but it certainly does not eliminate it. 

36 

Even with the extension, banks will suffer multibillion dollar 

losses. The OCC admits to $3.6 billion; other estimates place the 

number as high as $9 billion. 

These are losses that will be incurred on performing assets solely 

due to the actions that the bank regulators have taken in applying 

the Volcker Rule. In fact, the expected losses on these assets are 

negligible. 

So I have two questions. 

First, do you believe that depleting bank capital by billions of 

dollars is a result that is consistent with safety and soundness regulation? 

And second, this aspect of Volcker is clearly inconsistent with 

safety and soundness considerations in Section 13D1(j) of Volcker, 

which allows the regulators to permit activities that promote bank 

safety and soundness. So my second question would be, why don’t 

you use this authority to grandfather legacy CLO assets that are 

on banks’ balance sheets? 

Mr. ALVAREZ. Let me start by putting the problem in perspective. 

There is approximately $300 billion in CLOs outstanding. That includes CLOs that would be exempt under the Volcker Rule and 

CLOs that would be covered by the Volcker Rule. 

As Congressman Garrett pointed out earlier, any CLO that is entirely loans is exempt from the Volcker Rule requirements. It is 

only the ones that have nonconforming non-loan assets in the CLO. 

So of those $300 billion, we think about a hundred—based on the 

call reports, about $105 billion worth of CLOs are owned by banking institutions. That is, of the 6,800 banks in the United States, 

something like 50 banks report that they own CLOs. 

And then of those 50 banks, a handful of the very, very largest 

in this country own 90 percent of the CLOs. So this is largely a 

problem that is concentrated with a small number of very large institutions. 

Now, what the Federal Reserve has done by granting an extension to, or by indicating it would be willing to grant, an extension 

for a couple of years, is it turns out that something on the order 

of 50 percent of the CLOs outstanding will mature or be repaid before the end of 2017. So much of the CLOs will be done by that 

period of time. 

And as many people have testified before this committee, the 

CLOs that are owned by banking institutions have largely been 

performing. There are very few that are loss producing at this 

point. Having 2 extra years allows institutions more time to divest 

if they think that is appropriate, to conform the CLO to something 

that would be exempt from the Volcker Rule, and there is a variety 

of ways that could happen. 

Mr. KING. The OCC estimates up to $3.6 billion in losses; others 

go as high as $9 billion. Is that healthy for the economy? 

Mr. ALVAREZ. I think that the— 

Mr. KING. And couldn’t that force banks in effect to hold bargain 

basement sales? 

Mr. ALVAREZ. I think the $3.6 billion estimate was assuming that 

an entire chunk of CLOs would default that no one really believes 

will default. That was an extreme example. And I will let the OCC 

37 

speak to that, but I think they were not predicting a $3.6 billion 

default. 

And in fact, the representatives of the CLO associations have indicated that the CLOs are very well-performing and have very few 

losses in them. And I think that is historically accurate. 

Mr. KING. So you do believe that this adds to safety and soundness of the banking community—banking institutions by allowing 

this to go in place after 2 years? 

Mr. ALVAREZ. The Volcker statutory provision does not have an 

exception in it for actions that will cause losses. It allows a limited 

authority to grant an exception if it would, in fact— 

Mr. KING. Are you saying you would not be allowed to make an 

exception under Volcker, that Volcker would preclude you from 

this? 

Mr. ALVAREZ. Volcker does not have a grandfathering provision 

and it does not have an exception that allows us to cause institutions to avoid losses. 

Mr. KING. You are saying it would preclude you from doing that? 

Mr. ALVAREZ. That is right. 

Mr. KING. I would have to disagree with that. I think Congressman Garrett disagrees also. 

Mr. Chairman, I have a series of other questions on another 

issue. Could I submit them in writing to the panel? 

Chairman HENSARLING. Yes. Without objection, that will be 

made a part of the record. 

The gentleman’s time has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. Foster, for 5 minutes. 

Mr. FOSTER. Thank you. 

Chairman HENSARLING. Apparently, the Chair does not. He has 

been informed by the Minority side we are going to the gentleman 

from Minnesota. 

The gentleman from Minnesota is recognized for 5 minutes. 

Mr. ELLISON. Allow me to thank the chairman and the ranking 

member, and Mr. Foster as well. I know we all have busy schedules 

and I will try to be quick. 

Ms. Fuchs, thank you for the work that you do. I think the CFPB 

does have a responsibility to ensure that people of color are not 

overpaying for autos. 

What did the CFPB find in the price disparity studies by ethnicity and how significant are the differences? 

Ms. FUCHS. The Bureau has one matter that is an enforcement 

matter that has been public, and in the materials related to the enforcement matter, it talks about the specifics of that matter. Other 

matters that the Bureau is working on are ongoing either investigatory or supervisory matters, and so there are details that can 

be shared at this time. 

Mr. ELLISON. So you don’t want to talk about the price disparities by ethnicity? You don’t talk about whether there is a problem 

and how serious it is? 

Ms. FUCHS. The Bureau hasn’t done an analysis that looks across 

the entire industry and finds some number of disparity. We are 

looking at each individual lender that is engaged in indirect auto 

lending across their portfolio to assess whether there are dispariVerDate Nov 24 2008 12:59 Dec 05, 2014 Jkt 088535 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\HBA098.000 TERRI
38 

ties. We have been talking with the committee about the particular 

matter that— 

Mr. ELLISON. Ma’am, I am trying to give you a chance to talk 

about your good work on eliminating disparities and you are declining. 

Ms. FUCHS. I am— 

Mr. ELLISON. Is that what you really want to do? 

Ms. FUCHS. Perhaps I am not understanding the question. 

Mr. ELLISON. Fine. 

Ms. FUCHS. I apologize. 

Mr. ELLISON. Somebody else, something else. I know that the 

regulators have increased enforcement against money laundering. 

HBSC has been fined $1.9 billion for transferring billions of dollars 

from Mexican drug cartels and for violating sanctions laws, doing 

business with countries like Libya, Sudan, Burma, Cuba, and Iran. 

And I am glad that agencies are indicting money launderers, and 

I think that all those who are engaged in that activity deserve to 

be held accountable. But one of the things that I have become concerned about is how that regulatory system might be swinging a 

little too far, because what I have seen in my own district over the 

last 2 years is that money service businesses that send money to 

their families, particularly in Somalia, are having their checking 

and saving accounts closed by credit unions and banks. 

I have a group of Iranian graduate students at the University of 

Minnesota who were told that their bank accounts would be closed, 

and I have people with Muslim names who are having their checking and savings accounts closed. 

The difficulty is you have to stop terrorist financing. And the 

other difficulty is if you go too far in that direction, you close off 

good people just trying to do legitimate transactions. 

I have tried to raise these issues before, and I would like to submit some things for the record: a Treasury blog post from December 23, 2011, entitled, ‘‘The Importance of Remittances Through 

Legal Channels to Somalia.’’ And without objection, I would also 

like to submit a July 8, 2013, letter from the Department of the 

Treasury clarifying that college students from Iran can have bank 

accounts. 

Mrs. CAPITO [presiding]. Without objection, it is so ordered. 

Mr. ELLISON. Yes, thank you. 

Maybe, Ms. Friend, you could discuss this issue a little bit. Has 

your agency been trying to provide training and guidance for your 

regulated financial institutions to enable them to better understand the rules regarding knowing their customers? And do they 

have any concern that in our zeal to obey laws to stop terrorism 

financing, we might actually be closing off legitimate transactions? 

Ms. FRIEND. Congressman, I know the folks at the OCC have 

been in touch with your staff and we are concerned. We share concerns that if there are legitimate businesses that we are not asking 

banks to close off those accounts. 

Essentially, it is a bank’s decision who to do business with. What 

we direct them to do is to do due diligence and they need to have 

the proper controls to deal with whatever risks that they assess. 

Some institutions, we have found, have decided that rather than 

go through the additional burden of providing the types of controls 

39 

that they believe are necessary, might decide that they are not 

going to bank a particular entity. 

Obviously, with respect to Muslim names, if there is evidence 

that they are applying something in a discriminatory manner, that 

would be something we are concerned about and we are looking 

into it. So we are looking forward to a continued dialogue with your 

office. 

Mr. ELLISON. I want to thank you for that. And just please do 

continue to assure financial institutions that they don’t have to go 

beyond the line to meet the requirements of the law. 

Thank you. 

Mrs. CAPITO. The gentleman’s time has expired. 

I am going to recognize myself for 5 minutes for questions. 

Ms. Fuchs, in my opening statement I talked about the qualified 

mortgage, and I am Chair of the Financial Institutions and Consumer Credit Subcommittee. We have done a lot of hearings on 

this. 

And I am concerned that the borrower who is going to fit into 

this QM box is going to be the one who is least likely to be able 

to go to alternative sources to find mortgages besides their community banks or credit unions. What legal risks are associated with 

non-QM loans, in your opinion? 

Ms. FUCHS. Thank you, ma’am, for the question. As I think you 

know, the CFPB—drawing the lines on what would be a QM and 

what would not be a QM was one of the most significant aspects 

of the rulemaking, and the rule was designed to incorporate the 

vast majority of mortgages that are being made within the QM category. 

For mortgages that are outside the QM loan, we anticipate that 

those will continue to be made. In fact, I saw an article just yesterday that talked about something like 30 percent of banks would be 

looking at having lending programs that are outside the QM loan— 

the QM category. 

For those matters, the banks are subject to following ability to 

repay requirements, and our—we anticipate that by doing a returnto-basic underwriting, as we had in the past, there actually will be 

fewer foreclosures. And that— 

Mrs. CAPITO. You would agree that there is more legal risk associated with the non-QM loan, correct? And that is the way it is 

structured, the rule is structured. 

Ms. FUCHS. The QM categorization does provide some protections 

for institutions. However, the liability is closely cabined, and outside of the QM category, if banks are engaging in an ability-torepay calculus, then they should be in a good position with their 

solid underwriting. 

Mrs. CAPITO. I think—and we have a survey here that says 33 

percent of respondents indicated they would only make QM loans. 

So, a third of the lenders in this particular survey said that they 

would only lend in the QM box. I have a feeling it is actually a little bit larger than that. And I have heard—we have heard from 

community leaders who are actually exiting the mortgage lending 

space altogether. 

40 

You mentioned in your opening statement that before you do a 

rule you have a meeting and you talk about cost-benefits and have 

a report. Are those reports public? 

Ms. FUCHS. Yes, the Bureau goes through several things in order 

to look at the costs, benefits, and impacts of its rules. From the 

small business panels that we convene, there is a report that results from that. The brief of panels are done as a partnership between CFPB, OMB, and the Small Business Administration. During the panels, we take input from representatives of small businesses in the specific area that we are writing a rule, and that— 

Mrs. CAPITO. Yes, and I don’t mean to interrupt that. I only have 

2 minutes left. 

Ms. FUCHS. No problem. 

Mrs. CAPITO. Do you take into consideration the—did you talk to 

community bankers and credit unions and all those lenders in that 

space as well? Yes or no? 

Ms. FUCHS. Yes, the Bureau does. 

Mrs. CAPITO. Yes, and then that is public? Their response is public—the bankers? 

Ms. FUCHS. The Bureau, in the course of its rulemaking, considers the impact of its rules on small lenders— 

Mrs. CAPITO. Are those public reports? 

Ms. FUCHS. It publishes that in its notice of proposed rulemaking 

for comments. 

Mrs. CAPITO. Okay. We talked just a little bit about the remittance transfer rule. This is another one where a lot of people are 

exiting the business because of the onerous regulations imposed 

here. Some lenders do it for customer convenience; some do it for 

customer necessity. 

And I would just say that it is making it more difficult and more 

expensive. I am not going to really ask a question on that, but 

lodge a concern. 

Mr. Meeks and I have been working on a bill that would work 

on duplication and conflict of rules. And I know every 10 years you 

are supposed to go in and look at the conflicts. We are pressing for 

a shorter timeframe there. 

Mr. Alvarez, do you think it would be useful to have a shorter 

timeframe in terms of looking at the rulemaking processes to the 

duplications? Because that was supposedly one of the goals of 

Dodd-Frank and I am not sure we have actually seen that. 

Mr. ALVAREZ. That is an exercise that, by law, we go through, 

as Amy Friend mentioned earlier, under the Economic Growth and 

Regulatory Paperwork Reduction Act. It is every 10 years. 

The Federal Reserve has an informal policy where we review our 

rules every 5 years. We are a little off schedule because we have 

been spending so much time on the Dodd-Frank Act, but we expect 

to get back to that schedule. So a shorter period of time of reviewing those rules is a perfectly good idea. 

Mrs. CAPITO. Mr. Osterman, do you have the same— 

Mr. OSTERMAN. Yes. I think sometimes it takes a while for the 

rules to be in place to see how they interact but a shorter timeframe is something we could do. Although, given the vast numbers 

that we have to go through, we are getting ready to go through a 

10-year review right now, and as Ms. Friend indicated, she is the 

41 

head of the legal advisory group that is coordinating this effort, but 

with all the rules that are out there, to go through and review 

them all takes a long time in terms of going out and noticing those 

for the public— 

Mrs. CAPITO. Right. Imagine you are a community banker and 

you are trying to deal with all this— 

Mr. OSTERMAN. Exactly. 

Mrs. CAPITO. You guys are dealing with it every day. It is your 

job. So I would encourage you to try to adopt that mindset, maybe, 

sometimes to try to help those folks out. 

Next, Mr. Foster from Illinois is recognized. 

Mr. FOSTER. Yes, thank you, Madam Chairwoman. 

Ms. Friend and Mr. Alvarez, would it be possible to provide an 

estimate or a range of estimates of the additional losses that might 

be expected for banks which are forced to divest of the CLOs within 

the 2-year extension period, compared to the indefinite 

grandfathering that passed out of this committee? 

Ms. FRIEND. Let me first just discuss the $3.6 billion number 

that was in our economic analysis. It came up earlier. And that 

was attributable to the divestiture of CLOs and CDOs and any 

other impermissible fund. And so when we looked at that estimate, 

it ranged from 0 to 3.6 because it really depends upon what the 

market reaction is going to be. 

So I think it would be very difficult for us to estimate with a 

specificity exactly what the losses might be. Before we decided that 

we would take no further action than to support the Fed’s conformance period, we looked at sort of worst case scenarios and believe 

that there would not be any significant impairment to any institutions’ capital, at least in the national banking system, or to their 

earnings. And so, that is why we decided that this was consistent 

with safety and soundness. 

But again, it really depends upon on what the market reaction 

is going to be once the banks start to sell these, or as they run off. 

Mr. ALVAREZ. I have nothing to add. 

Mr. FOSTER. Okay. Mr. Alvarez, on page eight of your written 

testimony you mention that the Federal Reserve is consulting with 

the FDIC on a regulatory proposal that would require the largest, 

most complex U.S. banking firms to maintain a minimum amount 

of outstanding, long-term unsecured debt, in addition to the regulatory capital that they are already required to maintain. This is 

to facilitate the single point of entry resolution of these firms. Now, 

would this apply to all SIFIs or just banks? 

Mr. ALVAREZ. That is part of the discussion, how far should it 

apply—whether it should apply just to the largest banking organizations or it should apply to SIFIs as well. 

Mr. FOSTER. Yes, and would there be restrictions on who could 

hold this long-term debt? For example, could one SIFI hold— 

Mr. ALVAREZ. That is a part of the discussion as well. 

Mr. FOSTER. Okay. And how does this relate to the contingent 

capital discussions that I take it are also ongoing? We have been 

promised many times that well, we are in the process of thinking 

about contingent capital, it is getting closer. 

And I was wondering what your view was of the status of contingent capital. As you are well aware, the European regulators are 

42 

far ahead of us on contingent capital and it seems to be fairly successful. 

Mr. ALVAREZ. This is slightly different. The contingent capital is 

free— 

Mr. FOSTER. Right, it triggers—obviously, there is a regulatory 

trigger, not as a part of resolution. 

Mr. ALVAREZ. Correct. 

Mr. FOSTER. Could the mechanisms be similar—the conversion of 

debt to equity under prescribed conditions. And so would this be 

higher—or above or below in the capital stack of these firms—the 

additional— 

Mr. ALVAREZ. I don’t know the answer to that question. It is 

meant to be complementary. It would be after resolution—useful 

mostly after resolution rather than the convertible securities, as 

you point out, which is—convertible debt, which is mostly before. 

We are participating pretty actively in the international discussions. We think that is a fruitful way to consider the convertible 

instruments because it depends—the trigger there becomes a very 

important factor. And so should the trigger be a regulator, should 

it be a market event? Should it be a home regulator, post regulator? There are lots of variables there. It is a much more complicated instrument than the long-term debt. 

Mr. FOSTER. Thank you. Is there a schedule for that? Do you 

have any idea when we will actually see a concrete proposal so we 

will be able to say what the trigger mechanism—the preferred trigger mechanism is? 

Mr. ALVAREZ. I don’t have a concrete date for you. It will be soon. 

It will be something, though, that we will be very interested in 

public comment on because this is a very important effort, we 

think. 

Mr. FOSTER. Okay. Thank you. 

That was my last question. I yield back. 

Mrs. CAPITO. I recognize Mr. Royce, the Chair of the House Foreign Affairs Committee. 

Mr. ROYCE. Thank you, Madam Chairwoman. 

I wanted to ask Mr. McKenna a question. It is about a piece of 

legislation that I and Jared Huffman introduced, the Credit Union 

Residential Loan Parity Act. And what that bill does is to remove 

non-owner-occupied one-to-four-unit dwellings from the calculation 

of the member business lending cap currently imposed on credit 

unions. 

And this reform really has two advantages in terms of increasing 

the capital available to lend to small businesses and the availability of needed rental housing as a consequence if this change 

was made. And I was going to ask you, Mr. McKenna, does the 

NCUA have any comment on this legislation? 

Mr. MCKENNA. The agency has reviewed that piece of legislation 

and we do not have any safety and soundness concerns with it. 

Mr. ROYCE. Could you pull the microphone a little closer? 

Mr. MCKENNA. We have reviewed that piece of legislation and we 

do not have any safety and soundness concerns with it. 

Mr. ROYCE. You don’t have any concern about safety or soundness from that standpoint? 

Mr. MCKENNA. Not with that piece of legislation, no. 

43 

Mr. ROYCE. I appreciate that very much. 

I also wanted to ask you, on a related note, the NCUA has put 

forward a new proposed risk-based capital rule for credit unions 

over $50 million in assets, and I am concerned that risk weights 

applied to residential mortgage loans and member business loans 

under the proposal do not actually reflect the risk nor are they 

comparable to the system for community banks. 

And I will just give you an example. If you look at the delinquency rates, first of all, on these loans from the latest data available, credit unions have delinquency rates which are one-quarter to 

one-half that of banks. The proposed rule would apply risk weights 

that are double the comparable Basel weights. 

And that is the thing that stands out to me—the rate being double. Why does the proposed rule regarding risk-based capital deviate so much from the FDIC standards for community banks? That 

was what I was going to ask you. 

And do you have concerns that these risk-weightings could 

hinder credit union lending to homeowners or small businesses or 

even churches? You have these niches out there and this would be 

quite a change. But I would like to explore that with you. Go 

ahead. 

Mr. MCKENNA. As you pointed out, it is a proposed rule that we 

issued in January of this year. The comment period closes in May. 

We have already received lots of comments on the risk weights and 

that is something that the NCUA board is going to be looking at. 

The basic thrust of your question was whether our rule is comparable to the FDIC’s rule. And in general, taking into consideration the unique nature of credit unions and other factors, we 

think it is comparable to the FDIC rule. However, we are reviewing 

the risk weights to see if they make sense to credit unions. 

Mr. ROYCE. Yes, because the data behind those delinquency 

rates—one-quarter to one-half—if you look at the September data, 

it shows real estate loans last September—a delinquency rate of 

1.22 versus 4.77. If you looked at commercial loans, it would be 

0.35 versus 0.55. 

So the part that just stands out is if you end up with double the 

rate then the question is, do you end up sort of shorting capital 

that otherwise would be available for small business lending and 

so forth. 

So my hope would be to work with you—we have a good working 

relationship—as we go forward to try to make certain at the end 

of the day we don’t disproportionately impact capital that otherwise 

would be available for either home ownership, small business lending, and so forth. 

Mr. MCKENNA. We hope to work with all stakeholders to make 

the final rule more effective. 

Mr. ROYCE. Thank you very much. 

And Madam Chairwoman, again, I appreciate it. 

Mrs. CAPITO. I now recognize Mr. Sherman from California. 

Mr. SHERMAN. Thank you. 

I would like to pick up on Mr. Royce’s questions. I am also concerned about these rules on credit union capital. As I understand 

it, it would impose a Basel-like capital regime on those who already 

face stringent capital requirements. 

44 

And I will ask Mr. McKenna, it seems that the rule provides for 

tougher rules for credit unions than are applied to community 

banks under the Basel system even though credit unions have historically been even more risk-averse. Are the rules tougher than 

that are imposed on community banks? 

Mr. MCKENNA. Congressman, some of the risk weights are different than the ones that the FDIC has. 

Mr. SHERMAN. And I hope you would take into account the fact 

that the number one problem that small businesses, I think, have 

in all our districts is they can’t get capital. They can’t get a loan. 

We had Jamie Dimon in here saying he couldn’t find U.S. businesses to lend money to, so he sent the money to London where it 

was eaten by the Whale. 

Every one of us here could list a hundred businesses that can’t 

get business loans, and so I hope you would take that into account 

in determining what weights should be applied. 

Supplemental capital is an issue that credit unions have been 

concerned about. They would like the authority to pursue supplemental capital, since their tier-one capital is generally now limited 

to retained earnings, and of course they cannot, will not issue 

stock. 

I believe your agency has indicated support for supplemental 

capital, which credit unions can’t use for leverage ratio purposes 

without a change in the Federal Credit Union Act. Why isn’t your 

agency coupling its support here in Congress for supplemental capital for tier-one purposes with the risk-based capital proposal? 

Mr. MCKENNA. As you point out, it is currently a proposed rule, 

and the issue of supplemental capital will be something that we 

look at when we finalize the rule and listen to the comments. 

Mr. SHERMAN. So you may be putting the two together? 

Mr. MCKENNA. It is a possibility. 

Mr. SHERMAN. Okay. 

Now I would like to shift—I know a number of my colleagues 

have talked about this ‘‘Operation Choke Point.’’ I would ask unanimous consent to put in the record an article by William Isaac entitled, ‘‘DOJ’s Operation Choke Point: An Attack on Market Economy.’’ 

Mrs. CAPITO. Without objection, it is so ordered. 

Mr. SHERMAN. Thank you. 

I guess, Mr. Osterman, you have said that you are cooperating 

with DOJ on this. Is it being limited to—are you trying to choke 

off entities that had been indicted or convicted of crimes, or what 

is the target of Operation Choke Point? 

Mr. OSTERMAN. Congressman, I am really not in a position to answer that because it is not an FDIC program. Again, we have been 

providing information to the Justice Department for their actions, 

but we— 

Mr. SHERMAN. Okay. But it is your examiners that are putting 

the pressure on banks to do to certain U.S. businesses what I 

spend most of my time trying to get done to the government of 

Iran, and that is deny them access to the U.S. banking system. Are 

your examiners pushing banks toward cutting off any U.S. businesses that are—particularly those engaged in consumer credit? 

Mr. OSTERMAN. The answer to that is no. What we have— 

45 

Mr. SHERMAN. So we wouldn’t hear testimony from those who 

deal with your bank examiners saying that they were told, ‘‘Well 

we are going to look at you more carefully unless you cut off thisor-that business?’’ 

Mr. OSTERMAN. As I have said before, we have actually put out 

a policy statement on this issue to make it very clear from the very 

top that as long as financial institutions are properly managing 

their relationships and the risks, they are neither prohibited nor 

discouraged from providing these services. 

And we have actually had the head of our examination staff talk 

with our regional offices and our field offices about this. And so, to 

the extent that this message isn’t getting through, we are certainly 

happy to hear it and try to get that message correct. 

Mr. SHERMAN. I think you need to get the message through. 

And, Ms. Fuchs, I look forward to your agency regulating properly consumer lending, rather than having— 

Mrs. CAPITO. The gentleman’s time has expired. 

Mr. SHERMAN. —this get done behind the scenes without the Administrative Procedure Act. 

I yield back. 

Mrs. CAPITO. Thank you. 

Mr. Pearce is now recognized. 

Mr. PEARCE. Thank you, Madam Chairwoman. 

And I thank each one of your for your presentations today. 

Ms. Fuchs, you had mentioned that you are hard at—the CFPB 

is hard at work making sure that consumers have better information for making financial decisions. Later, you pointed out that you 

are required to consider rural areas. Again, I point it out every 

time I have the opportunity with someone with your agency that 

you—your original definitions of rural versus urban put 2 counties, 

one of 8.5 people per square mile that compares to 70,000 per 

square mile in New York. You would lump them together. 

And then the other one is 6 people per mile, and the one with 6 people per mile has a per capita income of about $25,000. So I 

am not sure exactly how that is that you are going to give consumers better information when you have missed the mark that 

far. 

I know you have done a 2-year study, but I don’t know many institutions will go in to lend money for the long term based on 2- 

year changing regulations. I don’t really have much belief that I 

would get different answers than I have gotten before so I will just 

add a quote from one of the bankers talking about being hurt by 

the real definition, which lets you know how you are cutting 

against the grain, really not providing the security and not providing what it is that you declare in your statement. 

A small banker in Alamogordo, New Mexico, says, ‘‘If I stop lending—he is being hurt by this rule definition—my community will 

not have a bank to meet their needs. I am a small bank investing 

private capital to service micro needs. Wells Fargo won’t make a 

loan for an ice maker for a small business in New Mexico but I 

will.’’ 

And that is the sort of thing that we run into. And another comment is regarding the purchase of trailer houses, mobile homes, 

manufactured houses, whatever category you put it in, and it apVerDate Nov 24 2008 12:59 Dec 05, 2014 Jkt 088535 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\HBA098.000 TERRI
46 

pears the CFPB doesn’t declare that to be quite up to the standards that you would like. So your positions on qualified mortgages 

and also balloon loans make it very hard for consumers to borrow 

money for manufactured housing. 

And yet, that is 50 percent of the housing in my district, and so 

you are doing exactly the opposite of what you declare, just as a 

point of reference so you can go away and know that I have at least 

said it. 

Mr. Osterman, I was actually intrigued by your comments. As 

Mr. Westmoreland was wrapping up, you were talking about Operation Choke Point, and do you all—as you are going in there, you 

said that it is against some State laws. Do your regulators know 

all 50 State laws? Do you differentiate? Tell me a little bit about 

how you avoid getting into areas where that is legal and those 

where it is not? 

Mr. OSTERMAN. Again, what we do is supervise our financial institutions, and our efforts are not targeted at legitimate businesses 

operating in compliance with the law. So our efforts are focused on 

making sure our institutions are being run in a safe and sound 

manner and that if there—and I think there is a recognition that 

there are certain types of— 

Mr. PEARCE. I understand that there are certain types of things 

that are wrong, so do you bring criminal investigations? It says in 

an article that you bring criminal investigations—you, DOJ, FTC, 

USPIS, and FBI, and it includes the FDIC there. So you would 

bring criminal investigations too? 

Mr. OSTERMAN. We would not be involved in criminal investigations—if we see criminal activity, we would make a referral to the 

Department of Justice— 

Mr. PEARCE. You would make a referral when somebody gets so 

far out of bounds? There are things that abridge the law and 

abridge the themes of common decency. 

Mr. OSTERMAN. If there is illegal activity, we will make— 

Mr. PEARCE. Yes. I guess that would bring me to my point—my 

recurring point with the FDIC is that you all had a supervisory 

role over MF Global, and yet no criminal charges were brought. 

That was $1.6 billion taken from customer accounts illegally. The 

Huffington Post said, ‘‘The lack of charges add to the government’s 

sad track record of toothlessness since the financial crisis.’’ 

And later in that article it says, ‘‘Apparently MF Global didn’t 

intend to take money from clients.’’ Now, I was not aware that intention was exactly the best decider, so we continue to see that certain scale of institutions, certain connected institutions are targeted and others don’t even get criminal charges. 

I yield back my time. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Washington, Mr. 

Heck, for 5 minutes. 

Mr. HECK. Thank you, Mr. Chairman. 

I would like to take this opportunity to extend my congratulations and welcome to my friend and colleague, Mr. Horsford, who 

has joined us. I can state unequivocally that there is not a single 

member of this committee happier than me that there is somebody 

less senior than I am. 

47 

[laughter] 

I would also like to congratulate him on the fastest and shortest 

brevet promotion to ranking minority member in the history of the 

community. 

Ms. Fuchs, you have come in for some criticism today and before—some warranted, some I suspect not so much. One area 

where you are generally not criticized at the Bureau is the manner 

in which you deal with servicemembers through Ms. Petraeus’ office. I never miss an opportunity to congratulate the work of the 

agency in that regard. 

Also I think, generally speaking, people extend to you plaudits 

for the way in which you have, generally speaking, listened. You, 

I mean, of course, figuratively. 

Lots of stakeholders from our district may be critical of final 

rules, but most of what we have heard for the last year or two is, 

‘‘We complained and they sat down and they listened.’’ 

One of the ways in which you are able to do that with respect 

to consumers and banks and credit unions is you actually have advisory boards that kind of formalize your ability to listen. I would 

very interested in just a sentence or two about how that makes you 

better at your job. And secondly—two-part—given that Mr. 

Pittenger has introduced an outstanding piece of legislation—sir, I 

compliment you—in the form of H.R. 4383, that would create another small business advisory committee for the CFPB for other entities that you regulate, like appraisers and title insurers, might we 

look forward to your active support of that to help you keep doing 

the good job of listening that you have done in these other areas? 

Your turn. 

Ms. FUCHS. Thank you so much, sir. I appreciate your comments 

about the CFPB’s outreach efforts, and I should—and we have 

found that both the Credit Union Advisory Committee and the 

Community Bank Advisory Committee have been very, very helpful 

for the CFPB. The CFPB writes rules across the entire financial 

services consumer finance industry, although we only examine 

larger banks and nonbanks, and so having those advisory committees has been helpful to us. 

With respect to the legislation, the CFPB doesn’t take positions 

on pending legislation. I should say, however, as I mentioned earlier, we are the only bank regulator and one of only three Federal 

agencies that subjects itself to the small business panel requirements, and we have found that extremely useful, and our economists would say it has been very valuable to hear from small businesses who would be affected by rules that we are planning to propose directly about those proposals. And so that has been a very, 

very useful process. Thank you. 

Mr. HECK. Thank you. 

And my compliments again to Mr. Pittenger, for the legislation. 

Mr. Osterman, it is axiomatic that piles of cash are an inherently 

bad thing. I am just finishing up watching the Breaking Bad series 

and there is that scene in the storage room where the six-foot-bysix-foot-by-four-foot pile of cash is kept in the little room. There is 

nothing good about that; nothing whatsoever. 

And that is why, sir, Mr. Perlmutter and I have been working 

so hard and so aggressively with Treasury and the Financial 

48 

Crimes Enforcement Network (FinCEN) to issue guidance with respect to providing access to banking services to legally constituted 

marijuana businesses in Colorado and Washington, because it is a 

public safety issue. Because we have to keep marijuana out of the 

hands of children and we have to keep cash out of the hands of 

gangs and cartels. 

And, sir, Happy Valentine’s Day. On that very day, FinCEN did 

issue guidance. Please tell us how your agency will now take that 

work to the regional level and to the examiners so that they can 

provide the necessary implementation advice and guidance and get 

on with this in the interest of public safety. 

Mr. OSTERMAN. Congressman, we expect the banks to follow the 

FinCEN guidance, including the new guidance that has been issued 

and its new SAR requirements for marijuana-related businesses. 

But at the end of the day, it is up to the bank to accept the business as a customer after weighing the risks associated with the 

customer relationship. 

Mr. HECK. I understand that. The question is, what have you 

done now to take that guidance regionally to your examiners and 

say, ‘‘Here is our new guidance, that if you instruct things to operate within this, that is acceptable.’’ What have you done to take the 

next step? 

Mr. OSTERMAN. Again, the examiners are aware of the FinCEN 

guidance. It is up to the bank to make the call as to how it is going 

to operate. 

Mr. HECK. Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Florida, Mr. 

Posey, for 5 minutes. 

Mr. POSEY. Thank you very much, Mr. Chairman. 

Thank you all for appearing here today. 

Mr. Alvarez, I would like to state a few facts, as I understand 

them, about the Volcker Rule and how it was adopted. Let me assure you that when I am finished, you will have more than adequate time to explain. 

Dodd-Frank codified the Volcker Rule as 12 USC-1851. As I believe Mr. Garrett alluded to, Section 18-51G specifically states that 

the rule does not prohibit any bank from securitizing a loan. 

Now, when the proposed Volcker Rule regulations, 76 CFR 215, 

were issued on November 7 of 2011, there was no discussion as to 

whether collateralized debt obligations (CDOs) and collateralized 

loan obligation (CLOs) would be considered proprietary trading. In 

fact, sub-part A of Section 13 specifically said that securities consisting entirely of loans were not proprietary trading. 

Yet, when the financial regulations were issued on December 10, 

2013, regional and community banks suddenly discovered that regulators had, in fact, made significant changes to the treatment of 

CDOs and CLOs and that the banks would have to get them off 

of their books in less than a year. Given the industry’s surprise 

with the final rule, I am trying to understand how this regulation 

morphed from the proposed rule to the final one, because there appears to be something seriously wrong here. 

Furthermore, the financial industry submitted more than 18,000 

comments during the notice and comment period for the proposed 

49 

regulations. Yet none of them raised a concern as to how CDOs and 

CLOs would be treated. 

That tells me that if an important piece of regulation receives no 

public attention during a comment period but a great deal of attention afterwards, you have to wonder whether the proposed rule 

was, in fact, adequately, fairly, and reasonably described when 

given for public comment, if it was described at all. So my question 

to you is, would you please give me a specific citation in the proposed rule where the treatment and CDOs and CLOs were set out? 

Mr. ALVAREZ. The proposed rule had something on the order of 

a dozen questions about asset-backed securitizations, including 

CDOs—asked about how the ownership interest should be defined, 

how the instrument should be treated under the Volcker Rule. As 

you pointed out, the proposal and the final rule both exempt assetbacked securitizations that are backed entirely by loans. 

The issue is a very small number of banks own CLOs that are 

not backed entirely by loans, that indeed are backed by loans and 

other securities that are not loans. As I mentioned, there seemed 

to be about 50 banks in that group. 

I think that may explain why there was no comment received on 

it. It is a very small universe of institutions that are affected by 

this among the thousands that are affected by the Volcker Rule. 

We have acted in a way that gives these institutions extra time. 

They have an opportunity to conform the investment in a variety 

of ways, short of divestiture. 

Some may choose to divest. As I mentioned, at least half of the 

CLOs are going to mature on their own terms during the period of 

time that we have given the institutions. So this problem is one 

that is very, very small. 

Mr. POSEY. So you are telling me that securities, consisting entirely of loans, are not proprietary trading then. You are telling me 

absolutely, unequivocally, without any shadow of doubt, that they 

are being treated properly. If they are entirely consisting of loans, 

then they are not considered proprietary trading, correct? 

Mr. ALVAREZ. If I could make a small modification of what you 

are saying, there are two restrictions in the Volcker Rule: one on 

proprietary trading; and one on ownership of covered funds. 

The issue you are raising is about the ownership of covered 

funds. And, yes, it is true that if it is an asset-backed securitization 

entirely by loans it is not a covered fund and is not covered by the 

Volcker Rule. 

Mr. POSEY. Thank you. I will hold you to that. Thank you. 

Thanks, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlemen from Nevada, Mr. 

Horsford, for 5 minutes. 

Mr. HORSFORD. Thank you very much, Mr. Chairman. 

First, I want to thank the witnesses for being here today and for 

providing so much valuable information and expertise on this subject. 

I started my service here in Congress on the Oversight and Government Reform Committee, where I learned to value the assessment of the U.S. Government Accountability Office, so I want to 

start with a 2013 GAO report entitled, ‘‘Financial Crisis Losses and 

50 

Potential Impacts of the Dodd-Frank Act,’’ and I would like to ask 

unanimous consent to enter this into the record. 

Chairman HENSARLING. Without objection, it is so ordered. 

Mr. HORSFORD. Thank you. 

The GAO report noted that, given the tremendous cost associated 

with the financial crisis, reforms only have to reduce the likelihood 

of another financial crisis by a very small percentage in order to 

offset the cost to the industry. The GAO identified as much as $13 

trillion lost in economic output and $9.1 trillion in wealth lost by 

U.S. homeowners. 

As a resident of Nevada, I can tell you when I go back home to 

my district, I see the devastating impacts and toll that the housing 

crisis took on our constituents and the people throughout our State. 

Now, no one supports excessive, burdensome regulations. But we 

also need appropriate regulatory oversight to both protect the good 

industry players from the bad actors as well as to help consumers 

who need a fair playing field in which to operate. 

So my question is for the panel. 

Mr. Alvarez, what efforts does your agency undertake in attempting to reduce any unnecessary burden when creating new rules and 

regulations, and what processes and procedures are in place for you 

to honor that commitment? 

Mr. ALVAREZ. As I described in my testimony, the Federal Reserve meets with affected parties in advance of designing rules in 

the most significant cases. We seek public comment in all of our 

rulemakings, including public comment on alternative approaches, 

on ways to reduce burden, we invite comment on the cost and burdens of the rule that we are putting forward. And so, we follow 

that process. 

In addition to that, in order to ensure that there is input from 

community bankers in particular, we have set up various councils 

across the Federal Reserve System—one in each of our 12 districts—with representatives from the local banking communities to 

inform us of the costs and burdens of the rules we are putting forward. 

Then representatives of those councils meet with our Board of 

Governors here in Washington and pass on those concerns and 

have a chance to input their own concerns. So we do quite a lot of 

outreach, and we do quite a lot of work with institutions to try to 

make sure that within the bounds Congress has set for us in the 

statute that we are implementing, we adopt alternatives that are 

the least burdensome. 

Mr. HORSFORD. So, Mr. Osterman, how, then, do you get feedback from both the industry and consumer side? Is it balanced? 

And fundamentally, is it different from the way past Administrations have approached that input? 

Mr. OSTERMAN. We seek notice and comment, as Mr. Alvarez has 

stated. We also will seek input even before rules are promulgated, 

on occasion, to get input. But certainly as we go through that process and we issue the notice of proposed rulemaking, we get the 

comment from the industry. We look at ways to minimize— 

Mr. HORSFORD. What about consumer groups? 

Mr. OSTERMAN. —the burden, and consumer groups are part of 

those groups that do provide us comments. And really, I don’t think 

51 

it is any different from the process that has been in place for many 

years under the Administrative Procedure Act. 

Mr. HORSFORD. Okay. 

Ms. Fuchs, how do you also obtain the perspective of communities like mine that have been heavily and disproportionately impacted by the failure of a lax regulatory oversight that helped contribute to the loss of so much wealth for average, middle-class 

homeowners? 

Ms. FUCHS. The CFPB is very conscious of the history that led 

to the creation of the Bureau, and in our work, in addition to some 

of the formal procedures I talked about in my written testimony, 

the Bureau has engaged in very, very regular interaction across the 

country with all sorts of communities. Virtually every month, we 

do a field event in a different State across the country. And while 

we are there, in addition to a public hearing, we also meet with 

community groups, community bankers, and credit unions. 

Mr. HORSFORD. Thank you. 

Thank you, Mr. Chairman. I look forward to continuing to work 

on these issues. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Mr. Osterman, my first comments or questions would be to you. 

A couple of times today you have already mentioned that, with regards to Operation Choke Point, the FDIC was working with DOJ 

and providing some information. Are you aware that the Division 

of Depositor Consumer Protection actually loaned two attorneys for 

a period of time to Operation Choke Point? 

Mr. OSTERMAN. No, I am not, sir. I don’t believe that is correct. 

Mr. LUETKEMEYER. I have a copy—or I am aware of a copy—of 

an internal memorandum that was produced for Chairman Issa 

that confirms that fact. And in talking with some of the executives 

at the FDIC, they confirmed that fact, as well, to me last week. 

So knowing that, and putting that fact before us here, I thought 

the mission of the FDIC was to work and be concerned with the— 

to ensure the safety and soundness of an institution. How do you 

rationalize loaning two of your examiners to the DOJ for Operation 

Choke Point, whose sole purpose is to run the non-deposit lenders 

out of business, a safety and soundness issue for the FDIC? 

Mr. OSTERMAN. Again, I am not aware of that. But assuming you 

are correct in terms of what you are proposing here, as I have indicated before, our efforts aren’t targeted at legitimate businesses. 

What we are looking at is making sure our banks are running in 

a safe and sound manner. 

In terms of the Department of Justice, if they are involved in trying to stop illegal activity and they seek our assistance, we generally would provide assistance to them so that activity could be 

addressed. 

Mr. LUETKEMEYER. Mr. Osterman, I used to be an examiner as 

well. I am still involved at arms length, probably, at a community 

bank as well. So I have been on both sides of the table on this 

issue. I understand what goes on. 

52 

But by the same token, I am not supporting those entities that 

are illegal or are doing illegal things. I support any activity that 

you engage in to get those—to ferret those out and get rid of them. 

The problem is we are going the wrong direction. We have allowed the pendulum to sway way too far. Operation Choke Point 

is a perfect example of regulatory stuff going amuck. 

I have here an excerpt from a letter dated February 26, 2014, 

from a banker to one of these nondeposit lenders closing his account: ‘‘We are unable to effectively manage your account on a level 

consistent with the heightened scrutiny required by our regulators 

for money service businesses.’’ 

Now, this is after the fall policy statement that you made. This 

is still going on. What is heightened scrutiny? What are they referring to? 

Mr. OSTERMAN. I am not quite sure what they are talking about. 

I can tell you that our efforts are focused on making institutions 

aware of risks that can be involved. But as long as the institutions 

are managing those relationships and the risks, they are neither 

prohibited or discouraged from providing those services. So— 

Mr. LUETKEMEYER. Mr. Osterman, we have a statement from one 

of your examiners that says that he doesn’t believe that non-deposit lenders have a moral right to exist. That is completely out of 

line. 

Your agency has no right to make that judgment on any business. Not only do we have a shadow banking system, we seem to 

have a shadow regulatory system as well. 

If you have regulators out there who are working in cahoots with 

the DOJ, who are still being punitive with regards to my letter of 

February 26th, after your stuff, and the moral judgment statement 

that is made, something has to change. Would you be willing to 

work on and put in place a safe harbor for these non-deposit lenders? 

Mr. OSTERMAN. I think that it is up to the non-deposit lenders 

to basically create a situation where the banks can be comfortable 

with the fact that they are being operated in a way that is not illegal or creating high risk to the institution. 

Mr. LUETKEMEYER. Mr. Osterman, you are regulating these entities. You are the one who is coming down on the banks and saying, 

‘‘Don’t do business with these.’’ 

My banker association was in just a couple of weeks ago, and one 

of them made the comment that, ‘‘I was doing business with one 

of these non-deposit lenders and I went by—and I will still—there 

was no problem with them, but the FDIC kept nitpicking me to 

death and I just finally got rid of them, and suddenly all my problems went away.’’ That has to stop. 

I think these folks need a safe harbor where you will give the 

banking industry a way to work with these folks and protect them 

from your operation. Do you agree? 

Mr. OSTERMAN. I think there needs to be dialogue here so that 

we can understand what the issues are and try to address them. 

Mr. LUETKEMEYER. Okay. 

Quickly, Ms. Fuchs, I am very concerned because the CFPB is 

about ready to jump in this area as well with your rules. Mr. 

Cordray was in front of this committee not too long ago, and he 

53 

made a statement to me that he agreed that non-deposit lenders 

have a space that they need to be in and he would support them. 

On April 25, 2012, he also said the CFPB is not in the business 

of product banning. I am going to be watching very carefully to see 

how you address that position of your Director and still allow these 

entities to exist. 

Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Wisconsin, Mr. 

Duffy, for 5 minutes. 

Mr. DUFFY. Thank you, Mr. Chairman. 

Mr. Alvarez, are you aware of whether the Fed is required to 

open up their advisory committee meetings to the public or to Congress? 

Mr. ALVAREZ. The Federal Advisory Committee is a statutory organization and is not required to be open to the public. 

Mr. DUFFY. Do you know why not? 

Mr. ALVAREZ. It allows the members of that committee—which 

are representatives of the banking industry—to give their candid 

views to the Board on monetary policy and on supervision. 

Mr. DUFFY. So it is monetary policy issues that come up that require some secrecy about what the Board is doing, right? 

Mr. ALVAREZ. Correct. 

Mr. DUFFY. Okay. Does the CFPB have a seat at the table talking about monetary policy? 

Mr. ALVAREZ. No. 

Mr. DUFFY. No. 

Ms. Fuchs, is it your position that the CFPB is not required on 

the FACA to open up their meetings to Congress or the public? 

Ms. FUCHS. The CFPB is an entity within the Federal Reserve 

System, and the Federal Advisory Committee Act (FACA) does not 

require the entities of the Federal Reserve system to comply with 

FACA. 

Mr. DUFFY. This is the Federal Reserve System, right? So you 

are saying that you are an integral part to the cause and the reason why the Fed is exempt, which is setting monetary policy? 

Ms. FUCHS. No, I am talking simply about the way the law is 

structured. I am not talking about the reason that Congress put 

that in place. 

Mr. DUFFY. So are you prohibited from opening your meetings up 

to the public or to Congress? 

Ms. FUCHS. With respect to the Consumer Advisory Board, the 

Bureau has certain sessions that are open to the public and I am 

aware that— 

Mr. DUFFY. Listen to the question. Are you prohibited at the 

CFPB from opening up your meetings to the public? 

Ms. FUCHS. We are not prohibited. 

Mr. DUFFY. So you can open them up if you want to; you just 

choose not to. 

Ms. FUCHS. The Bureau has certain meetings which are open to 

the public— 

Mr. DUFFY. That is not my question. You choose to shut down 

some of the meetings, right? 

54 

Ms. FUCHS. And it is my understanding, as well, that members 

of the committee staff have attended those public meetings. 

Mr. DUFFY. And those meetings aren’t discussing monetary policy, right? 

Ms. FUCHS. Not that I am aware of. 

Mr. DUFFY. And those aren’t meetings discussing covert operations in the CIA as well, right? 

Ms. FUCHS. Not that I am aware of. 

Mr. DUFFY. Okay. I have a riddle for you: What do tap water, 

your glasses, and the Consumer Financial Protection Bureau all 

have in common? 

Ms. FUCHS. I do not know. 

Mr. DUFFY. You don’t know? There was a blog 3 years ago, April 

6, 2011, on the CFPB Web site, and the answer is, they are all better when they are transparent. 

Dirty glasses are annoying, dirty water is annoying, and a dirty 

CFPB is really annoying. And if you are not transparent, which 

you have claimed the CFPB would be and you are not, that is of 

great concern to this committee. 

Look—the Credit Union Advisory Council meeting. No agenda. 

No notice of meeting. And a six-page summary of just glossary 

facts of what took place. 

You have a Community Bank Advisory Council meeting. No 

agenda. Nine pages of very glossary ideas of what took place in the 

meeting. 

The FDIC—Mr. Osterman—they have a similar meeting and 

they give an agenda; they give 20 pages of pretty detailed summary 

of what takes place in the meeting. And you are talking about the 

same issues. 

FDIC—full disclosure with an agenda. CFPB, not at all. 

You look at the Academic Research Council—no agenda. Do you 

know how long the minutes were from that meeting? It was two 

pages, one was a cover page and the other was barely a paragraph 

from the minutes. 

And the CFPB comes in here and says, ‘‘We are open. We are 

transparent. We want to disclose.’’ 

I would suggest that you use your discretion and you open up 

these meetings. Let us see what kind of advice you are getting, and 

who is giving the advice. I think that would serve the CFPB well, 

it would serve this committee well, and it would serve the public 

very well if you did that. 

I would just note that the Credit Union Times, on September 26, 

2013, in an article said, ‘‘Give public access to more of its meetings 

and hearings to increase transparency.’’ And that was in relationship to the CFPB. 

If you want to get buy-in from this committee, your lack of transparency in the face of all the claims that were made about how 

transparent you would be with little cute jokes and blog posts 

about how wonderful it would be at the CFPB, you haven’t met the 

standard. You haven’t met the standard that was set by Elizabeth 

Warren. 

Also in that same blog post it said, ‘‘Last month we blogged 

about our commitment to making sure it is always sunny at the 

CFPB.’’ 

55 

Ms. Martin, in her testimony last week, I am sure she would say, 

‘‘It is not always sunny at the CFPB.’’ I think she actually testified, 

‘‘It is a nightmare at the CFPB.’’ 

Let’s open it up. Let’s air it out. Let’s have the transparency that 

you all promised. 

I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlemen from New York, Mr. 

Grimm, for 5 minutes. 

Mr. GRIMM. Thank you, Mr. Chairman. 

I would like to follow up where Mr. Luetkemeyer left off, with 

Mr. Osterman. This Operation Choke Point gives me tremendous 

concern because it can certainly be Federal agencies like DOJ and 

others using a cloak of law enforcement to weed out and combat 

fraud and intentionally harming lawfully operating businesses. 

Listen, anyone who is not doing the right thing, not following the 

law, we have to get rid of them. But you can’t put the standard of 

‘‘guilty until proven innocent.’’ And in your last comment you said 

that these payday lenders and store fronts, non-deposit lenders, 

they have to meet this heightened standard, which means they are 

already assumed guilty. That is not how this works. 

I just want to be clear: If payday lending is going to be deemed 

illegal, the Congress will say so, not your agency. Are we on the 

same page there? 

Mr. OSTERMAN. Yes. 

Mr. GRIMM. Okay. Because it doesn’t seem that way. 

My understanding is the FDIC has a list of businesses that are 

on a heightened scrutiny list. That, in and of itself, causes me some 

concern. 

My question is, I understand that if the DOJ requests your assistance you are going to give that assistance. Has anything about 

Operation Choke Point caused you concern enough to maybe ask 

some questions of DOJ and say, ‘‘Hey wait a minute, you know, we 

want to be helpful but we may be breeching our own fiduciary responsibility?’’ Is there anything that has given you concern about 

Operation Choke Point? 

Mr. OSTERMAN. We have operated entirely consistent with our 

statutory mission in providing assistance to the Department of Justice— 

Mr. GRIMM. But my question wasn’t whether you were within 

your statutory obligations. My question was, has there been anything that has given you concern? Has there been anything that 

has given you concern where you think maybe something isn’t appropriate, that you may be overstepping a line? 

Mr. OSTERMAN. To the extent that we understand DOJ is seeking 

to stop illegal activity, there is not anything inappropriate there. 

And in fact, you talk about this list of high-risk activities. That is 

a list that the payment card industry has created themselves. It 

was a list that we put in our Supervisory Insights Journal a few 

years ago. And it basically is a list of high-risk activities that tend 

to have a higher incidence of fraud or illegal activity associated 

with those, so— 

Mr. GRIMM. Let me ask you this question. Let’s talk about civil 

investigative demands (CIDs) for a second. It has been reported 

56 

that at least 50 banks and third-party payment processors have 

been given these CIDs as part of this operation. 

Before issuing a CID, does the FDIC—do you request of DOJ 

that they give you any type of information to ensure that it is credible and that it is a reasonable cause to conclude that there was 

a substantial likelihood that the targets had, in fact, engaged in 

some kind of fraudulent activity? 

Mr. OSTERMAN. I am not familiar with the CID acronym, but to 

the extent that DOJ is doing an investigation, that is their investigation. We have been—we would provide them, respond to questions, that type of thing, but that would be their investigation. I 

don’t think they would come to us on that. 

Mr. GRIMM. I just want to be clear then, whatever DOJ asks for, 

the FDIC provides without asking any questions. You don’t do any 

internal investigation of any sort, so whatever DOJ asks for, you 

pretty much provide? 

Mr. OSTERMAN. No, I don’t—that is not correct. It would have to 

be a legitimate law enforcement activity that we would be supporting DOJ on. We would cooperate—we cooperate with other 

agencies as well in ensuring that the statutory mission of the agency is fulfilled. 

Mr. GRIMM. As far as you know, the coordination involvement, 

does it involve any attorneys general from other States with Operation Choke Point? 

Mr. OSTERMAN. I don’t know the answer to that question. 

Mr. GRIMM. How about any other consumer advocacy groups? 

Has there been any communications or involvement with consumer 

advocacy groups? 

Mr. OSTERMAN. Again, I am not aware of the answer to the question. 

Mr. GRIMM. I am asking specific with the FDIC, not with DOJ. 

Mr. OSTERMAN. Right. 

Mr. GRIMM. As far as you know— 

Mr. OSTERMAN. Right. I am not aware of it myself. 

Mr. GRIMM. You are not aware of any? 

Mr. OSTERMAN. No. 

Mr. GRIMM. Okay. 

I yield back. Thank you. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from Ohio, Mr. Stivers, 

for 5 minutes. 

Mr. STIVERS. Thank you, Mr. Chairman. I really appreciate you 

holding this hearing. 

And I appreciate the witnesses being here and their time. We are 

in a difficult time in this economy. There are still a lot of jobs that 

need to be added, and the way you have to add those jobs is you 

have to figure out how to finance that growth of our economy, and 

the financial sector has done that. 

I am really concerned about a couple of things that I want to talk 

about and ask some questions about. The Operation Choke Point 

really has me worried about the overreach of government and government shutting down properly licensed State businesses with 

which they just don’t agree. 

57 

And it gives me cause for concern about other businesses, whether they be opposed by folks on the left or the right. Government 

can really abuse its power and it really worries me. 

I have a testimonial from an Ohio-based company that has had 

a 20-year partnership with a financial institution, and with no 

warning they got a call just a few weeks ago and the bank is going 

to terminate their banking relationship after a 20-year relationship 

because of reputational risk. And that reputational risk is driven 

by our regulatory policy and regulatory pressure, and I am really 

worried about that. 

So I want to ask the FDIC whether, Mr. Osterman, you believe 

there should be a safe harbor? I know somebody has brought this 

concept up to you, but why shouldn’t State-licensed businesses 

have a safe harbor to know that they are going to be able to keep 

their relationships? 

Mr. OSTERMAN. I think as long as you have a situation where the 

entity is operating in a legal fashion, that should take care of addressing the issue. What we have seen in the past is there are certain types of businesses that have been viewed as high-risk by the 

payment card industry and others because of the higher incidence 

of fraud or illegal activity, and to the extent that— 

Mr. STIVERS. Sure. And I just hope your agency will put in writing what you just said, that if you are operating under a State license legally, that you—that is a safe harbor. So I would ask you 

to go back and put that in writing. 

One question for Mr. Alvarez, and I know this has come up already, on CLOs. Can you tell me where in Dodd-Frank you don’t 

have the power to grandfather CLOs? Because a 2-year extension 

and a grandfathering aren’t that much different except a 

grandfathering would allow those entire portfolios to run off in 

their fairly shortened duration. 

So can you help me understand? Can you cite the section or the 

page number of Dodd-Frank that doesn’t give you the authority you 

claim you want? 

Mr. ALVAREZ. I can’t cite the page number or the section but I 

can tell you what it says. There is a provision in the Dodd-Frank 

Act that says all investments and activities by banking entities 

must conform with the requirements of that section by the effective 

date, which is July 21, 2014, unless the Federal Reserve Board provides an extension. 

Then the statute goes on to say the Federal Reserve may provide 

one extension at a time for a cumulative amount of no more than 

three extensions. 

Mr. STIVERS. Okay. So that seems pretty clear to me how long 

these CLOs are. You could have made the extension an essential 

grandfathering by looking at the term. 

These things run off in 3 to 5 years. They are relatively shortterm. Why not deal with the whole thing instead of having to take 

two bites of the apple? It just doesn’t make sense. 

Mr. ALVAREZ. No, I appreciate that. And I think we would have 

appreciated the flexibility to be different, but the statute is quite 

specific. It says that we can grant three, 1-year extensions, but no 

more than one at a time. And we thought that—so we indicated our 

intention to grant those extensions. We have already granted one; 

58 

we did so just in this past December. And we will grant the next 

two in turn. 

Mr. STIVERS. Thank you. 

The only thing I would add about that is we have talked a little 

bit today about uncertainty. When you do multiple extensions and 

you do them for shorter duration, it adds to uncertainty for these 

businesses that finance things through CLOs, to the marketplace, 

and to those financial institutions which need that capital. So I 

would be concerned about that. 

One last question for Mr. Osterman: The FDIC approved a bunch 

of tailored plans at the end of the year for some resolution of some 

of the smaller banks. Do you think that adds any risk to the system? 

Mr. OSTERMAN. I am not familiar with what you are referring 

to—tailored plans? 

Mr. STIVERS. Yes. 

Mr. OSTERMAN. In connection with— 

Mr. STIVERS. In resolution. 

Mr. OSTERMAN. Oh, in terms of the resolution. The— 

Mr. STIVERS. So you obviously don’t think it adds risk, right, or 

you wouldn’t have approved them? 

Mr. OSTERMAN. The plans were not approved. We are going 

through a process of reviewing the resolution plans and they have 

not been approved. They are in the process of being reviewed and 

it is an— 

Mr. STIVERS. I know I don’t have much time left. When you allow 

people to submit tailored plans, clearly you understand there is not 

much risk there, and— 

Chairman HENSARLING. In fact, the gentleman has no time left. 

Mr. STIVERS. Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from South Carolina, 

Mr. Mulvaney, for 5 minutes. 

Mr. MULVANEY. Mr. Osterman, I don’t want to sound like we are 

piling on here, but for some of us this Operation Choke Point information is just coming to the fore. And I was particularly struck by 

Mr. Luetkemeyer’s opening comments, when he had the letter from 

the bank to the non-depository financial institution saying, ‘‘Look, 

you are a good customer; you are doing everything legally; you 

have been a great customer for a long time, but we just can’t do 

business with you anymore.’’ 

And when you add that to the statements from a bureaucrat, no 

matter how low-ranking they may be, who says to a particular 

legal industry, ‘‘You don’t have the moral right to exist,’’ this is the 

type of thing that, congratulations, now you have our attention. 

That is not the kind of thing that goes away, and I hope you send 

that message back to the FDIC. 

In fact, I hope that all of you take it to your various agencies. 

And it is not just that saying it is the problem; it is thinking it that 

is the problem. The fact that anybody would actually think that in 

this country, somebody else doesn’t have the right to do something 

that is moral really gets our attention and it is not going to go 

away anytime soon. 

59 

Let me ask you, your written testimony lays out, I think, very 

well the purposes of the FDIC, so you have an ongoing commitment 

to ensure that its regulations and policies achieve legislative and 

regulatory goals in the most efficient and effective manner possible. 

Is it a legislative goal of the FDIC to restrict the legal operation 

of a non-depository financial institution business? 

Mr. OSTERMAN. No, it is not. In fact, we wouldn’t—we obviously 

wouldn’t be legislating. That would be up to you all, but— 

Mr. MULVANEY. Is it a regulatory goal of yours? 

Mr. OSTERMAN. No. 

Mr. MULVANEY. Okay. Is there anything inherently unsafe or unsound—you have talked today about your job, which is to make 

sure that financial institutions are safe and sound and operated in 

such a manner. Is there anything inherently unsafe or unsound 

about short-term lending, properly conducted, or non-depository financial lending, properly conducted? 

Mr. OSTERMAN. Right. If it is properly conducted, it should be 

fine. 

Mr. MULVANEY. Is there a value to those services to the market? 

Mr. OSTERMAN. I believe there is. 

Mr. MULVANEY. Would removing those services to the market 

make the market less safe and less sound? 

Mr. OSTERMAN. Yes. If you don’t have the— 

Mr. MULVANEY. If Operation Choke Point has the unintended 

consequence of driving those legal businesses out of the market, 

would it be incumbent on the FDIC, in order to ensure the safeness 

and soundness of the markets, to prevent that from happening? 

Mr. OSTERMAN. We have issued a policy statement that outlines 

the FDIC’s position in connection with this type of activity. Again, 

our position is that our efforts are not targeted at legitimate businesses operating in compliance with the law. 

Mr. MULVANEY. You go on to say in your written testimony, and 

I think, again, it is properly stated, that another critical component 

of our rulemaking process is to provide the public the opportunity 

to participate in notice and comment rulemaking, et cetera, which 

I happen to agree with. 

Have you ever paid for a witness? Excuse me, have you ever paid 

for somebody to participate in the audience at one of your meetings? 

Mr. OSTERMAN. No, not that I am aware of. 

Mr. MULVANEY. Would it be appropriate for you to do that? 

Mr. OSTERMAN. I don’t know— 

Mr. MULVANEY. Would it be appropriate for you to stack the audience? 

Mr. OSTERMAN. —but it would depend on the particular circumstances of— 

Mr. MULVANEY. That should be a fairly safe answer, right? Mr. 

Osterman, of all the questions I asked you today, that is probably 

the safest. It is safe to say that is not appropriate, right? 

Mr. OSTERMAN. I think I know where you are going with this. 

Mr. MULVANEY. Where am I going with this, Mr. Osterman? 

Mr. OSTERMAN. I think you may want to ask my colleague the 

question. 

Mr. MULVANEY. That is exactly where I am going with this. 

60 

What were you all thinking? Seriously, to pay somebody to come 

and participate in the—to plant somebody in the audience? And I 

know the story that maybe they were going to be on the panel or 

maybe they weren’t. But you all admit now yourself this was 

wrong, right? 

Ms. FUCHS. I don’t know all the details of how the decisions were 

made, but it is not our general policy to do that. 

Mr. MULVANEY. And it is not going to happen again, right? 

Ms. FUCHS. I would imagine, but I— 

Mr. MULVANEY. Would you change your policy, please, on when 

you release your press statements? 

Right now, you all don’t—you all do what is called ‘‘midnight embargoes.’’ You issue something in the afternoon but you don’t let 

people talk about it till after midnight or late at night. Would you 

change that policy? 

Ms. FUCHS. We try to release our materials so that the press and 

other— 

Mr. MULVANEY. The FDIC doesn’t do that, do they? In fact, nobody else here does that, do they? 

Yes. Okay. 

I have 50 seconds left. I have a question for you, Mr. Alvarez, 

and it is on an entirely different topic. 

Governor Tarullo was here and we asked him a Dodd-Frank 

question. I laid out—and I won’t have time to give all the details— 

a specific trade, okay, under the Dodd-Frank prohibitions on proprietary trading. And I said, ‘‘Look, this is the type of trade where 

it seems that the SEC, the OCC, and the FDIC might all have concurrent jurisdiction.’’ 

And in response to my question, he said, ‘‘No. Whoever is the primary regulator has, by congressional delegation, the regulatory authority over them.’’ And when I asked him if they could be overruled by another one of the folks who have jurisdiction, he said, 

‘‘No. There is no real shared jurisdiction over a particular trade. 

There is one regulator on every single trade under Dodd-Frank.’’ 

Does that comport with your understanding of the implementation of that rule, sir? 

Mr. ALVAREZ. I think he must have been referring to the fact 

that— 

Mr. MULVANEY. I’m sorry. I said Dodd-Frank. I meant Volcker, 

and I apologize. But I would love to hear your answer. 

Chairman HENSARLING. Quick answer, please. 

Mr. MULVANEY. Does that comport with your understanding, sir, 

of the implementation of the Volcker Rule? 

Mr. ALVAREZ. The statute provides that each legal entity is regulated by a particular regulator, and only one regulator. So to the 

extent—I don’t—your question—if your question was about a legal 

entity doing a transaction, there is only one regulator for that legal 

entity under Dodd-Frank. 

Mr. MULVANEY. And they can’t be trumped by any other regulator? 

Mr. ALVAREZ. Not under the Volcker Rule. 

Mr. MULVANEY. Thank you, sir. 

Chairman HENSARLING. The time of the gentleman has expired. 

61 

The Chair recognizes the gentleman from Florida, Mr. Ross, for 

5 minutes. 

Mr. ROSS. Thank you, Mr. Chairman. 

Being from Florida, I had an opportunity when we had our payday lending issues that were pretty bad—and in fact, I was in the 

legislature at the time and we passed some laws that have become 

now the gold standard, I think, for all other States to follow with 

regard to payday lending. 

So I am really interested in what the Federal Government is 

going to do when it comes to this industry, and I guess I want to 

ask the first question of Ms. Fuchs, Mr. Osterman, and Ms. Friend. 

And following up on what Mr. Mulvaney was talking about, if the 

regulatory control is so strong to restrict or otherwise cut off the 

supply, if you will, of payday loans, is it your understanding, then, 

that the demand would go away? 

Ms. Fuchs? 

Ms. FUCHS. The Bureau is looking at payday lending right now 

and looking at whether rules are— 

Mr. ROSS. I guess what I am getting at is that we could all agree 

that if you can—if, through Operation Choke Point and whatever 

other methods have been out there, to try to prohibit the market 

from existing, that the demand will still exist, will it not? There 

will still be people who will need the use of payday loans. Banks 

don’t want payday loans. There is a market niche for payday loans, 

is there not, Ms. Fuchs? 

Ms. FUCHS. We understand that there is a need for small-dollar, 

short-term lending, and the Bureau is very conscious of that and— 

Mr. ROSS. And, Mr. Osterman, you would agree, too? 

Mr. OSTERMAN. Yes. 

Mr. ROSS. And, Ms. Friend, you would agree, as well? 

We have to live with the fact that demand will be there, and if 

we try to overregulate the supply, there will be a black market for 

it, which will make matters worse. And I think Mr. Osterman kind 

of alluded to that when he was answering Mr. Mulvaney’s questions. 

Now, having said that, Operation Choke Point talks about making sure that illegal entities are not given the banking relationships, but has there been any guidance for legal entities in that regard under Operation Choke Point? 

Mr. Osterman? 

Mr. OSTERMAN. Again, Operation Choke Point is a Department 

of Justice action going after illegal activities. What we have said 

at the FDIC is we are not targeting legitimate business. And all 

we want is to make sure our banks are running in a safe and 

sound manner. That is our perspective. 

Mr. ROSS. I appreciate that, but I have had people come to me, 

bankers come to me— 

Mr. OSTERMAN. Yes. 

Mr. ROSS. —recently, within the last month, 2 months, who have 

been told that because of the—what was it, the relational, 

reputational risk that they should not be engaged with this particular entity. Now, this is a legal entity. Are you offering any guidance to these banking institutions as to what legal entities are 

okay with them to operate? 

62 

Mr. OSTERMAN. We have issued a financial institution letter, 

which has gone out to the industry, indicating that as long as the 

bankers are dealing—they do their due diligence and ensure that 

those entities are operating in a legal manner— 

Mr. ROSS. And do you give them— 

Mr. OSTERMAN. —then that is— 

Mr. ROSS. —the standards of that due diligence, or is that left 

open to a— 

Mr. OSTERMAN. That is up to them. We are not going to prescribe 

that. 

But we also told our regional offices and field offices that as long 

as people were acting in a legal manner, it is not our job to— 

Mr. ROSS. For those banks that have been wrongly terminated, 

in terms of their relationship with legal entities, have you done 

anything to facilitate the rebuilding of those relationships? 

Mr. OSTERMAN. This is something that is just happening very recently. 

Mr. ROSS. Yes. 

Mr. OSTERMAN. Right. And so, we are, again, letting our examiners know what the expectations are. And I think there was an 

article today in The Banker indicating that the industry itself was 

looking at how to police itself and create some standards that could 

be used to ensure that they are operating in a way— 

Mr. ROSS. That these legal entities are not interrupted with their 

banking relationships. 

Ms. Friend, the OCC has been rather quiet on any guidance. Is 

that a pattern that I think we are to expect or do you expect there 

to be some guidance with regard to payday lending and Operation 

Choke Point, for that matter? 

Ms. FRIEND. We don’t have any guidance on Operation Choke 

Point. As has been said before, it is a Department of Justice investigation so we are not part of that. 

We had issued guidance in 2008, and our examiners and banks 

have been following that. And that basically suggests the banks 

have to do due diligence when they bank different types of customers. 

Mr. ROSS. And one quick question for Mr. McKenna, because I 

don’t want to leave you out there. I know it has been a little quiet 

lately. 

With regard to risk-based capital rules, do you have a timeframe 

for the implementation of those? Banks have, I think, 1 to 2 years 

to have it. What do you say— 

Mr. MCKENNA. The comment period currently ends on May 28th, 

and we will be considering all the comments, and then we will decide on the implementation after that. 

Mr. ROSS. Okay. 

Thank you. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair recognizes the gentleman from North Carolina, Mr. 

Pittenger, for 5 minutes. 

Mr. PITTENGER. Thank you, Mr. Chairman. Thank you for calling 

this important hearing. 

I would like to thank Congressman Heck, my colleague and the 

esteemed friend that I have who is now serving as a ranking memVerDate Nov 24 2008 12:59 Dec 05, 2014 Jkt 088535 PO 00000 Frm 00068 Fmt 6633 Sfmt 6633 K:\DOCS\HBA098.000 TERRI
63 

ber, for his very kind comments regarding the CFPB Small Business Advisory Council. And I look forward to working with him on 

the passage of this bill, and thank him for joining with me as a 

sponsor of this bill. 

I would like to say that as such, Ms. Fuchs, you all have been 

able to establish the Community Bank Advisory Council, the Credit 

Union Advisory Council, and the Academic Research Council, all 

done without legislative action. I think I am just curious to know 

why you would not have done this council for the small business, 

given the critical importance that it plays. 

Ms. FUCHS. Thank you so much for your question. 

As I mentioned before, we actually currently have a very, very 

good means of getting small-business input when our rules are 

going to affect small businesses. So through our small-business 

panels, we provide small businesses with information on proposals 

before we propose a rule. We meet with them— 

Mr. PITTENGER. But you would agree that these—this council 

then—formalize this and create a better opportunity for dialogue 

and input from small business? 

Ms. FUCHS. The Bureau doesn’t take a position on legislative 

bills. 

Mr. PITTENGER. Thank you. 

Ms. FUCHS. I am happy to bring back your comments— 

Mr. PITTENGER. I understand. 

We moved into a new house 5 years ago and my wife wanted 

some bushes planted. And we planted these bushes and I got a 

really fine person out there to help me do it. And in about a year, 

those bushes died. 

So we planted some more bushes. And in another year, those 

bushes died. And then it happened again, and I thought, ‘‘Now, 

something is wrong.’’ 

So I got another guy out there and he started digging. And he 

found a lot of red clay—impervious soil that wouldn’t let the water 

go through. 

And it made me think, all the good efforts of those folks who 

were planting those bushes was to no avail because those bushes 

would turn yellow, and they would look bad, and some would die. 

And they couldn’t function. 

And it seems to me that, although sincerely done and with good 

intentions, the enormous regulatory environment that we have 

today is killing the needed growth for our economy. 

As I recall, back in the 1970s we had very high interest rates, 

high unemployment—it was a very difficult time. It was called the 

malaise of Jimmy Carter. 

And following his completion of his term there was a man elected 

named Ronald Reagan. And Ronald Reagan came in and he cut all 

these enormous regulations. And what happened was, in a matter 

of 2 years we were creating 300,000, 400,000, 500,000 jobs a 

month. One month, a million jobs. 

We weren’t having an anemic job growth of—or economy of 2 percent. We had about 1.6 percent economic growth. 

Do you think maybe with all these good intentions, we have created an impervious soil that we can’t grow? And do you feel any 

concern that maybe, although well-intended, the impediments are 

64 

there—these rules, these regulations, these requirements, the uncertainty in the market because of not knowing what the regulators 

are going to do next? 

It seems to me that would be first on my mind to consider that 

maybe what was intended for good is really meant for bad. 

Do you have a comment you would like to make on that? 

Sure, we will start with you, Ms. Fuchs. 

Ms. FUCHS. We very much share your concerns about regulatory 

certainty, and that is why we have many means of speaking with 

industry. At the same time, we also hear from consumers. And 

through our consumer response function we have received over 

300,000 complaints from consumers about issues that they are seeing with their consumer finance activities. And— 

Mr. PITTENGER. Let me give you one example that occurred in 

my own town. A wonderful little bank, Bank of Commerce, about 

a $130 million bank, just announced last month that it had to 

merge with a larger bank. It could not absorb the regulatory requirements imposed on it—the same requirements of the larger institutions. And now, they have gone out of business. 

In 2007, we had about, oh, I think 8,500 banks in this country, 

and now there are about 6,800. That is a loss of 1,700 banks that 

have either had to merge or they have had to be absorbed. 

And I just think that there should be some serious consideration 

on revamping everything that we are doing on our regulatory environment. 

Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Pennsylvania, Mr. 

Rothfus, for 5 minutes. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

Ms. Fuchs, under analysis done by the CFPB for the QM rule, 

pursuant to the Paperwork Reduction Act, the Bureau estimated 

that the compliance burden for the QM rule for one person is only 

30 minutes and the estimated burden for each financial institution 

subject to QM is 1 hour. 

Do you believe that these are reasonable estimates? 

Ms. FUCHS. When the Bureau is engaged in the rulemaking, it 

does whatever it can to get data on the cost and the burden of the 

rulemaking. We try to understand what institutions do to comply 

with the rule. In fact, the Bureau has conducted a study about 

operational compliance activities that banks engage in— 

Mr. ROTHFUS. So do you believe these are reasonable estimates 

then? 

Ms. FUCHS. I believe they are reasonable. 

Mr. ROTHFUS. Okay. The Paperwork Reduction Act analysis for 

the QM rule fails to provide an analysis for how the financial institution 1-hour estimate was calculated. Will you commit to providing this committee with a more detailed and thorough analysis? 

Ms. FUCHS. When we do our Paperwork Reduction Act analysis, 

we do publish it in our proposal and our final rule. And so we take 

public comments, which is essentially the way the— 

Mr. ROTHFUS. Again, there was a failure to disclose how you arrived at 1 hour for the financial institution. Will you commit to proVerDate Nov 24 2008 12:59 Dec 05, 2014 Jkt 088535 PO 00000 Frm 00070 Fmt 6633 Sfmt 6633 K:\DOCS\HBA098.000 TERRI
65 

viding this committee with a more detailed and thorough analysis 

of that? 

Ms. FUCHS. I will certainly take back your comments to our 

economists. We try to do our best to explain both the data we rely 

on and the methodology in reaching our results. 

Mr. ROTHFUS. We are already seeing the first signs that some 

smaller community financial institutions are exiting the mortgage 

business rather than trying to navigate the liability risk and excessive compliance costs inflicted by the Bureau’s qualified mortgage 

rule. Indeed, a recent American Banker headline has suggested 

that QM will come to stand for ‘‘quitting mortgages.’’ 

Ms. Fuchs, how do you reconcile the one-size-fits-all approach 

taken by the CFPB in promulgating the QM rule with your statutory obligations to promote consumer choice and facilitate access 

and innovation in the marketplace? 

Ms. FUCHS. Thank you for your question. 

The QM rule was specifically designed to consider the differences 

between smaller lenders and larger lenders, including lenders in 

rural and underserved areas. 

We include within the loan specific provisions for small creditors 

who hold loans within their portfolio. We also have a 2-year window under which small creditors may make balloon loans that are 

held within portfolio. 

All of these things are in direct response to comments we heard 

from smaller lenders about the impact of the— 

Mr. ROTHFUS. Again, does it concern you, though, that entities 

will stop making mortgages as a result of this rule? 

Ms. FUCHS. The Bureau is watching the impacts of the QM rule. 

And as I mentioned earlier, the rule was specifically designed so 

that 90 percent to 95 percent of the mortgages that were being 

made before the QM rule was put in place would be covered by the 

QM rule. 

Mr. ROTHFUS. But won’t the overall effect of the QM rule be to 

advantage certain types of products and certain terms in the marketplace over others? 

Ms. FUCHS. Don’t forget that after the financial crisis, the marketplace changed. And the marketplace changed because there 

were products that caused the very risks that led to the financial 

crisis. 

We anticipate that over time, as the market— 

Mr. ROTHFUS. So you wouldn’t agree that maybe the cause was 

when the former chairman of this committee talked about rolling 

the dice with respect to the housing market? 

Ms. FUCHS. No. We feel that as the market gets comfortable with 

the QM rule, lending will evolve. And we anticipate that there will 

be innovation in the non-QM space. In fact, we specifically were 

trying to preserve room for that innovation when we crafted the 

rule. 

Mr. ROTHFUS. In an article that appeared—this is going to go to 

Mr. Osterman and Mr. Alvarez—in the pages of The Wall Street 

Journal, it was reported that in the third quarter of 2013, the number of federally-insured banks in the United States fell below 7,000 

for the first time since Federal regulators began keeping track in 

1934. 

66 

Are you concerned about this increased level of consolidation in 

the banking industry? 

Mr. OSTERMAN. Thanks for your question. It is something that 

we are monitoring. It has been a cyclical process. If you look at the 

way the economy has been, it has been very difficult to— 

Mr. ROTHFUS. Does the consolidation in the industry concern 

you? 

Mr. OSTERMAN. Even though there has been consolidation, insti- tutions below the $10 billion and billion dollar range have continued to be a very vital part of the economy. 

So the other thing is, in terms of new institutions getting into 

the industry, given the fact that we have been in such a difficult 

financial situation, what we have had is people coming in and actually investing in existing institutions, putting capital in those institutions. 

Mr. ROTHFUS. And how many institutions have been created 

since this law was passed? 

Mr. OSTERMAN. Since Dodd-Frank? 

Mr. ROTHFUS. Since Dodd-Frank was passed. 

Mr. OSTERMAN. Again, the economic situation—I think we had a 

de novo last year that was created. It has been very low—very low 

amounts. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

There are no other Members in the queue. 

I would like to thank the witnesses for their testimony today and 

for their patience in having to sit all this time. 

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. 

This hearing stands adjourned. 

[Whereupon, at 1:31 p.m., the hearing was adjourned.] 

(67) 

A P P E N D I X 

April 8, 2014 

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617 


88535.550
618 


88535.551
619 


88535.552
620 


88535.553
621 


88535.554
622 


88535.555
623 


88535.556